What is Fraudulent Conveyance in Florida?
In Florida, a fraudulent conveyance (also called a 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 the “transferee” of the asset.
Understanding Fraudulent Conveyance
A fraudulent conveyance can be either a fraudulent transfer or a fraudulent conversion.
An example of a fraudulent transfer is transferring the 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 to a different type of property, still owned by the debtor, that is exempt or immune from creditor attack. An example of fraudulent conversion is the debtor spending their non-exempt cash to purchase an exempt annuity.
Florida Fraudulent Transfer Statute
The Florida fraudulent transfer statute is Chapter 726 of Florida Statutes. The statute defines a fraudulent conveyance, sets forth the creditor remedies, and explains the procedures a creditor must follow to unwind a fraudulent transfer.
The statute includes important definitions. For one, the statute defines a transfer as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”
Fraudulent Conveyance: 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.
Important: People often mistakenly think that transfers or conversions of assets are OK if the creditor has not yet filed a lawsuit. Fraudulent conveyance liability stems from the moment someone becomes aware of potential liability.
How to Defend a 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 $12 million (2022) of the federal estate tax exemption ceiling has diminished “estate tax planning” as a reasonable defense against 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 their 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 conversion. Or, a married debtor that owns exempt tenant by entireties money can freely give the money to their non-debtor spouse or other family members without concern about making a fraudulent conveyance.
What Can a Creditor Do About a Fraudulent Conveyance?
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.
Fraudulent conveyance remedies do not include money damages. 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 attorney’s 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.
Tip: Be careful about making a transfer to a spouse or other family member. Often this can involve them in your litigation when they become the subject of a fraudulent conveyance claim against the transferee.
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. A fraudulent transfer to a family member or friend will likely cause them to be named 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 judgment. 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 Conveyance 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 their 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 ten 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 under Florida’s proceedings supplementary laws in Section 56.29(3) of the Florida Statutes. In 2020, a different Florida court held that the general four-year statute of limitations limits fraudulent transfer actions initiated as part of proceedings supplementary. 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 law in this area is unsettled and subject to future change.
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.
Liability for Fraudulent Conveyance
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 and 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 making a fraudulent conveyance.
Moreover, the Florida Constitution states that people have a basic right to both protect and freely transfer their property. The Florida Constitution in 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.” Constitutional rights are accorded broad interpretation. There are no cases so far that have asserted the Florida Constitutional right to protect property against creditor legal attack.
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 their property prior to judgment, subject to subsequent equitable remedies. 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 money judgment being entered. The Supreme Court stated, “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 ruling does not apply to pre-judgment equitable remedies such as a temporary injunction.
The point is that the transfer of freely alienable property is not unlawful. It cannot be restrained by a creditor, absent obtaining remedies allowed under other statutory law even if the transfer could subsequently be challenged under fraudulent transfer statutes.
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 the liability of third parties, including a debtor’s attorney, who advise and assist a judgment debtor with a transfer or conversion that 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.
Issues with Fraudulent Conveyances
The possibility of creditor allegations of fraudulent conveyance should not preclude asset protection planning. 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 Conveyance by a Third Party
In a recent case, In re Rensin, the court found 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, 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 fraudulent under section 222.30 of the Florida statutes because it was not the debtor themselves who made the conversion. The statute requires a “conversion by a debtor.”
Some commentators argued in the past that it is 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 and ruling protecting third parties from fraudulent conveyance from tort liability.
Also, the Florida Supreme Court and appellate courts have distinguished the intentional tort of common law fraud and deceit, on the one hand, and remedies under the FUFTA, on the other. It is settled that a fraudulent conveyance under the Florida Uniform Fraudulent Transfer Act is not common law fraud. An attorney is not committing fraud when advising clients about fraudulent conveyance law.
FAQs About Fraudulent Conveyances
What is a fraudulent conveyance how can it be avoided?
A fraudulent conveyance, in general, is a transfer made with the intent to hinder or delay collection by a current or future creditor. In Florida, a creditor can unwind the transfer or sometimes obtain a monetary judgment against the transferee for the value of the amount transferred.
What is the uniform fraudulent transfer act?
The Uniform Fraudulent Transfer Act (UFTA) is a model act enacted by no less than 45 states regarding fraudulent conveyances in terms of judgment collection. It was amended by the Uniform Law Commission in 2014 to be renamed as the Uniform Voidable Transaction Act (UVTA).