Florida Fraudulent Transfer

What Is a Fraudulent Transfer?

There are two types of fraudulent transfers in Florida: actual fraud and constructive fraud. Active fraud is when a transfer is made to avoid collection. Constructive fraud is when a transfer is made for less than reasonably equivalent value and leaves the debtor insolvent.

A simple example of a fraudulent transfer could be transferring legal title of property or registration of a financial account to the name of a debtor’s spouse or child. Moving money or other assets to a new location is not a transfer if the debtor has not changed ownership or title to the asset.

Actual Fraud

To establish actual fraud under Florida law, the following elements must be proven:

1. Transfer Made or Obligation Incurred: The debtor must have made a transfer of assets or incurred an obligation.
2. Intent to Hinder, Delay, or Defraud: The key element here is the intent of the debtor at the time of the transfer. The debtor must have intended to hinder, delay, or defraud any creditor of the debtor.
3. Creditor’s Claim: The creditor’s claim must have existed at the time of the transfer or obligation.

Debtors will not typically admit that their transfers or conversions were intended to protect against creditor collection. The trial court must infer the debtor’s intent from the facts of each situation.

Indicators (or “badges of fraud”) can help establish intent, such as:

• The transfer or obligation was to an insider.
• The debtor retained possession or control of the property after the transfer.
• The transfer or obligation was concealed.
• Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with a lawsuit.
• The transfer was of substantially all the debtor’s assets.

Constructive Fraud

Constructive fraud can be proven without showing the debtor’s intent to defraud. Its elements are:

1. Transfer Made or Obligation Incurred: As with actual fraud, there must be a transfer of assets or the incurring of an obligation.
2. Lack of Reasonably Equivalent Value: The debtor did not receive “reasonably equivalent value” in exchange for the transfer or obligation.
3. Financial Condition: One of the following financial conditions must apply:
   • The debtor was insolvent at the time or became insolvent as a result of the transfer or obligation.
   • The debtor was engaged in a business or a transaction, or was about to engage in a business or a transaction, for which the remaining assets were unreasonably small in relation to the business or transaction.
   • The debtor intended to incur, or believed or reasonably should have believed that they would incur, debts beyond their ability to pay as they became due.

A debtor’s transfer or conversion of property made after a creditor has a claim against the debtor is vulnerable to fraudulent conveyance allegations. A debtor’s conveyance is not immune from fraudulent conveyance issues just because no creditor has obtained a judgment or filed a lawsuit.

Fraudulent Transfer Statute

The Florida statute that governs fraudulent transfers is Chapter 726 of Florida Statutes.

The statute defines a fraudulent transfer, or fraudulent conveyance, what the creditor remedies are, and goes over the exact procedure under the statutes that a creditor must follow to unwind a fraudulent transfer.

Fraudulent Conversion

A fraudulent conversion is a debtor’s conversion of non-exempt property subject to creditor attack to a different type of property, still owned by the debtor, that is exempt or immune from creditor attack. An example of a fraudulent conversion is the debtor’s spending his non-exempt cash to purchase of an exempt annuity.

Defending Fraudulent Transfer Claims

Defending against a fraudulent transfer claim in Florida depends on the type of fraud alleged—actual or constructive

For actual fraud claims, a common defense is demonstrating a lack of intent to defraud creditors. This might involve showing that the transfer was part of regular business operations or legitimate estate planning. The defense could also argue that the transaction was made for fair value, which can challenge the assumption of fraudulent intent.

For constructive fraud claims, where the intent is not a factor, the defense might focus on the financial status of the debtor at the time of the transfer. Proving that the debtor was solvent, or that the business had adequate capital to operate even after the transfer, can be effective.

Additionally, if the statute of limitations has expired—generally four years in Florida from the transfer date, or one year from when it could reasonably have been discovered—the claim can be dismissed on those grounds.

Creditor Remedies

If a debtor makes a fraudulent transfer, the creditor can unwind the transfer, obtain an injunction against future transfers, or get a money judgment against the transferee.

