Florida Fraudulent Transfers and Conveyances

What is a Fraudulent Conveyance?

In Florida, a fraudulent conveyance, or fraudulent transfer, is a debtor’s transfer of legal title of non-exempt property to a third party with the intent to hinder, delay, or defraud a present or future creditor. The third party receiving the property is “transferee” of the asset.

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.

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.

Fraudulent Transfer Statute

The Florida fraudulent transfer statute 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 Transfer: Intent to Hinder or Delay Collection

The debtor’s intent is an essential element of a fraudulent conveyance. Conveyances are fraudulent if the debtor made the conveyance with the intent to hinder or delay creditor collections. 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.

For example, a court examining the debtor’s intent could consider 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 fraud.” However, just because a transfer involves one or more badges of fraud does not necessarily make that transfer fraudulent against creditors. The court must consider the debtor’s explanation of a conveyance to determine whether it was intended primarily to defeat creditors.

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.

How to Defend Fraudulent Conveyance Claim

Not all transfers or conversions that move assets beyond a creditor’s reach are fraudulent. Conveyances made with the primary intent other than creditor avoidance are not prohibited or reversible.

The debtor’s transfer of an asset to a third-party for reasonable value is not a fraudulent transfer—it is a sale. When the debtor receives cash or another asset of reasonably equivalent value as part of a sale the creditor can levy or garnish what the debtor has received from the sale.

There are reasons, other than a sale, why a debtor may transfer assets or convert assets without intending to hinder or delay creditors. Examples include tax planning, estate planning, or supporting a dependent family member. Reasonable financial planning is not a reversible fraudulent transfer simply because one of the consequences of reasonable planning is increased asset protection. 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.

After a debtor becomes aware of a creditor’s claim and potential liability the debtor’s explanations for subsequent asset transfer must be credible. For example, many debtors explain transfers to family members as “estate tax planning.” This 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.

Remember that fraudulent transfer rules apply to the debtor’s transfer or conversion of the debtor’s non-exempt assets—these are the assets that a creditor can attack to satisfy a judgment. There can be no fraudulent conveyance of a debtor’s exempt assets because these assets were already beyond the creditor’s reach. A debtor can transfer title to any of his assets that are protected from creditor collection by Florida statutes or the Florida constitution. For example, a debtor’s use of exempt wages or social security proceeds to purchase an exempt annuity cannot be challenged as a fraudulent conveyance.

For example, a married debtor that owns exempt tenant by entireties money can freely give the money to his non-debtor spouse or other family member without concern about making a fraudulent conveyance.

What Can a Creditor Do About Fraudulent Transfers?

Florida law gives creditors specific remedies to undo fraudulent asset protection planning. 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. Florida fraudulent conveyance 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. 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.

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.

Procedure Creditors Use to Challenge Fraudulent Conveyance

A creditor usually initiates its challenge of a fraudulent by filing 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 may order the transferee to return the property to the debtor or pay the creditor the fair market value of the transferred property. Debtors should understand that a fraudulent transfer 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 in Bankruptcy

Fraudulent transfers and conversions have more serious consequences in a debtor’s bankruptcy.

A fraudulent transfer or conversion within two years of bankruptcy could cause the debtor to lose his bankruptcy discharge in addition to reversing the transfer or conversion. Bankruptcy law also gives creditors the right to challenge as a fraudulent conversion the debtor’s purchase or improvement of the debtor’s Florida homestead within 10 years prior to the filing of the bankruptcy petition.

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.

Fraudulent Transfers Effect on Asset Protection

The possibility of creditor allegations of fraudulent conveyance should 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. Asset protection conveyances can improve a debtor’s negotiating position even if the conveyances might be subsequently undone in a creditor’s fraudulent conveyance action.

Fraudulent Transfers Made by a Third Party

In a recent case, In re Rensin, the Court hound that a transfer made by a third party trustee of an asset protection trust could not be a fraudulent transfer under Section 726 of the Florida Statutes. The court reasoned that the statute requires the debtor to be the transferor. Because the trustee of an asset protection trust is not the debtor, then a transfer or conversion made by the trustee cannot qualify as a fraudulent transfer under the statute.

In this specific case, the trustee used funds in the trust to purchase an annuity for the benefit of the Florida debtor. Annuities are protected under Florida law. The conversion of cash to the annuity could not qualify as a fraudulent conversion under section 222.30 of the Florida statutes because it was not the debtor himself that made the conversion. The statute requires a “conversion by a debtor.”

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.