Gassman, Crotty & Denicolo, P.A.



Tuesday, March 24, 2020 Alan GassmanCreditor Protection Strategies - In Light Of Recent EventsUnknown Speaker 0:04 Hi, this is Alan Gasman. Welcome to the exciting day of Tuesday, March 24 2020. We're here to talk about creditor protection strategies in light of this economic slowdown if that's what you want to call it, I have my email address here a gasoline gasoline pa calm. Please send me an email. If you have any questions, comments or suggestions for this presentation, I'll make sure I answer you during the presentation or after the presentation. Thanks very much for attending this and for getting the word out of important things that we're talking about. Speaking of getting the word out, we have a series of each of these going on. You can see the replays of what I've done with Colleen Flynn on employment law. You can see the replay of what we've done with Brandon CatrinUnknown Speaker 0:57 on tax planningUnknown Speaker 0:59 you can see the replay of what I've done with Lester purling on planning for medical practices, which is very, veryUnknown Speaker 1:07 interesting.Unknown Speaker 1:09 And also, by the way for you lawyers and CPAs, we're going to have a more extensive conference on this April 21, web based or the Florida Bar. It's going to be four hours on creditor protection and then one hour and 40 minutes on the secure act and planning with IRAs and things like that. And you've got our Lindberg webinars here, the one with Colleen Flynn was excellent March 25. It's free, it's 60 minutes. We also have a Weinberg article going out today on the employment law aspects the 80 hour rule and the 10 week rule. So don't miss that.Unknown Speaker 1:50 Enough of that. Let's talk about creditor protection. Now.Unknown Speaker 1:55 The most important thing that we need to talk to clients about when they are having cashflow problems is making sure that they keep enough cash in a safe place so that they can afford to restart their business or restart their practice. No matter what happens. We have no way of predicting how long businesses are going to be closed down with this virus. It sounds fine to say I have 60 days I have 90 days I can survive 60 or 90 days. But this thing may get worse, take out food maybe stopped. For restaurants, pharmacies may have to close down construction firms may have to close down.Unknown Speaker 2:41 So make sureUnknown Speaker 2:43 that your client knows that they will need the availability of cash to pay a good bankruptcy lawyer to restart the business and chapter 11. reorganization is not inexpensive and can cost 150 to $250,000. So they don't want to spend their last 10 to 20 to $50,000. Running a business where they're losing money losing money or losing money. That's why you have to talk to your clients about what's your present situation.Unknown Speaker 3:17 What is your burn rate?Unknown Speaker 3:19 What can we do to reduce the burn rate. And what happens if the banks don't extend lines of credit, we have to be a little bit pessimistic things could get worse, before they get better. Now that money could just be held in your client's personal name, because they're going to spend it before there would ever be a judgment against them. But clients of course are going to want you to want you to take them through this chart on page nine. To show them what assets here on the left hand side can't be reached by most creditors. What assets are more difficult to obtain, and what assets are completely exposed. I'm doing this in 30 minutes. So I'm not going to go into dramatic, tremendous detail. Married couples may have a lot of assets held as tenants by the entireties. Hopefully only one spouse has signed guarantees or will have liabilities so that their tbe assets are protected. We're going to see a lot of situations where clients will come to us and find out that they had assets titled jointly, but not in a way that qualified for tenancy by the entireties. On the right hand side in this chart, you see that spouse one could fund and irrevocable trusts for the health education and maintenance of spouse to be a Florida trust creditors of spouse one can't touch it because the spouse one isn't a beneficiary. Creditors of spouse two can't touch it because files two was not a contributor. That trust can save a lot of money in estate taxes. You can also sell assets to that trust that now low values. So this is a good time to do asset protection planning and estate tax planning. But you don't want to make any transfers to this type of trust, that are for the primary purpose or even a significant purpose of avoiding creditors. But if you think things are bad now and you're afraid, they'll get twice as bad that your stocks will go to half of what they are today, and you make a transfer to sell those stocks to this trust for a note and