What Are A Creditor's Rights And Remedies When A Debtor Fraudulently Transfers Property Or Assets To Avoid Payment Of A Debt Or Collection Of A Judgment?

In some instances a desperate or devious defendant or debtor will attempt to fraudulently conceal his, her or its assets by transferring them to a friend, relative, a related company or other cooperating third party, to try to look impecunious or judgement-proof, and avoid paying what is owed.

What should a creditor do in those circumstances?

In California, and in many other States, the Uniform Fraudulent Transfer Act may provide a remedy and protection for both business and personal creditors to set aside those fraudulent transfers and recover the property to pay the debt.

This can be done before, during and after a legal proceeding is started to collect the debt, whenever fraudulent transfers are discovered or reasonably suspected.

Those state statutes are very similar to the Fraudulent Transfer provisions of the U.S. Bankruptcy Code, 11 U.S.C. § 548, but the state remedies can be preferable to the Bankruptcy provisions because, if a creditor can recover assets under the State law, that recovery can be used to pay the debts of that creditor, whereas a recovery by a Bankruptcy trustee under the Federal law is used to pay all unsecured creditors equally.

Thus, there may possibly be a potential benefit in proceeding promptly under the State law to collect the debt, hopefully well before any Bankruptcy proceeding might be filed by the debtor.

The California Uniform Fraudulent Transfer Act allows a “creditor” to cancel a transfer of property by a “debtor”, where the transfer was made (a) to escape monetary “claims” of the “creditor” and (b) the transfer was made for consideration that was less than the “reasonably equivalent value” of that property at the time.

“A fraudulent conveyance under the UFTA involves “ ‘a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.’ ” (Kirkeby v. Superior Court (2004) 33 Cal.4th 642, 648 [15 Cal. Rptr. 3d 805, 93 P.3d 395].) “A transfer made … by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made, if the debtor made the transfer as follows: [¶] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor.” (§ 3439.04, subd. (a).)

“Section 3439.07, subdivision (a) sets forth creditors' remedies, which include avoidance of a transfer, attachment, and the equitable remedies of injunction and receivership as well as “[a]ny other relief the circumstances may require.” (§ 3439.07, subd. (a)(3)(C).) A transfer is not voidable against a person “who took in good faith and for a reasonably equivalent value or against any subsequent transferee.” (§ 3439.08, subd. (a).)”(Emphasis added)

Filip v. Bucurenciu (2005) 129 Cal. App. 4th 825, 827-830.

“(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:

(A) Was 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.
(B) 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 they became due. . . .”(Emphasis added).

Civil Code § 3439.04.

Such a fraudulent transfer, if the above elements are proven, can be set aside - or reversed or cancelled - by a “creditor” with a “claim”.

The Act contains the following definitions relevant to the issues at trial as to whether Plaintiff has proven a cause of action under the Fraudulent Transfer Act per Civil Code § 405.31:

(b) "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.
(c) "Creditor" means a person who has a claim, . . .
(d) "Debt" means liability on a claim.
(e) "Debtor" means a person who is liable on a claim.. . .”(Emphasis added) Civil Code § 3439.01.

“(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....” (Emphasis added) Civil Code § 3439.07.
Thus, in order to seek such relief under Civil Code § 3439.07, the Plaintiff must prove that:

1. It has a monetary “claim” or “right to payment” against the “debtor”(as defined in Civil Code § 3439.01(b)&(c)). (Civil Code § 3439.07(a)(1));
2. It is a “creditor” of the “debtor” as to a monetary “claim” (Civil Code § 3439.04(a))1;
3. The “debtor” made a transfer of its property with “actual intent to hinder, delay, or defraud [a] creditor” in collecting a monetary “claim”, and without “receiving a reasonably equivalent value in exchange for the transfer” (Civil Code § 3439.04); and
4. The other factors in Civil Code §3934.04(a)(2)(A) have been alleged and proven.

See , 2-4200 CACI 4203; Fisher v. Las Vegas Hilton Corp. (9th Cir. 2002) 47 Fed. Appx. 824, 828.

In Civil Code § 3439.01(b), thus a “Claim” is “a right to payment, . . .”

“Also, the property [transferred] must be subject to enforcement of a money judgment. See Cal. Civ. Code § 3439.01, (Legis. Committee Comment, Assembly 1986).” (Emphasis added)

Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 862.

