Case Law on Lawyer Liability for Fraudulent Transfers

This page analyzes the most important court decisions on lawyer liability for fraudulent transfers.

Liability Under the State’s Own Act

A state fraudulent transfer act gives the creditor a judgment against the first transferee or against the person the transfer was made to benefit. It creates no claim against anyone else. Courts refuse a claim under the act against a lawyer who advised the transfer and received none of the property. Nevada and Ohio read the act’s own remedies that way. A federal court reading Connecticut law reached the same result because Connecticut policy shields lawyers from liability to third parties.

The Cadle Co. v. Woods & Erickson, LLP, 131 Nev. 114, 345 P.3d 1049 (2015) (en banc). Leading case. An estate planning firm created an asset protection trust and entities, and the debtor funded them while a judgment creditor was trying to collect. The act gives the creditor “an equitable right to the property,” and the Legislature created no claim against anyone who never received or benefited from it. Aiding and abetting, conspiracy, and concert of action failed, and judgment for the firm was affirmed. Nevada rested on the act’s remedies, not a no-tort rationale.

Magnum Steel & Trading, L.L.C. v. Roderick Linton Belfance, L.L.P., 2015-Ohio-3450 (Ohio Ct. App. 9th Dist. 2015). A judgment creditor sued the debtor’s law firm and two lawyers who advised that any asset sale be at fair market value. Chapter 1336 “only applies to the transferor and transferee of the funds,” so the fees paid to the lawyers were the only reachable transfer, and those fees were bona fide payment at reasonably equivalent value. The conspiracy count failed for want of evidence; the court assumed without deciding that the lawyers could be sued on it.

Nastro v. D’Onofrio, 263 F. Supp. 2d 446 (D. Conn. 2003). A judgment creditor sought damages under Connecticut’s act from the lawyer and firm that prepared the documents settling the debtor’s stock into an offshore trust. The count was dismissed on the pleadings. No Connecticut authority recognized such a claim, the complaint alleged nothing beyond legal services performed for the debtor, and Connecticut’s strong policy against lawyer liability to third parties foreclosed it whatever the debtor’s own purpose. No Connecticut appellate court has decided the question since.

Aiding and Abetting

An aiding-and-abetting claim against a lawyer has survived a motion to dismiss. Minnesota allowed it in a nonprecedential decision, and the creditor later lost the trial; New York allowed it where the firm had taken a fee from the insolvent payor. Nevada refused the claim in Cadle, and in Nastro a federal court reading Connecticut law dismissed a claim that the lawyer had participated in the transfer. California bars a claim aimed only at a lawyer’s litigation conduct through the litigation privilege.

Optional Capital, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 18 Cal. App. 5th 95 (2017). A creditor sued two law firms whose litigation and mediation work preceded a $13 million transfer to the company they represented. The Court of Appeal affirmed orders striking the conspiracy and aiding-and-abetting claims under the anti-SLAPP statute. Every alleged act was a communication in a judicial proceeding, so the litigation privilege barred the claims, and the court refused to infer a conspiracy from the attorney relationship alone. The firms represented the recipient, not the debtor.

Janssen v. Lommen, Abdo, Cole, King & Stageberg, P.A., No. A14-0452 (Minn. Ct. App. Dec. 22, 2014), and No. A23-0856 (Minn. Ct. App. Mar. 18, 2024), both nonprecedential. Mid-trial, a law firm formed an entity and papered the defendant’s property into it, then took two $500,000 mortgages securing its fees. The 2014 decision reinstated conspiracy, collusion, aiding-and-abetting, and fraud counts against the firm, because the act exempts no lawyer who actively joins such a scheme. After a 2022 trial found no fraudulent transfer, the 2024 decision affirmed without reaching the claims against the firm.

