The Secrets of Asset Protection: Only the Wise Survive

Transcription

1 The Secrets of Asset Protection: Only the Wise Survive The Financial Fortress Edition An Introduction to the Fundamentals of Asset Protection John D. Ewing, MBA, JD P. Thomas Adams, ESQ, JD 3 rd Edition Copyright 2013 by Bridgeway Financial Corporation Published by Bridgeway Financial Corporation The Columbia Tower Center 701 Fifth Ave., Seattle, WA (206) No part of this publication may be reproduced, copied, duplicated, or stored in an electronic retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the express written permission of the publisher and the author. This information is provided for your convenience only. While the information provided is believed to be accurate and up to date, it is not and should not be considered legal advice. Printed: December 2013

2 PREFACE This book was written to provide an introduction to the fundamentals of asset protection for the clients of Bridgeway Financial Corporation (BFC). This book is not for dissemination to the general public and we expect clients not to lend this book to third parties. Do not make any copies or loan this book to any third parties to read. For additional copies please contact BFC. This book could be entitled Asset Protection 101 or may be referred to as a boot camp. It is designed as a training manual to be used to teach the principles of asset protection. You will become more familiar with the various complex entities that BFC markets such as the Nevada Corporation, the Comprehensive Protection Plan, the ERISA Compliant LLC and other strategies. After reading this book, you should be able to speak with authority and knowledge about asset protection. The general idea is to start with the basic fundamentals of asset protection. This requires a basic understanding of creditor/debtor law and how the collection process works. It also requires an understanding of the doctrine of constructive fraud. These are topics that most of the people in the asset protection business do not understand. I want to show you enough detail that you understand the principals involved in asset protection without losing your ability to see the forest because of the trees. This book is certainly not a comprehensive text on the subject matter. Asset protection covers a wide spectrum of issues and topics too broad to cover in one volume. We anticipate companion volumes that will discuss more complex domestic asset protection entities, as well as provide more information about offshore entities such as offshore asset protection trusts, captive insurance companies, private banks and the US taxation of worldwide income. These books may be used as text books for more advanced understanding of asset protection. Please note that the examples and statistics referenced in this edition were gathered in 2007, so allow for some changes. We currently have a newsletter called The Sentinel Review. It covers financial privacy, asset protection and related topics. It is a free newsletter that you can subscribe to from our website. There is also a commercial publication of this book for sale to the general public called The Secrets of Asset Protection: Only the Wise Survive. This book can be purchased online at We also anticipate continuing education and seminars. If you find any passages confusing, have specific material or subject matter that you would like to have added to the book, feel free to contact BFC at info@bridgewaycorp.com. We appreciate your feedback to help guide us in our quest to improve our asset protection materials. This information is provided for your convenience only. While the information provided is believed to be accurate and up to date, it is not and should not be considered legal advice. Copyright 2013 Bridgeway Financial Corporation Page ii of 527

3 TABLE OF CONTENTS CHAPTER 1: WHY IS ASSET PROTECTION PLANNING NECESSARY? The Litigation Explosion The Contingency Fee System Excessive Jury Verdicts The Liabilities of Everyday Life Ignorance of the Law is No Excuse Liability for the Acts of Others The Liabilities of Professionals and Small Business Owners Tax Liabilities First Major Cause of Bankruptcy is Medical Expenses Denial of Claims Personal Injury Protection Coverage (PIP) The Second Major Cause of Bankruptcy is Divorce Uninsured/Underinsured Motorist Coverage (UIM) The Insurance Industry s Subrogation Scam The Asset Protection Bottom Line Insurance is Not Enough! CHAPTER 2: UNDERSTANDING COLLECTIONS PROCEDURE The Basics of Creditor/Debtor Law How Creditors Locate Your Assets Understanding Civil Procedure Contempt of Court The Post Judgment Collection Process Post Judgment Collection by Private Creditors Garnishment Lien Foreclosure Actions Writs of Attachment Copyright 2013 Bridgeway Financial Corporation Page iii of 527

