Robert Krause was dodging a California judgment held by his creditor, the Cadle Company. Krause went to a Nevada law firm, Woods & Erickson, LLP ("W&E"), and apparently without telling them about the California judgment, had W&E implement a comprehensive estate plan, which included an asset protection trust into which Krause eventually transferred most of his valuable assets.
Cadle filed a claim against W&E alleging conspiracy, aiding and betting, and concert of action in regard to Krause's fraudulent transfers. W&E offered Cadle the sum of $8,000 to settle, and when that was rejected the parties went to trial.
W&E partner Robert Woods testified that his firm was not aware of the California judgment at the time they did Krause's estate and asset protection planning, and Woods told Krause that transfers of assets into the trust could be set aside by an existing creditor.
The Court ultimately held that Cadle had proven its case under a preponderance of the evidence standard, but not under a clear and convincing standard, and thus entered judgment for W&E on all claims. The Court also awarded costs and attorney fees to W&E.
Cadle of course appealed, and the appeal was heard by the Nevada Supreme Court.
The salient issue was whether W&E as a non-party could be liable for what it was sued for: conspiracy, aiding and abetting and concert of action.
The Court noted that a majority of jurisdictions do not recognize accessory liability for fraudulent transfers, either because a fraudulent transfer is not considered a tort, or because a state's fraudulent transfer statutes have been construed as not allowing a claim against a nontransferee, i.e., somebody who never received the transferred assets.
Within these two rationales for denying a fraudulent claim against a third party, some courts have also noted that a fraudulent transfer action is traditionally a claim for equitable relief (mainly, voiding the transfers), as opposed to legal relief by say of damages (which are not allowed, although a creditor choose a monetary award instead of avoidance). The Court further noted that Nevada law does not allow a money judgment recovery in a fraudulent transfer case in excess of the property to be recovered.
The Court decided that it would follow this legal/equitable distinction, and then further reasoned that an equitable action would not make sense against a person who never received the assets, i.e., a nontransferee. Thus, Nevada would not recognize a cause of action for aiding and abetting or civil conspiracy against a nontransferee, meaning that judgment would go to W&E on that issue.
As a bandaid to Cadle, or maybe a "comp" might be a better term since this was in Las Vegas, the Court cut down slightly the award of costs to W&E.
ANALYSIS
The holding of the Nevada Supreme Court is more or less consistent with others on this issue, particularly as it pertains to attorneys who have been sued for a fraudulent transfer: So long as the attorney was not a party to the transfer and was a "mere scrivener" in drafting documents, there will be no liability flowing to the attorney.
This rationale protects the innocent attorney, being the attorney who doesn't know that she is being used by a debtor to cheat creditors. This case is a good example: Krause mislead W&E as to whether he had any outstanding liabilities, and their work was not aimed at an existing creditor.
However, in some states, where an attorney knows and intentionally assists a client with committing a fraudulent transfer, a creditor may be able to bootstrap certain claims together and zing the attorney with personal liability. See Slenn, David J., Has the Warning Bell Sounded for Asset Protection Planners? The possibility of disciplinary sanction by the State Bar is also very real in such cases, though apparently outside Florida where it seems to be just fine with the State Bar for an attorney to help a client cheat legitimate creditors through dishonest means.
There is also a mostly-unanswered issue as to whether a creditor may sue an attorney who does planning for a debtor on a fraudulent transfer claim for the fees paid to the attorney, since those fees did not provide any "reasonably equivalent value" to the debtor's financial estate, recalling that "reasonably equivalent value" is always measured from the viewpoint of creditors, not debtors. Since asset protection planning is often expensive, particularly if it is done right, this sort of claim might cause an attorney to have to disgorge a goodly amount of fees, and there is little that such an attorney could offer in the way of a defense. In such a case, the attorney would be sued as a transferee, and so the defensive rationale applied by the Nevada Supreme Court in this case would not apply at all.
But even if there is no liability to the attorney because the attorney acted as a "mere scrivener", there is a good reason to be on-guard against clients and potential clients, for there can be a significant cost to dealing with these sorts of transactions.
First, in many states, the attorney cannot recoup (as W&E did here) its attorney fees for fighting the action. In many cases, attorney malpractice carriers will not cover these sort of cases and will immediately send a "Reservation of Rights" letter even if they pick up defense costs. That means that the attorney may have to come out-of-pocket to hire somebody to defend the case (defending it yourself has its own problems, summarized as "he who represents himself has a fool for a client).
Second, there is the professional time lost in dealing with the case. This case went all the way through discovery and trial, meaning that W&E's attorneys probably lost a significant amount of professional hours that they might have otherwise billed to paying clients.
The remedy is to recognize a critical fact of asset protection planning: Clients and prospective clients in financial distress will often lie to their attorney to get them to do something that the attorney would not ordinarily consider doing. Sometimes, as here, they will conceal judgments and claims against them, and in other cases they will pooh-pooh legitimate claims as being worthless. It is not enough to get a client to sign an Affidavit of Solvency, since if the client will lie to your face then the client will probably lie under oath too.
Therefore, attorneys taking asset protection cases, and maybe even some types of estate planning clients, must borrow a concept from the banking industry, which is KYC -- Know Your Customer. The best practice in asset protection planning is to conduct some due diligence of a prospective client before sending the Engagement Letter, at the very least conducting a Google search, and maybe also running a search of PACER (the inexpensive nationwide federal court case search) and the local court database for the county in which the prospective client resides.
Ideally, attorneys practicing in this area should also perform a credit and financial background check on their prospective clients, with the latter's consent. This can perform a useful dual-purpose of showing both the attorney and the client (if accepted) what a creditor might now see of a client were the creditor to perform such an investigation, as well as protect the attorney against the dishonest prospect.
I can't tell you how many times over the last couple of decades that I've been called by a prospective client for asset protection planning, only to find out that the person was being dishonest and had cases, judgments or support payments, etc., pending. In not just a few cases, the prospective clients had ongoing criminal matters and were really worried about forfeiture of their assets to recompense victims for their misdeeds or because they were involved in money laundering activity.
How would you later like to find out that you had helped somebody like that? How do you think that would look to your State Bar counsel? Here, the ounce of prevention really is worth a ton of cure. Much better to spend 30 minutes up-front than 100+ hours later dealing with a fraudulent transfer lawsuit.
Asset protection planning is a very difficult and complicated area of practice that implicates many more problematic and very serious issues than mere estate or transactional planning, and that complexity starts right up front with the initial prospective client contact.
Know Your Client up-front, not after irreparable damage has been done.
CITE AS
Cadle Co. v. Woods & Erickson, LLP, 2015 WL 1402689 (Nev., March 26, 2015). Full opinion at http://goo.gl/Fyjzl0
This article at http://onforb.es/1xG7jkj and http://goo.gl/lvINXI
