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. Briefly, a fraudulent transfer involves the conveyance of an asset to another person- an example is transferring legal title of property to a spouse. A fraudulent conversion involves the debtor’s expenditure of non-exempt property to acquire an exempt asset- an example is the purchase of an exempt annuity.

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 if the transferee cannot account for the property.  A creditor will sue the transferee of the fraudulent transfer to recover the property. Therefore, making fraudulent transfers to a family member or friend likely will cause them to be named as a defendant in a lawsuit. A successful action for fraudulent conversion may give the creditor a lien on the converted asset.

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 judgment and try to reverse a fraudulent conveyance or conversion.  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 conveyances are not prohibited, actionable, or criminal.  Florida Statutes do not provide for awards of additional damages against the debtor, and the statutes  do not impose criminal fines or penalties on either the debtor or the transferee of a fraudulent transfer.  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 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 on a creditor’s fraudulent transfer actions. Under Florida’s fraudulent conveyance  statutes 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 debtor’s transfer 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, Florida Statutes.  The four year limitation period 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.    The transferee named as a defendant in a fraudulent transfer action 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 prohibit 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 conveyance remedies do 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 to the extent that the asset protection improves the debtor’s negotiating posture.

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

  1. Transferring assets to family members is not a good  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 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. Some people  believe  that a fraudulent conveyance is tantamount to criminal fraud or they are concerned that a court will impose additional penalties or damages 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 the tort of common law fraud or even 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. Fraudulent conveyance actions are 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. As a result, a creditor who claims  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. Several court decisions in Florida have held that fraudulent conveyance actions are nothing more than creditor remedies to recover assets to satisfy a civil judgment.  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.

Asset protection planning is very unlikely to increase your liability or  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  put you back in essentially the same legal situation you were before your asset protection plan was implemented.

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.

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 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 too 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.


What to Do Next

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Alper Law
Fraudulent Transfer
July 5, 2012