Fraudulent Transfer Law
Fraudulent Conveyance Law
Every asset protection planning effort should begin with a consideration of the applicable fraudulent transfer or fraudulent conveyance law(s), which typically are provided through statutory codification. In most cases, asset protection planning will involve re-titling, or transferring property, or converting assets that are not exempt from claims of creditors to assets that are exempt from claims of creditors. Each transfer or conveyance of assets must be analyzed within the context of the applicable fraudulent transfer or fraudulent conveyance statute. Thus, a thorough understanding of the operation and application of the fraudulent transfer or fraudulent conveyance statute is a necessary prerequisite for the evaluation and selection of proper asset protection techniques available in a particular set of circumstances.
The implementation of these techniques may also be impacted by the applicable fraudulent transfer statute. If you need the assistance of an experienced Florida asset protection attorney in North Florida to help you determine if a transfer of an asset constitutes a fraudulent transfer pursuant to Florida law, please call us at 904-448-1969, or toll-free at (866) 510-9099. We have years of experience helping our clients avoid fraudulent transfer laws.
Distinguishing Fraud And The Uniform Fraudulent Transfer Act
Civil Fraud And Fraudulent Transfers
The actions of fraud and fraudulent transfer are separate causes of action. The law of fraud (“fraud”) is derived from and defined under the common law of deceit. The terms “fraudulent transfer” or “fraudulent conveyance” are fraught with semantic confusion due to the similarity of the terms, but are defined by statute, not by common law. These concepts are embodied in a statutory remedy by which a creditor may have a conveyance by a debtor set aside if it left the debtor insolvent.
Fraud implies moral turpitude. The foundation of the action to redress fraud is in the common law of tort, and evolved gradually over a long period of time. Fraudulent transfer suffers guilt by association with the common law variety, but the law of fraud and the statutory remedy for fraudulent conveyance are not the same.
Statutory attempts to protect a creditor’s ability to recover a debt by voiding certain conveyances of debtor’s property appeared in England as early as the 1376 Statute of Edward. The seed from which the contemporary fraudulent transfer remedy statutes grew is the Statute of 13 Elizabeth, enacted in 1570. Originally intended to overcome the inherent disadvantages of creditors in the 1500s where debtors were able to easily hide assets, the current incarnation of the fraudulent transfer statutes has obviated the concept of intent of the debtor. In the words of one federal court, “evil motive is not required. The requirement is merely “an intentional act prejudicial to creditors.”
Fraudulent transfer is not concerned with the relationship of the parties or righting a wrong, but is remedial. It is a tool for collecting money or for executing on a judgment. It is not a procedure for determining the liability of a debtor. The focus is on the solvency of the debtor; that is, the debtor’s ability to satisfy claimants who have already proved their debt. The transfers at issue often are “fraudulent” to third parties outside the particular transaction, and the “wronged” parties may not even be ascertainable at the time of the transfer. The “badges of fraud” associated with a fraudulent transfer are related primarily to whether the debtor, after the transfer, is unable to pay current or future creditors. Conversely, an action to set aside a transfer as fraudulent against creditors is likely to fail despite a showing of actual intent to hinder, delay or defraud a creditor (the “badges of fraud”) if the transfer has left the debtor with sufficient assets to cover the claims against him.
Consistent with its remedial purpose, fraudulent transfer law seeks to extend a creditor’s reach to assets no longer in the debtor’s possession, and offers numerous specific remedies which may operate against strangers to the creditor-debtor dispute. The UFTA enables a creditor, broadly defined as one holding a claim, to: 1) have the transfer or obligation avoided or annulled to the extent necessary to satisfy the creditor’s claim; 2) obtain an attachment or any other provisional remedy against the asset transferred or any other property of the transferee; 3) obtain injunctive relief against further disposition by the debtor or a transferee of the asset transferred or any other property; 4) have a receiver appointed to take charge of the transferred asset or of other property of the transferee; 5) obtain the entry of a money judgment equal to the lesser of the value of the transferred asset or the amount of the creditor’s claim; 6) obtain other relief as circumstance may require. In addition to the UFTA, the Bankruptcy Code, §548, allows the trustee in a bankruptcy proceeding to avoid any transfer of a property interest of the debtor, or any obligation incurred by the debtor if the debtor was insolvent on the date such transfer was made or such obligation incurred, and the transfer occurred within one year of filing the bankruptcy petition. Transfers made more than a year before the filing of the bankruptcy petition can be reached upon application of §544(b), which allows the trustee in bankruptcy to avoid a transfer that is voidable under applicable (state statutory) law. Florida’s statute of limitation for application of the Florida Uniform Fraudulent Transfer Act is four years from the date of the transfer or the date the obligation was incurred.
