How To Overcome A Fraudulent Conveyance

Here are some steps you can take to get paid if you have a good and substantial claim against a person or business, and you are told that even if you get a judgment you will have a hard time collecting because there are or will be no assets left upon which you could enforce the judgment.

Even if the debtor gets rid of all of the assets, you may still be able to collect on your claim if you can show that the debtor transferred a valuable asset for less than fair value for the purpose of avoiding paying debts or claims the debtor knew existed at the time of the transfer. Debtors who seek to hide or transfer assets often do so by transferring assets, or “selling” assets  to relatives or friends who knew or should have known of the debtor’s effort to avoiding paying the debt. The proof of this is usually the fact that the terms of the transfer provide little or no payment to the debtor by the transferee, or defer payment for so long as to make it clear that this was not an arm’s length transfer to a bona fide purchaser for value.

Several years ago, I obtained a judgment against a stockbroker for $2.5 million after a FINRA panel awarded that amount to our client, a former customer of the broker.  During the proceedings, when the broker saw the likelihood of our client obtaining a multi-million dollar award, the broker transferred ownership of a valuable New York City cooperative apartment to a member of the broker’s immediate family in exchange for the transferee’s agreement to pay the maintenance charges for the apartment for the next several decades.

Through discovery and investigation, we subsequently learned of the transfer and a court proceeding was successfully brought that voided the transfer as a fraudulent conveyance and directed that the customer’s judgment be paid through a public auction of the cooperative apartment.

While this cumbersome auction proceeding is required, and it will reduce the apartment sales proceeds by as much as 50% below market, it will provide a substantial return on the judgment, which continues to accrue interest at 9% annually.

This also serves as a lesson to debtors who seek to use a fraudulent conveyance to avoid paying a claim.  After the apartment auction, the debtor will have lost 50% of the value of the auctioned apartment that could have been used as a part of an asset transfer for settlement of the brokerage customer’s judgment.  Instead, after the auction expenses, the proceeds will not be nearly sufficient to pay the judgment, which will remain outstanding.  Thus, the debt continues to remain subject to the former customer’s multi-million dollar judgment; that is being further enforced in actions against other real estate owned by the broker in another state.

Courts look first at the consideration received for the asset transfer and the identities and relationships, if any, between the debtor and the transferee, the timing, and the circumstances surrounding the transfer – such as whether a claim had been threatened or filed against the debtor prior to the transfer.

If you have a claim that has not yet been filed, it is key to notify the debtor, in writing, of the nature and amount of your claim and of your intention to pursue payment on the claim.

If you have any questions about the matter discussed above or would like to discuss other corporate law matters, please contact me or the Scarinci Hollenbeck attorney with whom you work.