Fraudulent Transfer

A fraudulent transfer is a debtor’s transfer of legal title to his real or personal property to a third party with the intent to hinder, delay, or defraud a present or future creditor.  A fraudulent conversion is a debtor’s conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which is exempt or immune from creditor attack.  Florida fraudulent transfers and fraudulent conversions (collectively, a “fraudulent conveyance”) are defined and regulated by Chapter 726, Florida Statutes. Florida Statutes provide that a creditor can sue to overturn a transfer or conversion up to four years after a conveyance was made or the obligation was incurred.  Asset protection planning and transfers for real property become immune from fraudulent conveyance suspicion four years after the planning/transfer takes place.  Fraudulent transfers of personal property are subject to attack any time within the 20 year life of a civil judgment.

What is the consequence of making a Florida fraudulent transfer or conversion?

Florida fraudulent transfer concernsFlorida Statutes provide courts a collection of tools to undo fraudulent asset protection planning. Fraudulent transfers or conversions may be undone and reversed by a court’s putting the property back in the debtor’s hands where the property becomes subject to the creditor collection process.  The Statutes provide several equitable remedies to assist the creditor’s collection of these converted assets including injunctions against further transfers, imposing a receivership on the asset, or imposition of a constructive trust.  A creditor alleging fraudulent conveyance may sue the transferee who received the property in order to undo the transfer.  The transferee may be ordered to return the property to the debtor or pay the creditor the fair market value of the transferred property.  A fraudulent transfer to a friend or family member is likely to make that friend or family member a defendant in a creditor’s fraudulent transfer lawsuit. Making fraudulent transfers likely will cause a family member or friend to be named as a defendant in a lawsuit.

A judgment creditor has options as to where to file a fraudulent transfer action.  A creditor may open a proceeding supplementary in the same court and case where it obtained its judgment and try to reverse a fraudulent conveyance or conversion.  A creditor may also file a separate lawsuit to undo a fraudulent transfer.  The separate lawsuit may be filed in federal court even though the underlying judgment was obtained through a state court proceeding.

Fraudulent conveyances are not prohibited, actionable, or criminal.  Florida Statutes do not provide for awards of additional damages against the debtor, and the statutes certainly do not impose criminal fines or penalties.  Florida courts interpreting these statutes have pointed out that a debtor’s monetary liability cannot be increased because the debtor made a transfer or conversion later determined to be a fraud against present or future creditors.  Fraudulent transfers 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 on a creditor’s fraudulent transfer actions. Under Florida’s fraudulent transfer  statutes a creditor must initiate a fraudulent transfer 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 transfer. Fraudulent transfer actions contesting the debtor’s transfer of personal property may be brought at any time pursuant to Florida’s proceedings supplementary laws in Section 56.29, Florida Statutes.  The four year limitations is applicable to transfers of personal property or real property in bankruptcy proceedings. 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.

What are the defenses against fraudulent conveyance allegations?

Not all transfers or conversions which move assets beyond a creditor’s reach are fraudulent and subject to reversal.  Just because you have a debt or potential liability does not mean you cannot transfer or sell your property, or that you must refrain from prudent tax and financial planning.  Whether or not a particular transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor’s primary purpose and intent behind the transfer or conversion.  To ascertain a debtor’s purpose and intent of a property transfer, courts look to factors which indicate intent to avoid creditor claims.  For example, a court will examine whether any particular 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, and 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 a fraudulent transfer against creditors.  The courts must consider the debtor’s explanation in order to determine whether the transfer was intended primarily to defeat creditors.

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 so that such contributions ordinarily will not be undone as a fraudulent conveyance.

Defenses against fraudulent transfer allegations must be credible.  Some people explain their formation of family partnerships and children’s trust as reasonable estate tax planning.  That reason is not credible if the debtor does not have a taxable estate that warrants estate tax planning.  Changes in the estate tax exemption ceiling, or the possible elimination of estate tax, will diminish “estate tax planning” as a reasonable defense to fraudulent transfer attacks.  Most fraudulent transfer lawsuits are filed against the transferee or recipient of the subject property.  The transferee may assert a defense that he paid a reasonably equivalent value for the property and that the property was purchased in good faith.

How does the fraudulent conveyance issue impact asset protection planning?

The possibility of creditor allegations of fraudulent conveyance should not deter asset protection planning.  People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property.  Remember that fraudulent transfer and conversion statutes do not prohibit or make illegal fraudulent conveyances and the fraudulent transfer remedy does not increase the amount of the judgment.  Asset protection is effective even if steps taken might be subsequently challenged or even reversed as a fraudulent transfer or conversion.

