Florida Asset Protection Blog

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

Interesting Fraudulent Transfer Question

Consider a man and his wife who moves from Georgia to Florida and purchase a homestead for $100,000 cash. Title to the homestead is in the name of the husband only. After he and his wife reside in the new home for a few months, the man gets an equity line second mortgage. He uses $50,000 of loan proceeds to purchase an investment property title to which is taken in the wife’s name only. A year later, the man encounters severe financial difficulty and files chapter 7 bankruptcy. Because he has not lived in Florida for two years prior to filing he is not eligible for Florida bankruptcy exemptions and must file with Georgia exemptions even though he is a Florida resident. Georgia has a relatively small homestead exemption which I’ll assume is $10,000. (exact amount is not relevant ). Therefore, only $10,000 of his homestead is an exempt asset in bankruptcy. The issue is whether the equity line loan used to purchase the $50,000 property for his wife is a fraudulent conveyance of $40,000 subject to attack in the bankruptcy

I don’t know of any judicial decisions on point with this situation.. Whether a transfer is a reversible fraudulent transfer depends on the debtor’s intent. Facts and circumstances are evidence of intent, but there is not formula of fact to infer intent in every case; each case must be examined under its own facts.

Looking at the transaction solely within the bankruptcy context, there has been a conveyance to the wife of non-exempt equity to of $40,000 within a short time prior to bankruptcy. Yet, at the time the transfer occurred the man was under Florida’s unlimited homestead exemption law, and at that time his transfer of money to his wife was the transfer of proceeds from an exempt homestead. This case presents the question of whether a transfer of exempt property to another person can subsequently be reversed as a fraudulent conveyance if the transferor files bankruptcy and where the same asset transferred is not exempt under the bankruptcy law.

A bankruptcy trustee or bankruptcy judge could rule that the transfer of an asset not exempt in the bankruptcy context may be a fraudulent transfer. In my opinion, subject to finding a contrary decision, is that the transfer is not a fraudulent transfer because at the time of the transfer the asset was exempt homestead. The transferor/debtor could not have intended to make a transfer to avoid creditors if he did not then anticipate bankruptcy and knew that the asset would not be exempt in bankruptcy.

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

Are There Fraudulent Transfers After Defendant Wins Trial

A judgment is entered in favor of the defendant and against the plaintiff.. The plaintiff files an appeal. The defendant asks whether transfers of non-exempt assets to his spouse after his win in the trial court could be attacked as fraudulent conveyances in the event he loses the appeal and the plaintiff’s case is reinstated.

I think the transfers after initial victory could be considered fraudulent conveyances if the defendant loses the appeal. The judgment in the defendant’s favor is not final until all appeals are exhausted. The plaintiff still has a viable “claim” against the defendant as long as the plaintiff maintains the appeal. In other words, the defendant is not in the clear until he defends his victory in the appellate courts. Therefore, in the event the claim is reinstated by the appellate court any transfer of non-exempt assets still could be subject to reversal if shown to be intended to avoid the plaintiff’s claims.

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

Are Fraudulent Transfers A Crime ?

Clients often tell me of their frustrated attempts to get competent asset protection advice from attorneys who work in large law firms. Attorneys in traditional, “tall building” firms take a dim view of asset protection planning. As an example, a colleague attended last week a seminar on Florida asset protection taught by an attorney in one of Florida’s silk stocking law firms. The instructor taught that any transfer or conversion of assets that is later found to be a fraudulent transfer in violation of Florida’s fraudulent transfer statutes constitutes criminal fraud. Accordingly, any attorney who assists or advises a client to make a transfer of property subsequently reversed by a court as a fraudulent conveyance is engaged in assisting the commission of a crime. Such attorney, according to the instructor, is not only unethical but may himself be subject to civil remedies and criminal prosecution.

The problem with this opinion expressed authoritatively to other lawyers at a teaching seminar is that the view is unsupported by Florida law and has been rejected essentially by Florida courts. There is not statute that deems a fraudulent conveyance to be a criminal violation or punishable by fines or incarceration. The Florida Supreme Court and lower appellate courts have thus far consistently found that the fraudulent conveyance statutes are creditor recovery remedies only and they impose no additional civil liability on the debtor or any third party who assists the debtor. Some Florida judges have expressed contrary views in dissent opinions, and other state courts have reached contrary conclusions based on their own state’s laws. Florida law, however, is based not on minority views or foreign law, but rather on the decisions by the majority including the Supreme Court.

