THE FLORIDA SUPREME
COURT FINDS NO LIABILITY
FOR AIDING OR ABETTING A FRAUDULENT TRANSFER
By:
Denis Kleinfeld and Jonathan Alper
Published
in the Florida Bar Journal, June 2004
Introduction
The Eleventh Circuit Court of Appeals certified to the Florida
Supreme Court the question of whether under Florida’s
Uniform Fraudulent Transfer Act or FUFTA there is a cause of
action for aiding and abetting a fraudulent transfer when the
alleged aider-abettor is not a transferee. The Supreme Court’s
unanimous answer in Lewis B. Freemen, etc., et al., vs.
First Union National Bank was an unqualified “No.”
This unanimous decision impacts all lawyers, accountants, bankers,
and any other person who provides services to people transferring
their assets. While Freeman v. First Union involved
a banking institution, its legal principles apply to any situation
where a client’s asset transfers elicit a claim under
Florida’s Uniform Fraudulent Transfer Act. This decision
settles, in Florida at least, a contentious, controversial,
and recently much litigated legal issue. Lawyers, accountants
and others whose client is, or may become, a debtor cannot be
held liable for simply aiding and abetting their clients’
asset transfers found to be reversible under the FUFTA.
Freeman V.
First Union National Bank
In Freeman v. First Union the State of Florida filed
a lawsuit in the U.S. District Court for the Southern District
of Florida alleging that a company called Unique Gems ran a
“Ponzi scheme.” Unique Gems maintained bank accounts
at First Union National Bank. In the course of litigation, Lewis
B. Freeman was appointed receiver over the company. Plaintiff
Receiver’s Second Amended Complaint claimed that First
Union National Bank was liable to the Receiver for money damages
on the grounds that it aided and abetted a fraudulent transfer
by allowing Unique Gems to wire transfer money to Liechtenstein
even after the State filed the lawsuit. The Complaint alleged
that although First Union informed Unique Gems in a letter dated
February 21, 1997, that it would close its account in ten days,
the bank did not close the account. Subsequently, a court-ordered
injunction was entered on March 5, 1997, freezing the Unique
Gems account. Presumably, while the motion to freeze its assets
was pending, Unique Gems transferred a total of $6.6 million
from its First Union account to Liechtenstein. Even after the
injunction was entered, and after First Union told Unique Gems
that its account would be closed thirty days thereafter, First
Union still allowed Unique Gems to wire transfer an additional
$2 million to Liechtenstein. Finally, First Union closed the
Unique Gems account on July 24, 1997. These facts represent
an exceptional and excellent context to analyze the interrelationship
between Florida’s fraudulent transfer statutes and the
common law tort of aiding and abetting by a third party non-transferee.
The district court
dismissed the Receiver’s aiding and abetting claim against
First Union with prejudice because it did not state a cause
of action under Florida law. The district court held that the
FUFTA allows creditors only to set aside fraudulent transfers.
The court considered the FUFTA to be similar to the fraudulent
transfer provisions of the Bankruptcy Code and held that neither
provides for aider and abettor liability. The district court
noted that while the Receiver cited cases recognizing aiding
and abetting as common law fraud, or another cause of action,
none of the cases related to the Uniform Fraudulent Transfer
Act.
On appeal, the Eleventh
Circuit Court of Appeals noted that the FUFTA remedies for fraudulent
conveyance are different and possibly broader than those of
the Bankruptcy Code. The appeals court said that, “While
the Bankruptcy Code limits remedies to the recovery of transferred
property or its value…the FUFTA clearly provides additionally
for ‘any other relief the circumstances may require’.”
Thus, the issue before the Eleventh Circuit was whether the
FUFTA remedies, like bankruptcy remedies, include only equitable
powers to cancel a fraudulent transfer, or whether the FUFTA’s
“catch-all” phrase of “any other relief the
circumstances may require” gives rise to common law theories
for damages against third party non-transferees. The Eleventh
Circuit felt it could not predict how the Florida Supreme Court
would rule on the issue. Specifically, the Eleventh Circuit
asked the Florida Supreme Court, “Under Florida law is
there a cause of action for aiding and abetting a fraudulent
transfer when the alleged aider-abettor is not a transferee?”
The Florida Supreme Court began its own analysis by reviewing
the meaning of the wording “any other relief the circumstances
may require” in Florida Statutes Section 726.108(1)(c)(3).
