Often, a creditor will attack your asset-protection plan by asserting that the transfer of assets from you to another person or entity, or the investment of money into secured transactions, is a fraudulent conveyance, or fraudulenttransfer. The creditor will claim it is fraudulent because it was made with the intent, or effect, of avoiding collection. The creditor can, and will, make this claim even if your plan has been in place for several years prior to legal action. The creditor’s rationale is this: You must have known something was wrong ifyou’re trying to secure your money. (You, of course, know you’d be foolish notto secure your money!)
Terms like fraudulent conveyance and fraudulent transfer sound like something TV judges would say before banging their gavel and shouting, “Guilty!” But these terms shouldn’t be confused with everyday terms like fraudor criminal fraud, which have very different meanings.
Under Chapter 726 of the Florida Statutes, the State of Florida has enacted the Uniform Fraudulent Transfer Act. Under this law, the legislature has enumerated certain “badges of fraud,” which should be analyzed by a court when presiding over a fraudulent transfer claim. Badges of fraud are red flags that indicate to courts that a transfer may be suspect. These badges are circumstantial evidence demonstrating efforts to hinder, delay, or defraud. While courts require clear and convincing evidence that fraud has been committed, the standards for such evidence are exceedingly subjective. What one court views as insignificant, another court may consider a smoking gun.
Here are some badges that can get a debtor in trouble:
Prior litigation: The debtor has been served or was expecting to be served with a judgment.
- Concealment: The transfer was hidden or masked as another type of activity.
- Transfer to others: The debtor transfers assets to a friend, relative, or an insider (e.g., a partner or corporate entity intended to shelter the assets).
- Control: The debtor retains control of the assets even though they’ve been transferred to another entity.
- Absconding: The debtor moves the assets to another jurisdiction or entity with little notice or preparation.
- Transfer of all assets: The debtor transfers everything to other entities.
- Timing: The debtor transfers assets immediately before, during, or after a judgment.
- Inadequate consideration: The debtor suddenly sells his or her business to a buyer for below-market value.
- “Friendly creditor”: The debtor pays another debt to an organization that will hand the money back.
Given how difficult it is to prove intent, you might think courts would provide the benefit of the doubt to the transferor. You couldn’t be more wrong. The courts have seen fraudulent conveyances for centuries and just about every form of fraud possible. Not surprisingly, they have established firm guidelines to assist in determinations.