GUEST COLUMN:

Be prepared for the recession’s second act

If you or anyone you know was caught in the net of the recession, staring down breach of guaranty claims by banks, brace yourself for the next wave of activity. When confronted with guaranty claims by banks, clients generally have three responses: fight the claim, settle the claim or concede to the claim. Many caught in the recession consented to the bank’s claim with the expectation that nothing would come of the judgment because assets were protected or because the banks would lose interest. People who chose this path should continue to read carefully, because they have defenses that should not be overlooked.

• The next wave of claims. Many banks that obtained judgments are disposing of those judgments by selling them to third-party collection companies. These are the same sophisticated creditors that purchased debt from the FDIC in the first instance to pursue claims, and they have reinvented themselves to collect on judgments.

• Statute of limitation defenses. The main target of new lawsuits is the estate planning by the judgment debtors. Indeed, many took the position that their assets were protected and there could be no claims for a fraudulent transfer, which typically have a statute of limitations of one to four years.

Not to be deterred, however, creditors (who succeeded to FDIC claims) raise the issue of whether they benefit from a longer statute of limitations. The extended statute of limitations clearly applies to the FDIC (if it were the plaintiff) based upon a recent Nevada Supreme Court decision; but, there are other Nevada Supreme Court decisions applying shorter state statutes of limitations to claims made by successors to the FDIC. Thus, the first hurdle of the statute of limitations remains a challenge, and clever creditors are finding ways to extend the time they have to chase borrowers and guarantors.

• Assignment of fraudulent transfer claims. Most of the fraudulent transfer claims creditors are likely to assert were assigned to collection companies when purchasing the rights to a judgment. It is not clear, however, whether successors can pursue an assigned fraudulent transfer claim.

At least one court has ruled that fraudulent transfer claims are not assignable. Interestingly, that court relied upon the same cases cited by the Nevada Supreme Court in reaching its decision. Again, successor creditors to the FDIC argue that they can avail themselves of federal rights (belonging to the FDIC) to avoid such limitations. Thus, there is a question whether Fraudulent Transfer Claims can be prosecuted by assignees.

• Conclusion. Judgment debtors should be prepared for another assault by creditors who see another opportunity to profit. Companies that sought and received assignments of judgments are going to be pursuing fraudulent transfer claims. If you have done asset planning and have judgments against you, be prepared for the next wave of assault by opportunistic creditors and seek legal counsel.

Frank Flansburg III is co-owner of the law firm Schwartz Flansburg.

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