Fraudulent transfer law affects the rights and liabilities of parties who are not involved in the transaction at issue. The statutes and case law are clear that it is a remedial legal device, the purpose of which is to furnish creditors with enhanced powers to collect judgments. A “fraudulent transfer” is not an equitable action arising out of a misrepresentation to the creditor and detrimental reliance by the creditor being the proximate cause of the creditor’s legal damage. Thus, a fraudulent transfer cannot be a tort under the American legal system. Since a transfer of good title to property is a prerequisite to triggering the right of a creditor to avail himself of the statutory remedy, a transfer cannot be unlawful. If a transfer is lawful, a further remedy by statute would not be needed.
On the contrary, common law fraud is a tort concerned with the parties who are privy to a contract or transaction. A common law action for fraud allows a transaction to be set aside, or damages to be obtained by the party who is injured by another party’s active deception. The implication is that the injured party was coerced or deceived into participating in a contract such that it should be deemed to have failed in its essentials.
Criminal Fraudulent Transfer Statutes
Fraudulent concealment or transfer of property can carry criminal penalties for attorneys as well as clients and third parties under the bankruptcy code. Practitioners who collaborate with a client in criminal activity may risk criminal prosecution under an assortment of other federal statutes. The attorney, or any other adviser, should be wary of the Internal Revenue Code which can be used to ensnare such advisers. The omnibus clause of 26 USC §7212(a) which proscribes “corruptly obstructing or impeding” administration of the code has been employed to punish an attorney for setting up business entities to disguise illegal income and could be used to evade tax. United States v. Popkin concerns money laundering but has a fact pattern not unlike what might be involved in a sophisticated asset protection plan. The connection to “corruptly obstructing or impeding administration of the code is somewhat tenuous in Popkin, and suggests that the argument could be used to prosecute more common conveyances. Popkin, however, involved a sting operation where the attorney’s client informed the attorney that he wanted to repatriate drug money, and the attorney suggested the money laundering scheme.
Some states have criminal fraudulent transfer laws. For instance, Section 531 of the California Penal Code, makes it a misdemeanor for every person who is a party to any fraudulent conveyance or who, with intent to defraud, knowingly executes or procures another to execute, or files or procures the filing of any instrument purporting to convey property “knowing that the person executing the same had no right, title or interest in the property so conveyed. The California statute is clearly limited, however, to property which the transferor had “no right, title or interest in. Where the transferor has lawful title or property interest and has the right to transfer the property there is no violation. Criminal statutes must be carefully reviewed for specific application to a particular factual situation. It appears that the other states that have criminal fraudulent conveyance statutes are limited in the application of those laws to the transfer of secured or mortgaged property.
There is no Florida statute that imposes criminal, or even civil liability, on an attorney, or any other adviser, who assists a client in the planning and implementation of transfers that may ultimately be determined to be a fraudulent transfer or fraudulent conveyance.
The Florida Uniform Fraudulent Transfer Act
Fraudulent transfers of assets in Florida are governed by Florida’s adaptation of the Uniform Fraudulent Transfer Act, Chapter 726, Florida Statutes (hereinafter “FUFTA”). The transfer of assets that are not exempt from the claims of creditors into assets that are exempt from the claims of creditors, is governed by Florida’s fraudulent conversion statute, §§ 222.29-222.30, Florida Statutes. A claim seeking relief pursuant to FUFTA is a claim arising out of equity, and is not an action at law. Accordingly, none of the creditor, the debtor, or any other affected third party is entitled to a jury trial for the issues raised by the claim.
1. What Is A Fraudulent Transfer?
A fraudulent transfer or fraudulent conveyance as to present or future creditors is defined by FUFTA as: (1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (a) With actual intent to hinder, delay or defraud any creditor of the debtor; or
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
2. Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
Fla Stat, §726.105(1). Additionally, with respect to present creditors, a fraudulent transfer is further defined by FUFTA as follows:
(1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
(2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
Fla Stat, §726.106. Regarding exemptions, Fla. Stat, § 222.29 states that an exemption from attachment, garnishment, or legal process provided by this chapter is not effective if it results from a fraudulent transfer or conveyance as provided in chapter 726. Regarding conversion, Fla Stat, §222.30(2) adds that any conversion by a debtor of an asset that results in the proceeds of the asset becoming exempt by law from the claims of a creditor of the debtor is a fraudulent asset conversion as to the creditor, whether the creditor’s claim to the asset arose before or after the conversion of the asset, if the debtor made the conversion with the intent to hinder, delay, or defraud the creditor. In construing the above provisions, the Florida Supreme Court has determined that these statutory provisions, allowing creditors to attack fraudulent conversions of assets from nonexempt to exempt, rightfully apply to all statutory exemptions other than the Constitutionally protected homestead exemption.