The Court concluded that, “We believe that the Legislature
intended it to facilitate the use of other remedies provided
in the statute, rather than creating new and independent causes
of action such as aider-abettor liability….” After
further considering legislative intent, the Supreme Court stated
that, “There is simply no language in the FUFTA that suggests
the creation of a distinct cause of action for aiding-abetting
claims against non-transferees. Rather, it appears that the
FUFTA was intended to codify an existing but imprecise system
whereby transfers that were intended to defraud creditors were
to be set aside.” The Court stated, “We simply can
see no language in FUFTA that suggests intent to create an independent
tort for damages.” The Supreme Court explained that, “To
adopt the appellants’ position in this case would be to
expand the FUFTA beyond its facial application and in a manner
that is outside the purpose and plain language of the statute.
Consistent with this analysis we conclude that the FUFTA was
not intended to serve as a vehicle by which a creditor may bring
a suit against a non-transferee party (like First Union in this
case) for monetary damages arising from the non-transferee party’s
alleged aiding and abetting of a fraudulent money transfer.”
In Freeman v. First Union, the Florida Supreme Court
strictly interpreted the Florida Uniform Fraudulent Transfer
Act and circumscribed the statute’s remedies. The Supreme
Court’s unanimous decision is a remarkably clear and unequivocal
rejection of the Plaintiff/Receiver/Appellant’s position.
The Court’s decision in Freeman v. First Union
is in keeping with a series of recent Florida appellate decisions
concerning fraudulent conveyance law. In Yusem v. South
Florida Management District the Fourth District Court of
Appeals reviewed an alleged fraudulent transfer of funds to
an offshore account. The holding provides a clear definition
of a fraudulent conveyance action. The court stated, “A
fraudulent conveyance action is simply another creditor’s
remedy.” The court proceeded to define the nature of this
remedy as “either an action by a creditor against a transferee
directed against a particular transaction, which, if declared
fraudulent, is set aside thus leaving the creditor free to pursue
the asset, or it is an action against a transferee who has received
an asset by means of a fraudulent conveyance and should be required
to either return the asset or pay for the asset (by way of a
judgment and execution).” The Fourth District Court of
Appeals emphasized that a fraudulent conveyance action is not
an action against the debtor for failure to pay an amount owing
from a prior judgment and does not warrant an additional judgment
against the same debtor because of the fraudulent transfer.
A fraudulent conveyance action is not a lawsuit against a transferor/debtor,
but it is an action against the property or the transferee holding
the property.
In Beta Real v. Graham the Third District Court of
Appeals reviewed a situation where a partner in a British law
firm allegedly stole $9 million of which $1.4 million wound
up in a Florida bank in the name of a BVI corporation and $675,000
was spent acquiring a Florida condominium. The plaintiff’s
only argument for in personum jurisdiction in Florida was that
the defendant had committed a tortious act, specifically a fraudulent
transfer, within this state. The appellate court held that a
fraudulent conveyance is not a tortious act, and therefore,
not a basis for jurisdiction. However, the court did leave open
further proceedings, including assertions of in rem or quasi
in rem jurisdiction, by imposing a constructive trust, equitable
lien, or similar remedy even though the damages could not exceed
the amounts which have been traced to the theft and thus recoverable
in rem or quasi in rem.
In Bankfirst v. UBS Paine Webber, et al. the Fifth
District Court of Appeals reviewed an asset protection plan
where Bankfirst sued a debtor’s lawyers and financial
advisers for damages on the theory of common law civil conspiracy
to make a fraudulent conveyance. The Fifth District Court of
Appeals, in what is probably one of its most concise decisions,
upheld the trial court’s dismissal of Bankfirst’s
civil conspiracy action based on the “conclusion that
neither Section 222.30 nor Chapter 726, Florida Statutes, creates
a cause of action against the party who allegedly assists a
debtor in a fraudulent conversion or transfer of property, where
the person does not come into possession of the property.”
Interestingly, the legal basis for the relatively lengthy dissenting
opinion in that case is now completely refuted by Freeman
v. First Union.
The Third District Court of Appeals, in Danzas Taiwan, Ltd.
v. Freeman, again reviewed the argument that a fraudulent
transfer was a tortious act which gave rise to personal jurisdiction
within the State of Florida and reviewed an allegation of conspiracy.
