Liability for Fraudulent Transfers

 

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

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. 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.

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