Summary
The “Portnoy case” demonstrates what NOT to do if your company is facing the imminent threat of bankruptcy. Larry Portnoy received a loan from Marine Midland Bank in the amount of about $1 million for his company, Mary Drawers. About one year later, he established a Jersey Trust and transferred nearly all of his assets into that trust. In between these two events lies one incredibly crucial point: just a few months before the creation of the trust, Portnoy knew that his company was in imminent financial danger. By the end of that year, his company defaulted on its obligations to the bank.
Portnoy was forced into bankruptcy, and during settlement negotiations, he initially lied about the existence of the Jersey Trust. Additionally, he lied about his salary payments of $150,000 per year to his wife (about $300,000 per year in today’s dollar value). So, not only was he in bankruptcy, but he got busted for lying under oath, and both he and his family felt the seismic repercussions of his careless actions.
Critical Details and Longer Analysis
Improper Trust Setup
Portnoy’s many mistakes made it easy for the court to order the disbursement of his funds held in the Jersey Trust. First, the trust document clearly demonstrated that he had complete control over the assets within the trust. Thus, if the court ordered him to pay his creditors using the cash in the trust, all he had to do was call the trustee and tell them to send the money to his creditors. This is “Improper Trust Setup 101,” meaning that a proper trust designed for the purpose of asset protection never appoints the settlor with complete control over the assets within the trust. Most likely, Portnoy hired a bad attorney who inappropriately recommended this type of structure.
Timing and Intent
Second, Portnoy created the trust only a few months before defaulting on his loan, and since he was a sophisticated businessman, the court reasonably inferred that he formed the trust in anticipation of imminent default. His conduct relates to the “intent” element that courts always consider in asset protection cases, which is another way of asking, “Why did this person create the trust?” If the court determines that they did it to defraud their creditors, then they probably had fraudulent intent.
Here, Portnoy’s actions clearly demonstrated that he was not legitimately creating a trust for valid asset protection reasons. Instead, because of the imminence of default, and also because he could not provide any evidence to prove other intentions for creating the trust, he obviously created it to defraud his creditors. In turn, the court established fraudulent intent and had another reason to compel him to transfer assets from the trust to his creditors.
Concealment and Deceit
Third, he lied extensively about his financial position to both his creditors and the court during settlement negotiations. This came back to bite him when they discovered the existence of the Jersey Trust and the salary disbursements to his wife’s bank account. This is why they nailed him for “concealment,” which is another fancy way of saying “fraud.”
In the end, the court easily found that Portnoy had total control over all of the Trust’s assets AND that he was acting with the intention of defrauding his creditors based on the timing of the creation of the Jersey Trust. Moreover, his pattern of deceit regarding his financial position damaged the court’s perception of the integrity of his character. Needless to say, Portnoy was ordered to pay off his debts in full using all of his funds.
What We Would Have Done to Prevent This
Portnoy operated an entirely legitimate business, and based on the salary that he paid himself (and his wife), he was likely a great candidate for asset protection BEFORE imminent bankruptcy. This case is so critical for understanding why proper timing when creating an offshore trust is absolutely essential.
In addition, the improper structure of his Jersey Trust indicates that he was probably rushing to move all of his assets, which resulted in him hiring a bad attorney who evidently set up a faulty trust. This is why it is so very important to entrust your wealth only to people who are deeply experienced with the complexities of asset protection.
