Lawyer, Law Firm And Bank Exposed To Civil RICO And Other Liability For Assisting A Debtor Post-Claim In Kruse
As I have explained many times, when there is planning for a debtor who already has a claim pending, that is nothing like asset protection planning but is instead (outside some very limited exemption planning and the like which is permissible) just plain old fraud on creditors. Yet, some planners seem to think that they ought to engage in this type of planning, and so we routinely see reported opinions mostly in the area of voidable transactions where that sort of planning not only failed, as it should, but often resulted in more severe consequences to the debtor. We have seen cases where debtors have been hit with punitive damages, big attorney fee awards, and have lost their discharges in bankruptcy, all in addition to losing the assets that they were trying to protect. But here we see another side of such post-claim planning, where the planner and the bank involved themselves get sued for allegedly trying to assist the debtor in cheating his creditors.
The opinion that follows comes up on a motion for summary judgment, which does not include any factual findings by the court, but rather findings that the creditor has presented at least minimal evidence that such facts might exist (which is very different). I am advised that this case ultimately resulted in a settlement between the parties involved, so there will never be any adjudication by the court on the merits. The defendants in this case fervently denied and disputed the factual allegations. Please keep that in mind as we go through this opinion.
Be also advised that I was one of the expert witnesses for the creditor in this case, to testify on fraudulent transfer issues had it gone to trial. Nonetheless, my intention is to stick strictly to the text of the opinion in this matter, and attempt to divorce myself from any viewpoints based on my special knowledge of facts not in the opinion, and which would be irrelevant to anything anyhow. This is nothing like an important case because I was involved with it, but rather that this is a published opinion on an important matter of planner and lender liability for alleged voidable transactions under Iowa's Uniform Voidable Transactions Act (UVTA), which, being a uniform Act, means that this opinion could extend to other cases in the many states that have adopted the UVTA or its predecessor, the Uniform Fraudulent Transfers Act (UFTA).
It should go without saying that to the extent that my summary of the case seems to diverge with what the court actually wrote, the opinion controls. This is a very long opinion, probably suitable for an extended law review commentary written by a legal mind much brighter than my own, and you'll thus forgive me if I get something wrong in trying to condense it into this short article.
This case was the last of three lawsuits arising out of an auto accident in which Steven Weller ran into the car of Christina Kruse, cause the latter very serious injuries. In the first lawsuit, Kruse sued Weller for personal injuries and won a $2.5 million personal injury award. In the second lawsuit, Kruse sued Weller for having committed certain fraudulent transfers and won a judgment which set aside (avoided) those transfers. That brings us to the third lawsuit in which this opinion arises on a motion for summary judgment.
The complaint in the third lawsuit alleged that Weller's attorney, David Repp, and his law firm, Dickinson, Mackaman, et al., and the First State Bank of Lynnville, Iowa (First State), conspired to assist Weller in protecting his assets from the consequences of Kruse's personal injury judgment.
Essentially, Weller knew that he was a fault from the auto accident, and admitted the same to a police officer who appeared on the scene. Fearful of a liability award in excess of his $500,000 auto accident policy, and of losing the family farm, Weller retained the servers of a local attorney, Randy Stravers (who was not a defendant in this lawsuit), to transfer his farm into a revocable "living" trust and to make certain cash gifts to family members. Thus, Weller opened accounts with First State and made numerous cash gifts to family and friends. Later, Weller's insurance defense attorney was to tell Weller that these transfers were not appropriate in light of Weller's likely liability to Kruse.
Weller also told two officers at First State, Brad Van Vark and Steven Russell, that he had been in the accident with Kruse and would likely be sued. On September 15, 2012, Weller was sued by Kruse in the first of the actions. A year later, on September 9, 2013, and although First State knew about Weller's liability to Kruse, First State engaged in an annual borrower review for the Weller's loans and at this time Weller submitted to First State a financial statement claiming a net worth of $365,745. Kruse alleged that by this time First State knew that Weller was working with legal counsel to attempt to either transfer away or encumber Weller's assets with loans so that they would not be available to satisfy the Kruse liability, i.e., that First State knew or should have know that it would ultimately be an instrumentality in Weller's fraudulent transfers by way of encumbering his property.
