By: Charles B. Jimerson, Esq. and Daniel L. Buchholz, JD Candidate
Once the creditor obtains a decree from the court that the debtor made a fraudulent transfer, the creditor may collect on its claim under Florida’s Uniform Fraudulent Transfer Act (“FUFTA”), which provides creditors with various remedies. See Charles B. Jimerson’s blog post on the various remedies under FUFTA, Remedies for Creditors Under FUFTA Chapter 726 – Part I: Who May Be Liable. While the fundamental remedy under FUFTA is to set aside a fraudulent transfer, creditors may be entitled to compensatory damages as well. However, like all remedies under FUFTA, compensatory damages may be limited, or even unavailable, due to the equitable principles underlying the Act.
Compensatory Damages Under FUFTA
Not only does FUFTA provide creditors with a variety of remedies, but creditors may choose the remedies they want to pursue. In re Davis, 403 B.R. 914, 920 (Fla. M.D. 2009). Indeed, creditors may choose to either “avoid a transfer and seek recovery against the asset fraudulently transferred, or to receive a money judgment against the transferee based on the lesser of the value of the asset or the amount of the creditor’s claim.” Id. Further, avoidance of a transfer and a money judgment against the transferee are not mutually exclusive. Id. However, while there is no bright-line rule as to whether a court will prefer avoidance over a money judgment, it has long been established that avoidance of a fraudulently transferred asset is inappropriate when avoidance is impossible or impractical. Winn & Lovett Grocery Co. v. Saffold Bros. Produce Co., 164 So. 681, 683 (Fla. 1935). Therefore, in some cases, compensatory damages may be the only remedy available.
In cases where the asset transferred itself cannot be recovered, or when avoidance of the transaction or recovery of the transferred asset would not be practical or beneficial, FUFTA authorizes compensatory damages against both the fraudulent transferor and transferee, joint and severally. See McCalla v. E.C. Kenyon Constr. Co., 183 So. 3d 1192, 1194 (Fla. 1st DCA 2016). Additionally, FUFTA authorizes compensatory damages against third-parties for whose benefit the transfer was made.
Compensatory Damages Against the Transferor
The catchall provision found in section 726.108(1)(c)3, Florida Statutes, authorizes compensatory damages against transferors. See McCalla, 183 So. 3d at 1194 (citing Hansard Constr. Corp. v. Rite Aid of Fla., Inc., 783 So. 2d 307, 309 (Fla. 4th DCA 2001) (concluding “a plaintiff may recover money damages against the transferor under the so-called catchall provision, section 726.108(1)(c)3 . . . .”).
However, compensatory damages are “[s]ubject to applicable principles of equity.” Fla. Stat. § 726.108(1)(c). Accordingly, an action under FUFTA “is not an action against a debtor for failure to pay an amount owing from a prior judgment.” Yusem v. S. Fla. Water Mgmt. Dist., 770 So. 2d 746, 749 (Fla. 4th DCA 2000). Thus, a creditor that has a prior judgment for an unrelated claim against the debtor cannot obtain monetary damages against the same debtor under FUFTA for fraudulently transferring funds to avoid paying the creditor. Id. In short, FUFTA allows compensatory damages against a transferor, but only if the transferor is not already a judgment debtor of the creditor.
Indeed, such a limit makes sense in light of the remedial goal of FUFTA, which is to put the creditor back in the same position it would have been, but for the fraudulent transfer. See In re Kingsley, 06-12096-BKC-PGH, 2007 WL 1491188, at *5 (Bankr. S.D. Fla. 2007), aff’d, 518 F.3d 874 (11th Cir. 2008). If the creditor could recover an additional monetary judgment against the debtor on the basis of a prior judgment debt, the creditor would be allowed to recover twice for one harm, and thus, be put in a better position it would have been, but for the fraudulent transfer. This would violate the well-established principle, applied both at law and in equity, that a plaintiff is entitled to only a single recovery for a distinct harm. See Minotty v. Baudo, 42 So. 3d 824, 833 (Fla. 4th DCA 2010).
Compensatory Damages Against the Transferee
Similar to transferors, FUFTA authorizes compensatory damages against transferees. Fla. Stat. § 726.109(2)(a); McCalla, 183 So. 3d at 1194 (“The statute authorizes such awards [for money damages] against both fraudulent transferor and transferee, jointly and severally.”). Specifically, in an action under FUFTA “against a transferee who has received an asset by means of a fraudulent conveyance,” the transferee is required to pay for the asset transferred “by way of a judgment and execution” if the asset itself cannot be recovered. Yusem, 770 So. 2d at 748.
However, a transfer is not voidable, and a creditor cannot recover compensatory damages from a transferee, “against a person who took in good faith and for a reasonably equivalent value.” Fla. Stat. § 726.109(1). To determine if a transferee acted in good faith, courts apply an objective test to determine if “the transferee had either actual knowledge of the debtor’s fraudulent purpose or knowledge of such facts or circumstances that would have caused a reasonable person to inquire further about the transferor’s purpose.” Branch Banking & Trust Co. v. Hamilton Greens, LLC, 2016 U.S. Dist. LEXIS 77087, at *56 (S.D. Fla.), modified, 2016 U.S. Dist. LEXIS 77086 (S.D. Fla. June 14, 2016) (citing In re Berkman, 517 B.R. 288, 303 (Bankr. M.D. Fla. 2014)).
