Ohio Court Pierces Corporate Veil and Holds Transfers to Shareholder Were Fraudulent

A recent decision by the Ohio Court of Appeals (Second District) held that the City of Springfield, Ohio was entitled to “pierce the corporate veil” of the defendant corporation in order to reach the shareholder’s assets.  The court further held that transfers totaling about $900,000 to its shareholder (proceeds from the corporation’s sale of real property) were fraudulent conveyances pursuant to §1336 of the Ohio Revised Code.

This case was decided in June of 2013, but only recently published in the September 16, 2013 edition of the Ohio State Bar Association Report.

Forming a corporation, trust or other entity in and of itself does not automatically protect assets.  How the entity is operated (and how and when various transfers are made) also needs detailed attention.  The trial court in this case paid particular attention to the timing of the transfers in finding that they were fraudulent.

At a minimum, this new Ohio decision is another reminder that simply forming a corporation, trust or other entity is not enough for asset protection.  You need to pay close attention to how that entity is operated (and how and when various asset transfers are made).

 

Ohio Legacy Trust Can Be A Good Prenuptial Tool

Ohio Revised Code §5816.03 (C) provides that certain creditors can defeat the spendthrift provisions of an Ohio Legacy Trust.  This includes claims for child support and alimony.  But the applicable provisions of the Ohio statute only apply to a “spouse or former spouse.”

This means that if an Ohio Legacy Trust is formed before you get married, the assets in that trust should not be subject to the claims of a future spouse.  So the legacy trust can be used for prenuptial planning (without the consent of the future spouse to any of its provisions). 

Each situation must be examined separately.  But if you are planning to get married in the near future and you are considering a prenuptial agreement, you should also consider the possible advantages of an Ohio Legacy Trust.

Affidavit of Solvency is a Reminder to Plan Before You Have Creditor Problems

Ohio Revised Code §5816.06 requires an affidavit of solvency each time you transfer assets to an Ohio Legacy Trust.  This is a fairly standard provision for transfers to Domestic Asset Protection Trusts in other states as well.  In Ohio, failure to timely file such an affidavit may be used as a basis for an action to set aside the transfer. 

The affidavit of solvency required by Ohio Revised Code §5816.06 must state that:

        ·         The transferor is not made insolvent by the transfer

        ·         The transferor is not contemplating bankruptcy

        ·         There are no pending court actions other than those listed in the affidavit

It is often impossible to sign such an affidavit once you have serious creditor problems.  So this statutory requirement is another reminder to do your asset protection planning before you have any significant creditor issues.

Who Needs an Ohio Legacy Trust?

Here are some of the people who should at least consider setting up an Ohio Legacy Trust:

  • Business owners
  • CEOs and Directors
  • Physicians
  • Accountants
  • Attorneys
  • People considering marriage
  • Others who are willing to part with total control of a portion of their assets

The following chart (prepared by my partner, Paul Fidler) provides some general guidelines about whether you might benefit from an Ohio legacy trust. The chart would also be applicable to domestic asset protection trusts in other states as well. 

 

 

Information About Ohio Legacy Trusts

The link below provides some general information about Ohio legacy trusts. The material is from a presentation given by my firm on March 26, 2013 (the day before the Ohio Legacy Trust Statute took effect). 

www.ssrl.com/attachments/download/106/Ohio%20Asset%20Management%20Modernization%20Act.pdf

This new kind of trust is not for everyone. But for some Ohio residents, it could be a valuable way to protect a portion of your assets.

New Laws In Ohio Offer Much Better Asset Protection Alternatives

The Ohio Legacy Trust Act (part of Ohio House Bill 479) becomes effective on March 27, 2013.  Ohio will become one of approximately 15 states with what is commonly called a Domestic Asset Protection Trust Statute.

Ohio House Bill 479 also increases the Ohio homestead exemption and makes other changes that offer better asset protection alternatives in Ohio.  This new law - - coupled with changes to Ohio’s LLC statute that were made last year - - make Ohio a much better asset protection jurisdiction than it was a year ago.

Ohio House Bill 479 Protects 529 Plans

Ohio House Bill 479, signed by the Governor on December 20, 2012 and effective in March of 2013, has a provision that specifically protects contributions to 529 plans. 