Weller by this time had changed his legal counsel from Stravers to David Repp of the Dickenson law firm who held himself out as an "asset protection attorney". Just two months before the trial was to begin in the first Kruse action that would see the $2.5 million judgment entered against him, Weller first met with Repp and advised him of the cash gifts that he had made to friends and family on the advice of Stravers. Although Repp told Weller that this was bad advice under the circumstances, the two nonetheless concocted a plan whereby a new entity, Weller Farms LLC, was created to hold Weller's agriculture and commercial real estate with his son, Cody Weller. The stated objectives of the creation and funding of Weller Farms, were to, among other things, "continue, in perpetuity, the ownership of family assets," to "restrict the right of non-family to acquire interests in family assets," and also to "provide protection to family assets from the claims of future creditors against family members." The effect, of course, was to erect barriers to Kruse's enforcement of her judgment against Weller. Moreover, when Weller signed the deed and trustee's affidavit for his living trust to convey land to Weller Farms LLC, it recited that the land was free and clear of any known adverse claim although that land was subject to the enforcement of Kruse's judgment.
The judgment in favor of Kruse and against Weller for a little more than $2.5 million was entered on May 8, 2015. Just three days later, Weller and Repp prepared another financial statement for Weller, this time to be used in settlement negotiations with Kruse. The financial statement made representations that reduced Weller's net worth, based largely by playing around with the value of Weller's interest in Weller Fars LLCs.
First State comes back into the picture on October 9, 2015, when Weller met with the bank's loan officer for the review of his financing loans. Even though Weller's farmland and personal assets had already been transferred to Weller Farms, LLC, these were listed on Weller's personal financial statement. A few weeks later, First State gave Weller a "pass" rating, despite his having a negative net cash flow of $17,230 and his now-former assets were owned by Weller Farms LLC. That the assets of an entity were listed on the financial statement of the personal borrower was not a standard practice of First State.
Nonetheless, First State relied upon Weller's financial statement to engage in a refinancing of the Weller farm real estate, which was accomplished on January 4, 2016. The bank extended loans for a little over $340,000 for which Weller signed two promissory notes, and Weller Farms LLC guaranteed repayment. Critically, according to the opinion, the bank officer "Guinn admits, however, that he knew Weller had transferred his farmland and other assets to Weller Farms as part of his effort to preserve them from Kruse and make his financial condition appear weaker at least by the date of these January 2016 transactions, and that it is uncommon to secure loans with property that is not formally owned by the borrower." Additionally, First State extended $500,000 in available credit to Weller Farms LLC.
Four days after Weller's accounts were garnished by Kruse, First State extended another $23,000 to Weller Farms LLC for cattle, without either a financial statement or personal guarantee from Weller, and again First State's bank officer admitted that this was not First State's "typical practice." On January 20, 2016 and August 6, 2016, respectively, Weller and Repp prepared additional financial statements that contained irregularities about Weller's net worth, and First State continued to extend financing, although it new that Weller's real financial statement included the $2.5 million liability to Kruse.
Meanwhile, on March 3, 2016, Kruse filed her second lawsuit, the one against Weller for his fraudulent transfers. This litigation percolated for a couple of years, until the Iowa State court issued its ruling on March 13, 2018, avoiding Weller's transfers and finding that Weller had formed Weller Farms LLC with the specific intent of shielding his assets from Kruse. The state court also rejected (as is so common in these cases) Weller's purported explanation that the transfers were only part of his estate planning. At the end of the day, the state court unwound Weller's cash gifts to family members, later contributions to his children's college savings accounts, the transfers of property from Weller's living trust to Weller Farms LLC, as well as Weller's refinancing transactions with First State.
