It’s the Law: Transfers to defraud creditors can be undone

Q: I may have to sue my partner for breach of contract. I heard through the grapevine that he has transferred all of his assets and bank accounts to family members and he brags that I will never collect a dime if I get a judgment. Can he do that?

A: It is not unusual for someone facing liability to try and avoid paying a debt by transferring his or her assets to others. If the assets are transferred for less than what they worth, the effort to avoid payment may be unsuccessful. Such transfers are called fraudulent transfers, as they are intended to avoid payment of a debt.

Efforts to provide relief to creditors where assets are transferred to avoid creditor claims began in England. In 1571, England adopted the Statute of 13 Elizabeth, which provided creditors relief if they could prove a debtor intended to hinder, delay or defraud the creditor.

Florida adopted its first fraudulent transfer statute in 1823 and ultimately adopted the Uniform Fraudulent Transfer Act effective January 1, 1988 in Florida Statutes Chapter 726.

The statute lists several factors that the court may consider to determine fraudulent intent, and the list is not exclusive. The list includes:

1. Transfer was to an insider.

2. The debtor retained possession or control of the property after transfer.

3. The transfer was concealed.

4. The debtor had been sued or threatened with suit before the transfer.

5. The transfer was of substantially all of the debtor’s assets.

6. The debtor was insolvent or became insolvent shortly after the transfer.

The focus under the new statute is on result of the transfer, not the debtor’s intent. If a debtor is unreasonably hurt by the transfer, it is classified as a fraudulent transfer.

If a debtor obtains fair value in exchange for assets, a creditor cannot usually claim the creditor has been harmed. Accordingly, fraudulent transfers usually are for less than market value of the transferred assets. In many cases, they are transferred as “gifts.”

Under the statute, creditors have numerous remedies. Those remedies include:

1. Having the court set aside the transfer as if it had not been made.

2. Legally attaching or retrieving the transferred asset.

3. An injunction against further transfers by the debtor or anyone to whom the debtor has transferred assets.

4. Having a court appointed receiver take charge of the assets transferred to others.

The creditor must still prove the transfer was one barred by the statute. In some cases, that is difficult.

Although the test of a fraudulent transfer in bankruptcy is not identical, it is similar. The recent bankruptcy case of Jerry Fasolak shows that creditors are not always successful in their efforts to claim fraudulent transfer.

Jerry Fasolak was a 72 year old retiree. Prior to filing bankruptcy, he transferred virtually all of his assets to his wife. He transferred his individual bank account to another account owned by his wife and arranged for his paychecks to be deposited into his wife’s account. He traded in a car in his name for a new car solely in his wife’s name.

Two years before filing bankruptcy, Mr. Fasolak filed a loan application referencing $3.5 million of assets and only $800,000.00 as a liability. Over the next two years, Mr. Fasolak acquired and sold properties with all of the money from the sales going to the wife’s bank account. When he filed his bankruptcy petition, Mr. Fasolak had one property left, worth $1.1 million and encumbered by a mortgage of $765,000.00 along with two properties owned jointly with his wife.

Despite the movement of large sums of money from Mr. Fasolak to his wife, the bankruptcy court found that the debtor did not prove the assets were fraudulently transferred. The bankruptcy court found that Mr. Fasolak was aging and forgetful and was not in a position to take care of assets. As to the car, the bankruptcy court found that the new car was in the wife’s name for insurance purposes.

Although transfers by debtors to avoid creditors can be undone, the process is not simple. Obtaining a judgment is only the first step in collection. I suggest you consult with an experienced attorney promptly, as delay can interfere with your ability to collect your debt.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.

© 2008 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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