A new provision was added to Section 2329.66 of the Ohio Revised Code to protect contributions to a so-called 529 plan.  Funds held in such a plan by any person who is domiciled in Ohio will be exempt from execution, garnishment, attachment or sale to satisfy a judgment. 

Ohio Raises Homestead Exemption to $125,000

Ohio House Bill 479, signed by Governor John Kasich on December 20, 2012, will raise Ohio’s homestead exemption from its current $21,625 to $125,000.  The new law amends Section 2329.66 (A)(1)(b) of the Ohio Revised Code to provide for the higher amount.

The original version of the legislation had provided for an unlimited homestead exemption.  But this provision did not survive as the bill worked its way through the legislative process.  An initial amendment dropped the exemption to $500,000 and the final version contained the $125,000 exemption.

The new exemption amount will become effective in March of 2013.

Ohio Enacts Domestic Asset Protection Trust Statute

Ohio now has a Domestic Asset Protection Trust statute.  A new section 5816 of the Ohio Revised Code (the Ohio Legacy Trust Act) creates what is commonly known as a Domestic Asset Protection Trust.  The new statute was signed into law by Governor Kasich on December 20, 2012 and will become effective in March of 2013.  The Ohio Legacy Trust Act is modeled after statutes in Delaware and Nevada and several other states that have similar statutes.

The Ohio Legacy Trust Act is part of Ohio House Bill 479  – commonly known as the Ohio Asset Management Modernization Act.  This new law not only creates legacy trusts in Ohio, but has other provisions relating to asset protection.

Ohio House Bill 479 Improves Asset Protection in Ohio

Ohio House Bill 479 - - commonly known as the Ohio Asset Management Modernization Act (OAMMA)  will affect a variety of asset protection strategies in Ohio.  The new law was signed by Ohio’s Governor on December 20, 2012 and will become effective in March of 2013. 

House Bill 479 authorizes legacy trusts in OhioOhio is now one of approximately 15 states that allows this kind of trust, commonly known as a domestic asset protection trust.

The new statute also increases Ohio’s homestead exemption to $125,000; regulates the use and enforceability of certain loan covenants in non-recourse commercial loan transactions; and makes other changes that will affect asset protection planning.

Spendthrift Trusts in Ohio

 Ohio does not currently allow you to set up a Domestic Asset Protection Trust to protect your own assets.  But you can set up a trust that protects assets that you leave to a beneficiary other than yourself.  This kind of trust is commonly referred to as a “spendthrift trust”.  Many trusts that are formed for general estate planning reasons have spendthrift provisions. 

In 1963, the Ohio Supreme Court held that spendthrift provisions in a trust were not effective against the claims of a beneficiary’s creditors.  Twenty-eight years later, in 1991, the Ohio Supreme Court reversed its earlier decision and declared that spendthrift trust provisions were valid under Ohio law. 

One of my partners, Paul Fidler, recently spoke about this topic at the Cleveland Metropolitan Bar Association Estate Planning Institute. The outline of his presentation provides more detailed information about this important kind of trust provision. 

Any trust that you set up for someone else’s benefit should generally include a “spendthrift clause” which will help to protect assets from claims of the beneficiary’s creditors. 

Ohio Could Soon Have a Domestic Asset Protection Trust Statute

Last month, the Ohio House of Representatives passed House Bill 479, which I have discussed in posts on May 1, 2012 and May 23, 2012.

If the Ohio Senate goes along with the House, there will be a new Section 5816 of the Ohio Revised Code that provides for the Ohio Legacy Trust Act.  This will be a form of a so-called domestic asset protection trust.

Keep in mind that the Ohio Senate could amend the House version, and the final result is still uncertain.  And even if Ohio enacts a Legacy Trust Act, there will undoubtedly be various court challenges to parts of that legislation.

This is a rapidly developing area of law.  There is a constant tug of war between those who are trying to collect debts and those who are trying to protect various assets.  The tug of war will be continuing for quite some time.

Ohio May Increase its Homestead Protection

In my post of May 1, 2012, I reported that there was pending legislation in Ohio (House Bill 479) that would essentially provide an unlimited homestead exemption, similar to that in Florida, Texas and several other states.

On May 22, 2012 the Ohio House of Representatives passed House Bill 479, but it had significant changes from the original version.  The original proposal was amended to provide a complete exception for the state of Ohio and all its political subdivisions.  The proposed full homestead exemption was also amended to provide a maximum exemption of $500,000 per person.  It is important to note that this is still proposed legislation.  The legislation is currently before the Ohio Senate, and there are likely to be further changes.

