Understanding Ipso Facto Clauses In Asset Protection Planning

When looking through the documents that other planners use in their asset protection plans, it’s always interesting to see long clauses and other things that are aimed at when a client goes bankrupt or goes bankrupt. growth. In most cases, this provision seeks to sell the customer’s property in the company when a significant creditor arises. A typical sentence looks like this:

“If Joe goes bankrupt or Joe goes bankrupt, Joe’s holdings in ABCLLC will end soon.”

When designing projects, there are planners who seem to spend a lot of time creating them, which they think are for the most part much longer and more perfect. I don’t see this clause being taken to a page or more multiple times. If a customer gets into trouble, this clause is meant to help protect assets from creditors. But does this condition really work?

First of all, it must be understood that these provisions are expressly waived by the bankruptcy law itself and generally do not apply in the case of bankruptcy. In this forum, this clause is known as: IpsoFacto Clause And is covered by 11USC 365(e)(1).

(1) Regardless of the unexpired service contract or unexpired lease contract or the provisions of the applicable legal provisions, debtor performance contract or lease contract with an unexpired term, this contract or rights may not be terminated or modified or any obligations arising from the lease contract may not be terminated or amended at any time after the commencement of the case based solely on the conditions of the contract or lease, subject to: (a) at any time prior to the conclusion of the case. Bankruptcy or Debtor’s Financial Condition c) (B) initiate legal proceedings under this Title, or (C) appoint or have a liquidator or previous initiator of legal proceedings under this Title. ”

There are some legal exceptions to Section 365(e)(2), but their application is very limited and will be discussed in this article. It is important that it is forbidden to terminate or modify a contact (and only a “service agreement”) or a lease agreement that expires simply because the debtor is or is in bankruptcy (A) and (B). This is a clause.

In the most common application of bankruptcy in personal bankruptcy, this provision prohibits the termination of the mortgage, rental agreement, or car rental because the debtor has declared bankruptcy. But they can also play a role in asset protection planning.

Suppose the debtor is a member of a limited liability company. The LLC operating agreement stipulates that if a member goes bankrupt or goes bankrupt, they will be sold off the profits of that membership. In most cases, Section 365(e)(1) prohibits other members from excluding the debtor from the LLC if the debtor goes bankrupt or goes bankrupt (voluntarily or involuntarily). Work for.

It should be noted here that even if parties other than the debtor (e.g. these parties will be insulted and subject to subsequent financial sanctions, due to the parties’ attempts to do so) will likely be considered a violation of the automatic suspension of the bankruptcy court. Therefore, we advise you to be very careful when trying to use these terms.

In addition to bankruptcy, creditor recovery is usually described in the Unified Destruct Act (UVTA) or other fraudulent transfer laws. The recipient’s objections are based largely on the will test in 5(a). It has only two factors: (1) the debtor is insolvent at the time of the transfer, and (b) the transfer is not fairly equal. ..

The first factor is easy to enforce because the provision starts until the debtor goes bankrupt or goes bankrupt. The second factor can be more satisfying to the creditor, especially if the debtor is only selling assets. It is more difficult for creditors to buy an asset based on whether the asset reaches a reasonably equivalent level, but the reality is that most creditors are very close. Even if you have no money to buy. Asset value.

Therefore, ipso-facto clauses can work in this bankruptcy situation if phrased cleverly, but in reality some of them, despite their often complex nature, actually do. Doesn’t work for. The problem is that planners are focused on getting nothing for the lender. This is more likely to result in failure than reward to creditors. This is some less than the asset’s value, but creditors may be willing to accept it and move on.

Of course, this is also a common drawback of many common asset protection plans.