Compensatory Damages Against a Person for Whose Benefit the Transfer Was Made
Finally, FUFTA authorizes compensatory damages against another party: “the person for whose benefit the transfer was made.” Fla. Stat. § 726.109(2)(a). While a transferee is a person who receives the money or property from the transferor, a person for whose benefit the transfer was made, or a “Transfer Beneficiary,” is a person who received “a benefit because someone else received the money or property.” Alterman v. Comm’r of Internal Revenue, 110 T.C.M. (CCH) 507 (T.C. 2015) (citing Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 896 (7th Cir.1988)). To be liable for compensatory damages as a Transfer Beneficiary, the conferred benefit must: (1) actually have been received by the beneficiary; (2) be quantifiable; and (3) be accessible to the beneficiary. In re McCook Metals, L.L.C., 319 B.R. 570, 590 (Bankr. N.D. Ill. 2005).
Additionally, the conferred benefit must be sufficient. The term “benefit” has been interpreted narrowly by other jurisdictions as courts commonly require more than abstract benefits, such as subjective aesthetic enjoyment. Indeed, courts frequently require the benefit be quantifiable in terms of economic value and to correspond to the value of the asset received. See Irving Trust Co. v. Mann, 5 F. Supp. 895, 896 (S.D.N.Y. 1933); Mack v. Newton, 737 F.2d 1343, 1359 (5th Cir. 1984).
Finally, to be liable for compensatory damages, the Transfer Beneficiary must maintain actual control of the transferred asset. The “mere conduit” defense prevents liability for parties that were merely a medium through which the asset was transferred at the instruction of others. See In re Chase & Sanborn Corp., 904 F.2d 588, 598 (11th Cir. 1990). However, neither the Eleventh Circuit nor Florida courts have yet addressed whether the mere conduit defense applies in FUFTA actions. Perlman v. Bank of Am., NA., 561 Fed. Appx. 810, 813 (11th Cir. 2014). Additionally, the scope of the mere conduit defense may be limited as it “has only been applied by the Eleventh Circuit ‘in the context of banks receiving funds and depositing them into customer accounts.’ ” Branch Banking & Trust Co. v. Hamilton Greens, LLC, 2016 U.S. Dist. LEXIS 77087, at *61-62 (S.D. Fla.), modified, 2016 U.S. Dist. LEXIS 77086 (S.D. Fla. June 14, 2016) (citing Steinberg v. Barclay’s Nominees (Branches), Ltd., 2008 U.S. Dist. LEXIS 123947, at *7-8 (S.D. Fla. Sept. 30, 2008)). Indeed, some Florida courts have noted the defense likely does not apply “to an individual receiving funds and subsequently paying them to someone else or using them to pay someone else’s living expenses.” Id. Therefore, a Transfer Beneficiary may have a difficult time establishing this defense.
Calculating Compensatory Damages
Once the court has established who may be held liable for the debtor’s fraudulent transfer, it must be determined how much in compensatory damages the creditor can recover. Because the remedial goal is to put the creditor back in the same position it would have been, but for the fraudulent transfer, FUFTA sets the ceiling for compensatory damages rather than the floor. Specifically, the creditor can recover the lesser of “the value of the asset transferred” and “the amount necessary to satisfy the creditor’s claim.” Fla. Stat. § 726.109(2).
In general, the value of the asset transferred is determined at the time of the transfer. Fla. Stat. § 726.109(3). However, there is no bright-line rule for determining the value of the asset transferred as “[c]ourts must assess value on a case-by-case basis looking at the surrounding circumstances and focusing on the precise transfer in question and not on the value of the transfer to the debtor’s overall fraudulent enterprise.” In re World Vision Entm’t, Inc., 275 B.R. 641, 657 (Bankr. M.D. Fla. 2002).
Additionally, to further the remedial goal of FUFTA, section 726.109(3), Florida Statutes, allows for “adjustment as the equities may require” when determining the value of the asset transferred. Fla. Stat. § 726.109(3). Indeed, Florida courts have accepted the principle that “equitable adjustments are generally made to prevent the plaintiff from receiving a windfall.” In re Jackson, 318 B.R. 5, 27 (Bankr. D.N.H. 2004), aff’d, 459 F.3d 117 (1st Cir. 2006); In re Kingsley, 06-12096-BKC-PGH, 2007 WL 1491188, at *5 (Bankr. S.D. Fla. 2007), aff’d, 518 F.3d 874 (11th Cir. 2008) (adopting this principle and concluding UFTA “is designed to restore the estate to the financial condition that would have existed had the transfer never occurred.”).
However, while FUFTA seems to only limit creditors’ available compensatory damages, Florida courts have consistently held that money judgment includes pre-judgment interest. Mansolillo v. Parties by Lynn, Inc., 753 So. 2d 637, 640 (Fla. 3d DCA 2000). On the other hand, while Florida courts authorize awards of pre-judgment interest, the court in Mansolillo acknowledged that equitable considerations can be taken into account. Id. at 640.
While FUFTA provides creditors with various, nonexclusive remedies, many of them may be limited by principles of equity. Indeed, compensatory damages frequently face limits when the creditor would receive a windfall. Nonetheless, in cases where avoidance is impossible or impractical, compensatory damages may provide creditors with a valuable remedy.