The Ohio Creditors' Attorney Association and others are fighting the homestead exemption and other parts of the proposed law.  There is still no assurance as to what the ultimate outcome will be.

I will continue to monitor this very significant proposed legislation.

Many Asset Protection Considerations Depend on State Law

 Asset protection statutes and case law vary significantly from state to state.

  • More than ten states have enacted Domestic Asset Protection Trust (DAPT) legislation; but most states have not.
  • There is still not a single reported court decision upholding (or striking down) DAPT legislation.  Not only can state statutes vary, but in the future, case law in each state could be very different.
  • Some states have much better LLC protections than others.  State laws are constantly changing.  For example, Ohio recently passed legislation that provides significantly better protection for LLC members.
  • IRA protection depends to some degree on state law (particularly with respect to inherited IRAs).
  • Protection of life insurance from creditors also varies state by state.

The list could go on.  Some matters (such as 401(k) plans) are governed by federal law.

Asset protection attorneys therefore need to keep current on various state law developments in order to utilize the best strategies for clients.

 

Proposed Legislation Would Make Ohio a Leading Asset Protection Jurisdiction

Ohio House Bill 479 -- commonly known as the Ohio Asset Management Modernization Act (OAMMA) --would make Ohio a leading asset protection jurisdiction.  The proposed legislation would:

  • Permit a so-called Domestic Asset Protection Trust (DAPT).
  • Provide an essentially unlimited homestead exemption, similar to those in Florida, Texas and several other states.
  • Specifically protect inherited IRAs.
  • Specifically protect 529 plans from a plan participant's creditors.
  • Make some other changes that would help make Ohio one of the better asset protection jurisdictions in the country.

This is proposed legislation.  As explained recently by Akron Legal News, sponsors of the proposed law argue that it would allow Ohio citizens and business owners to better protect their assets.  It would also provide a legal environment that is favorable to the expansion of banking and trust business.  But it is still too soon to predict whether the proponents of the new legislation will ultimately be able to get it enacted.

Ohio LLC Statute Now Provides Better Protection from Creditors

Following up on my post of April 13, 2012 --

Ohio House Bill 48 (which becomes effective on May 4, 2012) makes important changes to Sections 1705.18 and 1705.19 of the Ohio Revised Code.  A new Section 1705.19(C) provides:

No creditor of a member of a limited liability company or any member's assignee shall have any right to obtain possession, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.

Section 1705.19(B) strengthened Ohio's charging order protection.  The new subsection (C) makes it even clearer that a creditor of a member simply cannot exercise legal or equitable remedies against the property of the limited liability company.

As I noted in my earlier post, these new provisions make Ohio LLCs much more appealing from an asset protection standpoint.

 

 

Important Changes to Ohio LLC Statute Take Effect on May 4, 2012

Ohio House Bill 48 (signed by Governer Kasich on February 2, 2012) makes some significant changes to Ohio's LLC law.  The new legislation (which becomes effective on May 4, 2012) affects Sections 1705.18 and 1705.19 of the Ohio Revised Code.

The new legislation clarifies that a charging order is the sole and exclusive remedy for satifsying a judgment against a membership interest of a debtor-member.  Other legal and equitable remedies are barred.

There had been some uncertainty about this area of Ohio law, and new legislation clears up that uncertainty.

Ohio law still does not specifically state that single member LLCs and multi-member LLCs will be treated the same.

At any rate, the new Ohio legislation makes Ohio LLCs much more appealing from an asset protection standpoint.

Ohio Court of Appeals Provides Guidance About "Piercing the Corporate Veil"

The Ohio Court of Appeals (10th District, Franklin County) recently provided some very specific guidance about "piercing the corproate veil" in Ohio.  The case is Lind Stoneworks, Ltd. v. Top Surface, Inc., 194 Ohio App.3d 98 (10th District 2011).

The trial court held a corporation and its sole owner liable for a corporate debt.  The trial court "pierced the corporate veil" and found the owner to be personally liable.  The owner admitted that the corporation had no officers, no directors, and had apparently failed to follow some other corporate formalities.

The Court of Appeals held that in this case, these facts alone were not sufficient to impose personal liability on the owner.  The appeals court basically found that there was insufficient evidence to pierce the corporate veil.  The decision of the trial court was reversed and the case was remanded for further consideration.

