Fraudulent Transfers Can Be a Costly Mistake

Posted by Hecht Walker, P.C.
Posted on June 14, 2014

Fraudulent Transfer is the act of transferring money or assets to another person or company in an attempt to avoid a debt. It is a civil cause of action that arises between debtors and creditors, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees.

A transfer will generally be viewed as fraudulent when it is made with actual intent to defraud, hinder, or delay any creditor. So, if the intent of a transfer is specifically to avoid satisfying a specific liability, then intent is present and likely will result in legal action against the debtor. Often an insolvent debtor will have multiple obligations. A debtor has the right to choose to pay one creditor over another without being guilty of fraudulent transfer, but care must be taken not to pay subordinate debts before those senior to them.

Even though the debtor may choose which debts to pay first, it can get tricky. For example, there may be a debt to a family member that the debtor would like to clear before paying the banks. This may appear to be a fraudulent transfer, but would depend largely on the specifics of the situation. Was the debt truly legitimate? Was it documented at the onset? Can it be verified by bank records?

Additionally, a debtor could unknowingly commit constructive fraudulent transfer. This can occur when a debtor transfers property but does not receive “reasonably equivalent value” in exchange for the property. If the debtor is insolvent at the time of the transfer, or as a result of the transfer is left with an unreasonably small amount of capital to continue in business, there may be a case for constructive fraudulent transfer.

In Kent v. A.O. White, Jr., Consulting Eng’r, Inc., 279 Ga. App. 563 (2006), the Georgia Court of Appeals not only upheld the trial court’s setting aside of a property transfer as a fraudulent conveyance, but also an award of punitive damages against the Transferor. In Kent, a consulting engineer obtained a prior judgment for his unpaid services against an attorney that had hired the engineer.  Just before the verdict at trial, the attorney conveyed his law office property to his daughter, and then continued to practice law at the office for free.  The engineer then filed a subsequent suit to set aside the property transfer as a fraudulent conveyance so that the property could be used to satisfy his earlier judgment.  The Court of Appeals not only upheld the setting aside of the property conveyance, but also the trial court’s award to the engineer for $29,434.50 in attorneys fees, $2,685.00 in expenses, and $75,000.00 in punitive damages against the attorney for the fraudulent conveyance.

Making a mistake in any of these situations can have dire consequences. While repaying a debt can be burdensome, avoiding repayment can be even more costly, especially when moving property to avoid losing it to the debt. The creditor can pursue not only the debtor, but the party the debt was transferred to, and will likely seek additional damages. As in the case cited above, recovery of all legal fees and punitive fines can total tens of thousands in addition to the original debt decisions related to your debts and assets.  An attorney can help negotiate a repayment plan for the original debt or can help protect clients to reclaim debts from a fraudulent transfer. While a Hecht Walker attorney can step in to help at any point, by contacting your attorney before taking action, costly mistakes can often be avoided.


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