2. Present And Future Creditors
A creditor is merely a person who “has a claim.” As defined in Fla. Stat., Section 726.102, a “claim” is broadly construed and “means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” §726.102(4), Fla. Stat. (2015). Thus, as is universally accepted, as well as settled in Florida, a “claim” under the Act may be maintained even though “contingent” and not yet reduced to judgment. Section 726.105(1) applies to both present and future creditors, regardless of whether the claim arises before or after the transfer occurs. Section 726.106 applies only to present creditors, i.e., those who already have a claim, even if the claim has not been reduced to judgment.
3. What Must A Creditor Show To Obtain Relief?
a. Completed transfer or an obligation incurred for a fraudulent transfer to have occurred, there must be a “transfer” of property, or an “obligation incurred.” A transfer is defined by the statute as: “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or any other encumbrance.” Fla. Stat., §726.102(14). A transfer occurs when, with respect to real property: “when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against whom applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee.” Fla. Stat., §726.107(1)(a). Where personal property is concerned, a transfer occurs, “when the transfer is so far perfected that a creditor on a simple contract cannot acquire a judicial lien otherwise than under ss. 726.101-726.112 that is superior to the interest of the transferee.” Fla. Stat., §726.107(1)(b). If a particular transfer can be perfected, as set forth in §726.107(1), but has not yet been perfected, then the transfer is deemed to have been made immediately before the commencement of the action by the creditor. Fla. Stat., §726.107(2). If the transfer cannot be perfected as provided in §726.107(1), then the transfer is deemed to have occurred when it is effective as between the debtor and the transferee. Fla. Stat., §726.107(3). A transfer is not made until the debtor has acquired rights in the asset transferred. Fla. Stat., §726.107(4). Under Fla. Stat., §726.107(5). an obligation is incurred:
(a) If oral, when it becomes effective between the parties;
(b) If evidenced by a writing, when the writing executed by the obligor is delivered to or for the benefit of the obligee.
The UFTA is not available to prohibit or enjoin a transfer before it occurs. The U.S. Supreme Court’s decision in Grupo Mexicano De Desarrolla, S.A., et al v. Alliance Bonde Fund, Inc., resolved a number of debtor-creditor issues. The case involved an action for money damages and a preliminary injunction was sought to prevent a defendant from transferring assets. The plaintiff was an unsecured creditor who had not yet established a judgment. Though the case did not deal directly with the fraudulent transfer statute, the facts and circumstances are similar to a typical fraudulent transfer or fraudulent conveyance case. The majority opinion specifically focused on the legal point of law that a court lacks authority to issue a preliminary injunction preventing a debtor from disposing of the debtor’s assets pending adjudication of the creditor’s claim for money damages. Such a remedy has historically not been available to a court of equity. In Grupo Mexicano, the creditor alleged that the debtor was insolvent, or if not insolvent, was dissipating it’s most significant asset, and by transfer of the asset would “frustrate any judgment” the creditor might obtain. The majority opined, “we suspect there is absolutely nothing new about debtors trying to avoid paying their debts or seeking to favor some creditors over others – or even about their seeking to achieve these ends through ‘sophisticated strategies.’” In footnote 11 of the Grupo Mexicano case, Justice Antonin Scalia observed: “There is nothing whatever wrong with respondents pursuing their own interest. Indeed, the fact that it is entirely proper and entirely predictable is the very premise of the point we are making. This new remedy will promote unregulated competition among the creditors of a struggling debtor.”
A fair reading of the opinion suggests that the transfer by a debtor of freely alienable property is lawful and the creditors concomitantly are free to pursue their legal rights.
b. Actual intent to hinder, delay or defraud if the debtor made the transfer, or incurred the obligation, with the actual intent to hinder, delay or defraud any creditor of the debtor, it is a fraudulent transfer. Determining the “actual intent” of the debtor is difficult in most cases, so the court is required to evaluate the following “badges of fraud” in each case presented: Whether:
(a) The transfer or obligation was to an insider.
(b) The debtor retained possession or control of the property transferred after the transfer.
(c) The transfer or obligation was disclosed or concealed.
(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
(e) The transfer was of substantially all the debtor’s assets.
(f) The debtor absconded.
(g) The debtor removed or concealed assets.
(h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred.
(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
(j) The transfer occurred shortly before or shortly after a substantial debt was incurred.
