TOP 10 ARIZONA LAWSUIT VERDICTS OF 2008

ASSET PROTECTION UPDATE - TOP ARIZONA LAWSUIT VERDICTS OF 2008

We are continually surprised by the number of successful and educated business people and their advisors that underestimate the exposure they and they clients face just from “walking around rich” or even with just the appearance of wealth. We warn people about these exposures and seek to place barriers between this kind of harm and the assets of those we protect on a daily basis.

Sometimes our advice and experience is well-heeded, sometimes it is not. Don’t take our word for it – here are the facts; see the original story store as published in ARIZONA ATTORNEY, the magazine of the State Bar of Arizona by clicking here.

ARIZONA LAWSUIT AWARD SUMMARY

- True to what we are seeing in the real estate market, a home building company claimed the top verdict of $269 million;
- Once again, each of the top 10 verdicts was more than $5 million. The lowest was for $6Million;
- 9 out of the top 10 were more than $10 million;
- There were 24 verdicts over $1 million;
-Other verdicts resulted from actions for breach of contract, condemnation, product liability and elder abuse.

WHAT DOES THIS TELL US?

- That in almost all cases, the amount of liability insurance carried by the defendant was insufficient to meet the verdict;
- That liability insurance remains and important first line of defense, just the cost of defending one of these suits could be financially devastating;
- That the insurance coverage needed to be supported and further recovery limited by active Asset Protection planning;
- That in several cases it is unlikely that the assets of the corporation involved will be sufficient to pay the judgment, placing owners and officers in harm’s way;
- That all industries are vulnerable, this not “just” about any one group or profession;
- That a lifetime of work and the security and future of any of these defendant businesses and their owners and employees can be destroyed by a single law suit;
- That we are in a time, socially, politically and economically that requires each of us to take proactive responsibility for protecting our wealth, or the wealth of those that we serve as advisors.

UNDERSTANDING THE CHECKS AND BALANCES OF THE ASSET PROTECTION TRUST

We have many questions on how Asset Protection Trusts work and how you and your money are protected in international or "off-shore" jurisdictions. My friend Doug Lodmell created this great piece for our many clients and advisor & attorney partners that explains the basics.

UNDERSTANDING THE CHECKS AND BALANCES OF THE ASSET PROTECTION TRUST

By Douglass S. Lodmell, J.D., LL.M.


Since Asset Protection ultimately relies on removing the assets from both the U.S. jurisdiction, and the control of the clients, a very good question would be: How can a client be sure that the new foreign Trustee doesn’t run away with the money should we ever need to use the Trust? To answer this we need to look at the intricacies of how a well-drafted Asset Protection Trust creates internal and external ‘checks and balances.’

To begin, let’s look at how the plan ‘controls’ the money:

1) We create a legal structure which requires the approval and consent of various parties who act as checks and balances on the assets, and

2) We create a physical tracking mechanism directly with the independent client chosen bank, which holds the money, so that the client is always aware of where the money is.

The Asset Protection Trust has 4 primary roles:

1) The Settlors (the clients)
2) The Trustee
3) The Protector
4) The Beneficiaries


The legal control of the assets is done through a 2 party approval mechanism. This is kind of like requiring 2 signatures on a check. The Trustee is responsible for the management of the assets and has legal title. However, unless the Trustee is the client, they do not have physical possession of the money, which is held at an independent and unrelated bank.

In order for the Trustee to actually do anything with the money, they then must also have the consent of The Protector. This would include things like wiring the money to another bank or even to another account with a different name, or making any changes whatsoever in the physical location of the money

The role of Protector is just that, to protect the assets of the Trust for the benefit of the Beneficiaries. As such the Protector has 2 primary jobs: 1) to approve of the actions of the Trustee, and 2) to remove the Trustee if the Trustee is not acting in the best interests of the Beneficiaries. This is what ensures that the Trustee doesn’t run off with the money.

So who keeps an eye on the Protector? This is where the loop closes back to the only location in which the clients can have 100% security – themselves. The Settlors (clients) have the power to remove and replace the Protector for any reason they choose to at any time. The only exception is if a U.S. court is demanding that they do so to appoint the court or a court representative as Protector, in which case that particular order is ignored.

