Attorney's Time Slips Slip Up Post-Judgment Attempts To Defraud Creditors In Frankel

Jan 18 2014, 1:07pm CST | by

A former Lehman Brothers stockbroker, Sofia Frankel, was accused of churning her client’s accounts. After arbitration, a $2.5 million judgment was awarded against Sofia on October 30, 2008.

Just days after the arbitration award was entered, Sofia went to see attorney David Pratt of the Proskauer Rose LLP firm, and (very importantly, as we will see later) took along her son, Michael. What did they talk about?

Proskauer’s attorney time records for November 2008 describe a conversation of November 7 “with Sofia and Michael re: asset protection plan,” followed two days later by a conversation “with Michael Frankel re: asset protection planning.” The various items under consideration included the “sale/transfer of N.Y. condos,” “homestead waiver issues,” the “option of filing claim in bankruptcy court to obtain indemnification for arbitration award” and “efforts to identify insurance coverage or indemnification for arbitration award.”

At this time, Sofia had five major assets:

(1) Miami condo, claimed as homestead with her husband;

(2) Manhattan condo, owned with her husband in tenants in the entirety;

(3) 100% ownership in Applied Medicals LLC, a Florida medical supply company;

(4) A $4+ million investment account solely owned by Sofia at Fidelity; and

(5) Another Manhattan condo, solely owned by Sofia.

According to Pratt’s plan, Sofia withdrew $3.3 million from the Fidelity account, and apparently used $2.9 million of that money to purchase another Miami condo held solely in her name, and which she claimed as her homestead.

Sofia’s son, Michael — who is to feature prominently in the Opinion — acquired a 10% interest in Applied Medicals LLC, so as to terminate the LLC’s single-member status (Florida law allows a creditor to take the assets of a debtor’s wholly-owned LLC, which Applied Medicals LLCs was until Michael acquired his interest).

Then, Michael “bought” Sofia’s solely-owned Manhattan condo, valued at $1.175 million, for $1 “and other valuable consideration”.

Here, Sofia and Michael claimed that they had an unwritten, oral agreement for Michael to purchase the condo made in 1999, whereby Michael took immediate possession and assumed expenses, then at the age of 30 (coincidentally, 2009 when the transfer occurred), Michael would get the condo. Oh, and there were also some credits that Michael would get for deductions that Sofia would get for the interest and taxes that were actually paid by Michael over a decade.

The “other consideration” turned out to be a promissory note for $970,000 due in 30 years, plus monthly interest payments of $2,390 per month.

The trial court didn’t buy Sofia’s and Michael’s story, and granted summary judgment for the creditors. Because the past consideration was not memorialized in writing, under New York law it did not comprise fair consideration under that state’s Debtor and Creditor Law.

On appeal, the story didn’t fare any better:

 the record fails to support defendants’ contention that the conveyance was made pursuant to a previous agreement rather than as part of an asset protection plan contrived to insulate property from the claims of judgment creditors.

The Appellate Division also took great pains to point out that there was no “fair consideration” for the transfer of title from Sofia to Michael, noting that “fair consideration” in New York has two elements: (1) adequacy of consideration, and (2) good faith.

Whether or not the first test — adequacy of consideration — was met or not met, it was clear that there was utterly no good faith in Sofia’s sale of the condo to Michael, coming immediately after she suffered the arbitration award and started moving assets out of the reach of her creditors.

Here, Sofia and Michael claimed that it was only Michael’s intent as the transferee that was relevant in determining good faith, but the Appellate Division after a substantial survey of the law concluded otherwise. If either Sofia or Michael acted without good faith, then “fair consideration” could not be present, and certainly Sofia’s conduct fit that bill:

It is apparent that Sofia’s conveyance of the subject Manhattan condominium apartment to her son was but one of a series of transactions undertaken as part of an “asset protection plan” devised with the assistance of counsel immediately after the arbitration award was rendered against her. The emptying of a brokerage account, the purchase of Florida real estate claimed as a homestead and the transfer of the subject apartment held in fee simple demonstrate not merely a series of transactions coincidental to estate planning, as her affidavit intimates, but a concerted effort to place her assets beyond the reach of impending judgment creditors. Finally, the addition of Michael as a member of Applied Medicals LLC, of which Sofia was formerly the sole member, precludes plaintiffs from obtaining an order from a Florida court directing the surrender of her entire interest in the company to satisfy the award against her.

Though Sofia’s lack of anything like good faith was enough to put the kabosh on fair consideration, the Appellate Division didn’t let Michael off the hook either:

It is apparent that Michael was a participant in the asset protection plan from its inception, having conferred with his mother and her counsel. He was clearly instrumental to its implementation, having been installed as a member of Applied Medicals LLC to frustrate seizure of its assets and having received title to the subject premises conveyed by Sofia.

The Appellate Division went on to delve into the nuances of New York law relating to valid conveyances of real property, and essentially concluded that the property transfer was hinky, if not technically invalid, because of the unwritten terms and other circumstances. And as to the “past consideration” paid by Michael in addition to the $1 American,

 the facts conceded by defendants fail to demonstrate that, prior to the February 2009 conveyance of the apartment, Michael was anything more than a month-to-month tenant paying less than fair market rent for the premises. As to defendants’ suggestion that the 2009 agreement to transfer title was supported by past consideration, the amounts previously paid by Michael exceed the use and occupancy value agreed upon by defendants by a mere $21,433.66, a little more than 2% of the purchase price. As plaintiffs point out, when the transfer tax and filing charge are taken into account, the amount of past consideration received by Sofia for the apartment at the time of its conveyance was a negative $11,835.09, which negates any alleged fair consideration for the purchase of the subject apartment.

In thus concluding that Sofia had engaged in a fraudulent transfer to Michael, the Appellate Division in its summary gave their case one final kick:

 Michael has not alleged, let alone demonstrated, that he was a good-faith purchaser for value without knowledge of the fraud at the time of conveyance so as to render immaterial the lack of good faith in making the conveyance. Once again, this was clearly indicated by Michael’s participation in the asset protection plan with his mother and Proskauer Rose before the 2009 alleged transfer.

And with that, the Appellate Division affirmed the trial court’s grant of summary judgment for the creditors on the fraudulent transfer claim.

ANALYSIS

Once again, we must begin with the caveat that this is nothing like legitimate asset protection planning, but rather is just a blatant post-judgment attempt by Sofia to cheat her legitimate creditors. And, once again, we must reiterate that asset protection is all about avoiding fraudulent transfers, and not making them.

There is an old saying a bad lawyer can make a good argument, but only a good lawyer will know when the good argument is a loser. Here, while Sofia was able to transfer the condo and articulate an argument why fair consideration existed, the argument was destined to be a loser because the timing was obviously highly suspect, and the consideration paid by Michael was highly suspect.

But even beyond all that, we see yet another case where the Court essentially sees the two words “asset protection”, and that is basically all the Court needs to know to give the debtor the thumbs-down. Whatever planners may think of the legitimacy of asset protection planning, this case is but one in an increasingly long line of cases where the Courts view “asset protection” as a less-than-honorable practice.

Sadly, this isn’t because the Courts have addressed actual pre-claim asset protection, but rather because the Courts having to consider blatant fraud-on-creditor cases like this where the planner uses the words “asset protection” are making up so many of these cases. Here, the planner should not have recorded “asset protection” in his timeslips, but instead just recorded “planning to commit fraud on Sofia’s creditors” which is what all this ended up amounting to. The timeslips became a major slip-up, as they provided easy evidence for creditor’s to deflate Michael’s claims that he was in anything like good faith regarding the condo transaction.

There is utterly no need to use the two words “asset protection” in any client matter. There is no need to use the term in planning memoranda, in planning documents, in client communications, in billing statements, or anywhere else. The smart law firm will be the one that arranges for their technical support experts to have their word processing software automatically substitute the words “bubble gum” in place of “asset protection”. Yet, in case after case we see planners persisting in this practice in defiance of now substantial case law, not to mention common sense.

This case is also illustrative of how Courts considering fraudulent transfer issues do not look at transactions in isolation, but rather look at transactions in light of all the surrounding circumstances. A good story in isolation can become a bad novella where substantial other seedy transactions are contemporaneously taking place.

Here, it was clear that Sofia was transferring a goodly portion of her assets for the purpose of cheating her creditors, and that Michael was complicit in assisting her, such as buying into Applied Medicals LLC so as to terminate its single-member status as to Sofia. In the light of these other circumstances, it becomes obvious that Sofia was selling the condo to Michael not for truly legitimately reasons, whatever they said (words are cheap), but to cheat her creditors out of their collection rights against the condo.

This case is disappointing in the sense that Proskauer Rose LLP is normally a very good law firm with very good lawyers. Here, we can only hope that somehow this planning slipped past their internal controls and was a “one bad apple” sort of aberration.

Which is to say that the mere fact that a client is in financial distress does not ipso facto mean that the attorney should (or as we have seen in other cases, ethically can) provide certain assistance to the client. This is a case where the client should have been told, “You should have done you planning before these claims arose, and it is now too late for anything like asset protection planning to be done for you.” Sometimes clients, for their own good, need to be told the cold-hard truth that post-judgment is not the time to start planning, and shown the door. Yet, it is probably inevitable that we will continue to see these attempts that cannot be reasonably be characterized as anything other than attempts to cheat legitimate creditors out of their collection rights.

And that’s not asset protection at all, or at least anything like legitimate asset protection planning.

CITE AS

Sardis v. Frankel, 2014 WL 37870 (N.Y.App., Jan. 7, 2014).  Full opinion at http://goo.gl/SEJCO7

This article at http://onforb.es/1eU6KHj and http://goo.gl/pNnEHb

Source: Forbes Business

 
 

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