Missouri Real Estate Lawyer

A fraudulent transfer of an asset can carry a steep price if done to defraud a creditor. When faced with a potential or actual claim by a creditor,many people think about whether they can transfer assets so that the creditor can’t get them. It’s a common sense question.

Let’s say you are an owner of an LLC. The LLC owns several apartment buildings. It’s winter, and the apartment building sidewalks are covered with ice. One of your tenants slips on the ice and injures herself. What’s one of your first concerns? Is the LLC going to get sued. If the tenant gets a judgment against the LLC, she could seize any or all of the apartment buildings owned by the LLC in order to pay the judgment. Perhaps, you think to yourself, you should quickly transfer some or all of the properties away from the LLC before she files a lawsuit.

If you’re more enterprising, you might consider making a big loan to the LLC and then recording a deed of trust on each property owned by the LLC to secure the loan. That way, you believe, you’d discourage her from executing on the property, since the sales proceeds would first go to you to pay off your deed of trust. She might end up with nothing in that scenario.

Fraudulent Transfers, Recent Case Law

In a Missouri case just decided on March 31, 2015, Curtis v. James, Jesse Curtis was injured while riding an ATV on property owned by defendants. Four months after the injury, defendants formed a trust and transferred their assets into the trust. Curtis then filed a lawsuit against defendants, seeking compensation for his injuries. Curtis learned about the transfers into the trust and filed a separate action against defendants and the trustees of the trust, alleging that they were fraudulent transfers under the Missouri Uniform Fraudulent Transfer Act (Act).

The Act provides that a transfer is fraudulent if it is done with the intent to “hinder, delay, or defraud any creditor of the debtor”. The Act broadly defines a creditor as a person who has a claim and a “claim” as a right to payment. It does not matter whether the claim of the creditor arose before or after the transfer or whether the creditor obtained a judgment against the debtor.

In Curtis v. James, the trial court entered judgment against Curtis on the grounds that he had not obtained a judgment against defendants for his injuries before he filed the fraudulent transfer lawsuit. The appeals court cited the plain language of the Act (judgment is not required for a creditor to have a claim) in support of its reversal of the trial court’s judgment.

Although a transfer can be reversed if the court finds that it was done with the intent to defraud a creditor, what is the downside of transferring your assets, even if it’s deemed a fraudulent transfer? If you transfer assets and the court reverses the transfer, you’re in no worse shape than before the transfer. So why not take the chance? In the example above, if your LLC owns multiple properties, then each of them is at risk if your slip and fall tenant gets a judgment against the LLC. Why not transfer them away from the LLC and roll the dice. Maybe the tenant won’t sue for fraudulent transfer, and if she does, she might not be successful in getting all of transfers reversed. The worse-case scenario seems to be that the court will simply undo the fraudulent transfers. Of course you’ll have to pay your attorney to defend the LLC in the fraudulent transfer lawsuit, but that cost might be worth the chance.

Downside of Fraudulent Transfers

The Act provides that the court may provide any “relief the circumstances may require.” This has been interpreted by Missouri courts as permitting creditors to recover punitive damages against debtors who make fraudulent transfers under the Act and as permitting creditors to recover their attorney’s fees from such debtors. This interpretation puts real teeth in the Act and must be seriously taken into consideration by anyone thinking about transferring assets, whether owned individually, in trust, or by a legal entity, in order to avoid potential seizure of such assets by a creditor. Further, a creditor can include a separate claim for common law fraud, which also permits a judgment for punitive damages.

Additionally, the creditor might include, as part of a lawsuit brought under the Act, a count that seeks to pierce the LLC or corporate veil. The creditor must typically demonstrate fraud by the debtor in order to pierce the LLC/corporate veil. Since the creditor needs to also demonstrate fraud under the Act, a creditor might be inclined to attempt to pierce the veil as part of a lawsuit asserted under the Act. In that circumstance, both your personal assets and the assets of the business would be at risk if the creditor got a judgment for a fraudulent transfer.

Despite the forgoing, just because a creditor might have a claim does not mean that you should, under no circumstance, transfer any asset. The Act provides criteria for determining the intent of the transferor. For example, the court is to consider, among other things, whether the transfer was part of a legitimate business deal, whether the transferor retained control of the asset after the transfer, to whom the transfer was made, whether the transfer included substantially all of the assets owned by the transferor, the value received by the transferor in exchange for the transfer, and whether the transfer caused the transferor to become insolvent.

What you received in exchange for the transfer is still subject to seizure by the creditor. However, by demonstrating that it was not a fraudulent transfer, you will perhaps avoid a fraudulent transfer lawsuit altogether, or perhaps avoid a judgment that includes punitive damages and the attorney’s fees of the creditor if one is filed.

The Take Away

Transferring assets for the purpose of avoiding collection on a claim is a bad idea. This does not mean though that you should not put into place valid asset protection strategies. However, the intent and timing of transfers pursuant to such strategies must be considered before making such transfers.

The information provided in this article is general in nature, and it is not intended as legal advice. Your circumstances may be unique, and you should therefore consult knowledgeable legal counsel about how the information or concepts discussed in this article might apply to you or your business.

Michael Sewell has an MBA and JD, numerous years of high level business experience with multi-billion dollar corporations, and he has practiced law in Missouri since 2005. Michael Sewell is the owner of Sewell Law, LC, which helps clients with LLC formations, private securities offerings, and litigation.

Feel free to contact Michael through www.stlouisllcattorney.com.

This article was published on April 4, 2015.

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