The Lessor's Lien
Most lease agreements contain a lessor's lien clause. These liens are
not part of an intentional asset protection program; rather they are liens
that arise in the normal course of business. A lien may be used to ensure
that someone meets an obligation. In this instance, the lessor wants to
make sure that the lessee fulfills his lease obligations so the lessor
oftentimes encumbers the lessee's accounts receivable, furniture,
equipment, inventory, and other assets. Of course, in this situation,
the lessor is not attempting to protect the lessee's assets against
other creditors, yet that is exactly what the lessor is accomplishing.
The best asset protection planners understand how liens are used in such
everyday business arrangements, and the planner capitalizes on such processes.
Utilizing a standard business arrangement for asset protection is especially
desirable because it appears that there was no intentional asset protection
scheme. Because normal business arrangements often use accounts receivable
to secure a lease agreement, a lessor's lien is an especially good
way to protect this valuable asset.
The best type of lessor's lien, of course, is one that is held by a
company who is friendly towards the lessee, because we can then draft
the lease and lien terms to best suit our needs. Often, we will take property
from a business, sell it to another business, and then lease it back to
the original business. This lease-back arrangement has two benefits: First
you protect one piece of property by titling it to a separate entity and
when you lease back the property to the original entity, you put a lessor's
lien on a second asset. For example, an LLC could sell an office building
to a second LLC, lease the building back to the first LLC and subsequently
place a lessor's lien on the first LLC's accounts receivable.
As simple as the concept sounds, a lessor's lien in this or similar
circumstances requires a high degree of skill to do correctly. The trick
is to transfer the original asset into a separate entity in a manner that
won't be considered a fraudulent transfer. Also, you must structure
each entity so that they'll be respected as separate entities if challenged
in court. For example, sometimes if one entity is sued and the managers
of that entity also happen to manage the second entity, both entities
may be considered one entity under the theory of interlocking directors.
This pierces the veil of the second LLC, which will not only avail the
first LLC's creditor of the second LLC's assets and also invalidate
the reason for a lien on the company's accounts receivable.
Avoid Sham Mortgages
You can discourage a lawsuit with a mortgage recorded against your assets
because your creditor may simply assume that the mortgage is bona fide.
Even a paper mortgage can discourage a would-be litigant. Don't rely
on sham mortgages though. Assume that your creditor will challenge the
validity of your mortgage. Be prepared to satisfy the court that you owe
an enforceable debt for the amount of the mortgage. When your mortgage
holder is a friend, relative or affiliate, the mortgage can expect close
scrutiny. A more inquisitive or aggressive creditor may challenge the
validity of your mortgage. If you borrowed money, do you have the cancelled
checks to prove the loan? If you gave the mortgage to secure a debt for
services, can you prove that the services were actually rendered and were
Another limitation of third party liens is that the total value of the
secured party's claim against the collateral may still leave an exposed
equity. For example, a real estate developer who owns separate parcels
of land may arrange for a mortgage to be held by a third party in order
to reduce her equity in the land. The mortgage granted by the developer
to the third party and recorded on the county records offers no protective
value until a cash loan or other value is given to the developer. If a
plaintiff wins a lawsuit against the developer, the plaintiff can have
the county sheriff attach and sell the property to satisfy the judgment.
While the sheriff's sale will not extinguish the mortgage held by
the third party, it would be cold comfort to the developer, who nevertheless
lost her property.
Except for the appearance of a lien against the developer's properties,
the developer's arrangement will not withstand a plaintiff's attorney
who wants to sell the developer's property to satisfy the judgment
unless a valid debt is presently owed to the third party mortgage holder.
The difficulty for the asset protection planner is to show actual cash
loans to the developer to create that valid lien.
And what will the developer do to protect the cash received from the lender?
If the transaction is small enough, this presents less of a problem. However,
you may need complex arrangements to protect property worth several hundred
thousand dollars or more. The challenge for clients with millions to protect
can usually only be met with creative and aggressive planning. This may
call for transferring the loan proceeds to one or more international entities,
investing the proceeds in exempt assets or to buy international annuities
or some other sophisticated insurance-based product, or to secure an obligation-based lien.
Another challenge when planning complex third parties liens involves the
federal tax law. Not every asset protection consultant, attorney, or CPA
has adequate knowledge of the federal income, gift, and estate tax laws
to safely apply these arrangements. There are common tax traps that apply
to third party liens held by decontrolled entities or some other third
party. Because of its tax complexities, many asset protection specialists
avoid using foreign entities in their plans. On the other hand, the most
effective asset protection transactions may require a foreign corporation,
trust or other foreign entities for privacy purposes and to remove the
liquid assets from the grasp of predatory litigants.
Structuring secured liens on your personal assets or the assets of your
business can be effectively accomplished only with careful planning, attention
to detail, and by observing the applicable laws involved over the life
of the lien. You must clear a number of hurdles in order to avoid problems
with the lien itself, such as the fraudulent transfer laws and tax concerns.
This complexity creates a two-edged sword: It requires a high degree of
knowledge and skill in several different legal areas to succeed. The costs
involved can be significant when you consider the legal fees, taxes, and
special business services, such as foreign managers. Yet, done properly,
the complexity of the transaction can impose a formidable barrier to the
average plaintiff looking for a fast lawsuit recovery. As more Americans
enter the ranks of those concerned about lawsuits, and as they educate
themselves on asset protection, there will be more demand for sophisticated
asset protection strategies. Third party secured lien arrangements will
be high on that list.
YES, YOU CAN LOSE EVERYTHING!
You may think that your wealth is safe and that you don't need protection.
But don't delude yourself and accept reality — for every 60 minutes
you spend making money, spend 60 seconds thinking about how to protect it!