Joel v. Weber, 197 A.D.2d 396 (N.Y. App. Div. 1st Dep’t 1993). The First Department sustained aiding-and-abetting counts under the Debtor and Creditor Law against a law firm alleged to have knowingly helped divert the plaintiff’s partnership distributions. Merely giving legal advice did not immunize the firm; a New York lawyer answers to third parties on proof of “fraud, collusion, malice or bad faith.” A $75,000 fee the firm took from an insolvent payor raised a triable issue under former sections 273 and 275. That receipt reconciles the decision with FDIC v. Porco.

Civil Conspiracy

The states divide on whether a creditor can sue a lawyer who conspired in a fraudulent transfer. Arizona, New Jersey, and Texas allow the claim, each on its own conditions. Connecticut reaches the lawyer through fraud instead. In each of those decisions the lawyer had done more than advise and draft. Nevada refused the claim in Cadle, and Virginia refuses it because the statute voids the transfer and creates no liability that a conspiracy could spread to others.

The Lawyer Can Be Sued for Conspiracy

McElhanon v. Hing, 151 Ariz. 386, 728 P.2d 256 (Ct. App. 1985), approved in part, 151 Ariz. 403, 728 P.2d 273 (1986). The day after a $200,000 verdict, the debtor’s lawyer prepared the sale of the debtor’s only asset and kept the stock certificates as fee security. A jury awarded the creditor $286,120 against him for conspiracy to commit a fraudulent conveyance. That claim exists apart from the act; a lawyer’s privilege does not cover intentional participation in one. The claim requires a judgment, actual fraud, and inadequate statutory remedies.

Banco Popular North America v. Gandi, 184 N.J. 161, 876 A.2d 253 (2005). A restaurant owner faced a claim; his lawyer advised moving two houses and a mutual fund to family, carried out the transfer, and later issued a loan opinion letter. No tort of creditor fraud exists, but “a creditor in New Jersey may bring a claim against one who assists another in executing a fraudulent transfer,” and representing the debtor is no insulation. The creditor must prove agreement, knowledge, and every element of the transfer claim; the count survived the pleading stage.

Chapman Lumber, Inc. v. Tager, 288 Conn. 69, 952 A.2d 1 (2008). A lawyer advised an insolvent contractor to get his name off the deeds. He then negotiated a note and mortgage covering property the contractor no longer owned and told the supplier’s lawyer it held over $100,000 in equity. A jury awarded $55,500 for fraud, tortious interference, and conspiracy, and the Connecticut Supreme Court reinstated the verdict with exemplary damages and interest. Zealous representation stops short of assisting a fraud on a third party. Connecticut has no independent conspiracy tort; the wrong was fraud.

Essex Crane Rental Corp. v. Carter, 371 S.W.3d 366 (Tex. App. 2012). The debtor’s lawyers drafted an assignment of a satisfied debt to the debtor’s son’s company, drafted agreed judgments exceeding $3 million, filed them without disclosing the relationship, and executed on the debtor’s assets. Summary judgment for the lawyers was reversed. Fact issues existed on their knowing participation in a conspiracy and on whether they promoted the scheme for a fee. Attorney immunity does not cover knowingly drafting fraudulent documents to evade a judgment creditor, a limit the Texas Supreme Court has since restated.

Both v. Frantz, 278 Ga. App. 556, 629 S.E.2d 427 (2006). A woman sued her former lawyer and his firm, which had prepared the powers of attorney used to empty her joint accounts and formed the partnership that took real estate during her divorce. Her fraudulent conveyance and civil conspiracy claims survived summary judgment, because a jury could find the lawyers had misappropriated her property; the lawyers won summary judgment on conversion. Nothing was decided against them, and the plaintiff was the woman the lawyer had represented, not a creditor of someone he advised.

A Fraudulent Transfer Supports No Conspiracy Claim

La Bella Dona Skin Care, Inc. v. Belle Femme Enterprises, LLC, 294 Va. 243, 805 S.E.2d 399 (2017). The judgment debtors’ law firm held an $85,000 note secured by their business assets, declared a default after judgment, bought the assets at its own foreclosure auction, and sold them to a family company. Demurrers to both conspiracy counts were sustained. The statute only voids the transfer and imposes no liability on participants, so a fraudulent conveyance is no predicate act for a conspiracy claim. The fraudulent conveyance count against the firm, as the recipient, was reinstated.

