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TRANSFERS TO DEFRAUD CREDITORS: THE LAW AND THE PRACTICALITIES
Introduction:
A judgment is only
a piece of paper obtained at the end of litigation until it is used to
seize a debtor’s assets or to force a debtor to pay the debt. See our
article on
Debt Collection-the Tools Available to Collect Judgments
for a detailed analysis of the tools available.
Some judgment
debtors, realizing that the writs of attachment are soon to be issued by
the Court, decide to hide their assets, often transferring them to
relatives or friends, sometimes to entities out of state or out of the
Country, sometimes simply putting them under false names.
The courts have long
recognized this tendency on the part of debtors and the legislature, as
well, has passed various statutes giving judgment creditors the power to
void the transfers under certain circumstances.
While the Act and
the cases generally refer to “fraudulent transfers” in reality the
relief provided is not that related to the typical
Fraud
action but is honed to the particular circumstances surrounding a debtor
seeking to evade judgment.
This article shall
outline the statutory scheme and give some practical advice to both
judgment creditors and judgment debtors
The Basic Law:
Where a creditor has a claim against a debtor's assets, whether by
judgment or otherwise, that debtor may not convey or otherwise dispose
of such property in an effort, or to the effect, to deprive the creditor
of her legitimate right to recover such assets as may satisfy the
obligation due the creditor.
A fraudulent
conveyance is a transfer by a debtor of property to a third person
undertaken with the intent to prevent a creditor from reaching that
interest to satisfy its claim. Yaesu Electronics Corp. v. Tamura
(1994) 28 Cal. App. 4th 8, 13.
I. Uniform Fraudulent Transfer Act.
Cal. Civ. Code §
3439 et seq. embodies the current regime of California law – known as
the Uniform Fraudulent Transfer Act. The UFTA prohibits debtors from
transferring or placing property beyond the reach of their creditors
when that property should be available for the satisfaction of the
creditors' legitimate claims. A transfer under the UFTA is defined as
“every mode, direct or indirect, absolute or conditional, voluntary or
involuntary, of disposing of or parting with an asset …, and includes
payment of money, release, lease, and creation of a lien or other
encumbrance.” Cal. Civ. Code § 3439.01(i).
The UFTA provides
remedies only to those creditors to whom a debt, as defined in §
3439.01, is owed. Whether the creditor's claim arose before or after
the debtor made the transfer or incurred the obligation, four (4)
distinct grounds for finding a fraudulent transfer exist:
(i) Cal. Civ. Code §
3439.04(a)(1) designates as fraudulent any transfer made or obligation
incurred by a debtor with actual intent (determination of "actual
intent" depends on the assessment of eleven factors, see infra
Actual Fraudulent Intent for § 3439.04(a)(1) Determined by § 3439.04(b))
to hinder, delay, or defraud any creditor of the debtor;
(ii) Cal. Civ. Code
§ 3439.04(a)(2)(A) designates as fraudulent (and presumes fraudulent
intent) a transfer made or obligation incurred without receiving
reasonably equivalent value where the debtor was engaged or about to
engage in a business or transaction with unreasonably small remaining
assets in relation to the business or transaction;
(iii) Cal. Civ. Code
§ 3439.04(a)(2)(B) designates as fraudulent (and presumes fraudulent
intent) a transfer made or obligation incurred without receiving
reasonably equivalent value where the debtor intended to incur, or
believed or reasonably should have believed that he or she would incur,
debts beyond his or her ability to pay as the debts became due;
(iv) Cal. Civ. Code
§ 3439.05 designates as fraudulent (and presumes fraudulent intent) a
transfer made or obligation incurred without receiving reasonably
equivalent value where the debtor was insolvent at the time of making
the transfer or incurring the obligation or became insolvent as a result
of the transfer or obligation.
It is not necessary
that the transferor acted maliciously or with a desire to harm his
creditors. See Economy Refining & Service Co. v. Royal Nat'l Bank
(1971) 20 Cal. App. 3d 434, 441. The Economy Refining & Service Co.
Court held that it was the debtor's intent to make the transfer, rather
than some evil intent to harm the creditor, which sufficed for finding
intent to defraud. Id. ("actual intent to defraud consisted of
the intent [. . .] to remove the assets and to make impossible the
collection of appellant's judgment"). Furthermore, in the words of one
court:
Mere intent to delay
or defraud is not sufficient; injury to the creditor must be shown
affirmatively. [. . .] It cannot be said that a creditor has been
injured unless the transfer puts beyond [her] reach property [she]
otherwise would be able to subject to the payment of [her] debt.