There was no allegation that the alleged tortfeasor, Danzas
Taiwan, received fraudulently conveyed assets, only that it
was paid fees for services rendered to facilitate the physical
transfer of assets. The appellate court, citing the decisions
of both Bankfirst and Beta Real, held that
there could be no jurisdiction over Danzas Taiwan for commission
of a tortious act in Florida “because there is no cause
of action against Danzas Taiwan for conspiracy to engage in
fraudulent transfers.” Thus, Freeman v. First Union
and its predecessors in Florida’s appellate courts unequivocally
and unanimously define an action under Florida’s Uniform
Fraudulent Transfer Act as a creditor’s equitable remedy,
and they further agree this statute gives creditors no cause
of action in tort against non-transferees for aiding and abetting
or civil conspiracy.
The Client’s Right To Convey Assets
The Florida courts’ characterization of fraudulent transfers
as reversible acts, but not tortious acts, is important for
the protection of a person’s assets from creditor attack.
Otherwise, it would be difficult and risky for people to design
their business ownership and to arrange personal assets defensively
if any asset transfer later cancelled as a violation of the
FUFTA exposed the transferor and their professional advisors
to additional civil damages based on theories of tort liability.
Moreover, according to both the Florida Constitution and the
United States Supreme Court, people have a basic right to both
protect and freely transfer their property. The Florida Constitution
refers specifically to the protection of citizens’ property.
Article I, Section 2, Basic Rights, provides that, “All
natural persons, female and male alike, are equal before the
law and have inalienable rights, among which are . . . to acquire,
possess and protect property.” It is clear that Constitutional
rights are accorded broad interpretation. While there are yet
no cases which have asserted the Constitutional right to protect
property against creditor legal attack, this issue, no doubt,
will arise and be examined by the courts.
The United States Supreme Court in Grupo Mexicano de Desarrollo,
S.A., et al. v. Alliance Bond Fund, Inc., et al. solidified
a property owner’s right to freely transfer his property
prior to judgment subject to subsequent equitable remedies under
fraudulent conveyance statutes. This case involved an action
for money damages where the creditor sought a preliminary injunction
in federal court to prevent a defendant from transferring its
assets prior to judgment being entered. The majority opinion
pointed out prerequisites for equitable remedies as well as
the general availability of injunctive relief against asset
transfers depend on common law principles of equity. The Supreme
Court stated that, “It was well established, however,
that, as a general rule, a creditor’s bill could be brought
only by a creditor who had already obtained a judgment establishing
the debt.” The Court reiterated its understanding of the
well-established general rule, “that a judgment establishing
the debt was necessary before a court of equity would interfere
with the debtor’s use of his property.” In other
words, under common law a creditor has no property interest
in the assets of a debtor prior to the creditor obtaining a
judgment, and before judgment, a debtor’s property is
freely alienable.
The point is that all people, even potential debtors, have fundamental
rights to protect and control their property. The transfer of
freely alienable property is not unlawful and cannot be restrained
by a creditor, absent obtaining remedies allowed under other
statutory law such as bankruptcy, even if the transfer could
subsequently be challenged under fraudulent transfer statutes.
Ethical Issues
Prior to the Florida Supreme Court’s decision in Freeman
v. First Union, some commentators argued that it was unethical
in some circumstances for an attorney to assist a client’s
property transfer which was subsequently found to be a fraudulent
conveyance. The most prevalent arguments were, one, that attorneys
had a duty as an “officer of the court” not to impair
the collection of a court’s money judgment, or two, that
assisting a client’s fraudulent conveyance constituted
the assistance of “fraud.” Both ethical positions
are inconsistent with the Florida Supreme Court’s interpretation
of the FUFTA.
To begin with, the Florida Bar Model Rules of Conduct (the “Rules”)
provides in the Preamble that, “A lawyer is a representative
of clients, an officer of the legal system and a public citizen
having special responsibility of the quality of justice.”
The concept of lawyer as “an officer of the court”
suggests the close working relationship between judges and traditional
court room practitioners. The phrase “an officer of the
court” is relevant primarily to representation involving
work in a courtroom. The Florida Supreme Court has explained
that an attorney’s role as “officer of the court”
is to work with the court system, for example, by improving
the Bar admissions process, serving on disciplinary committees,
and representing indigents. This Court has never used the term
“officer of the court” to impose on attorneys additional
duties that could create conflict with or diminish the attorney’s
ethical responsibilities to diligently advocate on his client’s
behalf. Any other meaning would place the attorney in the role
of being an ombudsman rather than a zealous advocate.