Many factors can influence whether or not personal liability will be imposed on a corporation owners.  The Court of Appeals noted that in general, shareholders, officers and directors are not liable for a corporation's debts.

A limited liability company does not have as many required formalities as a corporation.  Nevertheless, it should still have a separate bank account and otherwise be treated as a separate entity.

The message from this recent Ohio court decision is clear:  make sure that you follow basic formalities with your corporation, limited liability company, or other business entity.  This is relatively easy to do; and failing to do it can completely defeat the purpose of forming the entity in the first place.

Federal Judge Orders Convicted Defendant to Forfeit Pension Funds

A federal judge in Cleveland, Ohio recently ordered a convicted public official to pay $57,000 in damages by taking those funds from his retirement account.  An Ohio law passed several years ago specifically authorizes such an action if a public official has been convicted of certain crimes, including bribery.  The decision by U.S. District Judge Sara Lioi was reported in an October 29, 2011 article by James McCarty in the Cleveland Plain Dealer.

The convicted public official (former state court judge Steven Terry) was ordered to cash out the $57,000 from his retirement fund.  Mike Tobin, a spokesman for the U.S. Attorney's office, acknowledged that this was clearly a precedent.

Retirement accounts are generally well protected from creditors.  The Ohio statute involved in this particular matter has limited application -- to certain convicted public officials.  It is nevertheless important to be aware of cases like this one -- because we would not want to see a law like this one extended too far.

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Statute of Limitations for Fraudulent Transfers

The statute of limitations relating to a fraudulent transfer can vary significantly from jurisdiction to jurisdiction.  In Ohio, Section 1336.09 of the Ohio Uniform Fraudulent Transfer Act provides that a claim for relief must generally be brought within four years after a transfer was made.  But even if that period has expired, a claim may be brought within one year after the transfer was (or reasonably could have been) discovered by a claimant.

Some other states and certain foreign jurisdictions (such as the Cook Islands) have much shorter statutes of limitation.  This is one of the considerations involved in choosing a jurisdiction for a domestic asset protection trust or an offshore trust.

Many jurisdictions (including Ohio) consider when a claimant reasonably could have known about a transfer.  For this reason, it is sometimes advisable to provide some sort of public notice of a transfer of assets.  Many clients mistakenly think that asset protection involves hiding assets.  That is not the case.  It is not always advisable to provide public notice of an asset transfer, but sometimes it is.  This can be done in a number of ways, such as filing a deed, a UCC financing statement, or some other public notice that a transfer of assets has occured.

Delaware Law Provides Stability and Certainy for Businesses and Their Owners

Approximately 900,000 businesses are incorporated in Delaware, including 63% of all fortune 500 companies.  This is according to Rita K. Farrell in a recent New York Times article.

In various other posts, I have explained how Delaware's LLC statute provides better asset protection for LLC owners than the law in many other states.  The Delaware law for corporations is also advantageous (particularly for larger corporations).  This is in part because the law in Delaware is generally favorable to businesses; it tends to be stable; and it is predictable.  According to the New York Times, 21% of Delaware's revenues come from franchise taxes!  Many businesses have obviously decided to be formed in Delaware; and Delaware obviously has an incentive to continue that trend.

Various other states are also very viable alternatives for forming a corporation or a limited liability company.  I am still forming a number of Ohio corporations under certain circumstances.  Each situation must be analyzed on its own.  But as noted in the New York Times article referenced above, Delaware is obviously a very popular choice for incorporating a new business.  It is also becoming a very popular choice for forming a limited liability company.

Delaware is a Good Choice for an LLC

As I mentioned in a post last month, limited liability company laws vary significantly from state to state.  Depending on your particular circumstances, one state could have significant advantages over another.

Here are a few reasons why Delaware is one of the best states to form a limited liability company from an asset protection standpoint:

  • Formation is relatively convenient and inexpensive compared to many other states.
  • The applicable Delaware statute clearly makes a charging order the exclusive remedy of a creditor.
  • Certain other creditor remedies are expressly barred.
  • Delaware law allows various provisions in the LLC Operating Agreement that could be favorable from an asset protection standpoint.
  • Delaware has a more developed body of case law than many other states; and the Delaware Chancery Court is a very sophisticated court from a business standpoint. 

