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SEC v. SOLOW: If the SEC is a “Super-Creditor” Then State Law Exemptions Don’t Matter, Right?

April 2010

“Assuming the Solow decision is right and the SEC is a “super-creditor,” then is there a line as to which agencies are “super-creditors” and which are not? Are all quasi-judicial agencies “super-creditors?” Or are only the IRS and SEC?  

Moreover, for those of us involved in asset protection planning and/or in representing clients who are licensed by the SEC, the Solow case is an important reminder that traditional notions of asset ownership, title and asset protection may not be applicable when the SEC starts to ask questions. If we are advising clients who may someday have SEC or IRS (or other agency) claims, then we should all be aware that traditional notions of asset protection planning may need to go out the window.”

Last week, LISI provided members with two newsletters that addressed the case of SEC v. Solow: LISI Asset Protection Planning Newsletter #151 by Gideon Rothschild, and Asset Protection Planning Newsletter #152 by Howard Rosen, counsel for Mrs. Solow, and Jeffrey M. Verdon.

Now, Jeff Baskies provides members with a most interesting perspective on Solow.

Jeffrey A. Baskies is a Florida Bar certified expert in Wills, Trusts and Estates law who practices at Katz Baskies LLC, a Boca Raton, FL, boutique trusts & estates, tax & business law firm.  Jeff has been a frequent LISI contributor.  In addition, his articles have been published in Trusts & Estates, Estate Planning, Probate and Property, the Florida Bar Journal, Lawyers Weekly USA and other journals.  He’s been frequently quoted as an expert estate planner in the Wall Street Journal, the New York Times, the Boston Globe, Forbes Magazine and other news publications.   Jeff is listed in Best Lawyers in America, in the Worth magazine list of the Top 100 attorneys, in Florida Trend’s Legal Elite, in Florida SuperLawyers (Top 100 in Florida) and in other similar publications.  He can be reached at /.

Here is Jeff’s commentary:


On 4/28/10, two LISI commentaries addressed the case of SEC v. Solow.   Both commentaries provided insights into the case.  Mr. Rothschild, as discussed below, highlighted why the decision may have been correct, and how it can be understood in light of its facts.   Mr. Verdon and Mr. Rosen discussed why they think the decision was wrongly decided. 

On their face, it would seem the two commentaries cannot be reconciled.   However, maybe they can be.  Maybe there are bad facts – as Mr. Rothschild points out – and maybe there is a reason why the SEC and the judge “ignored” various state exemption laws and statutes of limitations – as Mr. Verdon and Mr. Rosen allege.

Perhaps the two commentaries can be reconciled based on the court’s interpretation of the nature of the creditor in this case.  Had this been a “regular” old judgment creditor, then perhaps the timing issues Mr. Rothschild highlights would not have mattered, as Mr. Verdon and Mr. Rosen seem to suggest.  Maybe the planning would have been protected.

However, this was not any, old judgment creditor.  This creditor was the Securities and Exchange Commission, a quasi-judicial regulatory agency created by Congress and appointed by the President.  Citing a series of cases (noted in more detail below) to support his holding, the Judge held the SEC is a “super-creditor” with powers akin to the IRS, allowing them to collect on “disgorgement orders” without regard for state law asset protection statutes.

While both commentaries briefly addressed the Court’s discussion of the differences between “judgments” and “disgorgement orders,” it seems this section of the Order may ultimately be worth further attention.  Indeed it appears to be a very important part of the holding.  


The facts are summarized well in Mr. Rothschild’s commentary in LISI Asset Protection Planning Newsletter # 151.


In his commentary, Mr. Rothschild defended the decision and pointed out that:

[G]iven the timing of the transfers from Mr. Solow to his wife and his participation in the equity stripping to the Cook Islands trust, it is not surprising that the Court held him in contempt.  … In the end it was the timing of the trust settlement and Mr. Solow’s actions (after the judgment was rendered) that caused the house of cards to fall. … As this case more than adequately demonstrates, it is this author’s view that asset protection strategies (particularly involving the offshore variety) should only be engaged in when there are no clouds on the horizon or where there will be assets remaining to provide for contingent and existing liabilities…

Subsequently, the commentary from Howard Rosen and Jeffrey Verdon took the Judge to task and pointed out many of the “faults” with the decision itself.  In particular, they noted there were statutes of limitations that had passed, and there were assets in “exempt” form (tenants by the entirety [“TBE”] and/or homestead) already, which the court seemingly, they asserted, ignored.   