Unwinding the Transfer

The primary remedy is the reversal, or the unwinding, of the fraudulent conveyance. When a court reverses a debtor’s conveyance the property will be put back in the debtor’s hands where it becomes subject to the creditor collection process.

Money Damges

Money damages is not a fraudulent conveyance remedy. A debtor’s monetary liability to a creditor does not increase because the debtor made a transfer or conversion later determined to be a fraud against creditors. Several Florida court decisions have held that fraudulent conveyance actions are nothing more than creditor remedies to recover assets to satisfy a civil judgment.

Attorney Fees

A creditor may not recover its attorneys fees for pursuing a fraudulent transfer remedy. Generally, a creditor may not recover attorneys fees absent express statutory authority. Florida’s fraudulent transfer and conversion statutes contain no attorney fee provision.

Florida Fraudulent Transfer Statute of Limitations

The statute of limitations refers to the time limits for filing lawsuits.  The general rule is that the statute of limitations for a fraudulent conveyance in Florida is four years. A creditor must initiate a fraudulent transfer or fraudulent conversion complaint within four years from the date of the transfer, or one year from the date the creditor discovered, or reasonably could have discovered, the conveyance intended to defeat creditor collection.

The statute of limitations applicable to fraudulent transfer of specific items of personal property (and not real property) is unclear. One Florida court held in 2014 that a creditor may challenge a debtor’s transfer of personal property any time during the twenty year life of a civil judgment pursuant to Florida’s proceedings supplementary laws in Section 56.29(3) of the Florida Statutes. The court held that the four-year time limit under Florida’s fraudulent conveyance statutes does not limit actions against personal property transfers during proceedings supplementary to collect a judgment. However, more recently, in 2020, a different Florida court held that fraudulent transfer actions initiated as part of proceedings supplementary are limited by the general a four-year state of limitations. In any event, fraudulent transfer remedies in proceedings supplementary are limited to the return of identifiable personal property and, importantly, do not include money damages against the transferee.

The statute of limitations is longer when the federal government is the judgment creditor. The federal collection statutes give the government six years to bring a fraudulent transfer lawsuit. The Internal Revenue Service has ten years from the tax assessment date to contest a taxpayer’s asset transfers.

Criminal Liability for Fraudulent Conveyances

The terms fraudulent transfer and fraudulent conveyance sound bad. Some debtors are concerned that a fraudulent conveyance is a criminal offense tantamount to criminal fraud. Or, they are concerned that a court will impose criminal fines or sanctions against a judgment debtor who has made a fraudulent conveyance.

However, several Florida courts, as well as some federal courts, have held that a fraudulent conveyance to avoid creditors’ claims is not tortious fraud and is not criminal fraud. A debtor will not go to jail for a making fraudulent conveyance.

Attorney Liability for Client’s Fraudulent Conveyance

Many attorneys are reticent about asset protection work because they fear personal liability for assisting their clients’ transfer of assets to avoid creditor claims.

Florida’s fraudulent conveyance statutes do not specifically address liability of third parties, including a debtor’s attorney, who advise and assist a judgment debtor with a transfer or conversion which is subsequently deemed a fraudulent conveyance.

However, three Florida separate appellate cases have held that there is no potential liability for debtors’ attorneys, financial advisers, accountants, and any other agent of the debtor, for aiding a fraudulent conveyance, so long as the agent does not possess the transferred property.

The Florida Supreme Court held that there is no cause of action for aiding and abetting a fraudulent transfer when the alleged aider-abettor is not a transferee.

But there is potential liability for advisers who become too involved in their client’s asset protection plan. Attorneys who take title to or control over their client’s assets may be liable as recipients of a fraudulent conveyance. The Florida Bar has sanctioned attorneys who did more than provide legal advice and prepare legal documents for clients involved in a fraudulent conveyance. Advisers should limit their help to professional advice and professional services.

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 with Fraudulent Transfers

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.

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.