Hog, Prepare To Be Slaughtered

Richard S. Fuld, Jr., the former chairman and CEO of Lehman Brothers . . . recently sold his Florida mansion to his wife for $10 in an apparent attempt to shield the home from his potential creditors[.]

Will he prevail?

Few asset protection attempts could be more naked. And, the 2005 bankruptcy law was reformed specifically to address this kind of abuse. But, bankruptcy law is only relevant if his wife is somehow brought into bankruptcy, and presmably, she has done nothing actionable personally . . . except receive an outrageous gift from her financially troubled husband.

The status of this gift would be transparently clear as a fraudulent transfer, but for the fact that:

The Florida Supreme Court ruled in Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. Sup. Ct. 2001), that the Florida homestead law prevented a creditor from setting aside the conversion of non-exempt assets into an exempt Florida homestead, even where the conversion was made with actual intent to hinder, delay or defraud creditors. The Florida Supreme Court ruled that the homestead law, set forth in the Florida Constitution, has primacy over laws enacted by the legislature, such as the Florida Uniform Fraudulent Transfers Act and a Florida law prohibiting fraudulent conversions. However, the Florida Supreme Court in Havoco recognized an exception to the homestead law where the homeowner used the proceeds of fraud to acquire or improve the property.

So, how does one get her into bankruptcy where Florida law does not apply:

If the Florida homestead exemption stands, the battle would likely turn to forcing Ms. Fuld into involuntary bankruptcy in a timely fashion, so that the 2005 Bankruptcy Code limitations can be made to apply. In order to file an involuntary petition, three creditors of Ms. Fuld’s, holding non-contingent, liquidated claims exceeding $13,475 would have to join together in a petition. 11 U.S.C. 303(b)(1). That’s the easy part. If Ms. Fuld objected to the petition, as she surely would, the bankruptcy court could grant the bankruptcy petition only if Ms. Fuld was “generally not paying [her] debts as they come due.” 11 U.S.C. § 303(h)(1). This standard might be difficult to meet when the only unpaid creditors are those who recovered judgment on fraudulent conveyance claims.

I've been called a cynic on this point, but I strongly suspect that Fuld's play won't succeed.

Another possibility is that Havoco may violate the full faith and credit clause as applied to a foreign creditor, and that Ms. Fuld may be denied a Florida homestead exemption on the factual basis that she is not truly a Florida resident.

Notably, a federal creditor, such as the SEC, might be able to adjudicate the availability of the exemption not in the friendly to debtors state courts, but in the perhaps less friendly forum of the relevant U.S. District Court in Florida (something also available to private creditors in a diversity action).

Another posture that could escape the Florida courts and the exemption issue would be to attempt to secure a federal tax lien (dimes to dolars the couple filed jointly in 2007 and all prior years), that would bind her as well.