Squeezing Blood From The Turnip: Collecting From Debtors Who Fraudulently Transfer Assets
Lawyers often speak of clients being “judgment proof.” This phrase does not mean a defendant enjoys immunity from a judgment being entered against them; rather, it refers to a potential judgment being worthless in a practical sense because the potential debtor would not have assets available for collection by the creditor. There are a host of circumstances where this could happen. Sometimes the debtor would be able to extinguish the judgment through a bankruptcy filing. Other times, the creditor’s claim may be too low in priority for there to be enough assets to satisfy higher-priority creditors, the classic situation being where there is more than one mortgage on a property (the first mortgage holder’s security interest gets satisfied before second and third mortgage holders). Frequently, debtors threaten to file bankruptcy to ward off the threat of litigation; the debtor is in effect telling the potential creditor, “Suing me will be useless because you will never succeed in collecting even if you win.” Such a threat is often credible and reasonable, and can spare all parties the costs of futile litigation.
But what about the debtor who conveniently becomes unable to pay the claim because their assets have disappeared? What about when those assets magically reappear after the threat of collection has passed? Most jurisdictions have laws which forbid certain transfers of assets for the purpose of thwarting legitimate creditor claims. In Washington State, the Uniform Voidable Transactions Act (“UVTA”) (formerly Uniform Fraudulent Transfer Act) generally makes voidable transfers by the debtor if the debtor made the transfer:
(a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) 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; or
(ii) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
The UVTA lists multiple factors which a court may consider in determining the debtor’s actual intent, including whether:
(a) The transfer or obligation was to an insider;
(b) The debtor retained possession or control of the property transferred after the transfer;
(c) The transfer or obligation was disclosed or concealed;
(d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(e) The transfer was of substantially all the debtor’s assets;
(f) The debtor absconded;
(g) The debtor removed or concealed assets;
(h) 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;
(i) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(j) The transfer occurred shortly before or shortly after a substantial debt was incurred; and
(k) The debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.
The creditor seeking to void the transfer has the burden of proof by a preponderance of the evidence to show the transfer is voidable under the UVTA. If the creditor is successful, the creditor can avoid the transfer, obtain an injunction to prevent further transfers, have a receiver appointed to take charge of the asset, levy execution on the asset, or obtain other equitable relief. The creditor must act in a timely way. Depending on the circumstances, the statute of limitations is either 1 year or 4 years from the date of the transfer.
Whether you are a creditor, debtor, or potential creditor or debtor, the lawyers at Beresford Booth have a wealth of experience in civil litigation and issues associated with collectability of judgments and potential judgments. We would be happy to assist you.