then the values go down. Creditors Can't touch this trust. That might have been a good thing to do. We don't expect things are going to go to half of what they are today.Unknown Speaker 5:36 But you never know.Unknown Speaker 5:38 So here you can talk about estate tax planning with your clients and the reasons for making some of these transfers. Here's more talk about spouse one, funding a trust for spouse two and the descendants known as a dynasty trust. This trust could be established in the Nevada and then spouse one could be added back as a beneficiary of certain events occur. So that's certainly good estate tax planning and incidental creditor protection planning. Going back to the idea of losing tenancy by the entireties protection that your clients thought they had, you have to look at the documents, you have to look at the account agreements. You have to know the history. I've got a good white paper on tenancy by the entireties. I'll be glad to send it to you. It's a chapter from our book called Gasman and mark on Florida creditor protection planning, which is a Bloomberg tax document book. We'll be glad to send that to you just send me an email. The things like USA accounts, joint accounts in states that don't recognize tenancy by the entireties, stock certificates, shareholder agreements, operating agreements, those things, they all fail.Unknown Speaker 6:51 Now, page 17.Unknown Speaker 6:54 I want to talk a little bit about wage accounts.Unknown Speaker 6:58 A wage account.Unknown Speaker 7:00 is an account opened by somebody who is the head of household, who has at least one other person that they are supporting the wages of a salary workerUnknown Speaker 7:15 that go to that workerUnknown Speaker 7:18 are normally protected from creditors under Florida statute to 22.11. And when those wages go into an account that holds only wages, that account is creditor proof for a periodUnknown Speaker 7:33 of six months.Unknown Speaker 7:36 Now, if you work for yourself, you have your own medical practice or your own legal practice your own accounting practice. Your wages may not be protected because the Florida court and the bankruptcy courts have been very unkindUnknown Speaker 7:52 to FloridiansUnknown Speaker 7:54 who try to keep wages and wage accounts protected but really can control what's a wage and what's the difference. None of these cases have ever been appealed to a higher court. So there may still be the ability to protect wages, especially if there's an employment agreement in place, and fixed periodic payments that look and smell like wages. You can give thought to whether there's a dependency that would typically be a minor or a spouse or it could be an adult child where there's a moral obligation to support them. Think about the wages. We're going to talk more in a little while about why that can be very important. Disability Insurance and disability insurance proceeds are also protected. pensions and IRAs are protected. This year, clients need to rethink how much they're going to put in their pension plan. They may even be pulling $100,000 out of the pension plan this year. The Senate and the House both both proposals. have the ability to pull $100,000 out without paying the 10% excise tax, but they will pay income tax on their withdrawal. Nevertheless, pension plan and IRAs are creditor protected. So it's a good idea to plan to continue to fund them. And maybe even to put more in than before using a defined benefit plan or a cash balance plan. PAGE 26. What creditors to pay first. If you have a possibility that you may be going in and bankrupting out or negotiating with creditors, the ones that are most difficult to negotiate with and the ones that just don't go away or on the left hand side here. government loans, trust funds. Definitely. When you take the money out of the employees paychecks you've got to give it to the government to crime if you don't. hazardous waste liability, breach of fiduciary duty law bilities people are going to be borrowing from trusts and not being able to pay them back. That's going to be a breach of fiduciary duty that you cannot bankrupt out. By the way, I don't recommend that you borrow from a trust. If you're a trustee. That's another criminal offense when people do it. Child Support and alimony and then repaying Medicare. Some doctors are going to get overly aggressive with Medicare. They're going to, in effect, borrow money from Medicare by filling too much. And those are all things that you cannot think runs out. You want to pay them first. And certain creditors are very difficult to repay or have much stronger rights than regular creditors, including the IRS and also Medicare when they're recoveringUnknown Speaker 10:45 a judgment.Unknown Speaker 10:48 So we need to talk some here about bankruptcy and bankruptcy terminology because