The only other possible loophole that could endanger the money is if both the Trustee and the Protector conspired together to defraud the Trust. This is highly unlikely in and of itself due to the fact that the Trustee is a large Trust Company and has their own internal checks and balances as well as the fiduciary duty and liability to the Trust, and the fact that the Protector is personally chosen directly by the client and has the same fiduciary duty. Nevertheless, the plan has one final check that ensures that the client themselves always have full knowledge of where the money is, and where it is going to.

This final check is called a “client acknowledgment” procedure. The bank, typically a large private Swiss bank, chosen by the client, will have a hold period prior to the execution of any orders to withdraw funds, or move money from the Trust account. This procedure would require the bank to have a personal confirmation that the Beneficiaries (also the clients) have direct knowledge of the proposed transfer.

While the Beneficiaries are not in “control” of the money directly, since the bank must have a direct personal verification that the Beneficiaries are aware of the transfer, if a proposed transfer is not approved, the bank will be so informed, by the clients themselves. The order would then be delayed for a sufficient period of time for the Settlors to appoint a new Protector, who will appoint a new Trustee.

As you might imagine, the net effect is that it is virtually impossible to make any move with Trust assets without the client’s direct knowledge and consent. This combined with the fact that any serious Asset Protection Plan is going to use only the most stable and reputable institutions to fill any fiduciary role makes having your assets offshore safer than the local bank down the street by far.

The difference is that the bank down the street is in the jurisdiction of the court at the other end of the street. And right in the middle is the all-too familiar lawyers office, which is where all the trouble began in the first place.

Understanding the Arizona Anti-Deficiency Statutes and What they Mean to YOU

We have many questions and conflicting interpretations of the Arizona Anti-Deficiency statutes and what they really mean and do. For clarification I turned to Attorney Neal Bookspan who is a partner at Phoenix law firm of Jaburg & Wilk and who handles a variety of business, bankruptcy and litigation issues. A link to Neal’s profile can be found by clicking here: ABOUT ATTORNEY BOOKSPAN and I have included some basic contact info for him below as well.

Neal, thanks for your help on this issue. Here’s what Neal had to share:

Ten Truths Regarding Arizona's Anti-Deficiency Laws

1. Arizona's anti-deficiency statutes only provide protection to borrowers on residential property, not commercial property, industrial property or raw land.

2. The Arizona anti-deficiency statutes are A.R.S. §§ 33-729(A) and 33-814(G). Section 33-729(A) applies to purchase money mortgages (when is the last time anyone saw a "mortgage" document used in Arizona??) and purchase money deeds of trust that are foreclosed judicially. Section 33-814(G) applies to deeds of trust foreclosed through a trustee's sale. Almost all deficiency issues in Arizona arise under § 33-814(G).

3. Under either statute, the threshold question is whether the property at issue is "two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling." Under the existing case law the dwelling must be built and at least occasionally occupied.

4. The property may be "occasionally occupied" by the owners or rented to third parties and qualify for anti-deficiency protection.

5. Arizona's anti-deficiency statutes apply to second priority mortgages and deeds of trust if they are purchase money obligations. Non-purchase money mortgages and deeds of trust are not protected by Arizona's anti-deficiency statutes.

6. If a purchase money mortgage or deed of trust subject to Arizona's anti-deficiency law is extended, renewed, refinanced, or worked out, the loan retains its status as purchase money and the borrower remains protected by Arizona's anti-deficiency law.

7. To obtain a deficiency judgment after a trustee sale, an action must be brought within 90 days after the sale. If an action is not brought within this time period, the right to a deficiency is lost pursuant to A.R.S. § 33-814(D).

8. The Arizona anti-deficiency statutes are applied both against and to protect guarantors in the same manner they are applied against and protect borrowers.

9. Lenders may continue or postpone trustee's sales. This may be done an unlimited number of times and the only notice given of the new time and place for the trustee's sale is by public declaration at the time and place of the scheduled trustee's sale.

10. Where a deficiency is permitted, the sale of the underlying property results in a credit against the amount of the judgment in an amount equal to the higher of the fair market value of the property or the sales price obtained at a public sale. If a request is made within 30 days of the foreclosure, a judgment debtor may seek to have the court determine the fair market value of the property.



ABOUT GUEST COLUMNIST ATTORNEY NEAL BOOKSPAN

Email: nhb@jaburgwilk.com
Phone: 602-248-1000
Practice areas:Bankruptcy Construction Law Corporate Transactions Creditor's Rights

Remember, the best we can do here is general info - NEVER - specific legal advice, so call Neal for help that is fact specific to you.

