In the world of post-judgment collection, creditors frequently encounter a debtor who in an effort to shield his/her assets transfers those assets to a trust for "asset protection." While creditor's counsel can generally enforce the judgment against the revocable trust assets as a fraudulent transfer when the transfer of the assets occurred after the clear existence of the debt whether pre or post-judgment, what happens when the debtor transfers those assets to the revocable trust before the creditors claim arose or the debtor even knew of the creditor's potential claim?
In an interesting case, the creditor was able to set aside transfers to a trust that occurred years before the debt was reduced to judgment or the debtor knew of the creditors' claim. This case sets forth a good primer for eliciting the type of testimony that a creditor is going to need to prevail under the following fact pattern.
The facts of the case are as follows... Debtor ran a soil and engineering business. In 2000, he performed soil testing in connection with the future Creditors' pool. In 2004, Debtor formed three trusts and transferred virtually all of his assets into one of the trusts. Creditors' pool began to crack and in 2008, Creditors sued Debtor for negligence. Debtor settled with a counrt enforceable stipulation for entry of judgment or settlement agreement, but, not surprisingly, failed to make his settlement payment and the debt was reduced to judgment upon application therefor by creditors' attorney.
Creditors attempted to force a sale of a commercial property owned by Debtor that had been transferred into the Trust. Before the sale, the Trust filed a third party claim stating that the property belonged to the Trust and not Debtor. The Creditors filed a petition to invalidate the third party claim alleging fraudulent transfer and the court held a bench trial on the issue.
During the trial, Debtor admitted that his primary objective in creating the trust was asset protection because soil engineers were frequently sued. He also testified that the transfers to the Trust were without reasonably equivalent value and left Debtor with less than $500.00 in other assets. Further, Debtor admitted that he operated his business out of the same office building owned by the Trust, and that the Trust didn't charge him any rentals. Debtor continued on, testifying that he had also transferred his personal residence into the Trust, and that he and his family lived there, also rent-free. In a unique twist, the beneficiary of the trust was Debtor's brother and not Debtor himself, which is the more common situation.
The Trial Court used Debtor's testimony to find that Debtor had the intent at the time he transferred the property into the trust to hinder, delay and defraud Creditors even though this particular creditors' claim was in fact unknown to him at the time of the transfer in 2004.
Debtor appealed, arguing that the fraudulent transfer laws are not meant to encompass claims against future, unknown creditors. He also claimed that there was no evidence that he had specifically intended to defeat the collection efforts of the subject Creditors or some other existing creditor.
The court upheld the finding that a general intent by a debtor to defeat the rights of "future creditors" would satisfy the intent requirement of the UFTA. This case is instructional in how a savvy creditor's counsel can unwind a transfer to a trust made for general asset protection and not to hinder a specific creditor.
For assistance in defeating a creditor hiding assets under the guise of assets protection, contact commercial collections attorney Ronald P. Slates today.