How OJ Simpson may help keep Dick Fuld from stiffing his shareholders

Paul Caron, the TaxProf, has a post on Dick Fuld's transparent attempt to shield his multimillion dollar home from any potential shareholder lawsuits by selling it to his wife for $10.

As you may or may not be aware, Florida is notorious among bankruptcy analysts because OJ Simpson bought a house there in the hopes of shielding his assets from the civil suit over the murder.  Florida is one of the few states with what is known as an "unlimited homestead exemption".  All states permit you to shield your primary residence from creditors in bankruptcy (though not from a mortgagor, as discussed in my previous post).  As long as you keep making any payments on loans secured by the house, you can keep it.  However, most states cap the value of the home you can thus shield.  Not Florida.  So OJ's strategy was, as far as we can tell:

1)  Buy enormous house worth zillions of dollars and move into it
2)  Wait until civil suit is over
3)  Declare bankruptcy
4)  Sell house for a zillion dollars; thumb nose at justice.

This probably wouldn't have any consequences, if he had not been so damn famous--though of course, many argue that if he had not been so famous, his primary residence at the time of the civil suit would have been the pokey.  At any rate, his case so outraged Congress that at the time of the 2005 bankruptcy reform, they wrote in provisions designed to prevent people from using Florida's ridiculously generous homestead provisions to shield assets from civil judgements.  You now cannot discharge debts incurred by court judgement from a willfully malicious action, and it's a lot harder to convert outside assets to protected Florida homesteads:

The legislation places limits on those who purchase new expensive homes within two years of filing bankruptcy, imposes a 40 month waiting period before those who relocate to a new state can avail themselves of the new state's homestead exemption, and finally, creates a 10 year reachback period to attack homesteads acquired to defraud creditors. Thus, whereas prior law permitted O.J. Simpson and WorldCom's Scott Sullivan to purchase mansions in Florida while leaving their creditors holding the bag, the bankruptcy reform legislation closes the most notorious homestead exemption loopholes.

The TaxProf post offers more details:

The new 2005 bankruptcy amendments may be an impediment to the Fulds' strategy. In the first place, Ms. Fuld might not be able to use Florida's homestead exemptions in bankruptcy. Under the 2005 amendments to the Bankruptcy Code, a debtor can only use a particular state's exemptions if the debtor has been continuously domiciled in the state for the 730 days immediately preceding bankruptcy. If the debtor was not domiciled in any one state continuously during the 730 day period, then the debtor would be eligible to use the exemptions from the one state in which the debtor was longest domiciled for the 180 day period preceding the 730 day period. 11 U.S.C. § 522(b)(3)(A). The upshot is that Ms. Fuld might not be able to use the Florida exemptions at all if she has been domiciled in New York rather than Florida during the relevant time periods.

In addition, even if Ms. Fuld was sufficiently domiciled in Florida to be eligible to use the Florida exemptions in bankruptcy, Section 522(p) of the Bankruptcy Code limits any increase in the value of an exemption acquired during the 1215 day period preceding bankruptcy to $136,875. If Ms. Fuld's bankruptcy is filed within 1215 days of the transfer, it appears her homestead would be limited to $7,136,875, allowing the trustee to sell the homestead to realize the additional $6,863,125 in value for creditors (assuming the mansion is really worth $14 million).

So it would seem that Ms. Fuld would have to live in Florida for the 730 days preceding bankruptcy and would have to avoid bankruptcy for more than 1215 days after the transfer, in order to get the full benefit of the Florida homestead exemption in bankruptcy.

However, this all assumes that Ms. Fuld ends up in bankruptcy. The Fulds may be trying to shield Ms. Fuld's new interest outside of bankruptcy under Florida law. The Fulds may be expecting judgments against Mr. Fuld and not Ms. Fuld. To get at Ms. Fuld's property if she is not personally liable on any judgment, they would have to bring a fraudulent transfer action to avoid Mr. Fuld's gift transfer of the half interest in the mansion. There is an interesting question whether this gift transfer could be avoided under Florida law.

It seems amazing to me that this is even possible--it's so clearly a fraudulent conveyance designed to let the Fulds live well no matter what the court decides they owe their shareholders.  But Florida courts have been notoriously reluctant to change the system.  No matter what you think about the 2005 bankruptcy reform, it made this abuse a lot harder to get away with.