I find many attorneys in large, traditional law firms who share the opinion that asset protection planning involving property transfers intended to shield assets from creditors is wrongful, unethical, and even criminal. I think the objection expressed by some attorneys is in fact based on their moral objections to asset protection rather than on rational legal analysis. Many people feel that asset protection is immoral to the extent it avoids paying people to whom debtors are both legally and morally obligated. I have never tried to convince other attorneys to change their moral views. People who morally oppose asset protection should not provide legal advice in this area and should refer clients with questions to other attorneys who are both qualified and comfortable providing such legal services. It is dishonest to translate personal moral objections to asset protection, or any other areas of law, in to condemnations of asset protection based on non-existent criminal statutes or misrepresentations of prior court decisions.

I expect some readers disagree.

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

Fraudulent Transfers of Corporate Profits

One unresolved issue in common law of fraudulent conveyance concerns business profits or distributions from closely held corporations which are used to support the debtor’s family. For example, suppose a judgment debtor supports his spouse and children with earning from his business corporation of which he is the chief executive and sole stockholder. The business pays the debtor a salary and profit distributions. The debtor deposits all salary and profit distributions into a bank account owned jointly with his non-working wife. The money in the account is used solely to support his wife and children. The salary is exempt because the debtor is head of household. The question is whether the deposits of corporate distributions to the joint checking account are fraudulent transfers of the debtor’s corporate profits to the debtor and his wife.

I don’t know of any case that has addressed this issue in Florida. I do not think these transactions fall within the intent of fraudulent transfer law. My conclusion is based on, among other things, Florida marital law. All earnings of this debtor during the marriage are marital property, and therefore, the debtor’s wife would have a 50% interest in accrued corporate profits in the event of a divorce. Therefore, the profits are jointly owned when earned. The martial law is consistent with another argument that the deposit in the joint account is made for consideration- the working husband is providing financial support in exchange for his wife’s work at home in support of himself and his children. Transfers for reasonable consideration are generally not fraudulent as to creditors. To the extent corporate profits are deposited in regular amounts and at consistent intervals also supports arguments against their being fraudulent conveyances. I would arrive a different conclusion if the debtor historically accrued profits within the company and made a large, one-time transfer from the corporation to a joint account on the eve of a legal problem. I would be interested in anyone’s contrary opinion of this hypothetical because I am not sure how a courts would rule.

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

Conspiracy To Opporutnity Shift As A Fraudulent Conveyance

I read a report in Leimberg Information Services about a Missouri Court of Appeals case which held that a debtor and other parties can be held liable for civil conspiracy in a fraudulent transfer when they create new entities through which the debtor conducts future business. The case essentially finds that opportunity shifting is a form of fraudulent conveyance. When a creditor obtains a judgment against a business and its principal owner the individual businessman often starts a new company to conduct the same business and gives ownership of the new business to his spouse or other family member so that neither the new corporation nor the owners are subject to the prior judgment. The Missouri court found this technique of creditor avoidance, although not a traditional form of transfer, nevertheless could be undone as a form of fraudulent conveyance. To date, no Florida case has reached the same result. The Missouri court also found the debtor and his wife were both liable for damages on the theory of civil conspiracy for their efforts to set up successor businesses operated by the debtor. Leimberg’s article says that the case is evidence that, “civil conspiracy is the creditor’s new super-weapon against planning meant to render a debtor judgment-proof.” While this observation may be generally true throughout the county, Florida courts have held uniformly that the fraudulent conveyance statutes do not support claims against third parties for civil conspiracy or any other basis of liability.

Definition of "Insolvency" for Fraudulent Conveyance

The May edition of the Florida Bar Journal contains an article Mr. Robert Meyer about whether a disclaimer for estate planning purposes can be set aside as a fraudulent conveyance against creditors of an heir or trust beneficiary. The article includes an interesting discussion of the meaning of insolvency for purposes of fraudulent conveyance allegations.

