Fraudulent conveyances and transfers

Florida law provides that a transfer is fraudulent when a debtor transfers an asset with the intent to hinder, delay, or defraud a creditor.

                                          Florida Uniform Fraudulent Transfer Act (FUFTA)

The elements of a fraudulent transfer claim:

1. The transfer was made with the “actual intent to hinder, delay or defraud” a creditor of the debtor.

                                                                   OR

2. The debtor made the transfer “without receiving equivalent value.”

                                                                  AND

3. The debtor engaged in a business or transaction in which the debtor’s assets were “unreasonably small” in relation to the business or transaction.

                                                                   OR

4. Incurred debts beyond what the debtor could reasonably have believed he could pay as such debt or debts became due.

The remedies that may be sought by the creditor in its position that a fraudulent transfer or conversion occurred include:

1. Avoidance of the transfer.
2. Attachment or garnishment of the asset.
3. Appointment of a receiver.
4. Injunctive relief.

Such conveyance may be either a fraudulent transfer or a fraudulent conveyance under the statute.  A fraudulent transfer involves at its simplest contemplation is the transfer of an asset fraudulently whereas a fraudulent conversion is the changing or conversion of non-exempt property into another form of property or asset in order to hinder, delay or defraud the subject creditor.

Chapter 726 of the Florida Statutes defines a transfer as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”

The intent of the transferor of the asset is possibly the most important determinator of whether a transfer is deemed fraudulent.   In determining the actual intent of the transferor, in court proceedings, very seldom does the transferor state his actual intent in transferring the property was to hinder, delay or defraud his creditors.

In determining the actual intent of the transferor then the courts will examine a number of facts or circumstances in determining such an intent.   The judge will examine what is referred to as the “badges of fraud.”

Florida’s Uniform Transfer Act (FUFTA), codified under Chapter 726 of the Florida Statutes, enumerates the facts and circumstances that are indicative of an actual intent to defraud, the badges of fraud:

1. Transfer was to an insider.   An insider may include a family member, but also a close friend or associate, in some circumstances.
2. Debtors retained possession or control over the asset after its disposition or transfer.
3. Whether the transfer or obligation was concealed or disclosed.
4. Whether the transfer occurred shortly before the impending threat of litigation against the transferor occurred at the time the debt was incurred or occurred significantly before the debt was incurred.
5. Whether the transfer is composed substantially of all the assets of the transferor.
6. Whether the debtor absconded or removed or concealed assets
7. The debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer
8. The debtor transferred important business assets to the lienholder, who subsequently transferred the assets to the debtor’s insider.

The debtor may raise several defenses to an avoidance action by a creditor in a state court proceeding or within the realm of the bankruptcy court, an action brought properly by the bankruptcy trustee:

1. The first defense may be the Statute of Limitations.   In bankruptcy, the transfer must generally be less than two years before the bankruptcy filing.  Under Florida Law, the Statute of Limitations is generally four years but with strong exceptions that account for when the transfer occurred or when the creditor could have reasonably known of the transfer.   However, the bankruptcy code does contain a ten-year lookback for the transfer of a non-exempt asset into a residential property for the purpose of evading or defrauding creditors and for transfer into a self-settled trust.  A self-settled trust has no or minimal asset protection value in the State of Florida.
2. Probably, the second defense should be that the transferred asset is not property for purposes of the fraudulent conveyance status.  Florida and most other States define an asset as property of the debtor which is not exempt.  The transfer of an exempt asset or property of the debtor is not subject to such fraudulent conveyance statutes.
3. The debtor’s action was not a transfer or conversion of such property.
4. No debts or the debt subject to the creditor’s action was not present at the time of the transfer or conversion.
5. The debtor did not possess the requisite fraudulent intent in the making of the transfer or conversion.  Arguably, it should be the sole examination in determining fraudulent intent by asking what the actual intent of the transferor was, subject to some standard of reasonableness.    Property, exempt or not, may be transferred for myriad reasons, including and according to estate planning, asset protection, and tax reduction plans.   When such plans were formulated and executed are important in determinations of fraudulent intent, as the commencement of such plans following aggressive collection and litigation efforts by the creditor could clearly signal an element of fraudulent intent.
6. The defendant possesses the defense of Immunity.
7. The debtor received an equivalent value in return for the transfer.
8. The debtor did not receive equivalent value in return for the transfer, but the debtor was engaged in a business transaction in which the debtor’s assets were not unreasonably small in relation to the business or transaction, OR the debts were not beyond the reasonable contemplation of such debtor to pay as such debts become due.

In bankruptcy proceedings, a trustee may bring an action against a fraudulent transfer or conveyance under 11 USC 548 [Fraudulent Transfers and Obligations] seeking several remedies, including avoidance of the transfer.   Such action must be brought within two years before the petition filing.

The bankruptcy section otherwise predominantly mirrors the Florida version with the element of actual intent; “made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity” to which the debtor became indebted, either before or after the time of the transfer.

So, the bankruptcy code contains the element of actual intent as expressed in the State statute, and here, the element of circumstantial or constructive fraud also contains the State version:

“Or received less than a reasonably equivalent value in exchange for such transfer” and was insolvent or became insolvent as the result of the same transfer or engaged in a business transaction with the use of unreasonable small capital, or incurred debts beyond the debtor’s ability to pay, or made such transfer on or for the benefit of an insider under an employment contract and not in the ordinary course of business.”

All these considerations, including contemplations of what constitutes actual fraud, constructive fraud, and the badges of fraud, the concepts of which both overlap and flow into each other, should be combined and incorporated into a formal decision as to whether the transfer of the asset by the debtor constitutes a fraudulent conveyance.