for many clients Who have or will have insolvent companies. Bankruptcy will be an important tool. You won't have to necessarily take them into bankruptcy. I apologize if somebody's mowing the lawn of the,Unknown Speaker 11:14 of the Airbnb,Unknown Speaker 11:16 that I'm renting to be quarantine because I was in Argentina up until a week ago. But that's another story.Unknown Speaker 11:24 Let's talk a little bit about the bankruptcy code.Unknown Speaker 11:29 You won't necessarily have to go into bankruptcy, but you're going to have to be able to negotiate with a credit based upon what you will be able to do in bankruptcy. So, if you would like to know more about bankruptcy, let me know. I'll send you more information. We're going to give a talk next Monday for Lindberg on for 90 minutes on bankruptcy planning. Let's just go through some of these steps of definition. Chapter Seven bankruptcy is where the game is over. It's a person who has mostly business debt usually, or it may be a business entity. You go in you file the bankruptcy. If you're in court appoints a trustee, the trustee gets to see all your legal documents and all your legal letters and gets to depose the debtor, and there is no attorney client privilege anymore. So if you think your client may go into bankruptcy, make sure you understand that your attorney client privilege may be gone. You might want to be careful about what you put in writing. Once the bankruptcy is filed, the assets are what is known as the bankruptcy estate. If it's a chapter seven bankruptcy, as I said, which is a liquidation where you take the assets and distribute them among the creditors then The non exempt assets, the assets not protected under the law, just go to the trustee and the exempt assets stay with the debtor. There's not a lot of good reasons, usually for a corporation to file a Chapter Seven bankruptcy. But one good reason would be if you are the officer or director of an insolvent company, you have a fiduciary duty to the creditors of that company to handle things properly. That's a matter of Florida law. If you file a Chapter Seven bankruptcy for the company and give it all to the trustee, then that becomes the trustees problem, and it's no longer your problem. The other reason that a company may want to enter into a chapter seven bankruptcy is that the judge can accrue a sale of the assets of the bankruptcy estateUnknown Speaker 14:00 ToUnknown Speaker 14:02 your spouse, your friend, your cousin, your somebody like that they or you could even buy the asset back from the bankruptcy estate yourself using exempt assets to pay for it, or post bankruptcy wages to pay for it. Once the judge approves the sale, creditors cannot set it aside or go after the new entity, because otherwise the doctrine of successor liability will apply. So, a lot of times physicians Tell me, well, I'll just have the minimum limits of liability on my malpractice policy. If somebody Sue's me I'll just shut the company down. I'll set up a new one. It's not so easy, because the doc of the doctrine of successor liability. Now the fourth term we have here is the word discharge. An individual who files a chapter seven bankruptcy can discharge the debt,Unknown Speaker 15:07 it goes away, you get a fresh start.Unknown Speaker 15:10 But another entity like a corporation that goes into a chapter seven bankruptcy does not get a discharge. It also doesn't have any assets except for whatever assets it had that the trustee abandons the trustee doesn't take over, doesn't try to sell. So again, I've had several clients in the past filed chapter seven bankruptcies, not realizing that they weren't going to get a discharge, and they say it's known, they would not have filed. Now, loss of discharge on page 29 is a really bad thing. You take an individual, you put them into bankruptcy, and then you discover that for one reason or the other, they can't get a discharge. Now, it's not only waiting eight years to file a bankruptcy again,Unknown Speaker 16:03 it's never getting a dischargeUnknown Speaker 16:05 from the judgment.Unknown Speaker 16:08 And how can you lose your right to a discharge? Well, one way is that if you make a transfer to avoid creditors within one year before the filing of the bankruptcy petition, then you will lose your discharge in most circumstances. So, if you have a client that may have to use bankruptcy, and you have decided that it is best for them to try to transfer assets to avoid creditors, and by the way, there's nothing wrong with that under Florida law,Unknown Speaker 16:42 it's a common strategy.Unknown Speaker 16:46 But if they do that, and within a year, they file bankruptcy or they're forced into bankruptcy, then they have lost their discharge. So you have to be very careful with timing How do you keep creditors from forcing you into bankruptcy, most