The Lawyer as Transferee

A lawyer who received the debtor’s money answers as a transferee where the lawyer controlled it, and that rule runs through the state acts and section 550 alike. A firm that passes funds through its trust account on instruction is a conduit in North Dakota and most federal circuits. The Eleventh Circuit has expressly held good faith an element of the conduit exception, so a firm there escapes only by proving no control and good faith. A fee the lawyer keeps is itself a transfer to the lawyer, judged by value, good faith, and knowledge.

Under the State Acts

PHI Financial Services, Inc. v. Johnston Law Office, P.C., 2016 ND 20, 874 N.W.2d 910. Leading case. A debtor sent $170,400 to its lawyers’ trust account, $150,000 as fees and $20,400 marked for the owner’s father. The North Dakota Supreme Court imported the bankruptcy conduit test because the act’s judgment section derives from section 550(a). The firm was a conduit as to the money it passed on, and the father was the first transferee. The fees were a transfer to the firm, and $115,000 of them was voided for want of reasonably equivalent value.

Nisenzon v. Sadowski, 689 A.2d 1037 (R.I. 1997). A debtor’s real estate lawyer took a quitclaim deed to a lot the debtor co-owned with the creditors, for consideration the trial justice disbelieved, then conveyed it to his own partnership and mortgaged it. The Rhode Island Supreme Court affirmed a $30,000 judgment against the lawyer as the first transferee, measured by the creditors’ claim rather than the property’s value. A letter promising the creditors repayment, sent after he acquired the lot without disclosing it, was fraud, and being the debtor’s lawyer did not insulate him.

Timothy v. Pia, Anderson, Dorius, Reynard & Moss, LLC, 2019 UT 69, 456 P.3d 731. A judgment debtor’s $50,000 reached a law firm’s trust account, and the creditors sued the firm as a transferee under Utah’s act. The district court held the firm was not a transferee, lacking dominion or control over trust-account money, and the Court of Appeals affirmed in 2018. The Utah Supreme Court granted review, then dismissed the case as moot because the judgment had expired, and vacated the Court of Appeals opinion. Utah has no appellate authority on the question.

TrizecHahn Gateway LLC v. Schnader Harrison Segal & Lewis, LLP, 2023 PA Super 249, 305 A.3d 1107. Two lawyers facing a judgment exceeding $3 million transferred their capital-account rights to their new firm, which took their appeal in exchange, and the judgment creditor sued the firm under Pennsylvania’s act. After three appeals the Superior Court affirmed judgment for the firm. The accounts held about $118,000 and the legal work was worth $400,000, so the debtors received reasonably equivalent value, and a judgment debtor’s retainer to appellate counsel has obvious utility even from the creditor’s standpoint.

Klein v. King & King & Jones, 571 F. App’x 702 (10th Cir. 2014), nonprecedential. A law firm defending a third party on criminal charges took a $25,000 retainer wired from a Ponzi scheme’s account, and the receiver sued the firm under Utah’s act. The firm was the initial transferee, having taken dominion and control on arrival. Its good-faith defense failed on value, because the legal services benefited only the third party and gave the debtor nothing. Summary judgment for the receiver was affirmed. The decision borrows the bankruptcy concept of the initial transferee.

Under Section 550 in Bankruptcy

Martinez v. Hutton (In re Harwell), 628 F.3d 1312 (11th Cir. 2010). Leading case. A lawyer took a debtor’s $500,000 settlement into his trust account and disbursed it the same day to the debtor, his family, and selected creditors, with a $1.396 million judgment unpaid. The first recipient is the initial transferee under the statute’s words, and the equitable mere-conduit exception requires the lawyer to prove both a lack of control and good faith. Summary judgment for the lawyer was reversed. On remand the bankruptcy court found he could not credibly claim innocent-participant status.

