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. A Florida fraudulent transfer is a transfer of legal title to a second person who is the recipient, or “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.
The Florida fraudulent transfer statute is Chapter 726 of Florida Statutes.
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 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.
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.
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.
What to Do Next
We help people go through their assets and income and determine what is at risk of collection from a judgment creditor. We then develop a plan to protect any exposed assets from collection. If you’re interested in protecting your assets from monetary judgment creditors, contact us or schedule an appointment online.
Last updated on July 30, 2020