Florida Asset Protection Blog

Fraudulent Transfers: Exception To Four Year Statute of Limitations

As a general rule, a creditor cannot challenge as a fraudulent conveyance any transfers of assets made more than four years ago. I use the four year statute of limitation applicable to fraudulent transfers and conversions as a planning guideline and do not advise most clients to consider additional asset protection tools to protect transfers four years in the past. There are, however, exceptions to this general rule which permits creditors to challenge older asset transfers. Specifically, Florida Statute 726.110 provides that a creditor can challenge as fraudulent an asset transfer to avoid pre-existing creditors for one year after the creditor was or could reasonably have been discovered by the creditor under certain conditions. This Statute gives some creditors the ability to challenge a conveyance no matter how ancient for a period of one year after the creditor’s actual or constructive discovery.

The Statute seems preserves creditors’ rights in certain circumstances where, for example, a debtor has concealed an asset conveyance so that the transfer could not reasonably have been discovered, although that condition is not expressly stated in the Statute. I do not think a creditors’ right to challenge effectively transfers is without practical time limits. The farther back in time a debtor has conveyed assets the easier it is to defend the transfer. Assume, for instance, a creditor finds though discovery in aid of execution of a judgement that the debtor transferred title to an asset five or more years ago. This old transfer, if not purposefully concealed, would be difficult to reverse as fraudulent even if the creditor could get by the four year statute of limitations on the grounds of recent discovery under the one-year rule. Effective asset protection is mostly common sense, and older planning done openly is usually easily defended.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Fraudulent Transfer By Failing Business To Owners Or Their Family Member Creditors

When a small family business encounters business problems they do everything they can to preserve money. One of the first steps usually is reducing or deferring salary payable to the owners. Some businesses borrow money from other family members to pay bills. Some business cannot recover nor can they obtain enough capital to survive a recession, and eventually, they recognize that the business must shut down. I have often been asked by owners of failing businesses whether they can use what money is left in the business to pay themselves deferred salary or to repay their family members. The owners would prefer to pay themselves and their family rather than expose what money remains in the business to creditors. The owners think its fair to pay what are legitimate obligations to themselves or family. Unfortunately, payments from a failing business to owners or their family may be subject to reversal under Florida law.

Florida’s fraudulent transfer statutes provide that a transfer is fraudulent as to creditors whose claim arose before the transfer was made if the transfer was made to a business insider, the debtor business was insolvent at the time of the transfer, and the transferee insider had reasonable basis to believe the debtor business was insolvent. When a business is in trouble and about to close the business is presumably insolvent and the owners are aware of its financial conditions. Salaries paid to owners prior to closing would usually be considered fraudulent as to business creditors. Transfers to repay family loans is less clear as the family recipients would have to have reason to know of the business insolvency.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Fraudulent Divorce: Can A Property Settlement Agreement Be Reversed As Creditor Fraud?

Generally, if a husband transfers non-exempt property to his wife in the face of a creditor’s claim or lawsuit, the transfer will be reversed a a fraudulent conveyance. From time to time people who anticipate a legal problem tell me that in the event they lose a lawsuit they will divorce their wives and give their property to their wife as part of the divorce. The legal issue is whether there can be a fraudulent divorce to avoid or delay creditors. Does the fact that the divorce settlement is approved by a court protect property transfers made pursuant to the settlement agreement?

I think most courts would find that there can be a fraudulent divorce and that transfers made as part of a divorce settlement can be set aside. The answer depends on the facts of each case. The court would have to decide if the divorce is an arms-length divorce or part of a marital conspiracy to protect family assets. Certainly, if the spouses continue to live together and or not maintain separate lives there is less chance of the property transfers surviving challenge. Transfers in exchange for release of marital rights such alimony are on firmer ground.

This question involves competing public interests. Courts protect dependent spouses. Property transfers to provide the dependent spouse sufficient assets to maintain their lifestyle serves that public purpose. Courts also tend to enforce their own judgments and grant creditors equitable remedies to collect their judgments.

I have not seen any Florida cases setting aside a divorce as a creditor fraud.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Reasonably Equivalent Value Required To Avoid Fraudulent Transfer

Fraudulent conveyance is always the largest issue in asset protection planning. A debtor has a strong defense to a fraudulent conveyance threat if the debtor can prove that he sold or transferred an asset for value. For example, if a debtor sells an asset to a third party and receives money or property in return the debtor is left with the equivalent amount of assets and the creditor is not harmed thereby. The question often is how much money does the debtor need to receiver for a transfer of asset in order to avoid allegations of a transfer to defraud creditors.