If you form your LLC in Delaware but it does business in another state, you will have to file additional papers in that other state to qualify to do business.

Ohio LLCs may provide significant protection; but they are currently not as solid as the protection offered by Delaware law.  I am now generally forming Delaware LLCs even when one of my clients will be doing business in Ohio.

Each situation should always be examined on an individual basis.  As I have mentioned many times before, there is no magic asset protection formula that will be appropriate in all situations.  But in situations where a limited liability company is appropriate, Delaware is currently a very reasonable choice.

Ohio Court Affirms the "Internal Affairs Doctrine"

The "Internal Affairs Doctrine" means that the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation.  For example, if there is a dispute between two shareholders of a Delaware corporation, it would typically be decided using Delaware law, even if the company operates in another state.  This means that the state in which you form a corporation or a limited liability company can be important.

A recent decision by the Court of Common Pleas of Franklin County Ohio affirms this doctrine.  The Court held that the law of Delaware (where the corporation was incorporated) rather than the law of Ohio (where the case arose) applied to a dispute involving corporate directors.

While many state corporation and LLC statutes are similar, they are not all the same.  Frequently it is fine to form a new entity in the state where it will be operated.  In some circumstances, however, it is advisable to form the new entity in another state.

So whenever an entity is formed for asset protection purposes, one factor to be considered is whether to form the entity in one state rather than another.

Ohio Appeals Court Affirms Basic LLC Protections

It is now well settled that a limited liability company insulates the owners from the debts of the company.

It is nevertheless reassuring when a court re-affirms basic LLC protections.  In Dover Phila Heating v. SJS Restaurants 185 Ohio App.3d 107, 2009-Ohio-6187, the Ohio Court of Appeals for the Fifth Appellate District confirmed once again that members of a limited liability company generally have no responsibility for the debts of the entity.  The case was decided in late 2009 and published in the April 5, 2010 Ohio State Bar Association Report.  Citing another Ohio case, Slimans Printing Inc. v. Velo Internatl., Stark App. No. 2004CA00095, 2005-Ohio-173, 2005 WL 100963, ¶ 13, the court noted that pursuant to Ohio Revised Code §1705.48(B),

Neither the members of the limited liability company nor any managers of the limited liability company are personally liable to satisfy any judgment, decree, or order of a court for, or are personally liable to satisfy in any other manner, a debt, obligation, or liability of the company solely by reason of being a member or manager of the limited liability company.

While there is nothing surprising in this recent decision, it is always good to see a court re-affirming the basic protections of a limited liability company.

Creditors Have Many Options Once They Have a Judgment Against You

An article in the September 20, 2009 Business section of the Cleveland Plain Dealer contains a good summary of the various remedies available to a creditor who has a judgment against you.  Cleveland Plain Dealer columnist Sheryl Harris is discussing a $3,000 judgment obtained in a small claims court in Rocky River, Ohio; but the alternatives she outlines would be just as applicable to a $3 million judgment in Ohio and many other states.

Here are a few of the things a judgment creditor may be able to do:

  • Garnish your wages
  • Attach your bank accounts
  • File a lien against your home and/or other real estate that you own
  • Force a sale of your home and/or other real estate that you own
  • Attach your personal property

There are of course limits on these remedies.  A creditor can garnish only a certain percentage of your wages.  As I have discussed in other posts, a small portion of the equity in your home will be protected in Ohio pursuant to Ohio Revised Code Section 2329.66 (while states such as Florida and Texas protect almost all the equity in your home).  It may be possible for the creditor to seize the full amount of your bank accounts, up to the amount of the judgment against you.  Transferring assets after a judgment has been entered (or even after a lawsuit has started) will likely be a prohibited fraudulent conveyance under Ohio Revised Code Section 1336.04 and similar statutes in other states.

The situation that columnist Sheryl Harris is writing about sounds like one in which we would all be rooting for the creditor.  The creditor is trying to collect on a judgment against a roofing company that failed to make proper repairs.  In many cases, however, I am representing a potential debtor.  And in those situations I want to lawfully protect the assets of that person or entity to the greatest extent reasonably possible under applicable law. 

The Cleveland Plain Dealer article is a good reminder that while debtors have many rights, so do creditors.  Asset protection attorneys must have a thorough understanding of the rights of creditors.  When an attorney is working to protect your assets, he or she must be knowledgeable about the various techniques that can be used to seize those assets.

