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Mary Vandenack & Assisting Clients in Avoiding Potential Creditors: What Actions Can an Attorney Take?

As published in Steve Leimberg's Asset Protection Planning Newsletter on 6/9/14.

Reproduced Courtesy of Leimberg Information Services, Inc. (LISI) at https://www.leimbergservices.com.

"The Iowa Supreme Court recently ruled that an attorney did not commit an ethical violation in assisting a client with transactions that were determined by a court to be fraudulent transfers. The opinion of the Iowa Supreme Court in Iowa Supreme Court Attorney Disciplinary Board v Ouderkirk offers significant guidance to attorneys who assist clients with asset protection planning.

The Iowa Supreme Court ruling is based on the Iowa Code of Professional Responsibility. While such rules were replaced in 2005 by the Iowa Rules of Professional Conduct, the current rules and the rules of professional responsibility of most states include provisions similar to those that were considered in this case."

Mary Vandenack provides members with important commentary dealing with an Iowa Supreme Court opinion that, as she points out, offers significant guidance to attorneys who assist clients with asset protection planning.

Mary E. Vandenack is founding and managing partner of Vandenack Weaver LLC in Omaha, Nebraska. Mary practices in the areas of tax, high net worth estate planning, asset protection planning, business succession planning, and tax-exempt entities. Mary's practice serves business owners, executives, real estate investors, health care providers and tax exempt organizations. Mary is a member of the American Bar Association Real Property Trust and Estate Section, Taxation Section, and Business Section and serves on several committees in those sections. Mary regularly writes and speaks on tax, asset protection planning, and estate planning topics. Mary is also a member of the American Bar Association Law Practice Division and is a regular contributor to the Law Practice Magazine, of which she currently serves as Features Editor. As a school shooting survivor, Mary is a member of the American Bar Association Youth At Risk Commission and has developed a passion for advocating for mental health legislation and designing trusts that facilitate recovery for youth at risk as well as gun trusts.

EXECUTIVE SUMMARY:

The Iowa Supreme Court recently ruled that an attorney did not commit an ethical violation in assisting a client with transactions that were determined by a court to be fraudulent transfers. The opinion of the Iowa Supreme Court in Iowa Supreme Court Attorney Disciplinary Board v Ouderkirk offers significant guidance to attorneys who assist clients with asset protection planning. The Iowa Supreme Court ruling is based on the Iowa Code of Professional Responsibility. While such rules were replaced in 2005 by the Iowa Rules of Professional Conduct, the current rules and the rules of professional responsibility of most states include provisions similar to those that were considered in this case.

FACTS:

Mason James Ouderkirk, a longtime Iowa attorney with no previous disciplinary issues, assisted Rodney Heemstra with a variety of legal matters. The Iowa Supreme Court opinion describes Heemstra as a wealthy farmer sophisticated in matters related to buying and selling real estate. Throughout the 1990s, Ouderkirk often assisted Heemstra with real estate transfers. It was typical that Ouderkirk would provide Heemstra legal documents and that Heemstra would handle closings and follow up details.
In January, 2003, Rodney Heemstra shot and killed his neighbor, Tommy Lyon. Heemstra was initially convicted of first degree murder but that conviction was reversed and remanded for retrial. Upon retrial, Heemstra was convicted of manslaughter. In addition to restitution awards in the criminal action, Lyon's widow obtained a $5,700,000 judgment against Heemstra in a civil wrongful death action.

Immediately following the shooting, Ouderkirk provided a power of attorney to Rodney Heemstra's wife so that she could continue to handle matters related to the farming operation. At that time, Ouderkirk warned the Heemstras that any transfers of property by the Heemstras could be susceptible to being set aside as fraudulent transfers by the Lyon family.

In the two months following the shooting and prior to conviction in the criminal proceeding and judgment in the civil proceeding, Rodney Heemstra and his wife, Berta made a variety of asset transfers to revocable trusts and an irrevocable trust. In doing so, the Heemstras transferred the majority of their property value to various trusts. Ouderkirk assisted in drafting the revocable trusts and some of the transfer documentation. The Heemstras told Ouderkirk that the purpose of the transfers was to accomplish a re-organization to satisfy concerns of mortgagees of their properties about receiving payments and protecting their interests. Ouderkirk was aware of a forced sale of equipment initiated by one of the creditors.

In March 2003, the Heemstras approached Ouderkirk about transferring property to an irrevocable trust. Ouderkirk advised the client, initially in person and by follow up in writing, that they should not pursue the irrevocable trust. The Heemstras indicated to Ouderkirk that they would abandon the idea and Ouderkirk confirmed this understanding in his follow up letter.

A week after the discussion related to the irrevocable trust, the Heemstras requested Ouderkirk's assistance in drafting an agreement to sell property from one of the revocable trusts to an irrevocable trust. The Heemstras told Ouderkirk that the Appleroon Irrevocable Trust was an out of town buyer they had located. Ouderkirk did provide assistance with the purchase agreement. The terms of the contract, including the last paragraph were provided to Ouderkirk by the Heemstras. Paragraph 26 of the contract provided as follows:

26. CLAIMED ATTACHMENT. Buyer acknowledges that the Iowa District Court for Warren County has issued a writ of attachment in a pending lawsuit entitled The Estate of Tommy Ray Lyon vs. Rodney Heemstra which may be purported to affect title to the real estate described herein, even though Rodney Heemstra is not a party to this transaction. Seller and Buyer are of the opinion that said attachment does not effect [sic] the real estate which is subject of the contract because it was not in effect and/or filed against the premises at the time Seller acquired title to said real estate. Buyer shall suspend and not make payments due Seller which are attached, garnished, to be paid to, executed upon, levied upon and/or assigned by, to or for the Estate of Tommy Ray Lyon.... Seller shall defend, indemnify and hold Buyer harmless for any losses, damages or other monetary sums arising out of such claim or actions.

