FRAUDULENT TRANSFERS – WHAT TO DO WHEN THE DEFENDANT STARTS SELLING ASSETS BEFORE A JUDGMENT IS ENTERED

     In our last article we explored the issue of whether a Plaintiff may obtain pre-judgment discovery regarding a Defendant’s assets before recovering a Judgment.   We determined that the answer is, generally, no, unless the subject of the lawsuit relates specifically to the debtor’s assets.   As a matter of law, a Plaintiff is generally prevented from obtaining information regarding a defendant-debtor’s assets before the entry of a Judgment.   So what do you do if you discover, at some point, before you have a judgment, that the Defendant – Debtor has sold or given away his or her assets.   These types of transfers made by a debtor can be deemed “fraudulent” under Florida law and sometimes can be set aside.   There is, however, something you can do about it.

            Florida subscribes to the Uniform Fraudulent Transfer Act (“UFTA”).   That act generally recognizes that certain kinds of transfers made by a debtor, in anticipation of the entry of a Judgment against him or her, can be deemed fraudulent and, as a result, can be set aside.   There are several criteria which must be met.  

            First, the transfer must be made by the “debtor.”   A transfer which is made by someone other than the debtor, to a third person, is generally not considered to be fraudulent as to the Plaintiff.   There is one case which comes from the Fourth District Court of Appeals – – NationsBank – – which provides that the transfer made by a wife, of jointly held assets in a joint bank account, in contemplation of a Judgment to be entered against the Husband, can be deemed to be a transfer made by the “debtor.”   However, this case generally stands alone in Florida law.   Most often, Florida law requires that the transfer be made by the actual debtor, not just someone who is connected in some way to the debtor.

            In the event that the debtor makes a transfer, Courts will look at the question of whether the transfer was made with the intent to “hinder, delay or defraud” creditors or whether the party that made the transfer received “reasonably equivalent value” in exchange.  The question of whether a transfer would be deemed fraudulent is generally determined based upon the facts and circumstances surrounding the transfer.   Was the Plaintiff about to obtain a Judgment and the Defendant – Debtor transferred his assets shortly before the Judgment was entered?   Were the assets transferred to a relative/insider/friend of the debtor?   Was the debtor “insolvent” at the time of the transfer?   Did the debtor get what the asset was worth in connection with the sale or was it sold “on the cheap.” In other words, was the debtor already broke and simply transferred assets, at a fire sale price, to someone he or she is connected to called an “insider”  solely to avoid the reach of a Judgment creditor.   These are all questions that a Court will look at in the context of determining whether a transfer of assets by the debtor was fraudulent.

            While a Plaintiff may bring claims for fraudulent transfer, pre-judgment, most often these claims are not brought until after a Judgment has been obtained.   The reason for this is simply that a Plaintiff is generally prohibited from inquiring into the debtor’s financial information, pre-judgment.   This places the Plaintiff in the unfortunate situation of having to “set aside” a fraudulent transfer already made by suing the debtor and the person to whom the asset was transferred – – generally denominated the “fraudulent transferee”.  

            Fraudulent transfer claims can be difficult to prove.   Most claims which require the Court to analyze the party’s intent can be time consuming and expensive to prove in Court.   The reason for this is that the question of intent is generally a question of fact which cannot be determined on summary judgment.   In order to determine the intent of the parties, the Court will most often have to judge the demeanor of the witnesses, the surrounding circumstances and whatever the relevant documents may show.

            Plaintiffs should generally be on the look out for fraudulent transfers made by a debtor in order to defeat the  collection of a Judgment.   This is a common tactic utilized by debtors, particularly in Florida, to avoid payment.   A wise Plaintiff – Creditor will carefully monitor the Defendant – Debtor’s actions during the progress of the lawsuit to ensure that such conduct is prevented or, if it occurs,  that it is timely addressed.

Leave a comment

Filed under Uncategorized

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s