“Over the years, courts have considered a number of factors, the “badges of fraud” (id. at p. 1298) described in a Legislative Committee comment to section 3439.04, in determining actual intent. (See Annod Corp. v. Hamilton & Samuels, supra, at pp. 1298–1299.) Effective January 1, 2005, those factors are now codified at section 3439.04, subdivision (b) and include considerations such as whether the transfer was made to an insider (§ 3439.04, subd. (b)(1)), whether the transferee retained possession or control after the property was transferred (§ 3439.04, subd. (b)(2)), whether the transfer was disclosed (§ 3439.04, subd. (b)(3)), whether the debtor had been sued or threatened with suit before the transfer was made (§ 3439.04, subd. (b)(4)), whether the value received by the debtor was reasonably equivalent to the value of the transferred asset (§ 3439.04, subd. (b)(8)), and similar concerns. According to section 3439.04, subdivision (c), this amendment “does not constitute a change in, but is declaratory of, existing law.”

“In defendants' mind, only two factors are present here, namely, that the transfer was made to an insider and was made after plaintiff sued Peter, and therefore cannot establish actual intent. Setting aside the question of whether defendants properly count the number of factors present, we note a more fundamental problem with defendants' approach: these factors do not create a mathematical formula to establish actual intent. There is no minimum number of factors that must be present before the scales tip in favor of finding of actual intent to defraud. This list of factors is meant to provide guidance to the trial court, not compel a finding one way or the other. (See Annod Corp. v. Hamilton & Samuels, supra, 100 Cal.App.4th at pp. 1298–1299.)” (Emphasis added)

Filip v. Bucurenciu (2005)129 Cal. App. 4th 825, 834.

“No one [Civil Code § 3934.04(b)] factor is determinative, and no minimum or maximum number of factors is required. Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834, 28 Cal. Rptr. 3d 884 (2005). Rather, a court must consider all the circumstances of the case as a whole. A court is entitled to conclude that actual intent exists even where no badges of fraud are present, or that no actual intent exists despite the presence of several badges.”

Decker v. Antovich (In re Antovich Constr., Inc.), 2008 Bankr. LEXIS 1307, 13 (Bankr. N.D. Cal. Apr. 11, 2008)

"There is no minimum number of factors that must be present before the scales tip in favor of finding actual intent to defraud. This list of factors is meant to provide guidance to the trial court, not compel a finding one way or the other." Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834, 28 Cal. Rptr. 3d 884 (2005). “

Still v. Arakelyan (In re Still) (Bankr. C.D. Cal. 2008) 393 B.R. 896, 917.

What constitutes “reasonably equivalent value” for a transfer depends on the circumstances surrounding the transfer or transaction and the amount of consideration or “value” received in exchange for the transfer of the property.

“Reasonably equivalent value is the value of the property on the date of the transfer from the perspective of the creditors. In re Prejean, 994 F.2d 706, 708 (9th Cir. 1993); In re Fairchild Aircraft Corp., 6 F.3d 1119, 1125-26 & n.5 (5th Cir. 1993). Courts may consider the fair market value or what would be the fairly equivalent value of the property, taking into consideration all of the specific circumstances of each case affecting the value of the asset. Hansen v. Cramer, 39 Cal. 2d 321, 245 P.2d 1059 (Cal. 1952); Bailey v. Leeper, 142 Cal. App. 2d 460, 298 P.2d 684 (Cal. Ct. App. 1956).” (Emphasis added)

Decker v. Tramiel (In re JTS Corp.) (9th Cir. Cal. 2010) 617 F.3d 1102, 1109.

“In determining whether a transfer has been for an exchange of reasonably equivalent value, the court analyzes all the circumstances surrounding the transfer. 5 Collier on Bankruptcy P548.05 [1] [b] at [863] 548-35 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2002); see also Barber v. Golden Seed Co., Inc., 129 F. 3d 382, 387 (7th Cir. 1997) (applying Bankruptcy Code § 548 - reasonable equivalence should depend on all the facts of each case). In Sharp v. Chase Manhattan Bank USA, N.A. (In re Commerical Financial Services, Inc.), 350 B.R. 559 (Bankr. N.D. Okla. 2005), the court explained:

“ Generally, the 'totality of the circumstances' test is fact-intensive and may include consideration of fair market value (which may be established by comparable sales, income production capacity or some), the arms-length nature of the transaction, the economic circumstances and relationship of the parties, the maturity, competitiveness and efficiency of the market, industry standards, and other factors.”(Emphasis added)

Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 862-863.

“However, where a company is on its "deathbed", we will value its assets according to what could be obtained at a liquidation sale and not give them a "going concern value." See Coated Sales, 144 B.R. at 667; 80Link to the text of the note accord In re Taxman Clothing Co., 905 F.2d 166, 170 (7th Cir. 1990) ("going concern value is not the proper standard if the business is "on its deathbed'") (citation omitted); Langham, Langston & Burnett v. Blanchard, 246 F.2d 529, 532 (5th Cir. 1957) (not proper to give "going concern" value to assets of business that was "'financially dead or mortally wounded'") (citation omitted); Foley v. Briden (In re Arrowhead Gardens, Inc.), 32 B.R. 296, 299 (Bankr. D. Mass. 1983)” (Emphasis added)

Mishkin v. Ensminger (In re Adler, Coleman Clearing) (Bankr. S.D.N.Y. 1999) 247 B.R. 51, 111.