(k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Fla. Stat., §726.105(2). A creditor, to establish actual intent, must provide evidence that at least some of the “badges of fraud” are present. Evidence of only one badge of fraud usually is insufficient to establish a transfer was made with actual fraudulent intent. Notwithstanding the requirement of pleading “actual intent,” such a complaint is an action in equity to set aside the fraudulent conveyance, not an action at law for damages arising out of fraud. The fact that a complaint alleges actual intent on the part of the debtor to evade the creditor, does not transform the complaint into an action to recover on the ground of actual fraud. The fraud, such as it is, is only incidental to the right of the creditor to follow the assets of the debtor and obtain satisfaction of the debt. The gravamen of the cause of action is the ordinary right of a creditor to receive payment. This right has been implemented by the protection of legislation concerning the circumstances under which the creditor may avail himself of assets which the debtor has transferred to others.
c. Reasonably equivalent value. Even if there is no finding of an “actual intent,” a transfer will constitute a fraudulent transfer if it is made for less than “reasonably equivalent value” and the debtor is insolvent at the time of the transfer, or becomes insolvent as a result of the transfer. Fla. Stat., §726.105(2)(h). Value is received “if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made . . . .” “Reasonably equivalent value” is defined as occurring where the transferee “acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.” Fla. Stat., §726.104. Reasonably equivalent value is a factual analysis that depends on the particular facts and circumstances involved in each particular transaction. A transfer of property to a third party, even if for less than reasonably equivalent value, is not a fraudulent conveyance for which the creditor may obtain relief under Chapter 726, where the debtor has pledged to the complaining creditor collateral with a value in excess of the indebtedness, as security for the indebtedness.
d. Debtor’s Insolvency A debtor is considered insolvent in either of two situations. The first is if the sum of the debtor’s debts is greater than the sum of the debtor’s assets, based on a fair valuation. This method of determining insolvency is often called the “balance sheet test. A debtor is presumed to be insolvent if he is unable to pay his obligations as they become due. Fla. Stat., §726.103. The presumption of insolvency that arises where the debtor is unable to pay obligations as they become due is a rebuttable presumption and can be rebutted by a showing that the debtor is solvent based on the balance sheet test (assets exceed liabilities) or by a showing that the debtor is paying creditors other than the complaining creditor. Where the only evidence as to insolvency was the debtor’s testimony that he needed money from the sale to pay a loan, and was in financial straits at the time of the transfer, the court found that such evidence, without more, does not satisfy the statutory criteria for establishing insolvency. Under Fla. Stat, §726.106, even if insiders have judgment liens against the debtor, if payments are made to those insiders in satisfaction of the judgment liens, where the insiders had reason to know that the debtor was insolvent, the payments against the judgment liens constituted avoidable fraudulent transfers with regard to creditors whose claims arose prior to the transfers (payments).
4. Creditor’s Remedies For A Fraudulent Transfer
A creditor pursuing relief for a transfer or obligation that violates Chapter 726, generally is entitled to choose from the following options:(a) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim;
(b) An attachment or any other provisional remedy against the asset transferred or other property of the transferee in accordance with applicable law;
(c) Subject to applicable principles of equity and in accordance with applicable rules of civil procedure:
1. An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property;
2. Appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or
3. Any other relief the circumstances may require.
Fla. Stat, §726.108(1). Where a creditor already has obtained a judgment against the debtor, the creditor, if the court so orders, may levy execution on the asset transferred or its proceeds. Fla. Stat., 726.108(2). The relief granted a creditor for a fraudulent transfer cannot exceed in value the amount of creditor’s actual claim against the debtor.
Planning Needs Of Clients With Future, Present And Subsequent Creditors
From a planning perspective, it is significant to note that the FUFTA is applicable both to present and future creditors. Essentially, any transfer that is made for less than reasonably equivalent value, that renders the debtor insolvent, will be subject to a claim for fraudulent transfer or fraudulent conveyance both by those creditors who are known to exist at the time of the transfer, and also to those creditors who are not known, or who have not yet become creditors. Any transfer made with the specific intent to defraud creditors, based on an analysis of the “badges of fraud,” will result in the court finding a fraudulent transfer or fraudulent conveyance has occurred.
As a first planning step, all asset protection planning should consider the need for a reasonably equivalent value to be received by the transferor in return for the transfer of any property interest, or the incurring of any obligation.
Only when the transferor is solvent, and will not be rendered insolvent by the proposed transfer, should there be a consideration of transferring an interest in property, or incurring an obligation, without the receipt by the transferor of reasonably equivalent value in return for the transfer.
Anytime a transfer is made for asset protection planning purposes, care should be taken to substantiate the values of the interest transferred and the receipt by the transferor of an interest with a reasonably equivalent value. Similarly, the “badges of fraud” should be carefully reviewed to determine if any are present, and if so, what remedial action can be taken by the transferor to negate, or at least minimize, the effect of those indicia that are present at the time of the transfer.
Finally, even when acquiring assets that are statutorily exempt from the claims of creditors, through the transfer of assets that are not statutorily exempt, care should be taken to analyze the implications of FUFTA, the transferor’s actual intent, and whether the transferor is solvent at the time of the transfer.