The first case which established Weller's liability to Kruse and the second case which set aside the fraudulent transfers were successfully and aggressively litigated on Kruse's behalf by Iowa attorney Justin Swaim, who now sought to make Repp, his law firm, and First State pay for their involvement with Weller in what would be case from which the important opinion that we will discuss arises. The complaint drafted by Swaim for Kruse listed causes of action for, essentially, transferee and obligee liability against First Bank which was then trying to foreclose on the Weller loans, tortious interference with Kruse's collection rights, conspiracy to tortiously interfere with Kruse's collection rights, and civil RICO causes of action based on the defendants' conspiracy with Weller to defeat Kruse's collection rights.
For their part, the defendants removed the case to the U.S. District Court for the Southern District of Iowa, and were successful in having dismissed other causes of action asserted by Kruse, being aiding and abetting liability and intentional infliction of emotional distress. Nonetheless, the rest of the case percolated through the litigation process and eventually the defendants moved for summary judgment to try to kick out Kruse's case. Again, a summary judgment motion basically tests whether the plaintiff has at least minimal evidence to support its case, but does not allow the court to weigh evidence as would be done in a trial.
The court first took up the issue of whether First State could be liable to Kruse relating to the security interests created in favor of First State during the refinancing. Here, First State argued that there was no evidence that First State either knew of Weller's intention to fraudulently transfer assets much less aided him in that direction. Further, First State argued that Kruse had not be prejudiced by the refinancing.
As an initial point, the court rejected First State's argument that its mortgage loan to Weller did not constitute a "transfer" for purposes of the UVTA, noting that the UVTA defines "transfer" very broadly and could include the mortgage loan. The court then turned to First State's good faith transferee defense, which is a defense basically predicated on First Bank not being in cahoots with Weller to defeat Kruse's collection rights.
The problem for First Bank is that there was evidence that two of its bank officers knew of the auto accident, that Weller would likely be liable for an amount well in excess of his liability coverage, and that Weller was trying to both preserve his assets and paint a weaker picture of his financial situation than it actually was. But that wasn't the worst of it:
"Nor does the record, when viewed in a light most favorable to Plaintiffs, establish as a matter of law that First State undertook the 2016 refinancing solely out of a good faith desire to protect its security interest in Weller’s real estate. Multiple indicia of fraud raise legitimate questions about the Bank’s motivation behind the January 4, 2016 refinancing."
That evidence included that First State knew that Weller was transferring his assets into Weller Farms LLC, and that he did so very close in time to the first Kruse trial where he had the $2.5 million judgment entered against him. Yet, for refinancing purposes, and knowing that Weller had a huge liability in excess of his net worth, First State allowed Weller to claim the property that was in Weller Farms LLC. Finally, to top it all off, First State then issued yet another mortgage loan to Weller that further encumbered his property ⸺ at time when a lender should have been looking at Weller's true financial condition and not loaning him any new moneys at all. Thus the court:
"The structuring of the 2016 refinancing and circumstances surrounding those transactions, coupled with evidence supporting the Bank’s knowledge of Weller’s unlawful intent, generate disputed issues of material fact from which a reasonable factfinder could infer First State was motivated, at least in part, to further Weller’s illegal efforts."
The court further noted that the effect of First State's refinancing efforts was that Weller was allowed to continue his business and personal lifestyle as if he didn't owe Kruse anything at all. Basically, having his assets in Weller Farms LLC was Weller's first line of defense against Kruse, and having that property encumbered by First State's loans was the second. Here too, First State's arguments that it was simply acting as an ordinary lender was belied by the fact that Weller himself had no ability to repay his obligations to First State once Kruse had taken his assets. Effectively, First State's refinancing facility was little more than a thinly-disguised vehicle for Weller to equity-strip his assets to the detriment of Kruse.
First State's next argument was Kruse suffered no prejudice, since it had issued financing to Weller even before the auto accident happened, and thus First State's liens would be in a priority position over those of Kruse anyway. However, the court found that Kruse could be prejudiced in her collection attempts even if First State's loans had priority, since First State might have been oversecured (a/k/a overcollateralized) and to that extent Kruse would be blocked in her enforcement attempts. But even further, First State's security interests had the effect of deterring possible bidders at an auction of Weller's property and making that sale more difficult, since the First State's interest potentially exceeded the fair market value of the property. Thus, the court:
"Prejudice may be shown where a debtor such as Weller encumbers property to strip equity from the asset and create the appearance of over-securitization to discourage or otherwise attempt to lower the value produced at a judicial sale."