One of the most important badges of fraud for purposes of assessing a fraudulent conveyance is the debtor’s insolvency, or solvency, before and after the conveyance in question. The article points out that Florida statutes and other laws do not clearly define solvency or show how to measure solvency. The principle issue is whether assessment of solvency includes in the debtor’s assets those assets that are exempt from creditors such as homestead property, annuities, and retirement funds. Computation of solvency under Bankruptcy law excludes exempt assets; the tax code definition includes exempt assets. Florida Statute 726.103, the article points out, states that, “a debtor is insolvent if the some of the debtor’s debts is greater than all of the debtor’s assets” or secondly, the debtor is generally not paying his debts when due. The first part of the Statute’s definition does not specify whether exempt assets are considered, and therefore, the second test of debt payment becomes most important.

In any event, additional court rulings would help better define test of solvency for Florida asset protection law.

posted by: Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Does This Smell Like A Fraudulent Conveyance?

I was in a deposition today representing a lady who was the recipient, transferee, of an alleged fraudulent conveyance. The allegations are unique; here’s what happened. My client, a professional mortgage broker, loaned money to a businessman evidenced by a promissory note. The note stated that the loan was secured by two parcels of real estate and a mortgage note receivable from a third party. At the time of the loan, the collateral’s value was close to the original note amount. The note was not recorded, and there was no separate mortgage. My client did not know the borrower at the time of the loan, but subsequent to the loan they became good friends. The businessman found it impossible to make payments on the note. My client and the businessman agreed that to satisfy the note the businessman would assign to my client all the collateral. The collateral by then had appreciated, and my client received assets close to double the amount of money she originally loaned. Just over one year after the assignment of collateral the business man filed Chapter 7 bankruptcy. The trustee is suing my client to recover the assigned assets.

This fact situation raises some interesting questions which I have yet to research. For instance, did the businessman receive reasonable value for his conveyance of property? Should my client be penalized because the collateral increased in value or that she made an over secured loan and a profitable business deal? Does it make any difference that the parties were on friendly terms after the loan was made? Assuming no collusion between the businessman and my client I do not think this transaction “smells” of a fraudulent conveyance designed to avoid creditors. Prior to one year before bankruptcy the debtor/business man is free to prefer any creditor. However, I also understand that the trustee and other creditors are angry because my client was enriched while everyone else may be wiped out. It will be interesting to see how this case unfolds

Changing Your Name to Avoid Creditors

A caller asked me if a debtor could protect assets by legally changing his name and then conveying assets to his new legal name. He reasoned that this would not be a fraudulent conveyance because he was transfer title to himself, just under a new name. This was an innovative asset protection ideal, but it is not a good asset protection plan. The caller did not understand that the fraudulent conveyance statutes also include a prohibition on fraudulent conversions. A fraudulent conversion is when the debtor sells an asset that is not exempt from creditors and buys an asset which is exempt. An example would be selling publically traded common stock and purchasing an annuity. Annuities are exempt from creditors under Florida law. Fraudulent conversions can be undone under the same rules applicable to fraudulent conveyances.

I ever heard of someone trying this type of asset protection planning involving a name change, and there is no court decision directly on point. However, in my judgment, the caller’s idea of transferring assets to himself under a new legal name would probably be reversed as a fraudulent conversion.

A Plan to Reverse a Fraudulent Conveyance

A new client presented a plan to undo a potentially fraudulent conveyance. Client and spouse had used a joint line of credit from a bank to borrow money for several investments. Some investments made in companies owned solely by husband made a profit. These companies distributed some profits to husband who, in turn, conveyed the profits to other companies owned solely by his wife.

A creditor obtained a judgment against husband only. To undo what may be deemed a fraudulent conveyance of profits to his wife, the husband and wife borrowed more money from the same lender on the same line of credit and deposited the borrowed funds in wife’s solely owned company. The wife’s company distributed to the wife/owner funds equal to the amount of profit the company had first received from husband’s company, thereby, reversing the potentially fraudulent conveyance. The client wants to know whether this plan makes moot any fraudulent conveyance action against wife and her company.

