What They’re Saying About Asset Protection Trusts

Earlier this week there was a fairly in-depth colloquy between Oregon trust and estate attorneys that was broadcasted on the Oregon Bar Association’s listserv.  Below is a selection of the various comments – unattributed.

First, the question from John Doe attorney:

Greetings:  I have been asked to consult with Client on setting up a trust to “protect assets.” Client says the intention is to put client owned real property into an irrevocable trust prior to starting a new business to “avoid scrutiny.”  I’m not sure what the client’s real hot button concern is at the moment.

My opinion of such trusts is generally that, in order to get the asset far enough out of grantor’s control to make it effective, grantor has to endure too many negative consequences to make it worthwhile.  Do any of the assembled masses have particular thoughts or experience you are willing to share on the topic?

If there is a particular reference that anyone would suggest, I would be grateful to be pointed in that direction too.

And here are the responses:

1. There are ways in which an irrevocable trust can offer protection, and there are DEFINITELY tradeoffs, as you correctly note.  As a starting point, I would read this article from Forbes on the Mastro bankruptcy (up here in Washington State), and consider how his asset protection plans did not work out so well.

2. Interesting case. There are a number of similar examples across the country where people on the cusp of financial oblivion take desperate measures to stash enough to preserve the good life. That said, asset protection planning is a hot topic and is becoming a big practice area all across the country. People read about it and it appeals to them in concept, although they don’t know very much about the execution. [John Doe’s] client seems to be concerned about protecting personal assets from claims of potential future business creditors. Much of that can be accomplished with careful entity structuring for the new business. Maybe that’s all that is needed here. Continue reading

Washington Supreme Court comes down on MERS

Yesterday the Washington Supreme Court issued its case in  the Certified Question of Bain v. Metropolitan Mortgage.

Here’s the Opinion.

The primary issue before the court was whether MERS can be a lawful beneficiary on a deed of trust, with the power to appoint trustees under the Washington Deed of Trust Act when it does not actually hold the promissory notes that secures the deed of trust.

The court held that only the actual holder of the promissory note evidencing the debt may be a beneficiary with the power to appoint a trustee to foreclose.  Or, as the court put it, “if MERS does not hold the note, it is not a lawful beneficiary.”

The court declined to answer what the legal effect is, if any, of a foreclosure, when MERS did foreclose as the beneficiary.

Our gut is that what is in the past is in the past, unless a borrower can prove fraud, or actual damages, based on Brown v. Household Realty, 146 Wn. App. 157, 189 P.3d
233 (2008) (holding that where the grantor of a deed of trust fails to invoke the remedies provided by the deed of trust act (ch. 61.24 RCW) before the deed is foreclosed in a trustee’s sale, the grantor waives claims based on the underlying obligation secured by the deed). But see RCW 61.24.127 which narrows Brown to some extent.

Can They Take My Retirement? Basic Asset Protection Explained

Over  time we accumulate assets. We borrow money to buy a home and repay it.  The home usually appreciates in value (except for recently). Some of  us buy CDs or stocks, bonds, and life insurance. Or we contribute to an  individual retirement account (IRA) or a 401k.

These assets can be protected from creditors to some extent.    Continue reading

BECU v. Burns: Banks Can Sue First, Foreclose Later.

Does entry of a judgment on a promissory note extinguish the lien of a security interest in real property that secures that note?  No, says Division 1 of the Washington Court of Appeals.

In BECU v. Burns, Boeing Employees’ Credit Union won judgment on a second position promissory note.  When the first position lender foreclosed, there were surplus funds available after the trustee’s sale.  The Superior Court said those funds belonged to the Burns.  BECU appealed.

The issue in Burns was whether BECU received the surplus funds as a second position lienholder, or whether the homestead exemption allowed Burns to take the homestead amount, $125,000, ahead of BECU.  In other words, by opting to sue on the note, and get judgment, did BECU give up its status as a consensual lienholder (who would be superior to the owner’s homestead exemption), and become an ordinary judgment lienholder (who is inferior to the homestead exemption)?  No, says the Court of Appeals.

Burns also answers a different question, that TEP thinks is far more important.  The question is this:  May I obtain judgment on a promissory note, levy upon other non-secured assets (to satisfy the judgment), and then later foreclose on the deed of trust, nonjudicially?  The answer is Yes!

In American Federal Savings & Loan v. McCaffrey,  107 Wn.2d 181, 728 P.2d 155 (1986), the Washington Supreme Court said:

“In transactions involving both notes and mortgages, the notes represent the debts, the mortgages security for payment of the debts. Either may be the basis of an action. The mortgagee may sue and obtain a judgment upon the notes and enforce it by levy upon any property of the debtor. If the judgment is not satisfied in this manner, the mortgagee still can foreclose on the mortgaged property to collect the balance.” (Emphasis added.)

Absent in the McCaffrey opinion is any explanation as to whether the “still can foreclose” language is limited to judicial foreclosures (a judgment holder can always judicially foreclose on his lien) or whether one can later nonjudicially foreclose on the mortgage lien.

Burns answers that question, albeit in dicta.  According to the Burns case, a noteholder can sue, win judgment, levy on other assets, and then nonjudicially foreclose on the collateral.

It will be interesting to see how many banks take this route – sue first, foreclose later.  If they do, we may see a lot of borrowers who can afford their mortgage thinking twice about simply letting the property go to foreclosure.

Does Washington State have Debtor’s Prison?

Debtor's PrisonYes.  No. Sort of.
Here’s what most creditors (or debtors) don’t realize.  Once a creditor has reduced his claim to a judgment, he now has rights to convert his judgment (what they call in the biz, “levy upon execution”) to cash.  This is done by garnishing wages, garnishing financial accounts, foreclosing real property liens, if any, or getting the county sheriff to take and sell the debtor’s personal property.

The question is this: how do you know where the financial accounts are so that you can garnish them?   The answer is you ask the court for an Order for Supplemental Proceedings, which is a court order, requiring the debtor to appear in court, and truthfuly testify about his assets and their whereabouts.  A creditor can ask to see the debtor’s tax returns, bank statements, certificates of title and deeds (and anything else reasonably calculated to learn where the debtor’s assets are located).

What happens if a debtor just doesn’t show up to testify?  This is where things can get nasty.  The creditor then asks the judge to sign a bench warrant for the creditor’s arrest.  The warrant gets filed with the county sheriff, and while the police will not actively look for the debtor, if he is ever pulled over, the warrant will show up, he’ll be arrested, and will spend a few hours in jail before he posts bail.  So technically, that isn’t debtor’s prison, because the offense is not being a debtor, but ignoring a court order to appear and testify.  But if you’re the debtor, it’s still time in jail, however characterized.