In a footnote, the court also noted that although Weller was obviously underwater when the $2.5 million judgment was rendered against him, such that a lender would ordinarily have sought then and there to protect its position, First State instead delayed the foreclosure of its loans until after the court in the second action had unwound Weller's fraudulent transfers, and in fact had in 2016 extended Weller additional credit even though he was plainly not credit-worthy by that time.
The bottom line is that there was sufficient evidence for Kruse to avoid summary judgment on her UVTA claim against First State, and the Court then moved on to her civil RICO claims.
To get past a motion for summary judgment on a civil RICO claim, the plaintiff must come forward with at least minimal evidence that the defendants were in conduct of an enterprise through a pattern of racketeering activity. Here, Kruse showed evidence that Weller, Repp, the Dickinson law firm, and Cody Weller were all part of an "association-in-fact" enterprise to defeat Kruse's collection rights against Weller's assets. Thus, the court:
"Even assuming the correctness of the Attorney Defendants’ position, however, there is sufficient evidence in the record to infer Weller and Repp shared the unlawful purpose of shielding Weller’s assets from Kruse’s impending judgment. It is unlawful to undertake a transaction '[w]ith actual intent to hinder, delay, or defraud any creditor of the debtor.' ... Repp admitted he knew Kruse was a protected creditor at the time he assisted Weller in forming Weller Farms and transferring his real estate to the entity less than two months before the personal injury trial. ... From this a reasonable factfinder could conclude Repp’s legal services were intended to accomplish the aims of his client, and that those aims were Weller’s fraudulent purpose to hide his assets from Kruse. Disputed material facts surrounding Repp’s intent in rendering his professional services preclude summary judgment. Repp’s position that he shared no unlawful purpose and only assisted Weller with 'general asset protection' is a question for the jury." [Internal citations omitted.]
The next issue was whether a "pattern of racketeering activity" existed, which can be satisfied by showing multiple instances of the use of mailings or wires (including phone calls and e-mails) in consummation of the scheme. Kruse rather easily satisfied this element by showing that Weller's filing of the formation documents for Weller Farms and the deed to his farmland was accomplished online, and that Weller's financial statements were also transmitted electronically. Moreover, since these transmittals spanned longer than a one-year period, the court found that sufficient to establish a pattern.
Civil RICO also requires a showing that a defendant either conducted or participated in the enterprise's affairs, at least in some part. There was ample evidence of this for Repp and the Dickenson law firm, since they were involved in creation of Weller Farms LLC and the transfers of Weller's farmland from his living to that new entity. Moreover, even if this were asset protection planning not aimed at Kruse but at other unknown future creditors, as Repp and the Dickenson law firm suggested, it was not even proper asset protection as that would have called for leaving enough assets outside the plan to satisfy the existing creditor, being Kruse. Finally, Repp's claim that he was a "mere scrivener" in Weller's planning was belied by the fact that Repp had some up with the planning and directed its implementation.
This now brings us to the requirement that Kruse prove a conspiracy by the defendants to satisfy that element of civil RICO liability. This is actually easier that it might sound, since it only requires proof that the defendants were working to further a common purpose, even if not all defendants are involved equally in the activity or either direct or merely support the activity towards that common purpose. But the defendants claimed that while they may have known that Weller intended to take steps to defeat Kruse's collection efforts, they did not know the specifics of Weller's intent and thus did not have the intent to join him in those efforts. Nice try, but no cookie said the court:
"Here, there is a genuine issue of material fact as to whether the Bank Defendants and Attorney Defendants knew of or were willfully blind to the general scope of the RICO enterprise and agreed to further its purposes based on what they knew, when they knew it, and the attendant circumstances surrounding their professional services to Weller. The record, viewed in a light most favorable to Plaintiffs, shows the Bank Defendants knew early on that Weller was responsible for significant personal injuries, that his liability well exceeded his insurance coverage, and that he was significantly devaluing and transferring assets forming the bulk of his wealth in an effort to minimize his obligations. But they nevertheless structured a refinancing of Weller’s debt in a way that did not follow First State’s standard banking practices, provided no conceivable protection to the Bank, but enabled the financial execution of Weller’s efforts to defraud Kruse and further encumbered his land. And it shows the Attorney Defendants knew from the inception of their attorney-client relationship not only that Weller was weeks away from incurring a significant liability for personal injuries he had admitted to causing, but also that Weller had previously made (improper) efforts to hide his assets from collection. They nevertheless prepared legal documents transferring his property to a corporate form that posed significant barriers to any recovery by Kruse, assisted Weller in the creation of financial statements that painted an inaccurate picture of Weller’s finances, and defended the legality of the conveyances in court. In both cases, the facts are sufficient for a reasonable jury to find Defendants tacitly agreed to participate in Weller’s scheme to defraud Kruse and conspired to further the purpose of a RICO enterprise."
Having denied the defendants' motions for summary judgment on the civil RICO claims, the court then moved on to Kruse's cause of action for tortious interference. Such claims in this context are premised on the idea that a creditor has a property interest in the assets of a debtor, and when a planner assist that debtor with the intent of defeating the creditor's rights, a wrongful interference has taken place under §§ 870 and 871 of the Second Restatement of Torts. Although the Iowa Supreme Court had not ruled on whether such a tort exists in the creditor-debtor circumstance, the court held that it was likely that Iowa's highest court would do just that based on their other decisions in somewhat similar cases.
Further on the issue of intentional inference, the court held that a creditor has a legally-protected property right in Iowa to the property of the judgment debtor. There was evidence that Repp intended to and did interfere with Kruse's interests in Weller's property through his planning, and that First State did the same thing through its encumbrances of Weller's property in the refinancing and the subsequent mortgage loan. Here, Repp attempted to assert the defense that his planning was simply in creating and funding an LLC, being Weller Farms LLC, and that such conduct was simply the ordinary conduct of an attorney. The court, however, did not buy this argument:
"But the tortiousness of Repp’s conduct is not judged by whether an LLC was a good fit for Weller in a vacuum; at issue here is whether such transfer-in light of what Repp knew when forming the LLC and transferring Weller’s only significant assets out of his hands-were appropriate at all under the circumstances. ... Although there is undoubtedly a public interest in enabling Iowa attorneys to provide sound legal advice to members of their community, this maxim does not hold true if the attorney’s representation knowingly furthers his client’s fraud.
"Repp admitted in his deposition that he understood Kruse to be a creditor protected under Iowa law at the time he filed the paperwork establishing Weller Farms and transferring the real estate to the entity. ... Indeed, Weller had previously testified he told Repp about the January 28, 2012 accident, the lawsuit against him, and that he had been advised to seek out additional representation because his legal exposure exceeded his insurance policy limits. And he went to Repp specifically because Repp holds himself out as an asset protection attorney. On these facts, a reasonable jury could conclude the legal services rendered by Repp to Weller were improper. ... To the extent Repp contends his advice that Weller’s previous efforts to shield his assets were inappropriate and instruction to retrieve the cash gifts negates any inference of improper motive, the same disputed issues of material fact concerning Repp’s intent in recommending Weller instead transfer his assets to an LLC preclude the entry of summary judgment. If Plaintiffs are successful in proving to a jury that Repp was more than a mere scrivener, tort liability is appropriate." [Internal citations omitted, emphasis in original.]
The court rejected as a defense that Kruse would ultimately have been able to collect on her judgment against Weller anyway, since that ignored the harm that had been done in requiring Kruse to pursue even more litigation (her second action to unwind the fraudulent transfers) that she would not have otherwise had to endure.
Repp and the Dickenson law firm also made an argument to the effect that Weller had a right to dispose of his assets any way that he desired, and their role was only to act as a "mere scrivener" to facilitate his goals. But the court pointed out that there was evidence that Repp went beyond acting as a mere scrivener since "estate planning" was not his intention, and Repp knew that at the time. Plus, the idea that a debtor has the right to dispose of his assets in a way that disadvantages a creditor was simply wrong. Again, the court:
"Described above, the record, viewed in a light most favorable to Plaintiffs, permits the inference that Repp knew Weller’s wrongful purpose in avoiding paying the impending judgment for Kruse’s personal injuries and nevertheless assisted him in shielding his assets by transferring them to a newly-created corporate form to hinder and obstruct her collection efforts against his farmland. Ultimately, the jury must balance the bad motivation of the defendant against the claimed justification for the act. ... As for Weller’s 'right' to dispose of his assets 'as he saw fit,' the Mahaska County district court summed it up best: 'avoiding paying Christina Kruse and her family the necessary money for Ms. Kruse to live is not an honorable venture. In fact, it is fraud and it is not allowed by Iowa law.' " [Internal quotation marks and citations omitted.]
Having found that sufficient evidence existed for Kruse to avoid summary judgment on the intentional interference claims, the court then moved on to her causes of action for aiding and abetting tortious interference and civil conspiracy. By this point in the opinion, the court had already found that sufficient evidence existed of the defendants' intent and actions to assist Weller, and so therefore these avenues of liability required further additional commentary. Indeed, on this point the court concluded its opinion with the finding that Kruse's case could move forward to trial on all these points, Kruse having come forth with sufficient evidence to support her case such that summary judgment would be inappropriate.
Shortly after the court issued its opinion in the case, and with the prospect of a lengthy jury trial before all the parties, the matter settled.
The most important lesson of this case is that post-claim planning for a debtor is very dangerous, and it doesn't take much for a planner or a party that facilitates transactions for a debtor to incur their own litigation exposure.
How much exposure? Consider Kruse's claims in the instant case. Civil RICO provides for treble damages, i.e., once damages are fixed, they are automatically multiplied by a factor of three. Tortious interference and conspiracy damages can be even worse, since they can justify an award of punitive damages which might be as high as ten times that of the compensatory damages. Thus, for example, if Kruse had been able to prove that it cost her an additional $300,000 in attorney's fees and expenses to set aside Weller's fraudulent transfers, the civil RICO damages would be $900,000 and there would be a risk of punitive damages as high as $3 million for intentional interference or conspiracy. Moreover, as intentional torts, these items would likely not be covered by any errors & omissions insurance, meaning that a defendant would additionally be out-of-pocket for its own attorney's fees and expenses to defend such a claim.
Notably, if the planning for the debtor had been successful in preventing the creditor's collection, then the creditor's damages might also include the money that it would have collected had the planning not been done, which would be an even larger amount. Thus, in an ironic quirk here, Repp and the Dickenson firm faced reduced liability because ultimately the planning that they did for Weller failed. [A cynic might suggest that there is a lesson here: If one is going to assist a debtor with planning, make sure that it doesn't work.]
This opinion also illustrates the hazards that financial institutions run in dealing with borrowers who they know to be financially distressed. While the case that Kruse was able to make against Repp and the Dickenson firm was pretty clear, her case against First State was somewhat less so. After all, First State had been financing Weller's farming and other business operations well prior to the auto accident, and to continue that financing even after the accident should not normally have raised any eyebrows.
The culpability of First State begins to arise when it both knew that Weller faced a large judgment, and that Weller was actively engaged in transfers and other planning (Weller Farms LLC) for the purpose of defeating Kruse's collection rights. Probably that by itself would not have resulted in First State landing on the liability hook, but then it took the first fatal step of playing around with the paperwork for Weller's eligibility for refinancing, even though First State knew that he was by then an insolvent borrower, and took the deep plunge into liability exposure when it extended him additional financing with his collateral being the assets that would otherwise have been available to Kruse for levy.
Which is to say that when a financial institution realizes that it has a financially-distressed borrower on its hands, that alone should be a bright red flag that thereafter extreme caution in dealing with that borrower must be taken. If there are then indications that the borrower is using the financial institution to conduct transactions that could have the effect of diminishing the rights of creditors, then the financial institution must declare Code Blue and take immediate steps to protect itself from liability, and its customer be damned. At the point, the only goal of the financial institution is to put the customer and its past banking or investment relationship as far in the rear-view mirror as possible.