Mehrtash v.
Mehrtash
(2001) 93 Cal. App. 4th 75, 80.
II.
Actual Fraudulent Intent for § 3439.04(a)(1) Determined by § 3439.04(b).
The "actual intent"
referred to in § 3439.04(a)(1) is determined upon consideration of
eleven (11) factors set out in § 3439.04(b). See also Filip v.
Bucurenciu (2005) 129 Cal. App. 4th 825, 834 (factors are not
mathematical formula, but to provide guidance to court, not compel
finding one way or other). Cal. Civ. Code § 3439.04(b) states:
In determining
actual intent under paragraph (1) of subdivision (a), consideration may
be given, among other factors, to any or all of the following:
(1) Whether the
transfer or obligation was to an insider.
(2) Whether the
debtor retained possession or control of the property transferred after
the transfer.
(3) Whether the
transfer or obligation was disclosed or concealed.
(4) Whether before
the transfer was made or obligation was incurred, the debtor had been
sued or threatened with suit.
(5) Whether the
transfer was of substantially all the debtor's assets.
(6) Whether the
debtor absconded.
(7) Whether the
debtor removed or concealed assets.
(8) Whether the
value of the consideration received by the debtor was reasonably
equivalent to the value of the asset transferred or the amount of the
obligation incurred.
(9) Whether the
debtor was insolvent or became insolvent shortly after the transfer was
made or the obligation was incurred.
(10) Whether the
transfer occurred shortly before or shortly after a substantial debt was
incurred.
(11) Whether the
debtor transferred the essential assets of the business to a lien holder
who transferred the assets to an insider of the debtor.
Finding actual
intent is a question of fact to be established by the trial court with
the burden of proof on the party asserting the fraudulent intent and
upon a showing by a preponderance of the evidence. E.g. People ex
rel. Allstate Insurance Co. v. Muhyeldin (Cal. App. 2d Dist. 2003)
112 Cal. App. 4th 604, 611.
III.
Constructive Fraudulent Intent Where Actual Intent Irrelevant.
There are two (2)
forms of constructive fraud grounding creditor claims which arose either
before or after the transfer under the UFTA. The first, Cal. Civ. Code
§ 3439.04(a)(2)(A), provides that a transfer is fraudulent if the debtor
did not receive reasonably equivalent consideration and "[w]as engaged
or was about to engage in a business or a transaction for which the
remaining assets of the debtor were unreasonably small in relation to
the business or transaction." The second, Cal. Civ. Code §
3439(a)(2)(B), provides that a transfer is fraudulent if the debtor did
not receive reasonably equivalent consideration and "[i]ntended to
incur, or believed or reasonably should have believed that he or she
would incur, debts beyond his or her ability to pay as they became
due."
In a related manner,
Cal. Civ. Code § 3439.05 provides that a transfer is fraudulent as to an
existing creditor if the debtor does not receive reasonably equivalent
value and "was insolvent at that time or . . . became insolvent as a
result of the transfer . . . ." Cal. Civ. Code § 3439.02 defines
insolvency and § 3439.02(c) allows a presumption of insolvency where a
debtor is generally not paying his debts as they become due. In other
words, this section acts to prevent a debtor from transferring his last
assets at unreasonably low value, thereby depriving the creditor of an
existing claim on the assets, if the debtor was insolvent or
became insolvent because of the transfer.
IV.
Time to Bring a Claim: Statutes of Limitations.
Cal. Civ. Code §
3439.09 provides that no action may be brought for fraudulent transfer
more than seven (7) years after the transfer was made notwithstanding
any other provision of law. Where actual intent to defraud can be shown
pursuant to § 3439.04(a)(1), an action must be brought within four (4)
years after the transfer was made, or, if later, within one year of when
the transfer was or could reasonably have been discovered by the
claimant. Where fraudulent intent is imputed by statute–§§
3439.04(a)(2)(A), (B) and § 3439.05–an action must be brought within
four (4) years of the time the transfer was made, otherwise it is
time-barred.
V.
Remedies Available under UFTA.
Where a debtor has
fraudulently transferred property subject to a creditor's claim, the
UFTA provides several remedies pursuant to Cal. Civ. Code § 3439.07
(Creditor's Remedies). Cal. Civ. Code § 3439.07 (Creditor's Remedies)
reads:
(a) In an action for
relief against a transfer or obligation under this chapter, a creditor,
subject to the limitations in Section 3439.08, may obtain:
(1) Avoidance of the
transfer or obligation to the extent necessary to satisfy the creditor's
claim.