For fraudulent conveyance purposes, the test applied to a transfer is one of “reasonably equivalent value.” (“REV”). REV is not the same as fair market value. A debtor is not expected to sell assets for full fair market value to avoid the taint of fraudulent conveyance. The law permits debtors to sell at a discount for whatever reason. There are a few court decisions which attempt to define REV in relation to fair market value. The general guideline is referred to as “the 70% Rule” which is that a transfer is fair if the consideration received is at least 70% of fair market value. People should plan on receiving more than 70% of FMV in order to better defend challenges of asset transfers.

After the transfer the debtor still has the problem of explaining what he did with the consideration he receives. The consideration for the transfer, whether it be 100% or 70% of fair market value, still has to be protected from creditors after the conveyance.

If a debtor transfers an asset which is exempt from creditors the creditor can transfer the asset for any amount of money, even for no money, without fear of attack under fraudulent conveyance statutes. There is no such thing as a fraudulent transfer of an exempt asset.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

When Are Transfers Subject To Attack As A "Fraudulent Conveyance?"

Many people tell me they are planning transfers that they do not think will be challenged as a fraudulent conveyance because no creditor has yet to file a lawsuit. For fraudulent conveyance issues the important event is not the lawsuit or judgment, but it is the creation of a claim. Fraudulent conveyance statutes address creditors’ “claims” not creditor lawsuits or creditor judgments. “Claim” is defined by the statutes. A claim means a right to payment, whether or not the right is reduced to judgment, is liquidated, fixed, contingent, disputed etc. A transfer of assets made even under the vague shadow of a potential claim is subject to attack as a fraudulent transfer under Florida Statute 726 even though substantial time passes before a lawsuit if filed or judgment awarded.

Fraudulent Conveyance Avoided In Conveyance To Non-Debtor Spouse

I have cordial professional relationships with a few creditor attorneys. Sometimes, a creditor attorney who is representing a debtor client invents interesting asset protection strategies. Mr. Larry Kosto of Orlando, Florida, is one Florida’s best collection attorneys. Larry says that he represented a debtor who owned assets jointly with his spouse which assets, for one reason or another, could not be deemed protected tenants by entireties assets. He came up with an interesting plan to transfer the joint assets to the non-debtor spouse and avoid fraudulent conveyance.

Although the joint assets could not legally qualify as tenants by entireties assets either spouse, individually, had the right to convey the entire asset. Mr. Kosto suggested that the non-debtor spouse initiate the conveyance to her own name without the joinder of the debtor spouse. Mr. Kosto argues that fraudulent conveyance statutes specifically refer to transfers by “the debtor” of non-exempt assets to other people. In his case, since the debtor did nothing to accomplish or implement the transfer (at least, directly) Mr. Kosto argues that the creditor cannot fit the non-debtor spouse’s actions within the statutory definition of a fraudulent conveyance. A creditor may argue that the non-debtor spouse was acting as the agent or even the alter-ego of the debtor in making a transfer with the debtor’s knowledge and consent. I don’t know of any court decisions addressing this strategy.

posted by Jonathan Alper, asset protection and banrkuptcy attorney, Orlando, Florida

Can Debtor Protect Nonexempt Real Property By Making The Property His Child's Homestead?

Man owns several rental properties and a primary residence. He is concerned some of his rental properties will be foreclosed as the falling real estate market has made it impossible to sell the homes for enough money to pay the mortgage and rental income does not cover monthly expenses. One of the rental home is owned free and clear. The man asked whether he can protect the free and clear home by deeding it to his adult child and having the child move into the home as the child’s primary residence. The man understands the transfer would be a fraudulent conveyance if one of his homes went into foreclosure and resulted in a deficiency judgment in the near future. His question is whether a creditor could take the transferred house occupied by the child and whether this is a viable asset protection plan.

The answer is no and no. I do not think the man’s creditors can take the house once owned and occupied by the child. The house would be the child’s homestead, and even if the child acquired the house as a result of a fraudulent transfer the creditor cannot set aside or reverse the conveyance of homestead property. I do not think this is an effective asset protection plan because the creditor would get a money judgment against the child for the value of the transferred property. Even if the child can protect the house he received, the child would still have a large money judgement against him. A fraudulent conveyance suit results in a money judgment against the transferee. The creditor could collect the judgment by levying upon nonexempt assets owned by the child. Homestead protection shields residences from fraudulent conveyance suits, but it does not protect against fraudulent conveyance judgments.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida.

