Fraudulent Transfers

The most important issue in any asset protection plan is whether or not transfer of assets constitutes a Florida fraudulent transfer or fraudulent conversion (collectively, a “fraudulent conveyance”) as defined and regulated by Chapter 726, Florida Statutes.  A fraudulent transfer is a debtor’s transfer of legal title to his real or personal property to a third party with the intent to hinder, delay, or defraud a present or future creditor.  A fraudulent conversion is a debtor’s conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which is exempt or immune from creditor attack.  Florida Statutes provide that a creditor can sue to overturn a transfer or conversion up to four years after a conveyance was made or the obligation was incurred.  Asset protection planning and transfers for real property become immune from fraudulent conveyance suspicion four years after the planning/transfer takes place.  Fraudulent transfers of personal property are subject to attack any time within the 20 year life of a civil judgment.

What is the consequent of making a Florida fraudulent transfer or conversion?

Florida Statutes provide courts a collection of tools to undo fraudulent asset protection planning.  Fraudulent transfers or conversions may be undone and reversed by a court’s putting the property back in the debtor’s hands where the property becomes subject to the creditor collection process.  The Statutes provide several equitable remedies to assist the creditor’s collection of these converted assets including injunctions against further transfers, imposing a receivership on the asset, or imposition of a constructive trust.  A creditor alleging fraudulent conveyance may sue the transferee who received the property in order to undo the transfer.  The transferee may be ordered to return the property to the debtor or pay the creditor the fair market value of the transferred property.  A fraudulent transfer to a friend or family member is likely to make that friend or family member a defendant in a creditor’s fraudulent transfer lawsuit.

A judgment creditor has options as to where to file a fraudulent transfer action.  A creditor may open a proceeding supplementary in the same court and case where it obtained its judgment and try to reverse a fraudulent conveyance or conversion.  A creditor may also file a separate lawsuit to undo a fraudulent transfer.  The separate lawsuit may be filed in federal court even though the underlying judgment was obtained through a state court proceeding.

Fraudulent conveyances are not prohibited, actionable, or criminal.  Florida Statutes do not provide for awards of additional damages against the debtor, and the statutes certainly do not impose criminal fines or penalties.  Florida courts interpreting these statutes have pointed out that a debtor’s monetary liability cannot be increased because the debtor made a transfer or conversion later determined to be a fraud against present or future creditors.  Fraudulent transfers have more serious consequences if you file bankruptcy.  A fraudulent transfer or conversion within two years of bankruptcy could cause you to lose your bankruptcy discharge.

What are the defenses against fraudulent conveyance allegations?

Not all transfers or conversions which move assets beyond a creditor’s reach are fraudulent and subject to reversal.  Just because you have a debt or potential liability does not mean you cannot transfer or sell your property, or that you must refrain from prudent tax and financial planning.  Whether or not a particular transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor’s primary purpose and intent behind the transfer or conversion.  To ascertain a debtor’s purpose and intent of a property transfer, courts look to factors which indicate intent to avoid creditor claims.  For example, a court will examine whether any particular transfer was made to a debtor’s family member, whether a transfer was concealed, whether the debtor retained effective use and control over the property transferred, and whether the transfer rendered the debtor insolvent.  These factors, and others, are referred to as “badges of fraudulent transfer.”  However, just because a transfer involves one or more badges of fraud does not necessarily make that transfer a fraudulent transfer against creditors.  The courts must consider the debtor’s explanation in order to determine whether the transfer was intended primarily to defeat creditors.

Reasonable financial planning is not a reversible fraudulent transfer simply because one of the consequences of reasonable planning is increased asset protection.  For example, a typical contribution to your IRA or 401k plan is prudent and normal tax planning so that such contributions ordinarily will not be undone as a fraudulent conveyance.

Defenses against fraudulent transfer allegations must be credible.  Some people explain their formation of family partnerships and children’s trust as reasonable estate tax planning.  That reason is not credible if the debtor does not have a taxable estate that warrants estate tax planning.  Changes in the estate tax exemption ceiling, or the possible elimination of estate tax, will diminish “estate tax planning” as a reasonable defense to fraudulent transfer attacks.  Most fraudulent transfer lawsuits are filed against the transferee or recipient of the subject property.  The transferee may assert a defense that he paid a reasonably equivalent value for the property and that the property was purchased in good faith.

How does the fraudulent conveyance issue impact asset protection planning?

The possibility of creditor allegations of fraudulent conveyance should not deter asset protection planning.  People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property.  Remember that fraudulent transfer and conversion statutes do not prohibit or make illegal fraudulent conveyances and the fraudulent transfer remedy does not increase the amount of the judgment.  Asset protection is effective even if steps taken might be subsequently challenged or even reversed as a fraudulent transfer or conversion.

Learn More About:

Fraudulent Transfer Liability: The extent of attorney and debtor liability for fraudulent transfers under Florida law.

Fraudulent Transfer Seminar: Presentation by Jonathan Alper to the Florida Bar  about where Florida law  stands on fraudulent transfers.

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