Fraudulent Conveyances

Fraudulent Conveyances

What are fraudulent transfers and conversions?
The most important issue in any asset protection plan is whether or not previous planning transactions constitute fraudulent transfers or fraudulent conversions (collectively, "fraudulent conveyance") as defined by Florida Statutes. A fraudulent transfer is a debtor's transfer of legal title to his real or personal property to a third party with the intent to hinder, delay or defraud a present or future creditor. A fraudulent conversion is a debtor's conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which new property is exempt or immune from creditor attack. Florida Statues provide that a creditor can sue to overturn a transfer or conversion up to fours years after a conveyance was made or obligation incurred. Asset protection planning and transfers become immune from fraudulent conveyance suspicion four years after the planning takes place.

What is the consequence of making a fraudulent transfer or conversion?
Florida Statutes provide courts equitable remedies to undo fraudulent asset protection planning. Fraudulent transfers or conversions may be undone and reversed by a court's putting the property back in the debtor's hands where the property becomes subject to the creditor collection process. The Statutes provide several equitable remedies to assist the creditor's collection of these converted assets including injunctions against further transfers, imposing a receivership on the assets, or imposition of a constructive trust. A creditor alleging fraudulent conveyance may sue not only the debtor transferor but also the transferee who received the property in order to undo the transfer. Consequently, a fraudulent transfer to a friend or family member is likely to make that friend or family member a defendant in a creditor's fraudulent transfer lawsuit. Fraudulent conveyances are not prohibited and are not illegal. The subject statutes do not provide for awards of additional damages against the debtor, and the statutes certainly do not impose criminal fines or penalties. Florida courts interpreting these statutes have pointed out that a debtor's monetary liability cannot be increased because the debtor made a transfer or conversion later determined to be a fraud against present or future creditors.

What makes a transfer or conversion a fraud against creditors?
Not all transfers or conversions which move assets beyond a creditor's reach are fraudulent and subject to reversal. Whether or not a transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor's purpose and his intent behind the transfer or conversion. To ascertain the debtor's purpose and intent of a property transfer courts look to factors which are often indicative of intent to avoid creditor claims. For example, a court will examine whether any particular transfer was made to a debtor's family member; whether a transfer was concealed; whether the debtor retained effective use or control over the property transferred; and, whether the transfer rendered the debtor insolvent. All of these above factors suggest that a transfer was a fraudulent conveyance which the courts should reverse.

Defense against fraudulent conveyance allegations.
When a creditor is trying to collect money from a debtor who has previously engaged in asset protection planning and has little or no assets easily subject to creditor collections a creditor will almost always institute an action attacking one or more of the debtor's prior transfers as fraudulent transfers or conversions. Just because a creditor believes a conveyance was intended to defraud creditors does not mean a court will set aside the conveyance. A debtor can show many legitimate reasons to convey assets other than avoiding creditors.

How the fraudulent conveyance issue impacts asset protection planning?
Just the possibility of a creditor's allegations of fraudulent conveyance should not deter aggressive asset protection planning prior to time a judgment is entered by a court. People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property. This is why the applicable statutes do not prohibit or make illegal fraudulent conveyances. Because a court cannot increase the amount of the judgment damages already awarded against a debtor because of a debtor's fraudulent conveyance, there is little or nothing to lose by planning to protect your property even if some planning might be subsequently challenged or even reversed.

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Cadle v. Schultz, 79 F. Sup. 392 (ND Tex 1991).

A default judgment was entered against Defendant Schultz for approximately $41,000. Subsequent to the judgment, Schultz, with the help of attorney/co-defendant R. Leonard Weiner, conveyed some of Schultz's assets in an attempt to escape his creditors. Plaintiff alleged that Schultz and his counsel sent written communications to a judgment creditor offering their cooperation in paying the judgment, and that these communications were, in fact, an attempt to "lull" the creditor into believing that Schultz was trying in good faith to pay the judgment. Plaintiff alleged that the communications were actually designed to gain time to complete fraudulent conveyances. The court held the scheme to fraudulently transfer Schultz's assets was a scheme to defraud and constituted a basis for liability against attorney Weiner for civil RICO.

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THIRD-PARTY LIABILITY FOR FRAUDULENT CONVEYANCE

Elliott v. Glushon, 390 F. 2d 514 (9th Cir. 1967)

A bankruptcy trustee sued attorney Eugene Glushon for his role in structuring transfers of bankruptcy estate property which were found to be fraudulent transfers under the Bankruptcy Act. The trustee sought to recover the property from Glushon or other co-defendants. In an affidavit submitted in evidence Glushon was quoted as saying, "You know we did it, and we know we did it. But just try to prove it." The court found that Glushon was not liable for damages because of his role in the alleged fraudulent conveyance. The court found that the purpose of the Bankruptcy Act is to preserve assets of the estate and not to render civilly liable all persons who may have contributed in some way to the dissipation of estate assets. A trustee may bring suit against those persons who received transferred property and may recover from the transferees the value of that property if they have subsequently converted the property. The court held that the term "fraudulent transfer" as used in the Bankruptcy Act includes a great many transactions which do not constitute "actual fraud."

Mack v. Newton, 737 F. 2d 1343 (5th Cir. 1984)

A corporate debtor sold 188 cows subject to a mortgage and applied the proceeds not to reduce the cow mortgage but to reduce another debt. Defendant Newton was one of the principals of the bankrupt corporation and also a principal of another entity who received the benefit of the proceeds from the sale of the cows. The trustee filed an action against Newton, in part, on the basis of civil conspiracy to make a fraudulent conveyance. The court held that under the Bankruptcy Act, a third party is not liable for the value of the property fraudulent conveyed, even though he may have participated or conspired in the fraudulent conveyance, provided he did not receive any of the property transferred.

Coggin v. Coggin, 30 F. 3d 1143 (11th Cir. 1994)

A bankruptcy debtor transferred $13,000 to his son. The transfer was found to be an avoidable conveyance under §548 of the Bankruptcy Act and grounds for denial of discharge. A partial recovery was made through settlement with the transferee's son, and the trustee sought to recover the additional amount of money from the transferor/debtor. The Eleventh Circuit denied recovery against the debtor for the value of the fraudulent conveyance not otherwise recoverable from the transferee, and did not permit an award of damages against the transferor debtor. Although not citing Elliott or Glushon, this case is consistent with these precedents because if the trustee cannot recover damages for a fraudulent conveyance from the debtor, then logically there is no grounds for same damages from the debtor's attorney or other agents.

Yusem v. South Florida Water Management District, 770 So. 2d 746 (4th DCA 2000)

During a lawsuit but prior to a judgment being entered against him, defendant Henry Yusim came into possession of approximately $210,000 and immediately thereafter transferred the same amount into an offshore trust. The money temporarily moved through the joint account of Henry Yusim and his wife, Judith Yusim. The court held that Judith Yusim was not liable because she was not the transferee of the money. The court further held that Florida's fraudulent conveyance statutes are nothing more than a creditor's equitable remedy that sets aside transfers leaving the creditor free to pursue the subject assets in the hands of the debtor or to maintain an action against the transferee who has received the asset. The fraudulent conveyance statutes do not provide for judgments for additional money against the debtor.

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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.

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