What is a Fraudulent Transfer?
A fraudulent transfer in Florida is a debtor’s transfer of legal title of property to a third party with the intent to hinder, delay, or defraud a present or future creditor. A fraudulent transfer involves the conveyance of an asset to another person—an example is transferring legal title of property to a spouse. Moving the location of money or assets is not a transfer if the debtor has not changed ownership or title to the asset.
A fraudulent conversion, on the other hand, 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 is using non-exempt cash to purchase of an exempt annuity.
Florida Statutes give creditors remedies to undo fraudulent asset protection planning. The primary remedy is the reversal, or the unwinding, of the fraudulent conveyance. If a debtor’s fraudulent transfer or conversion is reversed the property will be put back in the debtor’s hands. Then the property becomes subject to the creditor collection process.
Florida statutes provide several additional equitable remedies including injunctions against further transfers, imposing a receivership on the asset, or imposition of a constructive trust.
Money damages is not a fraudulent conveyance remedy. Florida courts have held that 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 present or future 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.
Reversal of Fraudulent Transfers
A creditor alleging fraudulent transfer usually files a supplemental lawsuit against the transferee who received the property. The lawsuit will allege that the debtor transferred an asset to the transferee to hinder the debtor’s judgment creditors. If the creditor wins the suit, the court will order the transferee to return the property to the debtor or pay the creditor the fair market value of the transferred property. Therefore, making fraudulent transfers to a family member or friend likely will cause them to be named as a defendant in a fraudulent transfer lawsuit.
A judgment creditor has options as to when and how to file a fraudulent conveyance action. A creditor may file a complaint in the same court and case where it obtained its underlying money judgement. A creditor may also file a separate lawsuit to undo a fraudulent conveyance. The separate lawsuit may be filed in federal court even though the underlying judgment was obtained through a state court proceeding.
Fraudulent transfers and conversions 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.
Statute of Limitations
The statute of limitations refers to the time limits for filing lawsuits. Florida’s fraudulent conveyance statutes include a four year statute of limitations. A creditor must initiate a fraudulent transfer or fraudulent conversion complaint within four years from the date of the transfer, or if later, one year from the date the creditor discovered, or reasonably could have discovered, the conveyance.
Fraudulent transfer actions contesting the transfer of specific items of personal property (and not real property) may be brought at any time during the twenty year life of a civil judgment pursuant to Florida’s proceedings supplementary laws in Section 56.29(3) , Florida Statutes. The four-year time limit under Florida’s fraudulent conveyance statutes does not limit actions against personal property transfers during proceedings supplementary. However, fraudulent transfer remedies under proceedings statutes 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 creditor. The federal collection statutes give the government six years to bring a fraudulent transfer. The Internal Revenue Service has ten years from the tax assessment date to contest a taxpayer’s asset transfers.
Not all transfers or conversions that move assets beyond a creditor’s reach are fraudulent and subject to reversal. Conveyances made with the primary intent other than creditor avoidance may not prohibited or reversible. The debtor’s receipt of reasonable consideration from the transferee is a strong defense against fraudulent conveyance allegations.
For example, the sale of an asset to a third-party for reasonable value is not a fraudulent transfer. A debtor may transfer assets if the debtor receives reasonably equivalent value in return.
Reasonable Explanations for Transfers
Whether or not a transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor’s primary purpose and intent. There are several reasons why a debtor may transfer assets or convert assets, such as tax planning, estate planning, or supporting a family member.
Reasonable financial planning is not a reversible fraudulent transfer simply because one of the consequences of reasonable planning is increased asset protection. For example, a typical contribution to your IRA or 401k plan is prudent and normal tax planning. Such contributions ordinarily will not be undone as a fraudulent conveyance.
Just because someone has a debt or potential liability does not mean that person is prohibited from selling or transferring their property for prudent tax and financial planning.
Defenses against fraudulent transfer allegations must be credible. For example, many debtors state that their transfers were done for “estate tax planning.” They may say that they transferred assets to estate planning entities such as family partnerships and children’s trusts to reduce estate tax. However, the explanation is not credible when the debtor does not have a taxable estate that warrants estate tax planning. The increase to $10 million of the federal estate tax exemption ceiling has diminished “estate tax planning” as a reasonable defense to fraudulent transfer attacks.
Debtors will typically not admit that their transfers or conversions were intended to protect against creditor collection. The trial court usually must infer the debtor’s intent to determine a fraudulent conveyance. Courts examine facts indicative of the debtor’s intent to avoid creditor claims.
For example, a court could examine whether a transfer was made to a debtor’s family member, whether a transfer was concealed, whether the debtor retained effective use and control over the property transferred, or whether the transfer rendered the debtor insolvent. These factors, and others, are referred to as “badges of fraudulent transfer.” However, just because a transfer involves one or more badges of fraud does not necessarily make that transfer fraudulent. The courts must consider the debtor’s explanation in order to determine whether the transfer was intended primarily to defeat creditors.
The possibility of creditor allegations of fraudulent conveyance does not preclude asset protection planning. People have the right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property. People are not prohibited from conveying what they own just because a creditor has threatened or filed a lawsuit. Even if a debtor loses a fraudulent conveyance case, the fraudulent transfer and conversion statutes do not increase the amount of a civil judgment. A fraudulent conveyance judgment puts the conveyed asset back in the debtor’s name so that the debtor is in the same collection position as he was before the conveyance.
Asset protection can be effective even if steps taken might be subsequently challenged or even reversed. Asset protection planning can still improve the debtor’s negotiating posture.
Fraudulent conveyances are not prohibited, actionable, or criminal. Some debtors are concerned that a fraudulent conveyance is 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. The terms “fraudulent transfer” and “fraudulent conveyance” have a bad connotation, and many people incorrectly confuse these technical legal terms in asset protection law with criminal fraud. Several Florida court decisions, as well as some federal courts in other states, have held that a fraudulent conveyance to avoid creditors’ claims is not tortious fraud and is not criminal fraud. You will not go to jail for a fraudulent conveyance.
Many attorneys are reticent about asset protection work because they fear exposing themselves to personal liability for assisting their clients’ transfer of assets to avoid exposure to creditor claims.
Florida’s fraudulent conveyance statutes do not specifically address liability of third parties, including a debtor’s attorney, who advise and assist the debtor with a transfer or conversion which is subsequently deemed a fraudulent transfer or conversion. However, three Florida appellate cases addressed third party liability for a judgment debtor’s fraudulent conveyances. Each appellate court held that there is no potential liability for debtors’ attorneys, financial advisers, accountants, and any other party agents of the debtor, for any involvement aiding the fraudulent conveyance short of possessing the transferred property. More specifically, 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.
There is danger for advisers who become too involved in their client’s asset protection plan. Attorneys who take title to or control over debtor 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. Advisers should limit their help to professional advice and professional services.