A profitable business corporation faced imminent civil judgment. The principal owner of the company owned additional corporations engaged in a related business. The owner hired an attorney to represent the primary business and the related business. The owner hired the attorney to do legal work for the other, related business that were not involved in civil litigation. The owner paid the legal fees from the checking account of the primary company.
The attorney asked me if he has potential liability as a transferee of a fraudulent conveyance from the primary corporation facing a judgment. The attorney believes the judgment creditor could argue that the primary company paid legal fees on behalf of the smaller, related companies to reduce money subject to garnishment after judgment. The payment of fees for legal work done for the related companies was effectively a fraudulent conveyance from the primary companies to the related companies. If a debtor pays the bills for a third party the debtor has effectively conveyed money to the third party. If the primary company’s payment of the other business’s legal bills the creditor would be entitled to a judgment against the recipient, the attorney, for the amount of the transfer.
A recipient of money from a debtor can defend fraudulent transfer allegations using the “present value” defense. If the attorney gave something of value for the money received the attorney can avoid repayment because he had entitlement to the money. The attorney was entitled to have legal bills paid. Although the attorney ended up with the money the real transferee, that gave no present value, was the related company whose bills were paid by the primary company. The creditor could sue the related company for a judgment for the amount of legal bills paid by the debtor business.
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