4 CHAPTER 1: WHY IS ASSET PROTECTION PLANNING NECESSARY? THE LITIGATION EXPLOSION Primarily due to the litigation explosion that started in the US toward the end of the twentieth century, asset protection planning has become a financial necessity in the US. The litigation environment has become hostile to defendants with unpredictable judges, higher damage awards, runaway juries and expanded theories of liability. Traditional forms of protection have become inadequate. Insurance policies contain many exclusions, policy limits are inadequate, the rates are high and policy lapses can occur. Piercing the corporate veil has become easier and there has been an increase in litigation seeking damages from Officers, Directors and shareholders. Although asset protection is not yet a class offered in law school curricula, it has become a necessity of everyday life. The American Bar Association has formed an Asset Protection Committee and some Continuing Legal Education (CLE) programs around the country are sponsoring Asset Protection CLE seminars. Columbia Center Tower Building Seattle, WA Attorneys practicing law in the US account for 80% of the attorneys worldwide and our law schools are increasing this disproportionate share annually. There were 1,633,127 lawyers actively practicing law in the US in the year An article in a Seattle paper stated that there are more attorneys in Seattle s Columbia Center Tower building than in all of Japan. It is anticipated that the number of practicing attorneys will double in less than ten years. Due to the excessive number of attorneys, it is becoming difficult to make a living as an attorney. This results in more and more frivolous and vexatious lawsuits being filed every year. Copyright 2013 Bridgeway Financial Corporation Page 27 of 527

5 One in every four small businesses has been sued or threatened with a lawsuit in the past five years. The average professional or business owner in the US will be sued five times during his or her lifetime. A new lawsuit is filed every 2 seconds in the US and nine out of ten lawsuits in the world are filed in the US. A US citizen has a one in three chance of being sued this year. Businesses are the number one target of lawyers; two out of every three will be sued this year. Tom Stanton thought he had it all: a beautiful home for his family, the car he d always wanted, a growing list of investments, his children in excellent schools, and dream vacations with his wife. But that all changed when he was served with process naming him as a defendant in a lawsuit. It did not matter that he was convinced he had done nothing wrong. He lost everything he had, and he still owes his attorney for the legal costs. THE CONTINGENCY FEE SYSTEM The US legal system is more favorable to persons filing a lawsuit (plaintiffs) than to the persons being sued (defendants). In England, and most other common law jurisdictions, the loser must pay the prevailing party s attorney fees. This deters attorneys and claimants from filing frivolous claims or claims without merit. In the US, we allow plaintiffs attorneys to take cases on a contingency fee basis in which they receive a percentage of the proceeds (usually 30-40%). Many large plaintiffs firms will spend Why Take a Chance on Losing Everything You Have? Contingency fees encourage the filing of spurious lawsuits. A new lawsuit is filed every two seconds and the deck is stacked in favor of the plaintiff. The average business owner or professional person stands a chance of being sued several times in his or her lifetime. Under the current system, any lawsuit, no matter how apparently worthless, can result in a ruinous judgment since one in every ten lawsuits results in a multimillion dollar verdict! thousands or even hundreds of thousands of dollars of their own money for expert witnesses, including accident reconstruction experts, investigators, economists, medical experts and other professional witnesses. Once a firm starts winning large verdicts, the firm retains capital to use for the preparation of future cases. A plaintiffs firm may advance funds for their client and then reimburse themselves from the proceeds of Copyright 2013 Bridgeway Financial Corporation Page 28 of 527

