by John Powers
In financial investigations, assets and liabilities are two sides of the same coin.
Show me the money. That’s the mission. It’s standard protocol for asset searches and the primary interest of clients who hire private investigators for this work. Whether their case pertains to post-judgment collection, probate administration, or financial discovery in divorce, people are looking for “good news.” They want you to find a windfall. A jackpot. A secret family fortune.
So why be a downer and focus on debts?
Knowing Net Worth:
Identifying someone’s assets doesn’t tell you much—unless you also know how much they owe. Some people who seem ultra-wealthy – with expensive houses, luxury cars and lavish lifestyles – are badly overextended, beyond the brink of insolvency.
To evaluate the financial profile of any individual or company, you’ll need to look for tax liens, evictions, foreclosures, and collection suits. If you fail to account for liabilities, you won’t know the difference between a billionaire and a bankruptee.
Identifying Business Interests:
Investigating a person’s history of commercial and civil litigation can yield valuable information about their ownership of business entities. This is particularly true for so-called “silent partners” and non-executive shareholders whose roles are not publicly listed in corporate filings.
Litigation filed against private companies may include depositions, affidavits, and other documents that identify principals and the extent of their holdings. Searching for cases in which the company and its owner are both named as co-defendants can be particularly useful for connecting the dots of undisclosed business interests.
Finding Financial Accounts:
Research to identify banking, lending, and investment relationships should include the disposition and settlement of past debts, including court judgments. Garnishments of bank accounts for judgment debtors are typically recorded in the court docket for the original action, plus any out-of-state venue where a foreign judgment was domesticated.
When it comes to collection, it’s best to be in the front of the line. The first creditor who garnishes a debtor’s bank account has the best chance of successful recovery, while subsequent levies at that same institution will likely yield diminishing returns. But even accounts that have been depleted or closed may contain leads for locating active assets. By subpoenaing historical statements, you might be able to determine whether the debtor transferred money to external accounts, which can be a red flag for fraudulent conveyances to associates or family members.
Transparency on Trusts:
Trusts are established for wealth preservation, estate planning and asset protection. Beyond the basics of revocable and irrevocable, there are many types of trusts, such as living, family, discretionary, spendthrift, hybrid, tax by-pass, Totten, and domestic asset protection trusts (DAPTs).
People who seek to place assets beyond the reach of creditors will often transfer ownership of their personal property to a newly-created trust. Creditors pursuing those assets must prove the trust – and the property – are still beneficially controlled by the original owner, before those assets can be attached for collection. So how do you determine who controls a trust?
Unfortunately, property records for the transfer might not offer much insight. Transfer deeds – also known as quitclaims – are often solely executed by the grantor and do not require a signature on behalf of the recipient or grantee. Moreover, trust documents are prepared and retained by private attorneys and are rarely disclosed in public records.
In many cases, the key to identifying participants in a trust is finding out who holds the mortgage debt on the property. Mortgage filings (known as “deeds of trust”) require that the borrower and property owner acknowledge the debt. These instruments are filed with the County Recorder, County Clerk, or Registry of Deeds. If the property was transferred to a revocable living trust, the mortgage may still be held by the original (individual) owner, confirming his/her continued interest in the parcel. If the trust refinanced the property, the loan documents should bear the name and signature of a trustee.
Banks occasionally require beneficiaries to serve as guarantors for any new loans obtained by a trust, which would also be memorialized in the publicly recorded mortgage documents.
Feasibility of Recovery:
Conducting financial due diligence before filing a lawsuit – and during settlement negotiations – can help litigants decide whether further litigation is worthwhile. Pre-litigation asset searches aim to answer a fundamental question: Does the defendant have sufficient net assets to cover the amount of the claim?
These investigations also shed light on the defendant’s history of handling debts and the extent of pending liabilities. Does the defendant promptly pay creditors, or does she routinely declare bankruptcy? Is the defendant being pursued in court by his business partners, his former spouse, and the SEC?
To a certain extent, their financial background and debt behavior may offer clues for predicting their future actions – and assessing how difficult it might be to enforce a potential judgment. However, these due diligence inquiries are the exception, rather than the rule. Many lawsuits proceed without any evidence-based assessment of a defendant’s financial ability to cover a claim, which is why many plaintiffs who succeed in the courtroom never actually see any money.
Everybody wants to find a pot of gold at the end of the rainbow, but with serial deadbeat debtors – even after a comprehensive asset search – there may be nothing to see beyond the storm clouds.
About the Author:
John Powers is president of Hudson Intelligence (https://www.asset.expert), an investigative firm in New York specializing in complex fraud and financial investigations.