I don’t think this reversal eliminates the problem because the transfer of funds and borrowing is too circular. Looking at husband’s and wife’s balance sheets after the conveyance, borrowing, and reversal, the husband’s balance sheet is the same after receiving the newly borrowed funds through wife’s company as it was just after he transferred profits to wife. The better approach would be for wife to borrow money in her own name on a separate line of credit from the joint line. The wife should use this money to reverse the fraudulent transfer. The fact that husband does not increase his debt in order to pay himself back eliminates the circularity of the reversal and makes the wife’s repayment of profits received easier to explain and defend.

Homestead: a "State of Mind"

A speaker at a legal seminar on Florida asset protection law, when discussing homestead protection in Florida described homestead as a state of mind. Homestead law seems simple, but it is actually very complex involving many facts and nuances. I think that describing Florida homestead as a state of mind captures the essence of homestead law. What the speaker was referring to is that whether a property serves as your Florida homestead is a matter of your subjective intent. Your intent includes things only you know in your own mind. For example, homestead protection is available to you if you really intend to make the property a permanent and primary place of residence. It also matters whether you consider Florida as your home state. On the other hand, if you intend to remain here only until legal clouds are clear and then return elsewhere you do not have the homestead state of mind. Homestead therefore depends on facts and circumstance- your behavior- which indicate to a judge what your true state of mind is in regards to your Florida property. There are no clear tests or standards that must be met to have a protected Florida homestead. The expression state of mind is a great description of a complex law that is easily understood by laymen.

Conveyance of Florida Homestead From Land Trust to Beneficiary

An email asked if the transfer of a personal residence from a land trust to the beneficiary of the land trust who resides on the property is a fraudulent conveyance under Florida law. I think that the transfer is not a fraudulent transfer under most land trust agreements. A land trust typically vests all beneficial ownership and use in the land trust beneficiary. The trustee holds minimal legal title, and the beneficiary retains total control over the trust property and the trustee. Even if the conveyance is deemed fraudulent, the result is that the residence once owned in the name of the beneficiary is exempt from creditors as a Florida homestead. The more important issue is whether the same property in the name of the land trustee has homestead protection. With the exception of one case to the contrary, most courts in Florida have extended homestead protection to a residence titled in a revocable living trust or a land trust where the beneficiary uses the property as his primary residence.

Bankruptcy Trustee Attacks Homestead Purchase

The homestead protection afforded Florida residents is being tested in a Florida bankruptcy proceeding. The Florida Supreme Court, in the case of Havoco v. Hill, has held paying money to purchase a homestead property or applying funds to reduce the principal balance on a homestead cannot be reversed, set-aside, or undone on the grounds that the purchase or payment was a fraudulent transfers to avoid creditors. In the case of In re Potter, pending in the Middle District of Florida bankruptcy court, the bankruptcy trustee, Ms. Gene Chambers, has sued to recover approximately $300,000 which a debtor used to by a homestead approximately 18 months prior to filing bankruptcy on the grounds that the purchase was a fraudulent conveyance under Florida’s fraudulent conveyance statutes. It will be interesting to see whether this court finds that the Florida Supreme Courts ruling in Havoco precludes this fraudulent transfer claim in bankruptcy, or whether the court ignores Havoco and applies a different legal standard.

Who Is A Creditor?

There is a common misconception that a party has to either have filed a lawsuit against you or has a judgment against you to be considered your creditor for purposes of fraudulent conveyance law. Transfers or conversions of assets to evade creditors can be reversed or the transferee sued for the value of the conveyance. Under Florida law, the term creditor is liberally construed, and almost anyone you do business with can be considered a creditor even if there is no existing legal dispute.

Florida Statute 726.102 defines a creditor broadly to include any person who has a claim against you whether or not the claim is matured, disputed, contingent, or reduced to a judgment. Therefore, if you transfer your assets to avoid potential future judgments which may be brought by another party to a business relationship, that other party could set aside the transfer if the party later asserts a claim through legal action and gets a judgment. The point is that for most people there is a large class of parties who may in the future contest asset planning under Florida’s fraudulent conveyance laws.