• Anthony A. Garcia

Creditor's Remedies Series: Part 1 - Uniform Fraudulent Transfer Act

Part 1 of a series briefly exploring the various options creditors have to get their money back.

If you have ever lent someone money or if you have ever worked for someone on credit, you know the feeling: am I really going to get the money that is owed to me? Until the cash is in your hand, you can never really be sure. What if the day you are supposed to be paid back never comes? What if, instead, the debtor tells you that there is no more money left to pay you back? What now?

Your first reaction should be skepticism, followed closely with immediate and aggressive investigation. If your debtor fails to pay you what is owed, it is vitally important to determine what exactly happened, what caused the debtor to become insolvent, and where the major assets of the company went. Faced with mounting debts and the growing possibility of being unable to repay, it is not unheard of for some foolhardy or desperate debtors to attempt to hide assets from creditors, transfer assets back to the shareholders before the company implodes, or even create a fresh new company to purchase the debtor's assets, leaving the creditors (i.e. you) to kick rocks. Sure, you may have a breach of contract claim against the debtor for failing to pay, but if there are truly no assets left in the company, a judgment against the debtor may ultimately be worthless. Fortunately, these misguided debtors, believing they have outsmarted the people they owe, have actually opened themselves up for serious attack by the patient and persistent creditor who has a sizable quiver of options when it comes time to take the debtor to Court.

In this Creditor's Remedies series, we will briefly explore the various options creditors have to get their money back from persons other than the debtor under the right circumstances. We begin with perhaps the most well-known and formidable legal devices creditors have to chase down the money owed to them: fraudulent transfer statutes.

The Colorado Uniform Fraudulent Transfer Act (CUFTA) - C.R.S. § 38-8-101, et seq.

Many states, Colorado included, have enacted a powerful set of statutes to help creditors pursue debtors who transfer assets in bad faith known as Uniform Fraudulent Transfer Acts. If a transaction qualifies as a "fraudulent transfer," the creditor will be able to pursue legal action against not only the original debtor, but any other individual or entity who received the fraudulently transferred assets (with limitations), creating a larger pool of people from whom the creditor can recover the amounts owed. This can extend to the actual shareholders and insiders of a business, any family members of those individuals, and possibly even their close friends if they were also involved in transferring or concealing assets. In certain circumstances the creditor may even be able to obtain a Court order preventing the debtor from transferring any other assets (known as an "injunction") and/or an order appointing a receiver to take control of and run the business which received the fraudulently transferred assets.

Further, as those who have engaged in litigation before will know, proceeding through Court is not cheap. However, in Colorado, a creditor may be reimbursed his or her attorney fees as damages for having to engage in the added time and expense of pursing fraudulently transferred assets. Often times the award of attorney fees can be greater than the amount fraudulently transferred, especially if the transfer was complex and required considerable effort to unravel. Indeed, in one case, this firm was successful in obtaining an award of attorney's fees roughly six times the total amount of fraudulently transferred assets!

So what types of transfers are fraudulent transfers? In general, there are two types: transfers made via actual fraud and transfers made with "constructive" fraud. Actual fraud is fairly straightforward; they are transfers made with actual intent to hinder, delay, or defraud any creditor of the debtor. A typical example of a transfer made with actual fraudulent intent occurs in an asset purchase transaction between two companies which are both owned by the same or similar owners. The owners of the original debtor, believing themselves to be clever, create a new company to "purchase" the assets of the original debtor for little or no value while leaving the liabilities languishing with the original debtor. This has the effect of making collection more difficult for creditors, which consequently, may also subject the new company (and possibly its owners) to liability for the fraudulent transfer.

Because those who engage in actual fraud rarely make their intentions explicit, Courts consider various well-known indicators of fraudulent intent known in the legal community as "badges of fraud." These badges include obvious indicators, such as transfers made to an insider or transfers of substantially all of the assets of a business. They also include more hidden and complex tactics, such as when assets are transferred to a lienor who then transfers those assets to an insider. If a judgment is rendered in your favor for a fraudulent transfer involving actual fraud, there is case law supporting the notion that such a judgment would not be dischargeable in bankruptcy, meaning you may be able to continue pursuing the judgment debtors even after the debtors file bankruptcy.

Constructive fraud, on the other hand, does not require any proof of intent. Rather, all that is required is that a transfer is made without the debtor receiving "reasonably equivalent value" in exchange for the transfer. In other words, when the debtor gives assets away without receiving sufficient value in return that a creditor can use to satisfy the debt. What constitutes "reasonably equivalent value" is a complicated legal analysis often requiring valuation and analysis of particular transactions to uncover the constructive fraud. Unlike actual fraud, however, a judgment based on constructive fraud may be subject to a bankruptcy discharge.

If you suspect that a fraudulent transfer has been made to your detriment, it is critical that you speak to a lawyer immediately as there are varying statutes of limitations based upon the type of fraudulent transfer at issue, to whom the transfer was made, and whether or not the debtor was insolvent at the time of the transfer. If you would like to schedule a more in-depth consultation, please contact my office at (720) 340-1702 to schedule a meeting. If you are concerned about the availability of funds a judgment debtor may have to satisfy a judgment, my office also conducts asset investigations to determine whether particular debtors have assets that may be used to satisfy eventual judgments. Inquire for details.

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