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A RANT And Then The Best Thing About Limited Partnerships.

By Rob Lambert - Email Editor

Date : September 25, 2008

Dear Valued Reader,

Dear Valued Reader,

THE RANT: I have been writing this newsletter for more than 14 years, and many of you have been reading it for nearly that long. Those of you who are regulars know that I don’t normally burden you with my view on social or political issues; but, in this case I can’t keep quiet.

I represent a substantial lady with one poor loan. Her credit scores are (or at least were) in the mid 800s, and she pays her bills on time. I have know her for years.

Well, my dear client received a notice of default from a company owned by JP Morgan/Chase. She called and asked why. She was told not to worry that she was current. The next month she received a second notice of default. She called and asked why again. Again she was told not to worry that she was current. She then received a third notice of default that caused all sorts of bells in other institutions to go off. Lines of credit are being questioned and will likely be called. Her credit is now in the low 600s and heading south. The lender is standing by their guns that she defaulted 3 months in a row. Not knowing what to do, she called in some legal horsepower.

The bottom line is that this lady on a very substantial loan was 5 cents (that’s right, one nickel) short on one payment. They never told her about the missing nickel, but in the process decimated her credit. That is why the notices of default were filed. The filings were even reviewed and approved by their credit committee. A quick aside, while this was going on, she received a letter from Countrywide informing her that her personal information including her social had been sold by an employee. Her phone is now ringing off the hook, and she is in a battle to protect her credit and identity.

These same pirates who milked BILLIONS from people like you, me and my client selling fancy loans are now seeking a blank check from you, me and my client for upwards of $700 billion dollars, more likely a trillion, to bail them out from the downside. Screw them.

To me, this stinks. I say let the pirates die. In less than a year they will be replaced by new players. My position is that the only folks who deserve to be helped are the innocent borrowers who were sold a bill of goods by slimy promoters selling paper so the just-as-slimy investment banks could securitize them.

To put this in perspective: The total damage in all countries hit by IKE is estimated to be $10 billion dollars. The proposed bailout will cost at least 700 times that amount.

By the way, if any of the several thousand lawyers reading this newsletter want to take on her case, just call me at 212.425.0225. I don’t suspect the damages are great, but the satisfaction could be. I can’t wait to see how this plays out in the press and the courts.

I pointed out that the corporate veil is nothing but an illusion when it comes to small companies. The reality is that the manager is also always personally sued, so trying to hide behind a corporate veil is seldom effective to shield the individual owner/manager from company debts.

I also pointed out that charging order protection is utterly undependable. It just doesn’t stand up consistently. Judges are just sick and tired of seeing doctors running off with their scrub nurses and attempting to keep the money from their wife by using an LLC or FLP. The consistent and over the top efforts of debtors to abuse charging order protection has given many judges the motivation to create exceptions to the cold statutory language which used to be the law. Now, charging order protection is riddled with exceptions to the point that you can almost say that the exception has become the rule.

Now that I have worked so hard to demonstrate why these entities aren’t good as stand alone Asset Protection vehicles, the question arises as to why I like them so much. These entities are very valuable and helpful.

I am going to take the discussion in steps, and this week I am only going to deal with one entity, the FLP, and the one reason why I like them so much.

FLP’s are magnificent entities when attached to a solidly constructed Kinetic Asset Protection Trust. NOT because they have any corporate veil protection. NOT because of charging order protection.

I like FLP’s because they are great entities to separate ownership from control.

Please reread the last sentence.

It is often important to separate ownership from control. The person in control has lots of liability. Remember, this person will almost always be individually sued, and this person is also the general partner who has full liability by virtue of the various state statutes authorizing Limited Partnerships.

Sometimes it is important to shift the liability to one party and the assets to another. In the case of the FLP, I often allocate all or virtually all of the good stuff, the assets, to the limited partner(s). Often, this limited partner who has all of the good stuff is an Asset Protection Trust.

It is often important to limit the exposure of the limited partner to creditors of the FLP. This is done by the statute. You do not have to be a great wordsmith to make this happen. It is mandated by the statute and is time tested in many courts. Note, it is almost impossible to achieve this iron clad separation of ownership from control with an LLC. LLC's are just not good vehicles for this purpose.

The act of separating ownership from control does a lot to keep the limited partner, often the Asset Protection Trust, safe from suit.

Next week I will go a little deeper with some of the other benefits of FLP's and also talk about LLC and why I like them... sometimes!

Have a healthy and protected week.

Rob Lambert

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