of us would not want to be in bankruptcy. It's like a fishbowl completely publicly exposed with lots of tools that the bankruptcy court has the you may not want to apply to your clients. If you have if an individual has less than 12 creditors than any one creditor can force the individual into bankruptcy. And as I said, if that person committed a fraudulent transfer, less than a year before they're forced into bankruptcy, they cannot get a discharge ever.Unknown Speaker 17:44 But if you have 12 or more creditorsUnknown Speaker 17:49 at arm's length,Unknown Speaker 17:50 they could be relatives with an arm's length creditorsUnknown Speaker 17:53 with certain kinds of debt,Unknown Speaker 17:56 then it would take three of them to force you into bankruptcy. So if you Most clients will just have one or two big creditors,Unknown Speaker 18:03 then they want to keepUnknown Speaker 18:05 another dozen happy creditors so that they cannot be forced into bankruptcy.Unknown Speaker 18:14 Now, let's go to page 30.Unknown Speaker 18:18 Oops, I skipped one.Unknown Speaker 18:21 PAGE 30. a chapter 11. Bankruptcy is typically used by business corporations, they cannot work a deal successfully with their creditors or with one or two creditors. they file a Chapter 11 bankruptcy, they automatically get 90 days where they really don't have to pay their own bills. They can collect their accounts receivable, they can put together a plan to pay the creditors over time. They have to get an accounting firm. They have to disclose to the world that they're in a bankruptcy reorganization. But it gives them The ability to negotiate with creditors and any debt that they dischargeUnknown Speaker 19:07 in the process of negotiation and settlementUnknown Speaker 19:11 avoids income tax under Section 108 of the income income tax code, whether the shareholders are the partners of the entity are insolvent or not. So again, this is an expensive process. You want to make sure that your clients hold on to enough cash or enough collateral so that they can make sure they have enough cash to pay to file a Chapter 11 bankruptcy, if they want to be able to retake the business or to pay to file a Chapter Seven bankruptcy and then buy the assets from the trustee of the chapter seven bankruptcy. So a lot of Floridians and a lot of people quite candidly who were moved to Florida as the result of this crisis, we'll put a lot of their money or all of their money into a home set up to half an acre if they are within the city limits up to 160 acres outside the city limits. Creditors can't touch the homestead. Creditors will hopefully negotiate knowing that not more than three creditors and have another 910 or 11 or 12 friendly creditors, they can't force you into bankruptcy. They're going to take hold of your company, you use some of the money in the homestead to pay for a chapter 11 bankruptcy, you negotiate with creditors and or get the bankruptcy judge to help you approve a plan or you come out on the other side.Unknown Speaker 20:50 Most clientsUnknown Speaker 20:52 who have dealt in good faith with the banks or other lenders have been able to work out deals sometimes Those deals have had to be in bankruptcy, because some of the lenders or some of the creditors would file lawsuits not trying to negotiate. Suddenly, they're about to get a judgment. If they get a judgment, they're going to be seizing assets, that's going to make the business even worse. So the client files the chapter 11 bankruptcy, the friendly creditors who didn't want to disrupt the businessUnknown Speaker 21:27 can vote for a plan.Unknown Speaker 21:29 The voting rules are very complicated. You need a certain percentage of the debt and a certain percentage of the lenders in each categoryUnknown Speaker 21:39 to approve the planUnknown Speaker 21:41 to be able to do pretty much what the debtor reasonably wants to do. So part of the planning here is to see a good bankruptcy lawyer and to make sure you have the right kind of debt. If you have one creditor that's a real stinker. You may be able to work better with that creditor by borrowing more money from other creditors who are going to be cooperative. And those may include related parties. Now, in a chapter 11 bankruptcy, they call the debtor, the debtor in possession because in a chapter 11 bankruptcy reorganization, the debtor holds on to all of the assets. I think everyone here knows what the definition of an exempt asset and a non exempt asset is. I think everyone here knows that you have to live in Florida 730 days if you've moved here from another state, before you can file a bankruptcy, applying Florida law, but nevertheless, you can stay out of bankruptcy. If you move here. Get a nice big homestead.Unknown Speaker 22:56 Let things blowUnknown Speaker 23:00 AndUnknown Speaker 23:01 then after the 730 