Fraudulent Transfer Law

Fraudulent Conveyances

What are fraudulent transfers and conversions?

The most important issue in any asset protection plan is whether or not previous planning transactions constitute fraudulent transfers or fraudulent conversions (collectively, “fraudulent conveyance”) as defined and regulated by Chapter 726 of the 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 new property is exempt or immune from creditor attack. Florida Statues provide that a creditor can sue to overturn a transfer or conversion up to four years after a conveyance was made or obligation incurred. Asset protection planning and transfers become immune from fraudulent conveyance suspicion four years after the planning takes place. Fraudulent transfer laws are different in bankruptcy court because there are different rules under federal bankruptcy laws.

What is the consequence of making a 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 assets, or imposition of a constructive trust. A creditor alleging fraudulent conveyance may sue not only the debtor transferor but also the transferee who received the property in order to undo the transfer. 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.

Fraudulent conveyances are not prohibited, actionable, or criminal. The subject 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 makes a transfer or conversion a fraud against creditors?

Not all transfers or conversions which move assets beyond a creditor’s reach are fraudulent and subject to reversal. Just because you have debt or potential liability not mean you cannot transfer or sell your property, or that you must refrain from prudent tax planning 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 his intent behind the transfer or conversion. To ascertain the 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 or 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.”

The above badges of fraud suggest that a transfer was a fraudulent conveyance which the courts should reverse. 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 debtors explanations in order to determine whether the transfer was intended primarily to defeat creditors.

Defense against fraudulent conveyance allegations.

When a creditor is trying to collect money from a debtor who has previously engaged in asset protection planning and has little or no assets easily subject to creditor collections a creditor is more likely to institute an action attacking one or more of the debtor’s prior transfers as fraudulent transfers or conversions. Just because a creditor alleges that the debtor’s conveyance was intended to defraud creditors does not mean a court will set aside the conveyance. As stated above, legitimate financial planning or estate planning often rebuts fraudulent transfer allegations. Reasonable financial planning is not reversible as a fraudulent transfer simply because one of the consequences of reasonable planning is increased asset protection. As an 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. For example, some people explain their formation of family partnerships and childrens trusts as reaonable 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.

How the fraudulent conveyance issue impacts asset protection planning?

The possibility of creditor allegations of fraudulent conveyance should not deter aggressive asset protection planning prior to time a judgment is entered by a court. 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 the fraudulent transfer and conversion statutes do not prohibit or make illegal fraudulent conveyances. Asset protection is effective even if steps taken might be subsequently challenged or even reversed as a fraudulent transfer or conversion.

Alternative creditor remedies to undo transfers

Fraudulent transfer statutes are not the exclusive creditor remedy to reverse a debtor’s conveyance of non-exempt property. Creditors may also use proceedings supplementary under Florida Statute 56.29 to undo transfers of personal property made to a debtor’s spouse or other insider. Florida courts have held that the  four year statute of limitation under the fraudulent transfer statutes does not apply to proceeding supplementary which may be initiated at any time during the 20-year life of a Florida judgment.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.