R.C. Lim, Attorney and Counselor at Law

Derrick Coleman, NBA Star, Files Chapter 7

Derrick Coleman, the former number one pick in the NBA draft, recently filed for Chapter 7 protection under the bankruptcy code. His case will be one of the few Chapter 7 asset cases, and among his assets he lists many fancy cars and other tchotchkes one would expect an NBA great to have collected over a career as an NBA great.

Coleman owed more than $4 million than his assets were worth. As a high profile case, Coleman hopefully did a more thorough job filling out his schedules than the former auto dealer Danny Hecker I wrote about a few days ago did. Having made some $89 million over his career, Coleman’s monetary troubles seem to have come from investing money in his struggling hometown of Detroit.

I suspect that Coleman could have done a little better had he visited an asset protection planning attorney. One thing that such attorney can do is advise you on how to segregate your assets and risk so that when one business fails it does not spill over to the rest of your assets or businesses. This is what parent corporations do when they create subsidiaries. The subsidiary can then fail without harming the parent. In Coleman’s case, it might have allowed him to close a business without having his creditors reach his personal assets.  In the context of corporations owning corporations, this can be quite expensive — separate and then consolidated taxes and books for auditing. In the context of smaller businesses, the series LLC offered in several states makes this considerably easier and cheaper to accomplish.

Some Lessons from In Re Hecker

Danny Hecker filed for Chapter 7 protection last June. His case reported some $750 million plus in debts perhaps the biggest case ever in his Minnesota jurisdiction. As a former car dealer, Hecker’s house of cards had collapsed from a high perch. Hecker’s assets were also significant, and he listed them at $18.5 million. As it turns out, he left a few important things out. Then he compounded the error by lying to the court. As the scheme unraveled, his ex-father-in-law who was implicated in the scheme apparently shot himself before he could give testimony.

The trustee in the case accused Hecker of fraud which led to an ongoing 25-count criminal indictment against Hecker. Among the assets that he left out were sizeable quanitites of cash that he handed over for the benefit of a girlfriend, motorcycles, boats, trailers, expensive watches, club memberships, a handgun, boat docks, airplane tickets, a car, and several hundred dollars of $2 bills. The ugly result here is that the settlement of his Chapter 7 suit has been dismissal of his case without discharge.  In other words, Hecker will continue to face the 25-count criminal indictment AND all of his assets will be sold–including those he thought he was hiding–AND Hecker will still be personally liable for some $725 million dollars to his creditors. Hecker’s lack of money is now very much affecting his criminal case for the worse. Hecker has already had two sets of criminal attorneys withdraw from representing him for nonpayment of fees. The man is clearly broke. And unlike a bankruptcy attorney who can petition the court to be paid from the sale of assets–assuming certain other things–his criminal attorneys can do no such thing. This leaves him with the Federal Public Defender’s office.

Hecker has fired his bankruptcy attorney who Hecker claims did a terrible job. As it turns out, the attorney Bill Skolnick is a pretty big deal there in Minnesota. I think it’s still had to tell what this means. But the case stands as cautionary tale of why it’s important to be truthful in the petition, truthful in the 341 meeting, and truthful in a 2002 exam. While the actual rate of prosecution for bankruptcy fraud is low and getting lower, the magnitude of the harm on the other side could not be worse. Essentially, you have all of your stuff sold–you keep all of your debts–and you go to jail.

Given the list of assets that were excluded, I am led to believe here that part of the mistake may have been simply that Hecker did not pay enough attention to filling out the forms completely. As a debtor, it is good to remember that when in doubt - DISCLOSE! While the trustee may not like wading through your extra entries, you will have removed the risk that you forgot something.  This process is considerably harder for the person who has a lot of things. While a stack of a hundred $2 bills might be rather hard to forget for some. For others, it’s only one of thousand other things exactly like it. The next thing for debtors to remember is that they really need to rack their brains and not expect to get everything on the first pass or to be prompted by their attorney for everything they own or control.  It is up to the debtor and the debtor alone to provide a complete list to the attorney. And much more importantly, it is the debtor’s signature(s) that go on the petition! You want to get it right.

Inherited IRAs and Bankruptcy

IRAs benefit from a federal bankruptcy exemption on an amount something north of $1.1 million. (The previous amount should have had its 3-year inflation reset on April 1, 2010.) This is a touch more complicated, and “roll-over” IRAs, or IRAs that are funded from ERISA plans can potentially qualify for unlimited amounts although there is very little guidance right now on what happens once such plans become “mixed” when a roll-over plan is mixed with regular contributions. (See Natalie Choate at Morninstar.com).

Inherited IRAs have become a fairly common tax planning strategy for estate planners. If not planning is done, an IRA can trigger a whopping tax bill. Tax is immediately due on long-term and any short-term gains. The capital gains tax would be in addition to any estate taxes on the estate. However, the IRS permits a decedent to pass an IRA without triggering a distribution and a tax and most importantly to replace the new beneficiary’s age for the purpose of calculating the minimum withdrawal calculations. This permits a “stretch-out” of the IRA distributions over a potentially very long period, depending on the age of the beneficiary, thereby permitting the assets to continue to grow tax free for an even longer time.

However, a Texas case, In re Jarboe, 2007 WL 987314 (Bkrtcy. S.D. Tex. 2007),  suggests that these inherited IRAs are not entitled to the same $1.1 million plus protection that they would have had in the hands of their original holder. Although this case is merely persuasive in other jurisdictions, like our 9th Circuit, bankruptcy practitioners are probably simply steering clear of its seemingly solid reasoning by advising clients to pay the capital gains tax and then push the former IRA assets into other categories of clearly exempt assets, like a home. If the client is already using his or her full homestead exemption, the exemption planning might be a bit more challenging.

California Homestead Exemption Increases By $25,000

The California homestead exemption protects a fixed amount of the equity in a person’s home from that person’s creditors. The means that judgement creditors cannot foreclosure on a property unless the person’s equity exceeds the amount permitted by state law. Under current California law, the base exemption is $50,000. If a person or a person’s s spouse resides in the home as a homestead, the amount rises to $75,000. For those over 65 years of age, disabled, or over 55 years of age with limited income, the amount jumps to $150,000.

On January 1, 2010, California will increase these amounts across the board by $25,000. (CA Assembly Bill 1046.) A client of mine mentioned that California to me in a hazy way, and I foolishly assumed that he was accidentally referring to the currently higher limit of $150,000 for the aged.  While this news did not pass unnoticed on the blogosphere, newspaper citations on the change are scant. I guess the newspapers assume (quite rightly) that their readership does not need to be reminded in any way of how much equity they’ve lost in their houses.