days, consider whether you want to use bankruptcy or not knowing that the fraudulent transfer into the homestandUnknown Speaker 23:10 will beUnknown Speaker 23:12 lost. Now, page 33, the attorney client privilege, it's very sticky. In the bankruptcy context. There are credit lawyers in Florida who believe that the crime fraud exception to the attorney client privilege appliesUnknown Speaker 23:32 when a Florida lawyerUnknown Speaker 23:34 is involved with a client's decision to make a transfer to avoid creditors.Unknown Speaker 23:41 I don't agree with that position.Unknown Speaker 23:43 And I don't know that there's any Florida case law to support it. But there is a US Supreme Court case not too old, which says that since a fraudulent transfer is considered to violate Bankruptcy Code Section 523Unknown Speaker 24:00 creditors can reach the attorneysUnknown Speaker 24:04 correspondence and other documentationUnknown Speaker 24:09 under the crime fraud exception.Unknown Speaker 24:12 So when you are representingUnknown Speaker 24:15 an individual who is involved with a company, and the company may go bankrupt, and hopefully the individual won't. You want to be very mindful that if you represent the company and the company goes into a chapter seven, you can lose your attorney client privilege. Or if there's been a fraudulent transfer relating to the company under 523. You could lose your attorney client privilege. You might be better off representing the individual officers and directors only. Not the company and keeping them out of bankruptcy. And even if your attorney client privilege still applies, you're going to have to prepare a privilege log. And if you wrote them 107 different letters, you're going to have to show the court and the opposition. The names, who those letters went to what dates they went out what they were about. So you have to be very careful in your communications. And what I should have said at the very beginning of this webinar, which I'm sure everyone here knows is, you don't do this at home. You don't you do this with the assistance of a debtor, creditor lawyer, also known as a bankruptcy lawyer, a good bankruptcy lawyer, who understands all these things that I'm talking about, and much more page 35, we cover the doctrine of successor liability. I see I've got about five minutes here, which is usually about two tenths of a billable hour.Unknown Speaker 25:52 PAGE 36.Unknown Speaker 25:54 Another strategy available to your clients who have an insolvent corporate situation is an assignment for the benefit of creditors. As I said, the officer of an insolvent company has a duty to the creditors to safeguard the assets and to not waste them. Florida law allows you to use a state court proceeding where theUnknown Speaker 26:20 company files forUnknown Speaker 26:23 the court to appoint a receiver. This receiver is going to be the person requested by the company. The receiver receives an assignment of the assets of the company sells the assets under court supervision, and then pays the creditors under court supervision. The creditors are all parties to the proceeding, and they have the ability to show up and complain. But if you follow the decisions of the judge, you're not going to have fiduciary duties. The problem with the ABC in my opinion is it does not free you from the doctrine of success or liability. So if you're a client puts his company into an ABC and his wife or his husband buys the company from the ABC, the creditors may still be able to use the doctrine of successor liability. Although most creditors don't know about it or don't use it. It's just a reason to use a bankruptcy as opposed to, andUnknown Speaker 27:21 ABC.Unknown Speaker 27:25 Now, here's aUnknown Speaker 27:25 timeline on page 41. If you're not able to see it, I'll be glad to send it to you. Any fraudulent transfer that you've made with the four years before filing the bankruptcy may be set aside in bankruptcy. So you have to be very careful on the timing. And as I've said, I'm very much abbreviating this presentation to keep it down to the 30 minutes. I know that everybody's very, very busy at this time helping clients out. If you want more information, let me know I'll send it to you. The final thing I want to say is to carefully let clients who may have insolvent companies know about the preferential transfer laws, that if I have a company that's upside down, or it's likely to be insolvent, it's expected to be insolvent, I take out a dividend.Unknown Speaker 28:19 With it within a year before the company goes into bankruptcy or a Florida court proceeding is fileUnknown Speaker 28:28 I have to give the dividend back.Unknown Speaker 28:31 On the other hand, if I'm earning a salary based upon the work I'm actually doing at the present time, not a past due salary, but a present salary commensurate