Fraudulent Transfers (aka “Voidable Transactions”)

Fraudulent transfers are one of the most important and difficult legal issues that must be confronted by the client and their attorney in order to create a successful asset protection plan.  A fraudulent transfer is defined as a transfer of property to a third party with the intent to “hinder, delay, or defraud” a present or future creditor.  For example, transferring title to real estate, or stock, or cash, etc. to your spouse because you are about to be sued is a fraudulent transfer.

Another type of prohibited transfer of property is called a fraudulent conversion.  This is where a person converts property that is subject to creditor seizure into a different type of property that is protected under State Exemption Laws. One example of a fraudulent conversion would be using available cash from your personal bank account to purchase of an annuity that is exempt from creditor seizure.

Types of Fraudulent Transfers

There are two different types of fraudulent transfers:

  • Actual Fraud:  These are instances in which the transferor acted with the specific intent of delaying, hindering, or defeating the creditor’s efforts to reach the transferred asset.
  • Constructive Fraud:  A transfer that leaves the transferor unable to meet his obligations as they come due may constitute a fraudulent transfer, even if the transferor did not intend to hinder the creditor.  In a business setting, constructive fraud may be found if the business is rendered inadequately capitalized by a transfer.

Consequences of Making a Fraudulent Transfer

Every state has laws that deal with fraudulent transfers.  In Florida, the fraudulent transfer statute gives a creditor the right to go to court to unwind the transfer and recover the asset.  If granted, the court will order the property to be put back.

It is important to note that the fraudulent transfer law is merely a creditor remedy to recover a specific asset.  In Florida, a creditor cannot sue you for money damages. The judgment amount you may owe will not increase merely because you made a fraudulent transfer.  Be aware, however, that fraudulent transfer law varies from state to state, and in other states you may be subject to additional civil penalties.

The Effect of Bankruptcy on Fraudulent Transfers

Judgment debtors are often tempted to transfer their assets and then file for bankruptcy so as to discharge the judgment.  This wont work.  As mentioned above, a fraudulent transfer can be easily reversed by the court.  In addition, and more importantly, you forfeit your right to a bankruptcy discharge if you commit a fraudulent transfer or conversion within two years of filing for bankruptcy.

Statute of Limitations

There is generally a four year clawback period in which to reverse a fraudulent transfer.  This clawback period is technically called a statute of limitations and, in Florida, it gives a creditor four years from the date of the transfer in which to file a lawsuit.  However, if the creditor was unaware of the fraudulent transfer and more than 4 years has passed, the creditor can still recover the fraudulent transfer if it files a claim within one year from the date the creditor discovered, or reasonably could have discovered, the conveyance.

If the fraudulent transfer involves personal property, Florida law allows a fraudulent transfer action to be filed at any time during the life of the judgment.

If the federal government is the creditor, the statute of limitations is longer.  Federal law gives the government six years to bring a fraudulent transfer action, and the IRS has ten years from the date of the tax assessment in which to do so.

Asset Protection Planning & Fraudulent Transfers

The mere fact that a transfer might ultimately be reversed as a fraudulent transfer does not mean you should not engage in asset protection planning.  You have an absolute legal right to arrange your financial affairs in whatever way you deem appropriate.  Do not be put off by a threat or possibility of legal action.  Until such time as a judgment is entered against you, you have the right to do whatever planning you want to do.  Even if a court later decides that the transfer was a fraudulent transfer, what have you lost?  Your judgment will not increase, and you will not be exposed to any additional liability or money damages.  All that will happen is that the creditor will be able to recover the assets transferred.  At a minimum, the time, cost, and expense to a creditor to file a fraudulent transfer action and the uncertainty surrounding the legal outcome, will often offer you an opportunity to negotiate a favorable settlement.