Joint Tenancy Not Great For Asset Protection

Holding property as joint tenants has numerous advantages.  It can be convenient, and it can generally avoid probate of the jointly held assets.  It is a big misconception, however, that joint tenancy provides very much asset protection.

A recent Ohio Court of Appeals Decision, White v. Parks is a perfect illustration of the drawbacks of joint tenancy from an asset protection standpoint.  A creditor filed a judgment lien against Robert Parks.  When Mr. Parks failed to pay the judgment, the creditor filed a foreclosure action against his residence, naming both him and his wife (the co-owners), even though the judgment was only against Robert Parks and not his wife.  The trial court ruled that even though Mrs. Parks was not subject to the judgment, the residence nevertheless had to be sold.  Mrs. Parks was to get half of the net equity after the sale and the creditor would receive the other half.  The Ohio Court of Appeals, Ninth District, affirmed the ruling of the trial court.

From the Parks' standpoint it was a lot better that their house was in joint name than in Mr. Park's name alone.  The joint tenancy provided some protection.  However, even though title was held jointly, the couple was forced out of their house.  In addition, the creditor got one half of the net equity.  Not a great result for this couple.

Holding certain assets as joint tenants (such as a checking account with relatively limited funds) often makes great sense, simply for convenience.  Advantages of joint tenancy may out-weigh the disadvantages for certain parties.  When deciding whether to hold assets jointly, the assets cannot be looked at in isolation.  How best to title your assets will depend on a wide variety of factors, including your occupation, marital status, income, net worth, asset mix and many other considerations.  Titling an asset one way could be good for one purpose and not for another.  You should not assume, however, that jointly held property will provide great protection from any of your creditors.

Fraudulent Conveyances

Asset protection planning generally involves transferring and/or re-titling some or all of your assets in order to better protect those assets from claims of creditors. Not surprisingly, however, there are statutory prohibitions against transferring your assets with the intent of avoiding your legal obligations. Whenever any assets are transferred or re-titled for protection purposes, it is critical to focus on applicable “fraudulent conveyance” laws, which give creditors the ability to void certain asset transfers in order to satisfy a judgment. Asset protection planners must have a thorough understanding of fraudulent conveyance laws.

The Ohio Uniform Fraudulent Transfer Act (Chapter 1336 of the Ohio Revised Code) is fairly typical of the statutes found in most other states. An examination the statute reveals how broadly a fraudulent conveyance is defined. Whether a conveyance is “fraudulent” under Ohio Revised Code Section 1336.04 depends on a variety of factors, including the following:

  1. Was the conveyance intended to hinder, delay, or defraud any creditor of the debtor?
  2. If the transfer was as sale, did the debtor receive a reasonably equivalent value in exchange for the asset that was transferred?
  3. Did the debtor know (or reasonably should have believed) that due to the transfer he would have debts beyond his ability to pay as they became due?

Whether a conveyance is “fraudulent” depends heavily on the “intent” of the person making the conveyance. Ohio Revised Code Section 1336.04 (B) says that in order to help determine that intent, consideration should be given to many different factors, including but not limited to:

  1. Whether the transfer was to an insider (like a family member or partner);
  2. Whether the debtor retained possession or control of the property transferred after the transfer;
  3. Whether there was a lawsuit pending or threatened;
  4. Whether the transfer made the debtor insolvent.

Whether or not a transfer is “fraudulent” is often a complicated issue that depends on a wide variety of factors. Other terms in the Ohio statute also frequently raise complicated questions. Debtors and creditors frequently argue about whether an asset was “transferred” at all. The term “transfer” is defined very broadly in Ohio Revised Code Section 1336.01(L) to include a direct or indirect, absolute or conditional, voluntary or involuntary method of disposing of an asset or an interest in an asset. The term “transfer” includes the payment of money, a release, a lease, creation of lien or other encumbrance. Exactly when a transfer occurs can be very important and may determine whether or not a creditor can reach a particular asset.   

Each state has its own fraudulent conveyance statutes. The Ohio statute discussed here is typical, but each applicable state law must be reviewed separately.

 

Fraudulent conveyance statutes do not make asset protection planning impossible. They are intended only to prevent improper transfers.  