It is well settled that because of the adversarial nature of
litigation and the duty for attorneys to zealously represent
their clients with total loyalty and confidentiality a lawyer
lawfully providing services to a client has no legal liability
to any third party in contract, tort or for a fiduciary duty
because of a client’s conduct. More specifically, the
general principle is that an attorney has no legal duty to a
third party adverse to his client’s interest, including
a client’s potential creditors.
Secondly, there is an important ethical distinction between
assisting actual common law fraud and assisting a fraudulent
conveyance. Under Rule 4-1.2(d) Scope of Representation, “A
lawyer shall not counsel a client to engage, or assist a client,
in conduct that the lawyer knows is criminal or fraudulent”.
(Rule 4-8.4(c) defines professional misconduct to include “engage[ing]
in conduct involving dishonesty, fraud, deceit or misrepresentation”).
Rules 4-1.2(d) and 4-8.4(c) are the only references in the Model
Rules to conduct of the attorney or client which involve fraud.
The term “fraud” or “fraudulent” is
specifically defined by the Rules as denoting “conduct
having a purpose to deceive and not merely negligent misrepresentation
or failure to apprise another of relevant information.”
This definition makes no reference to a fraudulent conveyance
or fraudulent transfer as under the Uniform Fraudulent Transfer
Act, Uniform Fraudulent Conveyance Act or similar statute. “Fraud”
does not include conduct which, although characterized as “fraudulent”
by statute or administrative rule, lacks an element of scienter,
deceit, intent to mislead, or knowing failure to correct misrepresentations
which can be reasonably expected to induce detrimental reliance
by another.
Florida’s Supreme Court and appellate courts have clearly
elucidated this distinction between the intentional tort of
common law fraud and deceit, on one hand, and remedies under
the FUFTA, on the other. By specifically rejecting the notion
that the FUFTA creates an independent tort for damages, the
Supreme Court in Freeman v. First Union distinguished
fraudulent transfers from the common law tort of fraud and deceit
of which damage is an essential ingredient. The Court recognized
that despite the FUFTA’s archaic language including the
word “fraud,” the statute does nothing more than
create a creditor remedy similar to replevin or other equitable
remedies. Such equitable remedies are different than damages
awarded to remedy the intentional tort of common law fraud and
deceit which requires all of the elements of misrepresentation,
reasonable detrimental reliance, and proximate cause as well
as damages.
The Florida Supreme Court also differentiated fraudulent transfers
from common law fraud in Havoco v. Hill. In Havoco,
the Court focused on exemption of a Florida homestead from remedies
under the fraudulent asset conversion provisions of the Florida
Statutes and the Uniform Fraudulent Transfer Act. The Court
concluded that homestead property is protected from the FUFTA’s
equitable remedies except where funds were obtained through
fraud or egregious conduct. In sum, the court held that a fraudulent
conveyance is not fraud and not egregious conduct.
As previously discussed, several recent Florida appellate court
decisions contrasted tortious fraud and fraudulent conveyance.
The Third District Court of Appeals has twice stated that a
fraudulent transfer is not a tort, and therefore, unrelated
to the intentional tort of common law fraud. Though not addressing
the issue directly, the Fifth District Court of Appeals, in
its Bankfirst decision cited several federal appellate cases
to support its holding, including the Ninth Circuit decision
of Elliott v. Glushon, which held that fraudulent transfers
in the context of bankruptcy include a great variety of actions
which are not common law fraud. Thus, the Florida Supreme Court
and Florida appellate courts have made clear that a fraudulent
transfer falls outside the definition of fraud, under the law
of deceit, proscribed by Florida’s ethical rules, and
is not otherwise considered egregious conduct.
Conclusion
The Florida Supreme Court in the case of Freeman v. First Union
Bank clearly holds that Florida’s fraudulent conveyance
statute is only a creditor collection tool and is not a basis
for damage claims against non-transferees such as third-party
financial consultants or legal advisors. This Supreme Court
decision, together with earlier opinions from Florida appellate
courts, definitively distinguishes fraudulent transfers from
the intentional tort of common law fraud. It is clear that a
fraudulent conveyance under the Florida Uniform Fraudulent Transfer
Act is not common law fraud. Freeman v. First Union
is another milestone in the ongoing balancing of creditor remedies
and debtor rights under Florida law. As to an attorney’s
previous concerns regarding their exposure to third-party liability
claims and ethical considerations involving client transfers
under FUFTA, following Freeman v. First Union an attorney
may be deemed to have an affirmative duty to competently advise
a client as to their rights under the law so the client may
acquire, possess, and protect property.