“In dealing with the conflicting views of the valuation experts, this Court finds the analysis of the court in Peltz v. Hatten, 279 B.R. 710, 737-738 (D. Del. 2002), aff'd sub nom., In re USN Comm., Inc., 60 Fed. Appx. 401 (3rd Cir. 2003) both wise and instructive:

“First, it is clear that experts and industry analysts often disagree on the appropriate valuation of corporate properties, even when employing the same analytical tools such as a [discounted cash flow] analysis or a comparable sales method. Simply put, when it comes to valuation issues, reasonable minds can and often do disagree. This is because the output of financial valuation models are driven by their inputs, many of which are subjective in nature. . . . Second, in determining whether a value is objectively "reasonable" the court gives significant deference to marketplace values. When sophisticated parties make reasoned judgments about the value of assets that are supported by then prevailing marketplace values and by the reasonable perceptions about growth, risks, and the market at the time, it is not the place of fraudulent transfer law to reevaluate or question those transactions with the benefit of hindsight.”

Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 864-865.

The determination of what constitutes “reasonably equivalent value” thus depends greatly on the circumstances of the transfer, and equal value is NOT necessarily required.

“[T]he Court must determine the value of what the Debtor transferred and the value of what he received. The Court must then determine whether the latter value is reasonably equivalent to the former. "Reasonable equivalence" does not require exact equality in value. . . .”(Emphasis added)

Kendall v. Carbatt (In re Carbatt) (Bankr. N.D. Cal. 2006) 357 B.R. 553, 560.

“The term "reasonably equivalent value" is not defined in the Bankruptcy Code. That function has been left to the courts. McCanna v. Burke, 197 B.R. 333, 338-39 (D.N.M. 1996). It is clear that "reasonably equivalent value" is not just another term for "fair market value." As the U.S. Supreme Court stated in BFP v. Resolution Trust Corp., 511 U.S. at 531, "fair market value is not necessarily the benchmark against which determination of reasonably equivalent value is to be measured. It may be presumed that Congress acted intentionally when it used the term 'fair market value' elsewhere in the Bankruptcy Code but not in § 548, particularly when the omission entails replacing standard legal terminology with a neologism."

“There is no hard and fast rule in the Ninth Circuit as to what constitutes "reasonably equivalent value." The concept of "reasonable equivalence" is not wholly synonymous with "market value" even though market value is an extremely important factor to be considered in the court's analysis. In re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990).

“Whether the transfer is for "reasonably equivalent value" in every case is largely a question of fact, to which considerable latitude must be given to the trier of fact. In re Ozark Restaurant Equip. Co., 850 F.2d 342, 344 (8th Cir. 1988). In order to determine whether a fair economic exchange has occurred, the court must analyze all the circumstances surrounding the transfer in question. 5 Collier on Bankruptcy, (15th Ed. Revised, 2007), P 548.05[1][b] at 548-36. The transferee's "good faith" is a relevant factor. In re Smith, 24 B.R. 19, 23 (Bankr. W.D.N.C. 1982).

“The immediacy of a nonjudicial foreclosure proceeding is one of the "price-affecting characteristics" of the Property which cannot be ignored in the "reasonably equivalent value" calculation. See BFP v. Resolution Trust Corporation, 511 U.S. at 539. However, the price paid at a "fire sale" of real property is not necessarily "reasonably equivalent value" for purposes of § 548. Salven v. Munday (In re Kemmer), 265 B.R. 224, 234 (Bankr. E.D. Cal. 2001).”

Salven v. Miller (In re Noon) (Bankr. E.D. Cal. Jan. 22, 2009) 2009 Bankr. LEXIS 390, 8-10, 2009 WL 197919; Barber v. Golden Seed Co. (7th Cir. Ill. 1997) 129 F.3d 382, 387, 1997 U.S. App. LEXIS 30232, 10-11 Congrove v. McDonald's Corp. (In re Congrove) (6th Cir. 2007) 222 Fed. Appx. 450, 454.

“ Naturally, reasonable equivalence will depend on the facts of each case. In some cases, no less than 100 percent of fair market value may be a reasonable price. In all cases, facts such as "the bargaining position of the parties . . . . and the marketability of the property transferred" will be relevant. Cook, "Fraudulent Transfer Liability Under the Bankruptcy Code," 17 Hous. L. Rev. 263, 278 (1980).” (Emphasis added)

In re Richardson (Bankr. D. Utah 1982) 23 B.R. 434, 448.