 

In addition to the specific provisions of Ohio Revise Code Section 1336.04 (and/or any other applicable statute), debtors must also consider how certain transfers may be perceived by a judge who may try to “do justice” notwithstanding the words of the statute. 

Protecting Your Home from Creditors -- Huge Variations in State Laws

A debtor’s personal residence is a natural target of his or her creditors. Some states (Florida, in particular) provide special protection for your home against claims of creditors. Currently, Florida’s protection is so strong that some debtors have re-located to Florida solely to take advantage of this protection. Texas also provides a very strong homestead exemption. Ohio, however, currently provides little statutory protection. Until very recently, the Ohio homestead exemption was only $5,000 -- one of the lowest in the country.  The exemption was recently raised to $20,200 (Ohio Revised Code Section 2329.66).  Furthermore, Ohio law does not permit residents of Ohio to utilize the federal bankruptcy exemption, which would be a higher amount. Even in bankruptcy, therefore, Ohio residents have only a $20,200 homestead exemption. There are huge variations in state homestead exemptions.   Texas and Florida are essentially unlimited; Nevada is currently $550,000. Other states -- like Ohio -- offer very limited exemptions.  

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has significantly curtailed the previous ability to move from state to state to take advantage of a better homestead exemption. Essentially, the federal law provides that the state homestead exemption is limited to $125,000 if the debtor moved within 3 years and 4 months of the bankruptcy and in certain other limited circumstances. This limitation applies only in bankruptcy, however, and not to a creditor’s action outside of bankruptcy.

In several states, debtors may benefit from re-titling their residence as “tenants by the entireties.” Ohio, however, does not currently recognize this form of home ownership. While “joint” ownership is sometimes used to avoid probate, it is not helpful from an asset protection standpoint. Creditors of either joint tenant may be able to reach the entire property to satisfy debts of the joint tenant.

In light of the fact that Ohio provides such a low statutory homestead exemption, we look at alternative means of protection for our Ohio clients. We can sometimes gain some protection for clients through certain trusts. Not all trusts provide creditor protection. Certain trusts, however, may provide some protection for a residence. We also frequently advise re-titling the house in the name of the spouse who is least likely to face future litigation.

Issues relating to your personal residence cannot be analyzed in isolation. They should always be considered in connection with an over-all asset protection strategy.

Piercing the Corporate Veil

Corporations and limited liability companies (LLCs) provide significant liability protection to their owners.  Shareholders of corporations and members of limited liability companies generally are not responsible for debts of the corporation or LLC.  A recent Ohio case, however, serves as a reminder that creditors may attempt to "pierce the corporate veil" and hold an owner individually liable for debts of the entity. 

In RCO International Corporation v. Clevenger, 180 Ohio App.3d  211 (2008) the Plaintiff brought a breach of contract action against an LLC and its two members.  While the lower court granted summary judgment in favor of the owners, an Ohio appeals court held that the creditor may have made sufficient allegations against the owners, to sue them personally.  While the Plaintiff did not allege fraud, it did allege an illegal act (the company's sending a false invoice).  On the surface, the facts of this case did not seem to present a strong case for "piercing the corporate veil".  The decision, however, may have rested on certain procedural issues.  In any event, this recent case is a good reminder that simply forming a corporation or LLC does not in and of itself automatically give the owner limited liability in all circumstances. 

What can be done to prevent a creditor from "piercing the corporate veil" and holding an owner personally liable?

  • Make sure your corporation or LLC is properly set up.  If you are setting up an entity without the help of an attorney, you may not be taking all the necessary steps to make sure that the entity is properly formed.
  • Observe formalities once the entity is formed.  Corporations should hold annual meetings of shareholders.  There should be meetings of the Board of Directors.  An LLC should have an Operating Agreement, and the terms of that Operating Agreement should be followed.  Your entity should have a separate bank account and be treated as a separate entity.
  • Your corporation or LLC should have usual and customary insurance for whatever business it is conducting.  A court is far more likely to try and "pierce the corporate veil" if the owner has intentionally failed to provide customary insurance for the entity's activities.
  • Follow good business practices.  Forming an entity will not shield an individual owner from fraud or illegal acts.

The leading court decision in Ohio, Belvedere Condominium Unit Owners Association v. R.E. Roark Companies, 67 Ohio St. 3d 274 (1993), as well as decisions in many other states, make clear that if usual and customary practices are followed, a corporation or an LLC should provide limited liability protection for its owners.