Five important things to remember about fraudulent transfers and fraudulent conversions:

  1. Transferring assets to family members is not an asset protection solution;
  2. Fraudulent transfers may result in a lawsuit against the recipient of your transfer;
  3. Fraudulent conveyances are not criminal fraud, and there are no civil damages awarded to the judgment creditor;
  4. The statute of limitations on fraudulent conveyance claims is generally four years, but some fraudulent transfer actions have a longer time limit; and
  5. Despite limitations, fraudulent conveyances are sometimes effective asset protection tools to improve a debtor’s negotiating posistion.

Liability for a Fraudulent Transfer

Most debtors and their attorneys are concerned about potential personal liability for asset protection planning. Most of the concern relates to prospective transfers and planning which could be deemed to be fraudulent transfers or fraudulent conversion in Florida. There are several court decisions in Florida regarding attorney liability for assisting their clients in a fraudulent transfer. These cases have held that neither attorneys or any other third party advisor may be held liable for damages for advising a debtor in regards to a fraudulent transfer. There are also cased dealing with a debtor’s liability for making a transfer or investment which is later reversed pursuant to Florida’s fraudulent transfer statutes. These court decisions have not imposed any additional damages or attorney fee liability upon a judgment debtor found to have transferred or converted assets to defraud, hinder or delay a judgment creditor. In general, concern about additional damages or third party liability for fraudulent transfers often impedes effective asset protection planning in Florida.

Attorney Liability

Liability for fraudulent transfers in FloridaMany 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. Until recently, no Florida appellate court has addressed the issue whether a cause of action exists against an attorney, as well as other third parties for assisting a fraudulent asset transfer or fraudulent conversion pursuant to §222.30 or §726.101 of the Florida Statutes.

Three Florida appellate cases address third party liability for fraudulent conveyances. Each appellate court held that there is no potential liability for debtors’ attorneys, financial advisors, accountants, and any other party whether or not an agent of the debtor, for any involvement in aid of the fraudulent conveyance short of actually possessing the transferred property.

In May 2003, 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 was an unqualified “No.”  After considering legislative intent, the Supreme Court stated, “There is simply no language in FUFTA that suggests the creation of a distinct cause of action for aiding-abetting claims against non-transferees.  Rather, it appears that 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 further stated, “Consistent with this analysis we conclude that FUFTA was not intended to serve as a vehicle by which a creditor may bring a suit against a non-transferee party’s alleged aiding and abetting of a fraudulent money transfer.” This unanimous decision impacts all attorneys, accountants, bankers, and any other person who provides services to people transferring their assets.

There is potential 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 took title or control of the debtor’s assets or who were deeply involved in asset conveyances. These cases involved unethical behavior in addition to just asset protection. To be safe, advisers should limit their help to legal or tax advice.

Debtor Liability

Any creditor can attack the implementation of an asset protection plan by alleging that certain transfers of your assets to other people or entities or the investment of money in exempt assets (such as annuities) constitutes a fraudulent transfer or fraudulent conversion because these conveyances were done with the intent, or effect, to hinder, avoid, or delay creditor collection. Any asset protection conveyance can be challenged as “fraudulent” for up to four years even if you had no obligation or duty to the challenging creditor when your asset protection plan was implemented.

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 the tort of common law fraud or even with criminal fraud. As a result, some people are fearful that asset protection planning could result in their being held liable for damages in tortious fraud or even charged with criminal fraud. Just the opposite, 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. As a result, a creditor who claims that part of your asset protection planning involved a fraudulent conveyance cannot also charge you with the crime of fraud and cannot seek additional civil damages based on common law theories of fraud, deceit, or misrepresentation.

The Florida law of fraudulent conveyances are based on specific Florida statutes, particularly Florida Statutes 222.30 and 726.101. These Statutes provide that a creditor may seek equitable remedies from a court to undo a fraudulent conveyances made to implement an asset protection plan. These equitable remedies are designed to put property back into the debtor’s hands so that the same property is available to satisfy a creditor’s judgment. Additionally, if you had transferred property to a third party, such as a friend or family member, and the transferee (recipient) is unable or unwilling to return the property, the court may impose a money judgment against your transferee for the value of the property conveyed. Even then, you are not liable for any additional damages based on the value of property fraudulently conveyed.

Therefore, asset protection planning is very unlikely to increase your liability and unlikely to get you in trouble. In almost all cases, even if part of your asset protection plan is successfully challenged as a fraudulent conveyance, a court will only put you back in essentially the same legal situation you were before your asset protection plan was implemented.

What to Do Next

We help individuals and businesses develop and implement a customized asset protection plan to protect your wealth from creditor collection.
Contact us to get started through our contact page or by calling our office at (407) 444-0404.
Alper Law
Fraudulent Transfer
July 5, 2012