Our law
firm specializes in representing taxi medallion owners whose medallions are
“underwater” (meaning that the loan secured and collateralized by the medallion
is greater than the value of the medallion) in workouts with banks and
creditors and in bankruptcy filings. We have noticed a trend recently
where many medallion owners who own underwater taxi medallions have transferred
their house or primary residence to a trust for no money or other consideration
for the transfer. There appear to be two reasons for these transfers or
conveyances: (1) estate planning (where the owner of the house wants future
appreciation of the property to benefit a family member or third party); or (2)
the property owner (who also owns the underwater medallion) believes that by
conveying the house to a trust, he or she is putting the house outside of the
reach of the bank or creditor, who will not be able to foreclose on the house if
there is a default on the medallion loan and litigation.
In our
experience, after meeting with and speaking to many medallion owner clients, we
have determined that most of these transfers are not done for estate planning
purposes, but to put the family house outside of the reach of the bank or other
creditors (the second reason).
A couple of
observations need to be made with respect to the transfer of a house to a trust
from a debtor/creditor and/or bankruptcy perspective. If an individual
borrows money from a bank, and their liabilities (monies owed to third
parties) exceed their assets (property which they own), which is generally the
fact pattern for an individual who wants an underwater taxi medallion, the
transfer of the family house to a trust for no consideration (money or
property) is a fraudulent conveyance. The statute of limitations (or look back period)
is six years under the New York State
Civil Practice Law and Rules and two years under the Bankruptcy Code. In a
fraudulent conveyance action, the bank or other creditor can commence an action
in New York State courts to reverse the conveyance of the family house from the
trust back to the individual, and there are many reported cases where creditors
have commenced these actions and prevailed (see
United States v.
Evseroff). Accordingly,
a homeowner who makes this type of the transfer may have incurred legal fees
and paid real estate transfer taxes and fees to accomplish nothing from a
workout or bankruptcy perspective!
In fact,
besides accomplishing nothing and incurring legal fees and real estate transfer
taxes and fees, the medallion owner/homeowner may actually end up in a worse
position than the medallion owner that did not make the transfer, for two
reasons: (1) if the trust owns a house and not an individual (who owns the
underwater medallion), then the individual cannot claim the New York State homestead
exemption which is currently $165,550 per
spouse ($331,100 for a married couple) in the New York metropolitan area; and (2) a creditor may object to the discharge of their debt
because of the fraudulent conveyance of the house to the trust (see Husky Int’l Elecs., Inc. v. Ritz).
The New York State homestead exemption
provides protection to New York State residents, to wit the first $165,550 in
equity in a primary residence, after the payment or satisfaction of a
consensual mortgage, is property of or belongs to the homeowner and is not
subject to the reach of a creditor or a bank.
Additionally,
the Bankruptcy Code provides that if a debtor made a fraudulent conveyance
transfer prior to the date of the bankruptcy filing, this may be grounds to
dismiss their bankruptcy case or deny them a discharge of certain debts.
While there
are techniques and approaches to undo or mitigate the damage done by these
transfers or conveyances, it is better to not do them in the first place. We
have however represented many individuals in mitigating the effects of
these types of transfers.
Prior to
engaging in a workout with a bank or creditor, an individual or a debtor should
and can engage in “asset protection planning” under New York State and federal
bankruptcy law, but fraudulently conveying the family house to a trust to put
the house outside of the reach of a creditor or a bank, does not work and is
not valid asset protection planning.
Our
experience has shown that nervous or stressed out homeowners who own underwater
taxi medallions may be doing themselves more harm than good by hastily conveying
their house or other valuable assets to trusts or third parties for no
consideration. We would advise medallion owners to consult with
competent, experienced attorneys or lawyers before engaging in such actions.
In fact, engaging in correct and meaningful asset protection planning can
often times result in a successful workout with a bank or a successful discharge
of debt in a bankruptcy filing.
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