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Fraudulent Conveyance Lessons for Debtors and Creditors

Published: October 23rd, 2018

Darryl M. Bloodworth

When the owner of a hotel transferred his stock to his wife shortly before he defaulted on a loan related to his ownership of another business, creditors cried foul. They filed suit, alleging that giving the stock to his wife without receiving any payment constituted fraudulent conveyance – an attempt to shield assets that could be used to pay creditors.

But the courts disagreed, siding with the Florida Panhandle hotel owner and his wife in long-running litigation that bounced around the courts for three years before finally being resolved at the Florida First District Court of Appeal. The court’s opinion offers insight to both creditors and debtors in instances where assets that possibly could have been used to satisfy debt are transferred, especially if the recipient is a related party such as a spouse.

Darryl M. Bloodworth, a founding shareholder in Dean Mead’s Orlando office who has substantial experience in commercial litigation and is certified by The Florida Bar in civil trial law, says the case provides clear guidance to both debtors and creditors who want to understand the requirements of Florida’s law on fraudulent conveyances. “A close reading of this case could save both sides money by avoiding needless litigation,” Bloodworth says.

The case is RREF SNV-Fl SSL, LLC v. Shamrock Storage, LLC, 250 So. 3d 788 (Fla. 1st DCA 2018).

Stock Given to Wife Ahead of Loan Default

The underlying facts of the case were not in dispute. The hotel owner transferred his stock ownership to his wife just a few months before he defaulted on a bank loan related to a storage facility he owned. He received nothing from his wife in payment for the stock. After winning a judgment against the man for a debt incurred by his storage facility business, a creditor filed suit to void the transfer of the hotel stock so that it would be available to satisfy the judgment. The creditor alleged that the transfer was made with intent to shield the assets from any judgment and therefore was fraudulent.

The courts sided with the debtor, however, and their opinions tell us a lot about how the law views claims of fraudulent transfers. Bloodworth says the case clarifies that under Florida law, a transfer of an asset must meet three conditions to be fraudulent. They are:

  • The debtor did not receive reasonably equivalent value for property transferred.
  • The debtor is insolvent. If a debtor defaults on a loan, he likely would be presumed to be insolvent.
  • The debtor is aware of claims against his assets. The claims don’t have to take the form of a judgment but are viewed more in an accounting context of having an unsatisfied debt.

At first glance, the debtor in this case would have appeared to be facing an uphill legal battle to prove the stock transfer wasn’t an attempt to safely park his hotel stock with his wife. In a case involving the transfer of assets to a spouse, the appeals court said, the burden of proof always rests with the defendant to show that the transaction was not made to delay, hinder or defraud creditors. Still, the defendants eventually prevailed, and here is why.

Defendants Proved They Didn’t Meet One Prong of Fraudulent Conveyance

It turned out that the collapse of the real estate market in 2008 had left the hotel with a $7 million mortgage, while its current market value was only $4 million. Thus, the husband gave the wife stock in an asset that had a negative net worth, Bloodworth says, rendering it worthless from a balance sheet perspective. “Essentially, the ruling said that it’s impossible to receive less than reasonably equivalent value for an asset that has no value,” says Bloodworth. Thus, the transfer did not satisfy one prong of the fraudulent conveyance law.

There also was a plausible reason for the transfer. Because of her better credit rating, the wife was able to secure a Small Business Administration-backed loan to shore up the hotel business. “That gave credibility to the defendant’s contention that the transfer wasn’t made to hinder collection of the debt,” says Bloodworth.

Takeaways on Fraudulent Conveyance

  • In assessing the value of a transferred asset, the courts will look strictly at the balance sheet. Bloodworth says it could have been argued that the asset had potential for considerable appreciation as the real estate market recovered. But the court drew the lines sharply, looking at the current market value and debt.
  • A transfer to a spouse or anything that isn’t at arm’s length will arouse suspicion. If you are going to make a transfer to a spouse in a situation where the transfer might be called into question, expect to have to defend it.
  • The clock starts ticking one year before a transfer. The court said any transfer made within one year before service of process for a claim requires a defendant to prove the transfer wasn’t made to delay, hinder or defraud creditors.

The law attempts to strike a balance between the rights of creditors and debtors, Bloodworth says. Notably, it does not provide for the award of damages when there is a fraudulent conveyance and limits a creditor’s remedy only to voiding the transfer. However, attorneys’ fees in these cases can be considerable, and a court likely would require a losing debtor to pay fees for both sides.

While it may seem unfair, Bloodworth says it is not easy for a creditor to establish that a debtor meets all of the requirements to prove fraudulent conveyance. “Look hard at these holdings before spending a lot of money in litigation,” Bloodworth warns.