written by Ross Pulkrabek
Individuals and entities sometimes transfer their assets to third parties as part of “asset protection” planning in an effort to render themselves “judgment proof” or create obstacles for existing or prospective creditors who might be inclined to sue them. Such transfers often are fraudulent and voidable under the law.
Lawyers can encounter fraudulent asset transfers in virtually any area of practice, such as when advising clients in commercial and business transactions, estate planning and probate, domestic relations, and all types of litigation. Colorado law not only provides remedies for creditors who are frustrated by fraudulent asset transfers, but it also imposes significant penalties on debtors and third parties who assist in any asset transfer intended to hinder creditors. Practicing lawyers should have a basic understanding of the law surrounding fraudulent transfers to help their clients understand available remedies and avoid pitfalls.
What is a fraudulent, or voidable, transfer of assets?
The Colorado Uniform Fraudulent Transfer Act (CUFTA) defines several categories of asset transfers as fraudulent or voidable. However, the most common type of fraudulent transfer involves a “debtor” conveying assets (or entering into an agreement to do so) with “actual intent to hinder, delay, or defraud any creditor.” Here, the term “debtor” refers to a person who owes money, whether or not that person already has been named as a defendant in a lawsuit or whether a civil judgment has entered against that person. “Creditor” means any person who has a claim against the debtor, whether or not the claim has been filed in court or reduced to judgment.
In many cases, the debtor’s “actual intent to hinder, delay, or defraud any creditor” can be determined by direct evidence, such as oral or written statements made by the debtor. More often, however, courts must infer the debtor’s wrongful intent from circumstantial evidence, including so-called “badges of fraud” that courts traditionally have considered in fraudulent transfer cases at common law and that since have been codified in CUFTA.
The most common badge of fraud is whether the transfer occurred after the debtor was sued, threatened with suit, or engaged in conduct likely to give rise to a claim. Another typical badge of fraud is whether the transfer was made to an “insider” of the debtor, such as a relative.
Fraudulent transfer cases can be simple or complicated. A simple case may involve the debtor deeding an interest in property to a spouse. However, fraudulent transfer schemes also can be incredibly complex. For instance, one of the badges of fraud sometimes found in complex cases involves the debtor working with a lienholder (such as a bank) as an intermediary to transfer assets to an insider of the debtor. An example of this kind of transfer is discussed in an article about a case this firm handled several years ago. See Jay Adkinson, Bank That Was Financially Involved with Debtor Gets Caught Up In Fraudulent Transfer Case In Wilson, Forbes (June 11, 2020), available at https://www.forbes.com/sites/jayadkisson/2020/06/11/bank-that-was-financially-involved-with-debtor-gets-caught-up-in-fraudulent-transfer-case-in-wilson/?sh=4b03d3496ae9.
Not every asset transfer after a debtor has been sued is fraudulent. When a debtor sells assets to a third party in an arms-length transaction and for fair value, such that the debtor continues to hold assets of reasonably equivalent value that could be attached by the creditor, the sale (standing alone) is not likely to be considered fraudulent. Similarly, payments for services rendered contemporaneously generally are not fraudulent.
On the other hand, where a debtor transfers assets without reasonable consideration, or where the debtor continues to use and control assets through a proxy, the transfer likely will be considered fraudulent. Likewise, where a debtor uses a seemingly bona fide transaction as part of a larger plan to avoid or defeat a creditor, the transaction (or at least aspects of it) may be found fraudulent.
Courts have broad latitude to determine whether a transaction or series of transactions amounts to a fraudulent transfer. Although even one badge of fraud can be sufficient to support a finding that a transfer was fraudulent and voidable, no single factor necessarily is determinative.
What are the remedies for a fraudulent transfer?
If a court finds a transfer to be fraudulent, it can order the transfer “avoided” to the extent necessary to satisfy the creditor’s claim. For example, where a debtor transfers title to real property to a spouse, that transfer may be voided and the creditor permitted to attach the property in satisfaction of its claim or judgment.
A court may award the creditor damages, both against the debtor as well as the transferee, which enables the creditor to pursue collection on a claim not only the debtor but also the transferee. In Colorado, if the court finds that a debtor or transferee acted with actual intent to hinder, delay, or defraud a creditor, the court may award additional statutory damages of up to 50% of the amount of the claim or value of the asset transferred. For example, where a debtor quit claims property valued at $1,000,000 to her spouse in order to hinder the creditor’s ability to collect a $1,000,000 judgment, CUFTA would allow the court to assess an additional $500,000 in statutory damages against the debtor and the spouse.
The statutory assessment is intended to deter fraudulent asset transfers and compensate creditors for the harm and expense caused thereby.
CUFTA also authorizes courts to order provisional remedies to preserve the status quo while a creditor prosecutes a fraudulent transfer claim. Such provisional remedies include injunctive relief and prejudgment attachments of assets. For example, a court may order a county sheriff to record a prejudgment writ of attachment against identified real property or bank accounts, both to prevent further wrongful disposition of assets and to secure the creditor’s ability to collect against an asset at the conclusion of a fraudulent transfer case. A court also may enjoin a debtor, transferee, or people acting in concert with them from further disposing of identified assets until the case can be heard.
Lastly, Colorado recognizes an independent tort claim for civil conspiracy among multiple people to engage in a fraudulent asset transfer. Accordingly, when a creditor is harmed by a fraudulent transfer, it is possible to pursue an award of damages not only against the debtor and transferee, but also against third parties who assist the transfer. Such third parties can include co-owners of a business whose assets are transferred, lenders or other lienholders, and even professionals who collude to facilitate the fraudulent transfer.
Conclusion
Lawyers can encounter fraudulent asset transfers in virtually any type of practice. By understanding the basics and being on the lookout for potential fraudulent transfers, lawyers can improve their creditor clients’ ability to obtain a full and fair recovery on their claims, and they can help clients who are debtors, transferees, or lenders/lienholders avoid the potential pitfalls and penalties associated with transferring assets under circumstances where a court might find the transaction improper.