They argued the decision was wrong citing to Mr. Rosen’s own testimony, which was in part:

[T]this transaction in no way put the SEC in a worse position than they would have been in if the transaction had not been undertaken, because the subject property was long-term (acquired in 2002) TBE property, and it was not reachable in any event by the SEC. Mr. Rosen testified that the loan transaction would only impair the SEC’s ability to collect Mr. Solow’s judgment if Mrs. Solow died – and, since she was still very much alive, the issue was moot.  

And they concluded as follows: “Query:  Has debtor’s prison returned to the United States?”


It appears central to Mr. Verdon’s and Mr. Rosen’s commentary that the assets held as tenants by the entirety prior to the judgment were “exempt” from creditors, and thus Mr. and Mrs. Solow should have been free to do some planning without this result.  In other words, they argue that the tenants by the entirety assets were exempt from the claims by the SEC; therefore, the Solows (Mrs. Solow in particular) did nothing wrong in planning with those assets as they (she) saw fit.   And thus since the tenants by the entirety assets were not reachable by the SEC, the transfer to the Cook Islands trust should be okay.   

Mr. Rosen and Mr. Verdon noted that Mr. Solow contended that all the talk about the asset transfers are, essentially, a red herring, because even if the assets remained as they were, they were unreachable to satisfy the Final Judgment.


However, there is an important distinction made in the decision based on the nature of the creditor that should be examined further.  In fact, it may well be that the nature of the creditor – the SEC/a quasi-federal agency – is the link that allows sense to be made of the decision.

Obviously, the SEC argued – and the court seemed to agree – that like the IRS, the SEC is a “super-creditor” who can get at assets regardless of state law exemptions. 

In the decision, there is a long discussion regarding the difference between a judgment creditor and an SEC disgorgement order.  This part of the decision and this particular discussion about disgorgement orders made it appear that the Judge was convinced that the SEC could have attached the TBE assets if they hadn’t moved offshore.  It also seemed that even Florida’s super debtor friendly homestead laws wouldn’t have stopped the SEC. 

If that is true and if the SEC is a “super-creditor” able to enforce disgorgement orders without regard to state law exemptions, then the opinion perhaps makes sense and supports/strengthens the SEC position.  If the SEC could have attached the assets had they remained in TBE, then Mr. Verdon’s and Mr. Rosen’s argument that the Solows should have been free to plan with those assets because doing so made the SEC no worse off would not be correct.   

Here are a few of the key elements of this discussion take from the decision (with emphasis added):

Disgorgement is an equitable remedy designed to deprive a wrongdoer of his unjust enrichment and to deter others from violating the securities laws. SE. C. v. Gane, 2005 WL 90154 at * 19 (S.D. Fla. 2005)(citingSECv. First City Financial Corp. Ltd., 890 F.2d 1215, 1230 (D.C.C. 1989)).

A disgorgement order is more like an injunction for the public interest than a money judgment. See SEC v. Huffman, 996 F.2d 800, 802-03 (5th Cir.1993), see also Steffen, 283 F.Supp.2d 1272, 1282 (M.D. Fla. 2003).

Disgorgement is not precisely restitution; it wrests ill-gotten gains from the hands of a wrongdoer. Huffman, 996 F.2d at 802. It is this feature, the similarity to an injunction, that allows disgorgement orders, unlike judgments, to be enforced by civil contempt.

Huffman, 996 F.2d at 802-03.

This Court has broad equitable powers to reach assets otherwise protected by state law to satisfy a disgorgement. See SE.c. v. Manor Nursing Ctrs., Inc., 458 F.2d 1082,1103 (2d Cir. 1972)(“Once the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy”). For example, a district court can ignore state law exemptions as well as other state law limitations on the ability to collect a judgment in fashioning a disgorgement order. See Huffman, 996 F.2d at 803 (holding that disgorgement is not a “debt” under the Federal Debt Collection Procedures Act, and defendants could not avail themselves of the state law exemption under the Act); SEC v. AMX, Int’l, Inc., 872 F.Supp. 1541, 1544-45 (N.D. Tex. 1994)(homestead exemption not taken into account); SEC v. Musella, 818 F.Supp. 600 (S.D. N.Y. 1993)(holding exemptions from attachment under New York law did not alter a person’s duty to pay under a disgorgement order); see also Pension Benefit Guaranty Corp. v. Ouimet Corp., 711 F.2d 1085, 1093 (lstCir.1983)(ignoring state law limitations on alter ego theory in ERISA context).

