Florida Bar Journal June 2004

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.

Jon Alper

About Jon Alper

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