Hyman v. Bast Amron LLP (In re Cargo Transportation Services, Inc.), 502 B.R. 875 (Bankr. M.D. Fla. 2013). A company paid six $5,000 settlement installments to a law firm’s trust account and filed bankruptcy within ninety days. The firm, counsel to a plan trustee in another case, moved the money to its operating account, paid its court-approved fee, and remitted the balance. Applying Harwell, the judge who decided that case on remand held the firm a mere conduit and found it an innocent participant acting in good faith. Every step had run under court orders.

Security First National Bank v. Brunson (In re Coutee), 984 F.2d 138 (5th Cir. 1993). A personal injury firm deposited a $48,000 judgment check in its trust account, took its fee, returned part to the injured couple, and paid off their bank loan, which it had guaranteed. The couple filed bankruptcy within ninety days. The Fifth Circuit adopted the dominion or control test and held “that the bank, not the firm, was the initial transferee of the funds.” The money sat in the trust account, and the firm had no legal right to use it.

DuVoisin v. Kennerly, Montgomery, Howard & Finley (In re Southern Industrial Banking Corp.), 115 B.R. 930 (E.D. Tenn. 1990), and 126 B.R. 294 (1991). An insolvent bank paid $10.4 million to its principal, who endorsed the checks into his law firm’s escrow account. The district court rejected the Seventh Circuit’s dominion test and treated the firm as a transferee though it never controlled the money. Its good-faith defense failed; a partner knew or should have known the transfers were voidable. The 1991 order cut the judgment to $359,101.60; the Sixth Circuit never reviewed the merits.

Boyer v. Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A. (In re U.S.A. Diversified Products, Inc.), 100 F.3d 53 (7th Cir. 1996). A company’s principal wired $125,000 of its money to a law firm the day before its Chapter 11 filing; the firm deducted a $14,000 fee and remitted the rest. The firm could put the fee to its own purposes and was a transferee of that much, not the remainder. The holding rested on section 542 turnover, which reaches any possessor of estate property, and the firm had to turn over the whole $125,000.

Farrar v. Warda & Yonano, LLP (In re Bella Vista by Paramont, LLC), 549 F. App’x 648 (9th Cir. 2013), nonprecedential. A Chapter 7 trustee sued the debtor’s own law firm to recover its fees as preferences and fraudulent conveyances. The Ninth Circuit held the firm was not an insider, remanded for findings on the value of the fraudulent conveyance, and held that the firm was the initial transferee under the circuit’s dominion test because it advanced no credible argument otherwise. The holding rests on that concession, with no analysis of the fees.

Jones v. Brand Law Firm, P.A. (In re Belmonte), 931 F.3d 147 (2d Cir. 2019). An involuntary bankruptcy was pending when a debtor borrowed $250,000 against her home on a mortgage her lawyer drew up; the loan was wired to his firm for her criminal defense. The firm paid two other lawyers and kept $118,864. The bankruptcy court avoided the transfer as unauthorized and ordered the firm to remit $59,432, half of what it kept. The Second Circuit affirmed; the trustee had realized nothing from the avoided mortgage, so the single-satisfaction rule was no bar.

Fees Traced to the Transferred Money

Southmark Corp. v. Schulte Roth & Zabel (In re Southmark Corp.), No. 99-11401 (5th Cir. 2000), nonprecedential. A debtor wired $3.3 million to its adversary’s law firm, which held it in escrow overnight and passed it on; $1 million returned to the firm as its fee. The courts later avoided the transfer as a preference. The firm was a subsequent transferee of the fee under section 550(a)(2), and its good-faith defense failed because it knew facts suggesting the transfer was recoverable. On rehearing the net judgment was fixed at $882,587.30.