The concept of "reasonable equivalence" is not wholly synonymous with "market value" even though market value is an extremely important factor to be used in the court's analysis. In re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990). The transferee's "good faith" is also a relevant factor. In re Smith, 24 B.R. 19, 23 (Bankr. W.D.N.C. 1982).

Salven v. Munday (In re Kemmer) (Bankr. E.D. Cal. 2001) 265 B.R. 224, 232.

“While fair market value is a factor in the determination of reasonably equivalent value, "[b]y its terms and application, the concept of 'reasonably equivalent value' does not demand a dollar for dollar exchange." Advanced Telecommunication Network, Inc., 490 F.3d 1325, 1336 (11th Cir. 2007) (citations omitted).” (Emphasis added)

Altman v. Southland Homes Corp. (In re Kronk) (Bankr. M.D. Fla. Feb. 8, 2010) 2010 Bankr. LEXIS 535, 10, 63 Collier Bankr. Cas. 2d (MB) 716 (Sale to wife’s uncle)

"The market value of . . . a piece of property is the price which it might be expected to bring if offered for sale in a fair market; not the price which might be obtained on a sale at public auction or a sale forced by the necessities of the owner, but such a price as would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take the particular . . . piece of property." Black's Law Dictionary 971 (6th ed. 1990). In short, "fair market value" presumes market conditions that, by definition, simply do not obtain in the context of a forced sale. See, e. g., East Bay Municipal Utility District v. Kieffer, 99 Cal. App. 240, 255, 278 P. 476, 482 (1929), overruled on other grounds by County of San Diego v. Miller, 13 Cal. 3d 684, 532 P.2d 139, 119 Cal. Rptr. 491 (1975) (in bank); Nevada Nat. Leasing Co. v. Hereford, 36 Cal. 3d 146, 152, 680 P.2d 1077, 1080, 203 Cal. Rptr. 118 (1984) (in bank); Guardian Loan Co. v. Early , 47 N.Y.2d 515, 521, 392 N.E.2d 1240, 1244, 419 N.Y.S.2d 56 (1979).” (Emphasis added)

Bfp v. Resolution Trust Corp. (1994) 511 U.S. 531, 537-538, 114 S. Ct. 1757, 1760, 128 L. Ed. 2d 556, 564-565.

Payment of a prior or pre-existing debt is legal “value” given for the property transferred.

“It is true that the CFTA requires "reasonably equivalent value" to be determined from the standpoint of the creditors. Cal. Civ. Code § 3439.03 note 2 (West Supp. 1993) (Legislative Committee Comment). But "fair consideration" under the old law also was determined from the viewpoint of the creditors. Hansen v. Cramer, 39 Cal. 2d 321, 245 P.2d 1059, 1061 (1952) fn.5 Patterson v. Missler, 238 Cal. App. 2d 759, 48 Cal. Rptr. 215, 220 (1965). Moreover, the prior statute defined "fair consideration" as the exchange of property or satisfaction of an antecedent debt which was the "fair equivalent" of the property transferred. Former Cal. Civ. Code § 3439.03 (West 1970); see Hansen, 245 P.2d at 1060.”

“We discern nothing in the language or history of the CFTA that would lead us to conclude that a time-barred debt that was a "fair equivalent" from the viewpoint of the creditors under the prior law is not also "reasonably equivalent value" under the CFTA. There has been no showing that the California legislature intended to abrogate the rule of United States Fidelity in enacting the current statute.” (Emphasis added)

In re Prejean (9th Cir. Cal. 1993) 994 F.2d 706, 708-709.

“Because a fraudulent transfer action focuses on protection of creditors--persons not parties to the property transaction--the transferee must pay reasonably equivalent value in order to establish a defense. However, the timing of actual payment is irrelevant, since the concept of value necessarily includes debt as well as cash payment.” (Emphasis added)

Lewis v. Superior Court (1994) 30 Cal. App. 4th 1850, 1874.

“Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.”(Emphasis added)

Civil Code § 3439.03.

Thus, in considering what constitutes “reasonably equivalent value” the Court can also consider whether the property was exchanged in whole or in part as payment of an antecedent or pre-existing debt, as well as the particular circumstances leading to the transfer.

Whether or not a “fraudulent transfer” has actually occurred thus may require some investigation and the use of appraisers etc.

Some of that investigation can be done using court “discovery” processes and procedures, after the action is filed, but some of the initial pre-filing investigation should include a review of public property and other public records, and the use some additional basic investigative skills and footwork from the parties and their attorneys or consultants.

As noted above, because a fraudulent transfer proceeding in a Bankruptcy case may offer little benefit for a particular debtor, and because a Bankruptcy may foreclose or stay a state fraudulent transfer action, in many cases it may be advisable to proceed with the state action to recover the assets much sooner rather than later, before any Bankruptcy is even contemplated or filed by the debtor.