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.