6 the trial, in addition to their contingency fee. The defendant must pay his or her attorney by the hour as the work is done and the defendant must pay for all expert witness and trial preparation expenses. Even if the defendant wins, the defendant is usually not reimbursed for attorney fees, court costs and witness fees. Something is wrong when an innocent defendant can be financially ruined by a frivolous lawsuit, while the claimant suffers no financial distress. EXCESSIVE JURY VERDICTS At the same time, runaway juries are frequently granting awards far in excess of the injuries sustained by the plaintiff. Every day we see headlines like the McDonalds case where Stella Liebeck spilled coffee on herself and got a $2.1 million settlement because the coffee was too hot. Shortly after Stella s lawsuit, another customer filed a lawsuit against McDonalds claiming a hot pickle fell out of a burger and burned her chin. She is asking for $100,000 damages and her husband wants $25,000 for an alleged loss of marital services. Nationally, 12 % of all jury awards are $1 million or more. The bottom line is that many plaintiffs attorneys are consummate trial attorneys with great expertise. Through lawsuits, plaintiffs attorneys have made more persons millionaires than all the lotteries and casinos in the US. THE LIABILITIES OF EVERYDAY LIFE Although there are many frivolous lawsuits, there are many defendants with valid claims that have merit. These defendants may be entitled to substantial damages that are not unreasonable due to the circumstances of the case. We are all vulnerable to substantial liabilities no matter how careful we may be. For example, many people have pet dogs, but no matter how wonderful your dog may be, dogs are unpredictable and it is the little cute ones that bite more often than the big ones. You can be very responsible and careful with your pets, but that beloved pet may still bite and/or chase someone. Serious dog bite cases usually settle for $30,000 to $50,000 and are covered by insurance, but occasionally a child or elderly person running from a dog will fall or get hit by a vehicle, resulting in death or serious injuries. There have been jury awards for such cases ranging from $500,000 to $6,000,000. Copyright 2013 Bridgeway Financial Corporation Page 29 of 527

7 The government s powers have grown exponentially every year over the last 30 years. These acts were supposed to fight crime & terrorism, but even though the intent was good, the effect has been to destroy the rights that were granted to us in The Bill of Rights. We all drive cars and we all make mistakes. If you fall asleep at the wheel, sneeze while turning or your brakes fail, you could be economically ruined. The damages could cost you millions of dollars that will not be fully covered by your insurance policy. In addition, every time you let your teenager or friend drive the family car you are financially responsible for any damages he or she may incur while driving. Unlike our ancestors who were frugal, we live in a society that encourages debt. We all carry debts: auto loans, mortgages, personal loans, credit cards, medical bills, lines of credit, real estate loans, alimony, child support, medical bills, legal bills and taxes are typical. In most situations debts are under control. Nevertheless, unforeseen circumstances may overwhelm your ability to meet your obligations. Slowdowns in gross revenue, reductions in workforce, medical emergencies or a divorce can financially destroy a fiscally responsible individual. Astronomical medical and legal bills can strike without warning due to accidents, illness or divorce. Miscalculations on a tax return or errors based upon good advice may result in a surprise assessment years later with accumulated penalties and interest. You may not be able to pay off a large assessment because the IRS charges 25% for interest & penalties. This fiscal burden is so high that substantial monthly payments do not reduce the principal. To a significant extent, we are all at the mercy of the liabilities of everyday life which are beyond our control. It does not matter how prudent, fiscally responsible or careful you are. We all make mistakes and we may be held liable for the errors and omissions of others. IGNORANCE OF THE LAW IS NO EXCUSE Our system of jurisprudence states that, ignorance of the law is no excuse even though it is impossible for anyone to keep up with the hundreds of thousands of rules and regulations enacted by various local, state and federal agencies and legislative bodies every year. We have zoning laws, labor laws, civil rights laws, anti-harassment laws, securities laws, communication laws, municipal Copyright 2013 Bridgeway Financial Corporation Page 30 of 527