Finally, in SEC v. Hickey, 322 F.3d 1123 (9th Cir. 2003), the court  … stated the following; …federal courts have inherent equitable authority to issue a variety of ancillary relief measures in actions brought by the SEC to enforce the federal securities laws.  …. Similarly, in this case, Mr. Solow’s only source of income and support is what he receives from his wife, … Therefore, this ability to ignore state law limitations and exemptions exists so that state law cannot defeat or limit the scope of remedial orders under federal law.


This language taken from the Court’s decision and particularly the language from the Hickey case (the last case quoted above) sounds like a constitutional law class from 2nd year of law school, and brings to mind issues of the Supremacy Clause.   

In the end, maybe that is where the Solow case comes out.   While the states can define property rights for many purposes, in the end, states cannot legislate in a manner that hinders the federal government (or its quasi-judicial agency) from doing its job.  Hence, the IRS can collect judgments against any assets, and maybe the same holds true for the SEC. 

If that is the case, then perhaps both commentaries are “right.”  The Solow Court did ignore state law statutes of limitations and exempt property statutes, and yet Solow was still rightly decided.


#1 Are all federal agencies “super-creditors?”

Assuming the decision is right and the SEC is a “super-creditor,” then is there a line as to which agencies are “super-creditors” and which are not?    Are all quasi-judicial agencies “super-creditors?”    Or are only the IRS and SEC?  

Moreover, for those of us involved in asset protection planning and/or in representing clients who are licensed by the SEC, the Solow case is an important reminder that traditional notions of asset ownership, title and asset protection may not be applicable when the SEC starts to ask questions.  

If we are advising clients who may someday have SEC or IRS (or other agency) claims, then we should all be aware that traditional notions of asset protection planning may need to go out the window.

#2 Are there any implications for receivership “claw-back” suits?

In addition, the Solow decision and its reinforcement of SEC “super-creditor” status also creates a question in the area of receiver claw-back claims. 

At this point, the big receiver claw-back cases (Madoff, Stanford, etc.) appear reliant on state law creditor claims.  In other words the receivers appear to be “any old creditor.”  Assuming that’s the case, those who withdrew funds from Madoff and Stanford in excess of their contributions and who may soon be subject to a claw-back suit by a receiver, ought to be able to rely on state law statues of limitations and asset protection statutes (subject only to the state law fraudulent transfer and conversion exceptions). 

However, if the claims by the receivers are in the nature of a quasi-governmental nature, could the receiverships become more powerful?  Could the receivers somehow claim they are acting on behalf of the SEC, and thus be empowered with the SEC’s “super-creditor” authority to seek disgorgement of “ill-gotten” gains? 

If so, representing clients involved in claw-back cases becomes much more complex.  Moreover, if that is a possibility, then disgorgement orders piercing state law exemptions regardless of title or fraudulent intent and even imprisonment for contempt in failing to comply with such orders become real concerns for planners and clients.

How far does “super-creditor” status extend?   If there is no clear line, then potentially Solow signals another level of risk for clients and planners alike when dealing with those in the cross-hairs of a receivership claim.  

On the other hand, this issue was not addressed at all in the decision, and hopefully these receivers are not imbued with the SEC’s “super-creditor” status.  In which case dealing with the receivers’ claims and planning with clients becomes much more structured and fundamental.    


First, Mr. Rothschild makes excellent points about how the Solow case highlights why last minute asset protection planning is dangerous for clients (at least those looking to stay out of jail), and it is potentially dangerous for lawyers too.  

And, in my opinion, the Solow case also highlights why we as planners probably ought to seek to represent clients who prefer their liberty more than their wealth.  Those who prefer their wealth more than their liberty may be drawn to desperate measures.

Finally, there are a few issues raised by the case and not yet really discussed: Are the SEC and the IRS the only “super creditor” clients need to worry about, or do all federal claims have a “super-creditor” power to reach otherwise protected assets?  Are receiver claw-back claims potentially quasi-federal actions imbued with the same “super-creditor” status?    These issues seem important to many of us, and yet the answers still appears not to be clear – at least not at this time.


Technical Editor – Duncan Osborne


LISI Asset Protection Planning Newsletter 153 (May 3, 2010) at  Copyright 2010 Leimberg Information Services, Inc. (LISI).  Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission.

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