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Asset Protection Plan Could Hurt Physicians

There are many asset protection plans floating around that are aimed at physicians. Though supposedly having physicians’ best interests at heart, some actually jeopardize them. Great caution is necessary. For instance, the "CAPS" plan, approved by the Florida Medical Association, involves an investment structure specifically designed to protect a physician’s practice receivables (A/R).

The basic steps are as follows:

(i) A bank lends money to the physician.

(ii) The physician buys an annuity with the loaned money. (The annuity and its proceeds are exempt from creditors under Fla. Stat. §222.14.)

(iii) Security for the loan consists of a lien on the annuity, a guarantee by the P.A. and a lien on the A/R to secure the guaranty. In many cases the loan documents provide that the bank is to look first to the A/R in the event of a default, thus freeing up the annuity for the physician.

Simple enough. But does it work? … Nope! (Unless, of course, the creditor’s attorney is incompetent.)

Let’s set the stage. A malpractice plaintiff gets a judgment against both the physician and the practice and asks the court to enforce the judgment by paying the A/R to the plaintiff. Some basic questions and answers:

(i) Who gets to decide? Answer – the same court that rendered the judgment. That is, the same court that already decided the plaintiff is the victim and the defendants are wearing black hats is about to rule again.

(ii) Do contractual technicalities matter? Answer - not likely. The court is considered a court of equity when it sits in "proceedings supplementary" to enforce its own judgment. Simply put, that means it has broad authority to fashion a fair result. So before getting into the technical analysis, just ask yourself whether it would be fair (i) for the bank to get paid in full, the physician to keep the annuity and the victim to get nothing, or (ii) to allow the plaintiff to be thwarted by the provisions of a contract to which she was not a party.

OK, so what’s the analysis? When the P.A. defaults the bank seizes the A/R to collect on the P.A.’s guarantee. That is, the P.A. pays the physician’s debt. The P.A. not only has the equitable right to be paid back by the physician, but the court can easily rule that the P.A. "steps-into-the-bank’s-shoes" with respect to the bank’s lien on the annuity. The P.A.’s lien rights could then be seized by the creditor, destroying the asset protection.

A similar theory is called "marshaling". Suppose two creditors are fighting over the same asset (the A/R) and only one of them (the bank) could get paid via a lien on a different asset (the annuity). The creditor with access to the extra asset must first collect against that extra asset so that both creditors can get paid.

There are other theories which could destroy the asset protection of these investment structures. For example, the CAPS investment structure involves a fraudulent transfer when the P.A. gives its guaranty and the A/R lien; and another fraudulent transfer when the bank seizes the A/R. But rather than get into the details, just step back and take a sniff.

How difficult do you think it would be for the court to find that the physician had the "actual intent" to hinder creditors when he or she bought the CAPS investment structure? Q: Were you aware that CAPS is an acronym for "Comprehensive Asset Protection Solutions"? Q:  What is meant by the phrase "asset protection"? Q: Why did you borrow money at a high rate to invest in an annuity earning a low rate, especially considering that the interest payments were not deductible?  Q for the bank:  Why would you agree to look to the A/R first, when seizing the annuity would be so much easier?

It’s safe to assume the promoters of these investment structures don’t emphasize that if actual intent is involved, then

(i) relief is provided for future, unknown creditors, and

(ii) the statute of limitations expires on the LATER of four years from the date of the transfer or one year AFTER DISCOVERY of the transfer by the creditor.

Finally, bankruptcy relief is not available if the debtor engaged in a fraudulent transfer within two years of filing the petition.  Who wants to litigate whether the bank’s seizure of the A/R was a fraudulent transfer?

To make a long story short, if the plaintiff’s attorney has a clue, the CAPS investment structure just makes the situation worse.

Planning is crucial in an era when malpractice claims are as plentiful as Florida mosquitos and when malpractice insurance costs are so high. But be wary. Make sure you know that what you’re buying will benefit you and not just your consultants.

©2010 Steven M. Chamberlain.  All rights reserved. Republication with attribution is permitted.