FINANCING / SERVICING THE TRIBAL LENDING ENTERPRISE: WHAT YOU NEED TO DO TO PROTECT YOURSELF
By: Howard Rosen, Attorney, © 2020 Donlevy-Rosen & Rosen, P.A.
Published by: https://thebusinessoflending.com/the-blog/ on May 14, 2020
Anyone in the business of financing or servicing a tribal lending enterprise (TLE) is aware of the controversies involved in that business. Notwithstanding the facts that numerous court cases have supported tribes’ ability to carry on these businesses, and that, in 2013, 31 congressmen and women signed a letter opposing federal attacks on tribal lenders, state-based and class action attacks continue. The Think Finance and American Web Loan settlements of $55 million and $141 million, respectively, are real world examples of just how risky these businesses are. Recent cases show that anyone providing services to a TLE, or even to a service provider of a TLE, should be concerned about potential lawsuits. This includes owners and C-level officers of lead providers, marketing companies, loan management system providers, payment processing companies, funding providers, consultants etc. Given these large payouts, we anticipate that the class actions firms will only get more aggressive. They smell blood in the water.
In view of the above, please ask yourself these two questions:
Are you confident that you will never be sued?
Are you confident that if you are sued, you will be treated fairly by the U.S. legal system?
Assuming you answered “no” to either of these questions, and you are financing, servicing, or in any way connected to a TLE, what should you do to protect yourself in view of these risks?
Our law practice has been 100% concentrated in wealth preservation planning for almost thirty years, and has represented third-party lenders, servicers, and managers in these TLE businesses. No creditor of a client has ever been successful in reaching assets held in one of our client’s trusts.
The key to successful wealth preservation is advance planning: implement the protective plan in advance of any claim.
Everyone’s case will be different, but certain principles are always applicable to wealth preservation planning. First and foremost, this is a legal matter, and it must only be handled by an experienced and qualified attorney. How can you be certain your attorney is experienced and qualified to properly implement this type of planning for you? Ask the attorney the questions set forth here:
Some general principles of wealth preservation planning: A properly structured offshore trust is the “gold standard” of wealth preservation. Why? First, considering protecting cash and publicly traded securities, if (and this is a big “if”) the offshore strategy is properly structured and implemented, no court in the United States will have the power to undo the plan. Stated another way: No court in the United States will have the ability or power to force the trustee to return the assets, nor will any U.S. court have the ability to seize trust assets properly held outside the United States.
Here’s an example of how this works: Jim’s company had provided services to a TLE for 10 years. During that time, Jim managed to save $30million from the servicing fees he earned. Jim invested his savings in publicly traded securities held in a US brokerage account. Being aware of the risks from his business, Jim decided to be proactive and protect his wealth, so he implemented the offshore trust protective strategy described above. As part of the implementation of his offshore trust, Jim’s brokerage investments are transferred to an account held in the name of his offshore trust at a Swiss financial institution. Two years later, he is dragged into a class action lawsuit. The US case goes badly for Jim – he loses and is hit with a $50million judgment. Jim has no substantial assets located in the US, so the judgment creditor will have to try to collect the judgment from Jim’s Cook Islands trust. The first thing the creditor will do is to try and “domesticate” the judgment in the Cook Islands. Since Cook Islands law does not recognize such foreign judgments, that will not work. Where does that leave the creditor? Having to start litigation all over again in the Cook Islands using Cook Islands lawyers (who will not take the case on a contingency basis – payment up front is required). In this case, the statute of limitations will have already expired in the Cook Islands, so the creditor is out of luck – the case cannot be brought. If the statute had not yet expired, and the creditor starts litigation in the Cook Islands, the trust can be moved out of the Cook Islands (even in the face of a local restraining order) to another suitable jurisdiction, thus requiring the creditor to start the litigation all over again with yet another set of new lawyers. What about Jim? Since Jim is a beneficiary of his trust, the trustee can make payments directly to Jim, or, for Jim’s benefit. The latter means that the trustee can pay the auto lease on Jim’s car, his mortgage payment, his kid’s tuition at college, Jim’s credit card bills, etc. – the point being that Jim will go on with his life. In these cases, a settlement is often reached – on our client’s terms. Otherwise the creditor will never collect anything, and those plaintiff lawyers only get paid if they collect.
Effectively protecting real estate requires the utilization of an ancillary strategy together with the offshore trust. The belief that real estate can be effectively protected by enclosing it in a box called a limited liability company, limited partnership, or corporation does not take into account the reality that a “result-oriented” judge (remember being treated fairly?) can disregard the entity. The only effective method of protecting real estate is to make the real estate “not worth going after” for a creditor. The only way to do that is to reduce the value of the property. That value reduction is accomplished by encumbering the property with a loan from an unrelated independent lender (the key to the effectiveness of this strategy), and transferring the loan proceeds to the offshore trust (a strategy our firm developed decades ago in conjunction with an offshore bank and independent lenders). Think about it: Would you spend your time and money to sue someone if all they had was a piece of real property worth $1 million encumbered by a $950,000 mortgage? This real estate strategy has been used successfully against the U.S. government. For more on this strategy, watch this short video:
Some assets cannot be protected with an offshore trust. Take your IRA, for example. You cannot transfer a traditional IRA to your trust without incurring a tax liability. So what can you do to fully protect your IRA? Utilizing a strategy developed by Donlevy-Rosen Rosen, P.A. almost 20 years ago, effective protection of the IRA assets is accomplished by causing the IRA (using a specialized U.S. IRA custodian) to establish a single member offshore limited liability company governed by properly structured specialized operating documents containing specific protective provisions.
The IRA contributes (transfers) all of its cash and securities to the LLC in exchange for a 100% ownership interest (member interest) in the LLC, leaving the U.S. IRA custodian directly holding only a member interest in the offshore LLC. The LLC is now the “investment” of the IRA. The independent offshore manager of the LLC will place the transferred cash and publicly traded securities into an offshore financial account (likely in Switzerland) which can be professionally managed by a U.S. investment manager. At this point, the cash and securities in the LLC (the IRA assets) will be beyond the reach of any U.S. court – fully shielded from U.S. creditors (analogous to the offshore trust). For more on our exclusive IRA protection strategy, see the short video on our home page: https://protectyou.com/ and see our newsletter at:
Again, the key to effective wealth preservation planning is to move your assets (or, in the case of real estate, the equity) beyond the reach of the U.S. legal system. Take the power away from the U.S. legal system to undo your planning and reach your assets.
To repeat what was said above: Only an experienced and qualified attorney should be retained to implement this type of planning.
For more information, call Howard Rosen, Esq. at 305-459-3289 (eastern time zone).