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.
Distinguishing "Fraud" from "Fraudulent Transfer"
The term “fraudulent transfer” has almost nothing to do with “fraud” in the criminal sense.  The original law on fraudulent transfers arose in England at a time when debtors were jailed for unpaid debts.  Back then, fraudulent transfers were deemed criminal acts, and a fraudulent transfer would have been a “fraud.”
In modern times, there are no debtors’ prisons , and the term “fraudulent transfer” is simply a term of art used in civil cases to award a remedy to a creditor under well-defined circumstances.  Nevertheless, some judges do not always appreciate the important distinction between “fraudulent transfer” as a civil remedy and “fraud” as an act of moral depravity.  This has resulted in a number of adverse decisions where the judge confused these two concepts and rendered decisions that were egregious to public policy.
In an effort to reign in judicial confusion over the distinction between fraud and fraudulent transfers, the Uniform Law Committee took the unusual step of actually renaming the Uniform Fraudulent Transfer Act.  Now known as the “Uniform Voidable Transactions Act,” this new law – a modest revision to the UFTA – makes clear that transfers deemed to prejudice a creditor are not inherently “fraud” in the moral or criminal sense.
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.
The (Ir)Relevance of Intent
Your intent at the time you engage in an asset protection plan can be highly relevant to a judge's perception of your activities as well as to the success of your plan.  To be more precise, the presence of "bad intent" is a factor that creditors and courts can latch onto in determining whether your plan should be respected.
To be certain, a creditor does not need to prove ill intent in order to establish that a debtor has engaged in a fraudulent transfer or voidable transaction.  Even in the absence of any bad intent, business transactions conducted with inadequate capitalization, or personal transactions that render you unable to pay your bills, may be categorized as fraudulent transfers.
Even if a debtor does not exhibit bad intent, a court may impute sinister motives based on external factors that may seem rather innocent. In one case, a California court found that a trust settlor had acted with actual intent to commit a fraudulent transfer by choosing to set up his trust under the domestic asset protection trust laws of another state.
Demonstrating good intent may be helpful in dispelling perceptions of bad intent.  A court may look more favorably on a circumstance in which you and your family members are working with a lawyer to implement a comprehensive estate plan that offers incidental asset protection benefits, as opposed to a scheme in which there are no perceived benefits other than merely asset protection.
Intent is relevant to the conversation, and our planning techniques are mindful of the burden that clients must bear in litigation to demonstrate good faith.  However, many of the techniques that we utilize in asset protection planning also shield our clients from the consequences of an adverse determination of intent.
Criminal Sanctions
The term "fraudulent transfer" is a civil law concept and not a crime.  Nevertheless, some states have criminalized transactions that may fall within the definition of a "fraudulent transfer," treating such activity as a misdemeanor or a felony.  These jurisdictions are:
  • Alabama
  • Alaska
  • Arizona
  • Arkansas
  • California
  • Kentucky
  • Massachusetts
  • Michigan
  • Nevada
  • North Dakota
  • Ohio
  • Oklahoma
  • Rhode Island
  • South Carolina
  • South Dakota
  • U.S. Virgin Islands
  • Washington
  • West Virginia
If you reside in one of these states, you should confer with qualified counsel before engaging in asset protection planning.