Judgment Could Be Collectible from Hidden Assets

One of the difficulties with lawsuits is there is no guarantee a successful litigant will actually get paid. We can make a good assessment of case strength and advise if the damages sought warrant anticipated cost of litigation, but we can rarely guarantee collection. A judgment against somebody with no assets is not much more than a piece of paper.

Sometimes “no assets” turn out to be “some assets.” How can that be? It is when the debtor has been tricky and transferred assets to others, so the debtor has nothing left by the time a court enters a judgment. When a debtor transfers assets and does not get reasonable compensation in exchange, those transfers can be challenged and often reversed.

Florida’s Uniform Fraudulent Transfer Act gives creditors causes of action when the debtor transfers assets to “insiders” to avoid creditors. In its effort to protect creditors, Florida’s legislature provided that claims under the statute can be pursued even before the judgment is entered.

The statute defines an insider as a relative, partner, or corporation in which the debtor is an officer, director, or person in control. The debtor most often transfers assets to a family member for no consideration in these cases. That is a transfer to an insider. Status as an insider is one of the most important factors establishing a fraudulent transfer.

The fraudulent transfer is defined as a transfer made or obligation incurred (a) with actual intent to hinder, delay, or defraud a creditor of the debtor, or (b) without receiving a reasonably equivalent value at a time when the debtor was engaged or was about to engage in a transaction for which the remaining assets of the debtor would be unreasonably small, or when the debtor intended to incur, or reasonably believed would incur, debts beyond the debtor’s ability to pay.

Because intent can be difficult to prove, the statute provides eleven factors to be considered in determining intent including; (a) if the transfer was to an insider, (b) debtor retained control or possession after the transfer, (c) was the transfer disclosed or concealed, (d) was the debtor sued before the transfer, (e) was the transfer substantially all of the debtor’s assets, (f) did the debtor abscond, (g) did the debtor remove or conceal assets, (h) did the debtor receive value reasonably equivalent to what was transferred, (i) was the debtor insolvent or rendered insolvent, (j) did the transfer occur near time a substantial debt was incurred and (k) was the transfer to a lienor of the business who then transferred them to an insider of the debtor.

The creditor does always have to prove actual intent (even though intent may have existed). Present and future creditors can challenge transfers made when the debtor was engaged or about to start a business for which remaining assets were unreasonably small or the debtor intended to incur debts which would likely be beyond ability to repay.

If a creditor’s claim arose before a transfer, the transfer is a constructive fraudulent transfer if made without receipt of equivalent value and the debtor was insolvent at the time or was rendered insolvent by the transfer. Transfer to an insider for a previously existing debt (a preferential transfer) is also a fraudulent transfer if the debtor was insolvent and the insider had reasonable cause to know of the insolvency. This protection does not extend to future creditors.

Proving a transfer is fraudulent opens the door to powerful collection weapons. The creditor can undo the transfer to reach assets needed to pay debt due from the debtor. That means the creditor can take the asset from the transferee just as it could have been taken from the debtor. The creditor can also obtain an injunction prohibiting further transfers and even a court-ordered receiver to take possession and manage the asset. For good measure, the statute also states the court can order “any other relief the circumstances may require.”

Transfers to family members are also subject to proceedings supplementary under a different set of statutes. When a transfer is made to a family member within one year before service of process on the debtor in a lawsuit, the debtor actually has to prove the transfer was not made to hinder or defraud creditors. In other fraudulent transfer cases, the creditor must prove a transfer was fraudulent. The proceedings supplementary statutes reverse that and make it even easier to undo the transfer.

Creditors in these cases are not limited to whatever was transferred. The statute also authorizes an award of money damages from both the debtor and the transferee. That means the transferee can face substantial liability when agreeing to help hide assets.

What are some examples of how these statutes are used? In one case, the creditor clawed back assets the debtor transferred to himself and his wife, even though Florida law provides assets owned by husband and wife jointly are not subject to claims of a creditor of only one spouse. In another, an LLC debtor transferred assets to the LLC members, and those assets were recovered by an LLC creditor. In yet a third, money and jewelry given to the debtor’s daughter were clawed back by a creditor.

These statutes are very powerful when a debtor tries to hide assets. But they do not guarantee recovery. The statutes do not create assets.

Analysis of a case at inception must include chances for success, cost of pursuit, and possibility of collection. A good attorney can provide advice on two legs of that analysis. Collectability is usually unknown until after judgment. But when it turns out the debtor is broke, the statutes can get assets the debtor transferred thinking they would be protected.