8 ordinances, criminal laws, county ordinances, animal rights laws, employment laws, consumer laws and the list goes on. Violations of civil laws or regulations can result in the imposition of fines and even criminal penalties for violations of civil regulations. The line between civil and administrative law and criminal law has grown very thin indeed. An area of law has developed called quasi criminal. This area of law usually deals with instances where violations of civil or administrative codes have been given criminal sanctions or designated as misdemeanors. The designation quasi criminal has been used to justify the denial of due process of law typically provided a person in a criminal proceeding. Likewise, administrative law has been used to deny persons the level of due process of law required in a civil proceeding. Civil forfeiture laws are essentially an administrative remedy given to the state to confiscate property that: a) was purchased with the proceeds of a crime; b) was the location where a crime occurred; or c) was used to facilitate a crime. These laws arose as a response to the Wars on Organized Crime, Drugs and Terrorism. At first, this seemed like a good idea. Why not confiscate the property where drugs are manufactured or a car that has been used to transport drugs or property purchased with drug profits? But the civil forfeiture laws have expanded far beyond the limitations of drug dealing, terrorism and organized crime. The problem is that the scopes of these laws have expanded to such an extent that innocent parties property rights are in danger. Civil forfeiture laws often allow the police to confiscate property without a warrant, court order or even a hearing prior to seizure. The police may be able to confiscate your property even if they have not charged you with a crime. Typically, unless you initiate a legal action within a short deadline period specified in a forfeiture notice, your property will be sold at an auction. If you fail to respond in time, you will lose your property. If you have sufficient funds to retain counsel and file a timely civil action, you may receive a post confiscation hearing. However, you are guilty until proven innocent. You will be required to Asset Protection is no longer just for the rich and famous. These days Asset Protection is needed by everyone. prove by a preponderance of the evidence that you and your property are innocent. Do you think this is ridiculous? It gets worse. You may not have the right to a jury trial. In some states, the initial hearing is presided over Copyright 2013 Bridgeway Financial Corporation Page 31 of 527

9 by the local sheriff, chief of police or their nominee who sits as the administrative judge. In these jurisdictions, after you are found guilty, your only remedy is an appeal. You will be denied the opportunity of a new trial with judge and a jury of your peers. On appeal, the only issue will be whether there was sufficient evidence or minimal evidence supporting the administrative judge s opinion. Sometimes this can be avoided by filing a petition to remove the case to a municipal or county court. In other jurisdictions, the process begins before a local or administrative judge. Due to the complexity of civil procedure, you will probably need to retain an attorney. And even though you are the accused in the civil proceeding, you are forced into the position of the plaintiff or petitioner and will be required to initiate the action by filing a petition or complaint and paying the filing fees and other costs, which are usually the obligation of the accuser, the government, in a criminal action. Normally, a person accused of complicity in a crime is the defendant and is presumed innocent; and the plaintiff has the burden of production to prove the accused guilty beyond a reasonable doubt. However, under the civil forfeiture laws, the burden is Most Government Agencies have the power to seize your assets at any given time without due process. placed upon the accused, as plaintiff, to prove their innocence by a preponderance of the evidence. Consequently, the accused as plaintiff or petitioner appears before a judge who is required by law to presume the he or she is guilty of complicity in a crime. Hence, the accused is denied the presumption of innocence and the burden of proof is placed upon the accused instead of upon the government. Originally, civil forfeiture actions were narrowly applied only to serious felonies such as organized crime and drug distribution. Now the scope of actionable offenses is outrageous and in some states civil forfeiture is being extended to all criminal violations, including misdemeanors. In Texas, Florida and New Jersey civil forfeiture applies to any kind of criminal violation, no matter how trivial. This includes violations of administrative regulations that are classified as quasi criminal misdemeanors. A gynecologist in New Jersey who allegedly performed examinations in violation of a state regulation had his office building and equipment confiscated. Many jurisdictions now routinely confiscate the vehicles of persons charged with Copyright 2013 Bridgeway Financial Corporation Page 32 of 527