In 2006, the Lyon Estate filed a collection action challenging the transfers made by the Heemstras as fraudulent transfers. The district court concluded that the transfers made by the Heemstras were part of "a complex shell game" and made with the "actual intent to hinder, delay and defraud creditors." The district court set aside the conveyances made by the Heemstras and awarded compensatory damages to the Lyon Estate. In setting aside the transfers as fraudulent, the district court concluded that Paragraph 26 of the Appleroon contract clearly established the fraudulent intent of the Heemstras.

After the district court set aside the transfers, Lyon's widow filed an ethical complaint against Ouderkirk with the Iowa Supreme Court Disciplinary Board. The Board filed a complaint against Ouderkirk for assistance to the Heemstra's alleging violations of four different provisions of the Iowa Rules of Professional Responsibility including DR 1-102(A)-(4) (conduct involving dishonesty, fraud, deceit or misrepresentation); DR 1-102(A)(5) (conduct prejudicial to the administration of justice); DR 7-102 (A)(1) (action to harass or maliciously injure another); and DR 7-102(A)(7) (assisting a client in fraudulent conduct). At the Disciplinary Board level, a conclusion was made against Ouderkirk on DR 1-102(A)-(4) and DR 7-102 (A)(1) related to Ouderkirk's assistance in preparing the purchase agreement for the sale of land to the Appleroon irrevocable trust.

In ultimately dismissing all of the complaints made against Ouderkirk, the Iowa Supreme Court, in its de novo review, discussed each of the rules and the issues that had been raised in relation to those rules. The Court noted that it is important not to "chill proper advocacy or deter lawyers from representing clients who need legal advice and who without it may be more likely to break the law in evading creditors." The Court also noted that great care should be taken in addressing ethics complaints from litigation adversaries.

COMMENT:

Is Assistance with a Fraudulent Conveyance an Ethical Violation?

One of the allegations in the Board complaint against Ouderkirk was that Ouderkirk assisted Heemstra with a fraud in drafting the purchase agreement to sell property to the Appleroon Irrevocable Trust. While the Board believed Ouderkirk's testimony that he was unaware of the buyer's identity (Heemstra relatives) and other factors that would give him knowledge of fraud, the Board concluded that Ouderkirk should have known that the Appleroon sale was a fraud based on paragraph 26.

The Court discussed at length the issue of whether a fraudulent transfer is a fraud for purposes of the rules of professional responsibility. The Court noted that fraud is not presumed and that attorneys are not expected to assume their clients are engaging in fraud. A lawyer is expected to resolve reasonable doubts in favor of the client and should generally be able to rely on the representations made by a client.

The Court distinguished between an attorney drafting documents knowing that a transaction is a fraud and an attorney drafting documents for a transaction that is later determined to be a fraudulent transfer. In its analysis, the Court noted that an attorney is not required to have complete and absolute knowledge of all facts related to a client and that an attorney can engage in a limited representation.

If an attorney does know that a client is engaging in a fraudulent transfer, then the attorney's assistance in completing such a transfer does cross ethical lines. An attorney does have an obligation to consider the propriety of any transaction. In the case of Ouderkirk's assistance to the Heemstras, the Court noted that the client had made false representations to Ouderkirk and that Ouderkirk's reliance on those representations was reasonable.

An Attorney Must Represent a Client within the Bounds of the Law

An attorney is prohibited from taking an action on behalf of a client when the attorney knows that the action is being taken to harass or maliciously injure another. The key is that the attorney must have actual knowledge that the client is taking an action for such a purpose. The Court noted that in the absence of direct evidence of actual knowledge, care must be taken in inferring knowledge from the circumstances. The Court pointed out that Ouderkirk had specifically advised his client against establishing an irrevocable trust and making transfers to it.

The Court rejected the Board's conclusions that Ouderkirk should have known that the Heemstras were committing fraud because of the inclusion of paragraph 26 in the Appleroon contract. The Board had suggested that Ouderkirk's knowledge that Heemstra had killed someone, in conjunction with paragraph 26, leant itself to an obvious conclusion of fraud. The Court noted that paragraph 26 did not make the contract fraudulent, that Ouderkirk did not have a responsibility to ask the Heemstras as to the meaning of paragraph 26 and that Ouderkirk had a reasonable basis to assist with the transaction.

Important factors in the Court's conclusion were that Ouderkirk believed his clients' representations, believed the transactions left his client solvent and that the transactions were public record.

Duty to Represent Client with Zeal

One of the arguments made by Ouderkirk was that he owed no duty to the Lyon Estate. The Court noted that while an attorney has a duty to represent a client with zeal, there is a concurrent duty to avoid inflicting harm on others in the legal process. Assisting a client knowingly engaging in a fraud would be unnecessary infliction of harm on another.

When is Attorney Conduct Prejudicial to the Administration of Justice?

An argument had been made that Ouderkirk's actions were prejudicial to the administration of justice because the estate had to pursue costly litigation to set aside Heemstra's transfers as fraudulent conveyances. The Court noted that absent an underlying ethical violation, Ouderkirk's conduct was not prejudicial to the administration of justice.

HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!

Mary Vandenack
TECHNICAL EDITOR: DUNCAN OSBORNE

CITE AS:
LISI Asset Protection Planning Newsletter #246 (June 9, 2014) at https://www.leimbergservices.com (c)Mary E. Vandenack 2014. Reproduction in ANY Form or Forwarding to ANY Person - Without Express Permission - Prohibited.
CITE:
Iowa Supreme Court Attorney Disciplinary Board v Ouderkirk, 845 N.W. 2d 32 (Supreme Court of Iowa March 28, 2014)

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