Smart plaintiffs’ attorneys know to look into a defendants’ assets before pursuing claims for damages. Wise attorneys know to check how those assets are structured, titled and domiciled, lest they prove unreachable even if the plaintiff prevails on liability.
Consider this common scenario. You represent a plaintiff in litigation against a defendant who is—at least on paper—wealthy. Settlement negotiations commence, and you begin preparing a settlement demand. Knowing what they do (or think they do) about their adversary, your client expects a substantial recovery. But an important issue arises: how much of the defendant’s assets are really reachable if the case goes the distance? Are there statutory and/or judicial hurdles to collection? Other impediments to recovery?
Nobody wants to bring their client a Pyrrhic victory. Understanding which of a defendant’s assets are not collectible (or might be collectible only with substantial effort, expense and time) helps counsel assess, inter alia: (a) whether the defendant meaningfully can pay a lump-sum settlement; (b) whether a payment plan or other structured settlement might be appropriate; and (c) whether non-monetary terms such as injunctions, cooperation, or compliance commitments should play a larger role in resolution.
Below are some common types of protected assets that practitioners may run into:
1. Retirement and Other Benefits
California law provides statutory protection for retirement accounts. Public retirement accounts are fully protected. California Code of Civil Procedure (CCP) § 704.110 provides protection for all amounts held, controlled or in the process of a distribution by a public entity or by an officer or employee of the entity for public retirement benefit purposes, and all rights and benefits accrued or accruing to any person under a public retirement system are exempt (except for judgments in favor of a child, family or spousal support). Private retirement plans and amounts held in accounts qualified under certain IRS provisions are protected under CCP § 704.115, except that certain retirement plans, annuities and retirement funds are exempt only to the extent necessary to provide for the support of the judgment debtor when the judgment debtor retires, and for the support of the spouse and dependents of the judgment debtor, taking into account all resources that are likely to be available for the support of the judgment debtor when the judgment debtor retires. California also permits a full statutory exemption for funds held in private retirement accounts applied to assets that were rolled over into an IRA that otherwise would have had only a limited exemption. McMullen v. Haycock, 147 Cal. App. 4th 753 (2007).
2. Trusts
Assets in a revocable living trust of a deceased settlor are subject to claims of creditors to a probate estate to the extent the estate is inadequate to satisfy these claims. A trustee’s only duty to such creditors is to refrain from affirmative misconduct that defeats creditors’ reasonable expectation for a recovery from trust assets, and there is no obligation to preserve trust assets for the benefit of claims. Arluk Med. Ctr. Indus. Grp., Inc. v. Dobler, 116 Cal. App. 4th 1324 (2004). However, creditors cannot reach the assets of an irrevocable trust. Laycock v. Hammer, 141 Cal. App. 4th 25 (2006).
3. Homestead Exemptions
A homestead exemption is intended to prevent the forced sale of a primary residence to satisfy the demands of creditors, except for mechanic’s liens, mortgages or sales to pay property taxes. Homestead exemptions vary from state to state and are found in state constitutions and statutes. These exemptions are extremely important for defendants seeking to protect assets from judgment creditors in litigation and therefore loom large in negotiating settlements. They also can differ from state to state. In California, there is a statutory homestead exemption that is the greater of $300,000 or the countywide median sale price for a single-family home in the prior calendar year up to $600,000. These amounts are adjusted annually for inflation. CCP § 704.730.
4. Offshore Assets
An obvious means of hiding assets from creditors is by depositing funds in offshore bank accounts. This presents creditors with at least two challenges: finding the offshare assets and collecting them. Regarding the first challenge, at least, savvy litigants may have some tools available; courts have held that requiring persons using offshore accounts to keep banking records for government inspection did not violate the Fifth Amendment’s right against self-incrimination because having a foreign bank account is not inherently illegal and the required information was not inherently criminal. In re M.H., 648 F.3d 1067 (9th Cir. 2011); In re Grand Jury Subpoena, 696 F.3d 428 (5th Cir. 2012) (same). Retaining a private investigator or forensic accountant; using investigative data software; and searching for unusual or fraudulent transfers may help track down the location of offshore assets. Actual collection, of course, may present its own array of difficulties, depending in part on where the assets are housed.
Not All that Glitters Is Gold
A defendant’s lifestyle and balance sheet may both reflect substantial wealth, but that may be cold comfort to a plaintiff if those assets are not reachable. Where collectability is an issue, counsel may wish to pursue alternatives forms of relief, such as cooperation, compliance commitments, injunctive relief, and regulatory pressure. And of course, experienced attorneys understand the importance of tamping down a client’s unrealistic expectations of financial recovery against a party whose assets are partially or entirely shielded.
For more information regarding Alto Litigation’s litigation practice, please contact one of Alto Litigation’s partners: Bahram Seyedin-Noor, Bryan Ketroser, Joshua Korr, or Kevin O’Brien.
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