with what I am worth, as a professional or as a worker in my business, that will not be set aside. So the three the three exceptions to the preferential transfer rule, which is what I'm talking about, are a contemporaneous exchange. value in the ordinary course of business, or getting I mean operating in the ordinary course of business, or giving something to somebody for new value. And we have some literature here that you can review on it. But you just don't want clients to make dividend payments or to do silly things.Unknown Speaker 29:22 The final thing isUnknown Speaker 29:26 the preferential transfer rules as they apply to guarantors. This is really, really nasty.Unknown Speaker 29:33 Let's see. Let's say that IUnknown Speaker 29:35 guaranteed Elise from my daughter's business.Unknown Speaker 29:39 The rent is $10,000 aUnknown Speaker 29:40 month. My daughter's company becomes insolvent. She's nevertheless able to make that rent payment for 12 months. Then she goes the company goes bankrupt. Every $10,000 payments she made relieved me of the obligation to do to pony up as a guarantor. So now the creditors can can pursue me for $120,000. So, let's review what we've said here today. We need to sit down with clients. We need to try to help them realistically look at their cash flow situation and their cash flow needs. We need to help them realistically look at their debt situation.Unknown Speaker 30:28 We need to make sureUnknown Speaker 30:30 that they cut expenses and that they understand when they will run out of money if applicable. We need to make sure that they set enough money aside to be able to pay for a bankruptcy. If a bankruptcy may be the answer to restarting their business or surviving the situation because of the legal and accounting representation that they're going to need. We're going to have to make sure that they get good advice from a competent bankruptcy lawyer who understand Our situation cares about them. We need to make sure that we know who we're representing and what we should put in writing, and who the bankruptcy lawyer is representing, and what she should be put in writing. We need to look at who has guaranteed assets. And we need to keep things organized. Keep things calm. Right now you have a lot of businesses that are not expecting to be insolvent because the government's about to print about a trillion or a trillion and a half dollars to bail everybody out. So now would be a much better time to make a move that might be considered to be a preferential transfer or to a transfer to avoid creditors than doing it in three months when things much may look much worse.Unknown Speaker 31:54 Finally,Unknown Speaker 31:57 it's really, really importantUnknown Speaker 32:00 To get with the CPA for the client if you can to make sure you bring in a real sense of reality, one thing I was really pleased with when they rolled back the April 15 to June 15, is that CPAs now have more time to give good business advice. Some of the some of the best things that a lawyer can do for a client is to get them in front of the CPA, and make sure that the CPAUnknown Speaker 32:27 gives themUnknown Speaker 32:29 good advice.Unknown Speaker 32:32 I've got an asset protection checklist here in the materials for you. I've covered my 30 minutes. If there's anything else I can do for you, please let me know. The final thing I'll show that I meant to show is if you have a medical practice, and the client is going to loan money to the practice, make sure you get a promissory note and a security agreement to put the client in front of the other creditors. If there's already multiple creditors give the creditor who is going to be the friendliest a lien on the assets. That lien probably needs to be put into place, night more than 90 days before a bankruptcy or a court proceeding, or 100 or a year, if that creditor who's getting the preferential lienUnknown Speaker 33:25 is related,Unknown Speaker 33:27 meeting the definition of what we call an insider. SoUnknown Speaker 33:34 if there's a problem with basisUnknown Speaker 33:36 that look at owing too much moneyUnknown Speaker 33:40 to the client could cause a taxable event. You could set up a new parent company to own the practice. And then the new parent company could be owed money, but you would not do this unless the entity is solvent.Unknown Speaker 33:53 So I hope that I'veUnknown Speaker 33:56 helped you giving you some tools for conversation. Again, please let me know if you have any questions, comments or suggestions. There's many other slides here that give you other ideas. We'll be covering these in more depth in other programs that you saw. Now you see my screen. Have a fantastic day. Make the rest of your day be billable and meaningful. Thank youTranscribed by ................
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