At any number of times, First State had the opportunity to tell Weller, "Sorry, but we just don't want that business." Doing so would have saved First State from litigation expenses that were far out of proportion to whatever meager earnings that First State made on these deals. Yet, that is probably much more difficult for a small local bank like First State, which lives or dies on its reputation within a small rural community and thus has a powerful incentive to keep its long-time customers happy and not be seen as abandoning a member of the community in time of need. Contrast this with the larger retail banks in urban centers which can and sometimes do terminate particular relationships on little more than a whim. But all financial institutions, small and large, rural and urban, have to be ready to pull the plug on customers who are intent on cheating their creditors.
On the flip side of all this is the element of scienter, which in this case amounts to knowing that the debtor is engaged in shenanigans to cheat a creditor. Suppose that Weller had dealt with Bank of America and conducted all of his transactions online and without talking to anybody; in that case, BOA would not have any knowledge of Weller's intent, and so BOA would not be on the hook for liability. Thus, somewhat perversely, it is that "Know Your Customer" (commonly referred to as "KYC") which leads down the path to liability in these cases, as First State would arguably have been much better off if they had known nothing at all of Weller's situation. This puts financial institutions into a sometimes difficult position: They need to know what their clients are doing and why, but it is precisely that knowledge which can get the financial institution into trouble at times.
The use of civil RICO claims against aiders and abetters of debtors trying to cheat their creditors is becoming more prevalent. I've seen civil RICO claims arise in a number of complaints against attorneys, trust companies and others, but this is one of the first cases where the litigation made it to the point where a court issued a written opinion on the subject. After this opinion came out, it generated great interest amongst the creditor's rights bar and now there are quite a few creditor's rights attorneys just licking their lips in anticipation of coming across the right case in which to try their own luck on that theory. With the prospect of treble damages, it should not be surprising to anybody were we to see the use of civil RICO greatly expand in creditor-debtor law.
The idea of using intentional interference claims against planners and others who assist a debtor with post-claim planning was something that I came up with and wrote about a few years back in my article: Can Intentional Interference With Economic Relations Be Used Against Post-Judgment Debtor Planning? (2/21/2017). Two years later, Kruse's attorney, Justin Swaim, thought he would give it a spin, and the court bought into the theory and thus validated it (at least under Iowa law). For planners and others who might assist a debtor with post-claim planning to defeat the rights of creditors, an intentional interference cause of action can be brutal because of the aforementioned potential for punitive damages to be awarded. Along with civil RICO, this is another theory that creditor's rights attorneys are looking forward to testing in their own cases.
Which is all to say that assisting a debtor with post-claim planning was never looked upon with favor by the courts, aside from perhaps some forms of allowable exemption planning. But lately such planning has become quite dangerous, and one should think not just twice, but a third, fourth and fifth time before signing on to that activity.
As I mentioned at the outset of this article, post-claim planning isn't asset protection planning at all but just fraud on creditors. It is one thing for a person to engage in planning against future unknown creditors that might or might not appear somewhere down the road, and quite another to try to take one's chips off the table while the game is in play. To the extent that the former is allowable is still being defined, but it is much less dangerous in terms of liability exposure for the planner and other facilitators than the latter.
Stated simply, if one is a good asset protection planner then they have to learn to just say "No" when debtors appear, as they inevitably will, in the conference room pleading that something be done to protect their assets from the creditors. Smart planners will show such debtors sympathy and the door, and dumb or morally-challenged planners will agree to do planning for them. But it is becoming a very different world for the latter, as these new theories are arising to tag them with liability for their activities.
When asset protection was in its infancy in the 1990s, there was a very substantial concern amongst the relatively few attorneys in the field at the time that they could face possible exposure to creditors, even if those creditors were not known to them, e.g., situations where a financially-distressed client lied to the attorney to obtain the attorney's asset protection planning services. Thus, it became simply pro forma and a recognized best practice that at the time the client engaged the attorney, the client would sign under oath a so-called Affidavit of Solvency wherein they set forth their known assets and liabilities.
