Fraudulent Transfers 101: What You Need To Know When Following The Money Trail

The debt collection process is based upon a creditor’s right to repayment from the liquidation of a debtor’s assets.  In Florida, there are many judicial procedures available, which allow creditors to identify, seize, lien, levy and force the sale of a debtor’s assets in order to satisfy the indebtedness owed to the creditor.  Unfortunately, many creditors face the difficult reality that an insolvent debtor with little-to-no assets is essentially “judgment proof,” and the debt is uncollectable.  In some circumstances, however, the debtor may have engaged in transferring or concealing assets in an effort to delay or hinder collection activities by its creditors.  In those cases, the creditor has a powerful set of remedies against the debtor and the subsequent transferees under the Uniform Fraudulent Transfer Act (“UFTA”).

All creditors should have a basic understanding of their rights and remedies when a debtor engages in fraudulent transfers to avoid collection.  Such knowledge can be the difference between writing off a debt entirely as uncollectable and satisfaction of the debt by judicial process or leveraging settlement with the debtor.

Creditors should understand how UFTA applies reasonably equivalent value to fraudulent transfers when seeking to identify, seize, lien, levy & force the sale of assets.

What are Fraudulent Transfers?

Under Florida’s version of UFTA (“FUFTA”), a fraudulent transfer is generally defined as “a transfer made or obligation incurred by a debtor if made with actual intent to hinder, delay or defraud any creditor of the debtor” or a transfer made “without receiving a reasonably equivalent value in exchange for the transfer or obligation.”  Fla. Stat. § 726.105(1)(a)-(b).  Fraudulent transfer statutes are designed to bring the transferred or concealed assets back into the reach of a creditor by avoiding the transaction or imputing a money judgment against the transferees of the assets.

Actual and Constructive Fraud

FUFTA addresses two distinct categories (or types) of fraudulent transfers. The first type is an “actual” fraudulent transfer, which focuses on the transferor’s intent to delay, defraud or hinder creditors (Fla. Stat. § 726.105(a)), whereas the second type is a “constructive” fraudulent transfer, which focuses—not on the transferor’s intent—but rather, the economic effects of the transaction (Fla. Stat. §§ 726.105(1)(b); 726.106(1) and 726.106(2)).  Proving actual intent of a debtor can be difficult, so FUFTA provides a list factors—or “badges of fraud”—from which a court may infer the debtor’s intent.  See Fla. Stat. § 726.105(2).  Proving a constructive fraudulent, on the other hand, requires proof that the debtor (i) did not receive reasonably equivalent value for the asset; and (ii) the transfer rendered the debtor insolvent.  Fla. Stat. §§ 726.105(1)(b); 726.106(1) and 726.106(2).

  1. Was there an exchange of reasonably equivalent value?

FUFTA does not define “reasonably equivalent value.”  Accordingly, whether value is reasonably equivalent must be determined on a case-by case basis.   In re Dondi Fin. Corp, 119 B.R. 106, 109 (Bankr. N.D. Tex. 1990).  The determination of whether a debtor has received reasonably equivalent value in exchange for the transfer of his assets requires a factual analysis.   In re Chase & Sanborn Corp., 904 F.2d 588 (11th Cir. 1990). “Value” has been interpreted fairly broadly, and has been defined as a comparison between “what went out” with “what was received.” In re Dealers Agency Services, Inc., 380 B.R. 608, 619 (Bankr. M.D. Fla. 2007) quoting In re Leneve, 341 B.R. 53, 57 (Bankr. S.D. Fla. 2006).

Therefore, the focus is on the “economic reality” of the situation.  In re Miami General Hosp., Inc., 124 B.R. 383, 394 (Bankr. S.D. Fla. 1991) (analyzing the reasonably equivalent value provided to the debtor even in the case of “indirect” benefits to the financial strength of the debtor).  In this regard, courts consider many factors, including the good faith of the parties, the disparity between the fair value of the property and what the debtor actually received, and whether the transaction was at arm’s length.  See e.g. In re Dealers, 380 B.R. 608; In re Vilsack, 356 B.R. 546 (Bank. S.D. Fla. 2006). 

  1. Did the transfer render the debtor insolvent?

Under FUFTA, a debtor is considered “insolvent” when the “sum of the debtor’s debts is greater than all of the debtor’s assets at fair valuation.”  Fla. Stat. § 726.103(1).  This definition is known as the “balance sheet test.”  Additionally, there is a presumption of insolvency when a debtor “is generally not paying his or her debts as they become due.”  Fla. Stat. § 726.103(2).  In other words, “Cash Flow” insolvency gives rise to a presumption of “insolvency” under FUFTA. 

  1. If a creditor proves a fraudulent transfer, what are the creditor’s remedies?

FUFTA sets forth six primary remedies available to creditors: (1) avoidance of the transfer; (2) attachment of the asset; (3) injunctive relief to prohibit further transfers; (4) appointment of a receiver; (5) levy and execution; and (6) “any other relief the circumstances require”—also known as the “catch-all provision.”  Fla. Stat. § 726.108(1)–(2).

Creditors typically seek the remedy of avoidance of the transfer or a money judgment against the transferee of the asset.  “[FUFTA] is either an action by a creditor against a transfer directed against a particular transaction, which, if declared fraudulent, is set aside thus leaving the creditor free to pursue the asset, or it is an action against a transferee who has received an asset by means of a fraudulent conveyance and should be required to either return the asset or pay for the asset (by way of a judgment and execution).”  Yusem v. South Florida Water Mgmt. Dist., 770 So. 2d 746, 749 (Fla. 4th DCA 2000).

If the creditor does not seek to unwind the transaction to put the asset back into the hands of its debtor, the creditor may seek a money judgment against the transferee.  The money judgment will be in the amount of the value of the asset transferred, as measured at the time of the transfer, or the amount necessary to satisfy the creditor’s claim, whichever is less.  Fla. Stat. § 726.109(2).

Conclusion

Fraudulent transfer actions provide creditors with powerful set of remedies to reach assets that were previously placed out of reach of the creditor.  If a creditor determines that its debtor has engaged in a transaction to render itself otherwise “judgment proof”, the creditor should scrutinize the transaction by determining whether the transfer was truly an arm’s length transaction for reasonably equivalent value. If you have any questions regarding issues relating to fraudulent transfers or commercial collections, Jimerson & Cobb, P.A. can assist you.  For more detailed discussions on complex collection mechanisms, our firm regularly provides educational seminars on advanced creditors’ rights and fraudulent transfer proceedings.


Authors:
Charles B. Jimerson, Esq.
Brandon C. Meadows, Esq.

Charles B. Jimerson is an A-V rated, board certified lawyer whose practice focuses on business litigation, construction law, banking law and eminent domain law. Jimerson & Cobb, P.A. is an award winning law firm with a practice emphasis on litigation and specialized experience in the financial services, real estate development and construction, and manufacturing and distribution sectors. Jimerson & Cobb, P.A. has been named to the Jacksonville Business Journal’s 50 Fastest Growing Companies each year for the past four years, and in 2016 and 2017 was honored as one of the 50 fastest growing law firms in the country. Mr. Jimerson’s online profile can be found at: http://www.jimersoncobb.com/attorneys/charles-b-jimerson/

Brandon C. Meadows is an attorney with the law firm of Jimerson & Cobb, P.A.  His practice encompasses a wide range of legal issues affecting businesses, including business disputes, corporate governance matters, and corporate creditors’ rights. Mr. Meadows’s online profile can be found at: https://www.jimersoncobb.com/attorneys/brandon-c-meadows/

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