Wasserman v. Bressman (In re Bressman), 327 F.3d 229 (3d Cir. 2003). Six wires totaling $430,000 moved a bankrupt’s Cook Islands trust money to his wife, who paid his criminal and bankruptcy counsel the day after each wire, $392,218.57. The three firms won summary judgment as transferees that took “for value, in good faith, and without knowledge of the voidability of the transfer.” The trustee’s warning letter created no duty to investigate, and knowing the trust existed was not knowing it was estate property. Whether the trust was an estate asset was assumed, never decided.

Rajala v. Spencer Fane LLP (In re Generation Resources Holding Co.), 964 F.3d 958 (10th Cir. 2020). A trustee sued two law firms over $722,566 and $1,343,750 in fees. A transferee paid those fees from money collected on a contractual right the debtor fraudulently transferred to it. The Tenth Circuit ordered the complaints dismissed. Section 550 reaches only transferees of the property transferred, here the contractual right, and the firms never received it; proceeds collected on that right and paid as fees are not that property. The court never reached value, good faith, or knowledge.

Criminal Cases Against Lawyers

Federal prosecutors have convicted lawyers under 18 U.S.C. § 152 who structured a debtor’s transfer and reported it falsely, signed the deed and the petition, hid a relative’s money in a trust account, or filed false sworn disclosures. Each of those convictions stands. The one prosecution built on entity advice and trust-account handling alone ended in a new trial, because the government could not prove the lawyer knew he was helping conceal money from the bankruptcy. Some states make the fraudulent transfer itself a state crime.

United States v. Webster, 125 F.3d 1024 (7th Cir. 1997). A Wisconsin lawyer incorporated a couple’s bar weeks before their Chapter 7 filing, backdated the stock certificates, drafted schedules stating the bar had been surrendered and the debtors owned no stock, and told the trustee there were no assets to administer. A jury convicted him of aiding and abetting the concealment of estate property under sections 152(1) and 2(a), and the Seventh Circuit affirmed. A lawyer who prepares and files fraudulent schedules usurps the trustee’s decision, and the concealed asset’s value was beside the point.

United States v. Ledée, 772 F.3d 21 (1st Cir. 2014). A bankruptcy lawyer drafted the deed moving her brother’s residence and office into his corporation, signed it as the corporation’s president nine months before his petition, signed his petition omitting the property, and gave the trustee leases suggesting he rented it. A jury convicted her of conspiracy and three counts under section 152(7), and the First Circuit affirmed the convictions and her 36-month sentence. Section 152(7) reaches property outside the estate when the transfer is meant to defeat the Bankruptcy Code. She took no money.

United States v. Kowalski, 103 F.4th 1273 (7th Cir. 2024). An Illinois lawyer hid about $357,000 of her brother’s assets in her own lawyer trust account, then invoked privilege over the account records, lied under oath, and fabricated documents. She pleaded guilty to concealing estate property under section 152(1), and the Seventh Circuit affirmed her 37-month sentence. A lawyer who represents a debtor holds a position of public trust, whether or not she practices bankruptcy law, and the trust account was the instrument of the concealment.

United States v. Gellene, 182 F.3d 578 (7th Cir. 1999). A New York partner, lead counsel to a Chapter 11 debtor, filed two sworn declarations omitting his firm’s work for the debtor’s senior secured creditor, then used the second under oath to support a fee application. A jury convicted him of two false declarations under section 152(3) and one count of using a false document under oath, and the Seventh Circuit affirmed a 15-month sentence. A false declaration is material without proof that it affected the disposition of assets. No transfer of property was involved.

United States v. Knight, 800 F.3d 491 (8th Cir. 2015). An Arkansas lawyer suggested that a developer form an entity for creditor protection, then ran roughly $1.2 million of the developer’s money through his trust account before the developer’s Chapter 7 filing. A jury convicted him of conspiracy, aiding and abetting bankruptcy fraud under section 152(7), and money laundering. The district court granted a new trial, and the Eighth Circuit affirmed on every count. Both sides’ experts agreed the trust-account use was not illegal absent proof he knowingly helped hide money; no conviction stands.