The idea behind the Affidavit of Solvency was not that it would somehow later protect the client in the event of a creditor attack, it being recognized that such an affidavit would probably amount to hearsay of the debtor and would likely to be excluded from evidence (although, who knows, it might squeeze in on one of the many exceptions for hearsay, such as past recollection recorded). Rather, the purpose of the Affidavit of Solvency was to protect the planner and others involved in the planning, such as trust companies and banks, from being implicated in post-claim planning, at least where they had not required the client to set aside a certain amount of assets to meet any possible liability where one was known or suspected to exist.
But even if a planner did not require an Affidavit of Solvency, what kind of planner except the very worst would even think about doing asset protection planning for a client without first conducting a thorough inventory of the client's assets and liabilities, known or likely? How could one even do credible planning without at a minimum knowing that information? It is, of course, impossible to do so unless somebody is just selling a one-size-fits-all product and then that person isn't anything like a real planner in the first place (and who cares, really, what happens to them).
Yet, if one is going to go through the work of making a thorough inventory of a client's assets and liabilities, then it is very little additional time to get the client to sign off on it as protection for the planner. Whatever their use in creditor-debtor litigation, Affidavits of Solvency have been successfully used on occasion to protect a planner from both civil liability and ethical sanction. It is thus nothing short of silly not to require one.
Another issue that came up in this case was the so-called estate planning defense, which is that the debtor wasn't doing any planning with the intention of defeating a creditor's collection rights, but rather was just engaging in plain vanilla estate planning. Whenever this defense has come up in a case involving an existing claim, it has failed and failed badly. It failed badly here too. If one really thinks about it, the estate planning defense is really absurd in a case where a creditor has a claim that is in excess of the debtor's net worth, since in that circumstance the debtor doesn't even have an estate to plan for. One doesn't do estate planning for somebody who is insolvent, as there would be utterly no point in such planning. But time and time again we see the estate planning defense asserted as if it is the penultimate answer to all claims of wrongdoing; it is demonstrably not. If anything, raising the estate planning defense in such a case is worse than not raising the defense at all, since it highlights that folks were engaging in transactions for a debtor who didn't have anything except for what creditors might take. It's a losing argument right out of the gate.
This is not to say that one can never do planning for a client who has an outstanding liability. Some types of clients are always fighting off one claim or another, and if one waited until the day when there were no clouds on their horizons then no planning would ever get done. But there is an established protocol in asset protection planning to deal with such situations, which is to reasonably evaluate the liability and leave enough assets out of the asset protection plan to satisfy the liability should it mature into an enforceable judgment. In such situations, the creditor having then been paid in full, the client can demonstrate that he was not insolvent for fraudulent transfer purposes at the time of the transfer, and the planner and others who facilitate the planning can engage in it without the fear of liability exposure as in this case.
Here, Weller did not leave any significant assets available to Kruse when he engaged in his planning, and that told the court a story too and the court specifically commented on that point.
The point of all this being that if an asset protection planner or a financial institution that facilitates such transactions doesn't accept as a client in the first place one who has an existing creditor (and will not make arrangements for that creditor to be paid in full), then the risks of liability exposure for the planner and others is low if not nonexistent. However, the planner or financial institutions that do accept such clients or customers are putting themselves squarely in the bullseye for creditors to seek not only recompense for their own additional time in digging assets out, but those creditors might also use some of these more novel theories to swing for the fences and seek a much larger award.
Unless one is charging really whopping fees for such services, and for the potential loss of professional income if there are ethical sanctions as well, and maybe also loss of reputation, then it doesn't sound like a particularly good deal.
Anyway, the opinion in this case is a great read and I commend it to you.
Kruse v. Repp, 2021 WL 2451230 (S.D.Iowa, June 15, 2021). Full opinion below. https://voidabletransactions.com/2021-kruse-iowa-opinion-voidable-transactions-and-fraudulent-transfer-conspiracy.html