Defenses to a Fraudulent Transfer Claim in Florida

A debtor or transferee facing a fraudulent transfer claim in Florida has several statutory and common law defenses available. The defenses differ depending on whether the claim is based on actual or constructive fraud, whether the defendant is the debtor or the transferee, and whether the case is in state court or bankruptcy court. Florida’s fraudulent transfer statute provides specific affirmative defenses and imposes strict time limits on when claims must be brought.

The burden of proving a defense falls on the party asserting it. A transferee who claims good faith must prove good faith. A debtor who claims the transfer was for legitimate purposes must offer credible evidence supporting that explanation.

Good Faith Transferee Defense

The primary statutory defense for transferees is the good faith defense under section 726.109(1). A transfer is not voidable under the actual fraud provision if the transferee took the property in good faith and for reasonably equivalent value. Both elements are required. A transferee who paid full value but knew the debtor was transferring assets to defraud creditors does not qualify. A transferee who acted in complete good faith but received the property as a gift also does not qualify.

Good faith in this context means the absence of knowledge that the transfer was fraudulent. The transferee does not need to investigate the debtor’s financial condition, but a transferee who had actual knowledge of the debtor’s intent to defraud creditors cannot claim good faith. Courts also examine whether the circumstances would have put a reasonable person on notice that the transfer was suspicious.

This defense applies only to actual fraud claims. It is not available against constructive fraud claims, because the constructive fraud provisions already require the absence of reasonably equivalent value as an element. If the transferee paid reasonably equivalent value, the constructive fraud claim fails on its own terms without reaching the defense.

Partial Value Retention

Even when a transfer is avoidable, a good faith transferee is not left empty-handed. Section 726.109(4) provides that a good faith transferee who gave some value to the debtor is entitled to a lien on, or a right to retain, any interest in the transferred asset to the extent of the value given. The transferee can also obtain a reduction in the judgment to reflect the value provided.

A buyer who purchased property from the debtor at below-market value in good faith would lose the property if the transfer is avoided, but would retain a lien for the amount actually paid. The creditor recovers the property, and the transferee’s investment is protected to the extent of the consideration given.

Statute of Limitations

The statute of limitations is often the most effective defense. Florida law establishes different limitations periods depending on the theory of fraud.

Actual fraud claims must be brought within four years of the transfer, with an additional one-year discovery period if the transfer was concealed. Constructive fraud claims must be brought within four years with no discovery extension. Insider preference claims under section 726.106(2) must be brought within one year.

A transfer that occurred more than four years before the creditor filed suit is generally immune from challenge. The discovery exception for actual fraud extends the period only when the creditor could not reasonably have discovered the transfer. A recorded deed or a public filing that disclosed the transfer starts the clock even if the creditor did not actually discover it.

Debtor’s Legitimate Purpose Defense

A debtor facing an actual fraud claim can rebut the inference created by badges of fraud by demonstrating that the transfer served a legitimate, non-fraudulent purpose. This is not a statutory affirmative defense but a factual rebuttal of the creditor’s evidence of intent.

Legitimate purposes that courts have recognized include estate planning undertaken before any creditor relationship existed, tax planning based on independent professional advice, asset diversification for investment purposes, and transfers made in the ordinary course of business. The explanation must be credible and supported by contemporaneous evidence. A debtor who claims a transfer was for estate planning but had no estate tax exposure at the time faces skepticism.

The timing of the planning relative to the creditor’s claim is the strongest factor in the debtor’s favor. Planning done years before any potential liability arose is difficult for a creditor to characterize as fraudulent. Planning done after a lawsuit threat or demand letter requires a much more compelling justification.

Solvency Defense

For constructive fraud claims, solvency at the time of the transfer is a complete defense. Constructive fraud under section 726.106(1) requires proof that the debtor was insolvent at the time of the transfer or became insolvent as a result. If the debtor can demonstrate solvency both before and after the transfer, the constructive fraud claim fails.

Insolvency under the statute means the debtor’s liabilities exceeded the fair value of assets. Exempt assets are excluded from the calculation. A debtor with $2 million in exempt homestead equity and $500,000 in non-exempt assets who transfers $200,000 must be evaluated based on the $500,000, not the $2.5 million total. If that debtor’s liabilities exceed $300,000 after the transfer, the debtor is insolvent under the statute.

The solvency defense requires careful documentation of asset values at the time of the transfer. Appraisals, financial statements, and account records contemporaneous with the transfer date provide the strongest evidence. Retrospective valuations are less persuasive.

Insider Transfer Defenses

Transfers to insiders for antecedent debts face a separate claim under section 726.106(2). Three statutory defenses apply specifically to these transfers. The transfer is not voidable if the insider gave new value to the debtor after the transfer, provided the new value was not secured by a lien.

The transfer is also protected if it was made in the ordinary course of business or financial affairs of both the debtor and the insider. Finally, the transfer is protected if it was made as part of a good faith effort to rehabilitate the debtor and the transfer secured both present value given for that purpose and the antecedent debt.

The ordinary course defense is the most commonly invoked. A debtor who regularly pays rent to a family member who owns the business premises, and who continues those payments at the same rate and schedule during financial difficulty, can argue that the payments were in the ordinary course of business rather than preferential transfers to an insider.

Charitable Contribution Defense

Charitable contributions receive special protection. A transfer to a qualified religious or charitable organization that is received in good faith is not a constructive fraudulent transfer. This protection does not extend to actual fraud claims or to constructive fraud claims where the debtor was rendered insolvent.

For natural persons, a charitable contribution made within two years before the commencement of a fraudulent transfer action or a bankruptcy filing is protected only if it was consistent with the debtor’s historical pattern of giving or did not exceed 15 percent of the debtor’s gross annual income for the year of the contribution. Contributions that exceed these thresholds may be avoidable even if made to a legitimate charity in good faith.

Secured Creditor and Lease Termination Defenses

Two additional statutory defenses protect specific types of transactions from avoidance. A transfer resulting from a lease termination upon default by the debtor, where the termination is pursuant to the lease and applicable law, is not voidable. Similarly, enforcement of a security interest in compliance with Article 9 of the Uniform Commercial Code is protected. These defenses ensure that routine commercial transactions are not disrupted by fraudulent transfer claims.