10 drunk driving. There have been many cases where parents or grandparents have lost their homes or cars because their children or children s friends sold marijuana on their property. Under a new federal law, placing false information on a loan application is a minor federal offense that can result in the confiscation of property purchased from the proceeds of the loan. The number of agencies given forfeiture authority has gotten overly broad in scope. Currently, there are over one hundred federal civil forfeiture statutes, both civil and criminal. Federal agencies with civil forfeiture authority include, but may not be limited to, the following agencies: DEA, Customs, IRS, Coast Guard, Bureau of Land Management, US Postal Service, Fish and Wildlife Bureau, Securities and Exchange Commission, Food and Drug Administration, Justice Department, Immigration and Naturalization Service, and HUD. There are also thousands of state and local police agencies that have been given civil forfeiture authority. You don t have to be rich & famous to be protected from the litigation nightmare. LIABILITY FOR THE ACTS OF OTHERS Although we have little or no control over the acts of others, the law may hold you financially accountable for their actions. You may be accountable for the actions of your partners, employees, agents, family members and persons who drive your vehicles. If your employee sexually harasses a coworker, if your partner commits malpractice or if your teenager runs over a nun with your SUV, you may be held responsible. Environmental cleanup costs are extremely expensive. Why worry about it if you are an environmentally responsible person? You may be held responsible for contamination that spreads to your land, that s why! If the man living next door spills toxic chemicals into the ground and they flow underground onto your property, you may have to pay for cleanup that may cost hundreds of thousands of dollars. Think about that the next time you see him dumping battery acid or the spent oil from his oil changes on the ground behind the garage next to your fence. Rare and difficult to kill molds have infected thousands of homes in the Southwest. You may be liable for harm to persons infected by toxic mold. You may be liable for infected real estate sold to others. You may have to pay damages for the harm to the new owners, as well as the cleanup costs and loss of Copyright 2013 Bridgeway Financial Corporation Page 33 of 527

11 the use of the property. Toxic mold cases have incurred multi-million dollar settlements. Civil forfeiture laws will hold you accountable for the misconduct of persons using your vehicle. Parents have lost their vehicles when their teenager got caught with marijuana in the family car. Grandparents have lost their homes because their grandchildren sold marijuana in the backyard or on the porch. Many landlords have lost their buildings because of the misconduct of tenants. Multi-level and network marketing (MLM) groups are sometimes vulnerable to allegations that they are unlawful pyramid schemes, unlawful business opportunities, theft, fraud, et cetera. After some of these businesses have operated for several years and many members have made a lot of money, an attorney general or federal agency may declare the program to be unlawful. Individuals who participated in good faith in a program they believed to be lawful are sent letters telling them that the program was a ponzi scheme or fraudulent endeavor. The letter may state that the profits they received were obtained by theft or by means of a criminal endeavor and they are instructed to return all of the profits they received from the program. These demand letters are often received after the MLM participant has and used the money to buy a new home, real estate, boats, stock, et cetera. If the money is not returned, the trustee and/or receiver may ask for a sworn financial disclosure and may initiate a civil forfeiture action, if there are sufficient assets. THE LIABILITIES OF PROFESSIONALS AND SMALL BUSINESS OWNERS In today s litigious society, many different kinds of legal actions can financially ruin a business. The typical risks include, but are not limited to: company vehicles accidents, malpractice claims, breach of contract claims, failure of a business venture, sexual harassment litigation, IRS audits or assessments, SEC or FTC violations, environmental accidents, defective product claims, negligence, class action lawsuits, contamination soil cleanup costs and the list goes on and on. Even if your company prevails, the legal fees alone may destroy the business financially. Typically, one out of every three employees in a company will eventually file a complaint against their employer with a government agency and/or file a civil action against their employer. Two out of three small businesses will be sued in any given year. Statistics provided by the US Chamber of Commerce indicate that small businesses are spending millions each year to defend against lawsuits. Copyright 2013 Bridgeway Financial Corporation Page 34 of 527