TRAITS OF THOSE WHO WILL SURVIVE THE RECESSION

We have seen that those who have weathered this storm most effectively and with a minimum amount of trauma shared several characteristics:

- They and their advisors were aware of potential exposures and were proactive in addressing them;
- They are able to make their personal, family overhead commitments from existing resources for an extended period of time, even without additional cash flow;
- They were willing and able to adjust their lifestyles and expenditures to current economic conditions;
- They lived very well, but well within their means, as opposed to at the limits of their means;
- They had assets that allowed them to meet existing business financing burdens and other fixed costs in a form that they were able to liquidate at minimal delay and expense;
- They had top counsel in place on tax, business and estate issues, and that counsel used a variety of strategies that not only served the primary goals but also protected those assets for the family. Some examples are the use of Insurance and Annuity Products and ILITS and Split Dollar agreements that preserve certain assets for the family by statute;
- They had great credit and relationships with banks that allowed them to agree on terms that were best for all parties involved, and had these relationships with several institutions;
- They had long term assets that were able to be made liquid with minimal penalty and delay, despite that liquidation not being part of the original plan, i.e. long term investments with an escape or liquidity plan built in;

No business is completely recession proof. Diversify and properly insulate your income streams if possible and be ready to be flexible and spot ways to identify new opportunities for your business and your skill set.

Realize that your niche, as you have defined it, may come to an end and know when to direct your assets and energy to those new opportunities. As examples, some of our clients who were major players in single family housing are now in the “economy” apartment market segment and are doing well. Doctors are expanding their practices and adding high value cash services like medically supervised weight loss to practices that were focused solely in other areas. Others have created booming new businesses like debt and credit repair that directly reflect the current economy.

Don’t take your market position for granted. In a down economy discount solution, product and service providers emerge in every market. These competitors will be selling price first and many consumers won’t see the differences until they have been poorly served and you have lost the business. Some steps to fight this:
- Make sure that your network and professional relationships are as strong and developed now as they were before you reached your current level of success;
- Look for ways to distinguish yourself and your business and maintain the highest standards of professionalism and service;
- Look for every way to add value and collaborate with other top services providers you work with so that you are a natural and logical part of every project or client they are involved with. - - Become part of a best of class team of teams that delivers the highest value to the consumer. This is true of everything from medical services to commercial contracting;
- Continue to be the best, or at least great at what you do. “Good enough” should not be part of your vocabulary.

Guard your credit like gold. Good credit has always been important on both personal and business fronts, but it is now more important that ever. As credit markets have tightened even the wealthy are having trouble obtaining credit for every day issues like home and auto purchase or leasing. Banks are scared and have pulled in the reigns on lending to all but those who have sterling credit, “good” is no longer good enough. They are also using late payments of any kind to move to the default interest rates permissible under various types on loan and consumer credit agreements as a way to generate fees and increase revenue internally. On a personal level this could mean that your VISA ay 8.9% jumps to 29.99% APR if your spouse sends in the check late. On a business level it is much worse. If your course of business has been to pay certain credit lines down late to a friendly creditor, it could now put you into default or cause an acceleration.

We are also hearing that clients who have used revolving credit lines for years as part of their business model either for capitalization or to pay recurring expenses are suddenly finding that their credit lines have been terminated or drastically reduced as is permissible in the fine print of most such agreements. This is despite the fact that the client has had no change in income or credit. Banks are simply deciding that they have too much exposure and are proactively limiting your ability to draw that money out.

Solution? – If you have a credit line that you know you are going to need or cannot risk losing – draw the money out now and look at the interest cost like an insurance premium; you may not want to pay it but if you need the “insurance” of having that money available it will not be available at any cost, certainly not in any short term scenario.

There are services out there that we have referred friends and clients to with great results. For an investment of a few hundred dollars many negative or inaccurate items can be removed in a short period of time increasing your credit score by dozens of points. Check your business and personal credit reports and see if they are accurate.

We are also seeing that banks that are in financial trouble and which need to reduce their outstanding debt balances are playing dirty tricks like re-appraising property they financed over 18 months ago to “current market value” at ridiculously low valuations then going back to the borrower and saying they need more collateral or they will call they note as the “fine print” entitled them to do. How bad can this be? In one case the bank re-appraised my client’s multi-million dollar commercial property at about 50% of current fair market value and wanted an additional seven figures in collateral. Fortunately, this client had sterling credit and good professional relationships that allowed him to re-finance at a lower rate with a more solvent and ethical bank.