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One-Year Vacation From Practice For Attorney Who Fraudulently Transferred Assets

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A Florida Attorney was approached by a Client who wanted to buy a piece of residential property in Pennsylvania. This seemingly innocent representation ends up with Attorney being suspended by the Florida Bar for a year, and you'll soon see why.

Client had been unable to secure traditional mortgage financing to buy the property from its existing Owner. Attorney thus formed, and was himself the sole owner of, the National Lease Management Corporation (NLMC). The idea was that Attorney would use NLMC to buy the property, and then lease it back to Client to live in.

Thereafter, Attorney drafted a Letter of Intent to purchase the property from Owner for $315,000 on the terms that $7,500 would be paid immediately as a down payment, and NLMC would make monthly payments to Owner until the balance had been satisfied. NLMC also gave Owner a Promissory Note to secure the balance of the payments.

So far, so good, and Owner took the $7,500 and the Promissory Note, and then deeded the property to NLMC.

At first, NLMC made payments to Owner. Then, NLMC apparently quit making payments to Owner and convinced her to accept a second, and then a third, Promissory Note instead -- the third and last Promissory Note for $110,000.

In the same year that the third Promissory Note was given to Owner, Attorney transferred the property out of NLMC to himself, thus leaving NLMC without any significant assets. About as quickly as the property was in his name, Attorney then took out a mortgage on the property for $274,975 -- and used the proceeds to pay his own personal tax liabilities, and not Owner.

After a couple of more years of non-payment, Owner sued Attorney and NLMC; whereupon, Attorney and his Wife filed for personal bankruptcy in Pennsylvania.

Not to be discouraged, Owner filed an adversary action in the bankruptcy proceeding asking for a determination that Attorney and his Wife owed a debt to Owner, and the debt was non-dischargeable. The bankruptcy judge ultimately agreed, and held:

To alleviate their tax problem with the IRS, debtors [Attorney and his wife] decided to take pre-emptive action against plaintiff [Owner]. To have equity with which to obtain a loan and hold the IRS at bay, debtors decided that NLMC would convey the property to them without paying any consideration for the transfer before plaintiff took action and acquired a judgment lien against the property. Although debtors' residence in Florida had sufficient equity to secure such a loan, they obviously chose not to do so.

By so doing, debtors undertook to cheat plaintiff by knowingly and intentionally depriving her of an opportunity to take action against NLMC to satisfy the amount owed under the third note. Their machination succeeded. Apart from real property, NLMC had assets of little or no value upon which plaintiff could levy to satisfy a judgment.

The bankruptcy court concluded that NLMC's conveyance of the property to [Attorney and Wife], without consideration, "unquestionably was fraudulent." The referee in this disciplinary case considered much of the same evidence presented to the bankruptcy court and has independently arrived at substantially the same findings—that is, in fraudulently transferring the [] property to himself, Attorney acted with the actual intent to defraud [Owner], the sole creditor of NLMC.

Based on the bankruptcy court's findings, Attorney was hauled before the Florida Bar, and the Referee recommended that Attorney be found guilty of violating Florida Bar Rule 3-4.3, which provides:

the commission by a lawyer of any act that is unlawful or contrary to honesty and justice, whether the act is committed in the course of the attorney's relations as an attorney or otherwise, whether committed within or outside the state of Florida, and whether or not the act is a felony or misdemeanor, may constitute a cause for discipline.

The Referee also concluded that Attorney's fraudulent transfer of the property from NLMC to himself "was not only unlawful, but also contrary to honesty and justice, in violation of Bar Rule 3-4.3."

Despite all of this, the Referee recommended that Attorney receive no more than a private reprimand from the Florida Bar. Attorney appealed to keep his record clean, and the Florida Bar cross-appealed the slap-on-the-wrist sanction.

The Florida Supreme Court heard the matter, and agreed with somebody, and that somebody was not Attorney.

Attorney basically claimed that since Owner was not his client, his fraudulent transfer perpetrated to the detriment of Owner could not be the basis for professional discipline.

Au contraire, said the Florida Supreme Court:

Rather, the commission by a lawyer of any act that is "unlawful or contrary to honesty and justice" may be cause for discipline.

That the Bankruptcy Court had found that Attorney had undertaken to cheat Owner by way of the fraudulent transfer was more than enough for the Florida Supreme Court to affirm the Referee's finding of Attorney's misconduct under Bar Rule 3-4.3. Further,

 Although [Attorney] was acting on behalf of his own corporation, and not as a lawyer representing a client in a transaction, he is nonetheless a member of The Florida Bar and subject to the disciplinary authority of this Court. * * * The Court expects members of the Bar to conduct their personal business affairs with honesty and in accordance with the law. * * * Moreover, we have consistently stated that basic fundamental dishonesty is a serious flaw, one which cannot be tolerated by a profession that relies on the truthfulness of its members.

[internal quotations and citations omitted]

It is here that the Florida Supreme Court then disagreed with the Referee, and upped Attorney's sanction from the private reprimand, to the much more serious one-year suspension from the practice of law.

ANALYSIS

There are a couple of key takeaways from this Opinion. The first is that the fraudulent transfer caused the bankruptcy court to except the debt from discharge.

Sometimes you'll be sitting in an asset protection seminar, and somebody who doesn't know what they are talking about will say something like, "Who cares if there is a fraudulent transfer, since the only effect will be that the court reverses the transfer?"

As shown by this case, fraudulent transfer can put a debtor into a much worse situation than if they had done nothing at all. In bankruptcy, a fraudulent transfer can lead to outright denial of discharge for the debtor, surcharge of the debtor's otherwise exempt assets, or (as here) exception of the particular debt from discharge.

An exception from discharge effectively means that the debt can never be discharged, which of course takes away in settlement negotiations a substantial concern of a creditor. Now, a creditor can simply make the debtor's life miserable until the debt is paid in full.

The second takeaway from this case is that a fraudulent transfer is a dishonest act which for participating professionals could professional discipline -- including, temporary (as here) or permanent loss of licensure.

While Attorney was a party to the fraudulent transfer, the same dishonest act rationale could apply to another attorney who advised or assisted his or her client with a fraudulent transfer, but was technically not a party to the transfer.

Attorneys who practice in the area of asset protection planning frequently get panicked clients -- clients who just had a bad car accident, or found out that the bank was about to call their personal guarantee, etc. These clients want help protecting their assets, and usually aren't concerned about the consequences. If a fraudulent transfer accomplishes that purpose, they want it.

What the client wants, however, may be decidedly different than what the attorney can do. An attorney can neither advise nor assist with a fraudulent transfer without risking professional sanction. Maybe the attorney can legally do something else for the client such as take advantage of exemptions, etc., but advising or assisting a client to take action to hinder, delay or defraud creditors isn't in the cards.

Unless the attorney is willing to kiss his or her Bar Card goodbye.

CITE AS

Florida Bar v. Draughon, 94 So.3d 566 (Fla., June 28, 2012). Full Opinion at http://goo.gl/r3gtQY

This Opinion at http://onforb.es/1cqdwlT and http://goo.gl/L5UEhj