(2) An attachment or
other provisional remedy against the asset transferred or its proceeds
in accordance with the procedures described in Title 6.5 (commencing
with Section 481.010) of Part 2 of the Code of Civil Procedure.
(3) Subject to
applicable principles of equity and in accordance with applicable rules
of civil procedure, the following:
(A) An
injunction against further disposition by the debtor or a transferee, or
both, of the asset transferred or its proceeds.
(B) Appointment of a
receiver to take charge of the asset transferred or its proceeds.
(C) Any other relief
the circumstances may require.
(b) If a creditor
has commenced an action on a claim against the debtor, the creditor may
attach the asset transferred or its proceeds if the remedy of attachment
is available in the action under applicable law and the property is
subject to attachment in the hands of the transferee under applicable
law.
(c) If a creditor
has obtained a judgment on a claim against the debtor, the creditor may
levy execution on the asset transferred or its proceeds.
(d) A creditor who
is an assignee of a general assignment for the benefit of creditors, as
defined in Section 493.010 of the Code of Civil Procedure, may exercise
any and all of the rights and remedies specified in this section if they
are available to any one or more creditors of the assignor who are
beneficiaries of the assignment, and, in that event (1) only to the
extent the rights or remedies are so available and (2) only for the
benefit of those creditors whose rights are asserted by the assignee.
Although some
transfers are voidable under § 3439.07, Cal. Civ. Code § 3439.08(a)
embodies the good faith exception to the voidability remedy. Where a
debtor transferred assets with actual fraudulent intent, pursuant to §
3439.04(a)(1), § 3439.08(a) provides that the transfer is not voidable
against a person who took for reasonably equivalent value and on good
faith, or against subsequent transferees. The transferee's good faith
or knowledge of the debtor's fraudulent intent may be inferred where the
transferee had notice of facts and circumstances sufficient to induce a
prudent person to inquire into the transferee's purpose. See Boness
v. Richardson Mineral Springs (1956) 141 Cal. App. 2d 251, 261.
To the extent the
transaction is voidable pursuant to § 3439.04(a)(1), a creditor may
obtain judgment to recover from one other than a good faith transferee
the asset or the value of the asset under § 3439.08(b). However, where
the transferee is of good faith, that transferee may retain his/her
interest or rights to the extent of value given to the debtor for the
asset.
VI.
Common Law Fraud Actions Still Available.
The UFTA is not the
exclusive means by which a wronged creditor may attack a fraudulent
conveyance. Creditors may pursue common law actions against debtors who
have transferred assets to deprive the creditor of a right to recover
their debts. See Macedo v. Bosio (2001) 86 Cal. App. 4th 1044,
1051. If creditors pursue a common law action, the statute of
limitations is established by Cal. Code Civ. Proc. § 338(d) and the
cause of action accrues not when the fraudulent transfer occurs but when
the judgment against the debtor is secured. Id. Cal. Code Civ.
Proc. § 338(d) provides a limitations period of three (3) years within
which to bring a claim based on fraud: "An action for relief on the
ground of fraud or mistake. The cause of action in that case is not
deemed to have accrued until the discovery, by the aggrieved party, of
the facts constituting the fraud or mistake."
Practicalities:
Any debtor thinking
about transferring funds to protect them from creditors must realize
that merely transferring them does not do much more than enlarge the
litigation to include family and friends who were unfortunate enough to
be included in the transfers. Any aggressive creditor…and most creditors
are aggressive…who has competent legal counsel will quickly file the
requisite action and the family member may find him or herself facing
substantial legal fees and prolonged unpleasant litigation.
Practically
speaking, if the transfer occurred after the debt was obviously leading
to judgment and if the transfer was not for valid consideration, one is
merely asking for litigation by such transfers and a payment program
would probably make more sense.
On the other hand if
there is a legitimate consideration and the transfer is part of an
ongoing business relationship, it is quite possible that the cause of
action will not prevail. Remember, the creditor has the burden of proof
of establishing that the transfer was to defraud creditors.
For judgment
creditors, one should not lose hope when a judgment debtor reveals that
he or she has no assets. Quite often an Order of Examination or a report
by an investigator will demonstrate a pattern of such transfers which
may justify prompt and effective demands for the return of the assets
from the third party transferees.
Such transfers are
so tempting and so typical that the effort to retrieve the assets is
well known in the Courts and the simple rule that is applied (the closer
to the judgment and the less the consideration paid by the transferee,
the easier a case to prove) can often result in successful collections
from a judgment debtor once thought without assets. |