Opinions Wanted: Are Punitive Damages Available For Fraudulent Conveyance

I found an interesting issue in a California bankruptcy case concerning fraudulent conveyance. A bankruptcy corporation paid many expenses within one year of bankruptcy including salaries and other money due to corporate insiders who had provided services to the corporation. The Trustee filed a complaint alleging the payments to insiders were fraudulent transfers. Some corporate insiders were Florida residents. The bankruptcy trustee sued these Florida insiders under the fraudulent conveyance sections of the bankruptcy code and under Florida’s fraudulent conveyance statute. A jury returned a verdict against the insiders, in favor of the bankruptcy trustee, finding that there were fraudulent transfers and that such transfers were made “with malice.” The court entered a verdict against the Florida insiders finding them jointly and severally liable for the total amount of fraudulent transfers by the debtor corporation and imposing $2 million punitive damages. The individuals are considering whether a fraudulent transfer judgment can include punitive damages.

I have not heard of any court decision that punitive damages are permitted for fraudulent conveyance under the bankruptcy code. I know one case from 1984 in Texas were a federal appellate court held there can be no punitive damages under the applicable bankruptcy code sections. I think some bankruptcy court have awarded punitive damages for fraudulent conveyance under applicable state fraudulent transfer statutes. Florida courts take a strict view of fraudulent conveyance remedies and have not allowed any damages other than the reversal of the transaction. Anyone’s informed thoughts would be appreciated. Is there a basis for punitive damages for fraudulent conveyance under the bankruptcy code?

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Spouses's Liability For Receiving Fraudulent Conveyance

I often receive calls, like this one, where a potential debtor is concerned that asset protection planning can affect his spouse. This man wanted to open a new bank account with his wife as “tenants by entireties” and deposit some of his separate money in the account. There were currently no judgments or lawsuits against the caller, but he was involved in a business disagreement which he feared could lead to a lawsuit and liability. He wanted to better protect his assets, but he did not want to make his wife involved in his problems.

Unfortunately, asset protection sometimes creates risk for an innocent spouse. In this case, the risk is that the husband’s transfer of funds into the new entireties accounts could someday be challenged as a fraudulent conveyance. A creditor’s fraudulent conveyance lawsuit would name the wife as a defendant; the husband/debtor may not be named as the defendant in the fraudulent conveyance suit. Any conveyance of any interest in property to a family member increases the recipient’s exposure to fraudulent conveyance litigation.

On the other hand, the recipient’s exposure is limited. The fraudulent conveyance remedy is the return of the property to the debtor. A fraudulent conveyance action cannot impose on the recipient / transferee any liability greater than the amount of asset value received. So, if this debtor’s wife were sued as a recipient of a fraudulent conveyance she should be able to resolve the lawsuit by returning to the debtor/ husband the amount of money she received in the entireties account. To further illustrate the principle, in most cases if the debtor conveys by deed a property to his spouse, or to he and his spouse jointly, the non-debtor spouses should be able to absolve herself of liability by executing a quit-claim deed of same property back to the husband or his creditors.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Fraudulent Transfer to Private Charitable Foundation

Debtor inquired whether they can shelter money from a creditor by transferring the money to their private charitable foundation. The first question is whether the foundation qualifies and operates as a charitable entity for tax purposes, and if it does, the next question is whether a donation to a charity may be undone as a fraudulent transfer.

Private foundations are charitable entities set up privately by an individual or his family. The IRS has very strict guidelines about setting up private charities. Violations result in reversed charitable deductions and penalties. The charitable giver cannot have any self-dealing with the private foundation, and the foundation must have a true charitable purpose. The giver has a limited ability to be compensated to managing a private foundation. If the debtor in this case benefits from the private foundation beyond IRS limits the foundation may be disqualified for charitable deduction and the transfer of money will likely be reversed as a fraudulent transfer because of the giver’s retained benefits.

If the debtor gives to a qualified private foundation, the next question is whether the true charitable donation is reversible as a fraudulent conveyance where the giver retains no undue benefit. A debtor facing a judgment remains free to do what he wants with his money until such time as the creditor obtains a vested lien on the debtor’s property. The debtor may spend his money on frivolous endeavors such as travel, he may burn his dollars, or through money out the window of a tall building. In these examples, the money is gone, no longer identifiable, and is not recoverable. A charitable gift is traceable to the charity, identifiable, and theoretically returnable. The issue is whether the debtor had the intent to defraud his creditors in making a charitable gift so that the charity could be ordered to return the money.

I don’t know of any lawsuits against true charities for fraudulent conveyances. My impression is that a true charitable gift lacks most badges of fraudulent transfer. For example, the debtor retains no interest in the money, has no control over the money, and is making no attempt to hide the conveyance. Its possible the debtor could benefit through an income tax deduction not otherwise allowable if the same money is payable to his creditor, and in such event, a court may more likely to question the transfer. This will be an interesting legal issue if and when decided by a Florida court.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida