You’ve got to have lawyers who know how to play the game and you’ve got to have a team fully prepared to go if the worst happens. Of course, you’ve really got to have your ducks in a row when you do the deal, and get lots of expert opinions. The chance you’ll have to pay lots of money is very small, and the risks go down if the company makes it for at least two years.
The courts don’t like this kind of litigation, and lots of cases support the folks who did the deal. Hedgie: But, what if we don’t make it and a bankruptcy is filed? Won’t lots of folks come after us, and won’t the judge do something for creditors? Instead, you do it mostly with other people’s money-you borrow money to pay off the stockholders, use the assets of the company as collateral, put up a few bucks of your own to show good faith, and run the business for a couple of years and then, you sell out most of your investment. You don’t do that in two years without some risk. You stand to make 400 percent in two years. Hedgie: Seems to me like all the litigation starts with big numbers and lots of noise. You know the old saying-pigs get fat and hogs get slaughtered. In both cases, there was lots of greed and a short-circuiting of orderly process. John: Has nothing to do with your situation. And, look at cases like Energy Transfer and Caesars. seems to go on forever! Looks like a feeding frenzy by lawyers and their friends. Worst case, it will cost you a few bucks for lawyers, other pros, and creditors, but it shouldn’t be much. should make four or five times our money in two or three years! But some of my guys are freaked out about legal risk. Overheard, in late 2015, at a very upscale restaurant in New York City: Hedgie Funde: We have this great LBO opportunity. When to speak with an attorneyįraudulent transfer laws vary from state to state, so consult us about the law in your specific state. Even if you’re not having trouble paying your debts, it’s possible to meet the technical definition of insolvency. To avoid this risk, analyze your net worth before making substantial gifts. So if you’re insolvent at the time, or the gift renders you insolvent, you’ve made a constructively fraudulent transfer, which means a creditor could potentially undo the transfer. How making a gift can qualify as a fraudulent transfer (and why you should know your net worth)īy definition, when you make a gift - either outright or in trust - you don’t receive reasonably equivalent value in exchange. Generally, the constructive fraud rules protect only present creditors - that is, creditors whose claims arose before the transfer was made or the obligation was incurred. You’re presumed to be insolvent if you’re not paying your debts as they become due. “Insolvent” means that the sum of your debts is greater than all of your assets, at a fair valuation.
Under UFTA, a transfer or obligation is constructively fraudulent if you made it without receiving a reasonably equivalent value in exchange for the transfer or obligation and you either were insolvent at the time or became insolvent as a result of the transfer or obligation.
This is a more significant risk for most people because it doesn’t involve intent to defraud. So before you make gifts or place assets in a trust, consider how a court might view the transfer. A court will consider the surrounding facts and circumstances to determine whether a transfer involves fraudulent intent. Just because you weren’t purposefully trying to defraud creditors doesn’t mean you’re safe from an actual fraud challenge. This means making a transfer or incurring an obligation “with actual intent to hinder, delay or defraud any creditor,” including current creditors and probable future creditors. The act allows creditors to challenge transfers involving two types of fraud that you should be mindful of as you weigh your estate planning options: 1. In our region, the District of Columbia has adopted the UFTA, Maryland has adopted the Uniformed Fraudulent Conveyance Act, and Virginia has adopted neither act but does have laws regarding fraudulent transfers. Most states have adopted the Uniform Fraudulent Transfer Act (UFTA). Have Maryland and Virginia adopted the Uniform Fraudulent Transfer Act? In a nutshell, if your creditors challenge your gifts, trusts or other strategies as fraudulent transfers, they can quickly undo your estate plan. However, if you have creditors, be aware of fraudulent transfer laws. A primary goal of your estate plan is to transfer wealth to your heirs according to your wishes and at the lowest possible tax cost.
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