Actually Fraudulent Transfers Law Definition Elements Defense Lawyer
[California Civil Code § 3439.04(a)(1)]
Definition
Under the Uniform Voidable Transactions Act (formerly the Uniform Fraudulent Transfer Act), a transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud a creditor. (Cal. Civ. Code, § 3439.04, subd. (a)(1); Lo v. Lee (2018) 24 Cal.App.5th 1065, 1071.)
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Element 1: Creditor
A “creditor” is a person or entity who has a claim against the debtor. (Cal. Civ. Code, § 3439.01, subd. (c).) A “claim” means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. (Cal. Civ. Code, § 3439.01, subd. (b).) Creditors whose claims arose after the allegedly fraudulent transaction have equal standing with existing creditors. (Cal. Civ. Code, § 3439.04, subd. (a).)
A creditor can be an individual, partnership, corporation, limited liability company, association, organization, government or governmental subdivision or agency, business trust, estate, trust, or any other legal or commercial entity. (Cal. Civ. Code, § 3439.01, subd. (g).)
A “creditor” includes an assignee of a general assignment for the benefit of creditors. (See Cal. Civ. Proc. Code, § 493.010; Cal. Civ. Code, § 3439.01, subd. (c).) An assignee of a general assignment for the benefit of creditors may exercise any and all of the rights and remedies available to the creditors of the assignor who are beneficiaries of the assignment, but only for the benefit of those creditors whose rights are asserted by the assignee. (Cal. Civ. Code, § 3439.07, subd. (d).)
The UVTA permits defrauded creditors to reach property in the hands of a transferee. (Mejia v. Reed (2003) 31. Cal.4th 657, 663.)
Element 2: Transfer or Obligation
A conveyance will not be considered fraudulent if the debtor merely transfers property which is otherwise exempt from liability for debts. That is, because the theory of the law is that it is fraudulent for a judgment debtor to divest himself of assets against which the creditor could execute, if execution by the creditor would be barred while the property is in the possession of the debtor, then the debtor’s conveyance of that exempt property to a third person is not fraudulent. (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.)
The UVTA is not the exclusive remedy by which fraudulent conveyances and transfers may be attacked. They may also be attacked by a common law action. (Wisden v. Superior Court (2004) 124 Cal.App.4th 750, 758.)
Element 3: Intent to Hinder, Delay or Defraud
The debtor must have had actual intent to hinder, delay, or defraud a creditor at the time the transfer was made or the obligation was incurred. (Cal. Civ. Code, § 3439.04. subd. (a).)
Under the UVTA, a transfer of assets made by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer, if the debtor made the transfer (1) with an actual intent to hinder, delay or defraud any creditor, or (2) without receiving reasonably equivalent value in return, and either (a) was engaged in or about to engage in a business or transaction for which the debtor’s assets were unreasonably small, or (b) intended to, or reasonably believed, or reasonably should have believed, that he or she would incur debts beyond his or her ability to pay as they became due. (Hasso v. Hapke (2014) 227 Cal.App.4th 107, 121-122.)
A transfer is not voidable against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee. (Wisden v. Superior Court (2004) 124 Cal.App.4th 750, 757.)
Whether a conveyance was made with fraudulent intent is a question of fact, and proof often consists of inferences from the circumstances surrounding the transfer. (Renda v. Nevarez (2014) 223 Cal.App.4th 1231, 1238.)
In order to constitute intent to defraud, it is not necessary that the transferor act maliciously with the desire of causing harm to one or more creditors. (Economy Refining & Service Co. v. Royal Nat’l Bank (1971) 20 Cal.App.3d 434, 441.)
Factors to Consider in Determining Actual Intent to Hinder, Delay, or Defraud [CACI 4201; Cal. Civ. Code, § 3439.04(b)]
There is no minimum number of factors that must be present before the scales tip in favor of finding of actual intent to defraud. This list of factors is meant to provide guidance to the trial court, not compel a finding one way or the other. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1020.)
Over the years, courts have considered a number of factors, the “badges of fraud” described in a Legislative Committee comment to section 3439.04, in determining actual intent. Effective January 1, 2005, those factors are now codified as section 3439.04, subdivision (b) and include considerations such as whether the transfer was made to an insider, whether the transferee retained possession or control after the property was transferred, whether the transfer was disclosed, whether the debtor had been sued or threatened with suit before the transfer was made, whether the value received by the debtor was reasonably equivalent to the value of the transferred asset, and similar concerns. According to section 3439.04, subdivision (c), this amendment “does not constitute a change in, but is declaratory of, existing law.” (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834.)
The factors in Civil Code section 3439.04 subdivision (b) do not create a mathematical formula to establish actual intent. There is no minimum number of factors that must be present before the scales tip in favor of finding of actual intent to defraud. This list of factors is meant to provide guidance to the trial court, not compel a finding one way or the other.” (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834.)
“Even the existence of several ‘badges of fraud’ may be insufficient to raise a triable issue of material fact.” (Annod Corp. v. Hamilton & Samuels (2002) 100 Cal.App.4th 1286, 1299.)
Element 4: Causation and Harm
A well-established principle of the law of fraudulent transfers is, “A transfer in fraud of creditors may be attacked only by one who is injured thereby. Mere intent to delay or defraud is not sufficient; injury to the creditor must be shown affirmatively. In other words, prejudice to the plaintiff is essential. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1020.)
It cannot be said that a creditor has been injured unless the transfer puts beyond her reach property she otherwise would be able to subject to the payment of her debt. (Mehrtash v. Mehrtash (2001) 93 Cal.App.4th 75, 80.)
Remedies
Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim
To the extent a transfer is voidable, the creditor may recover judgment for the lesser of (a) the value of the asset transferred (valued at the time of the transfer, subject to adjustment as the equities may require), and (b) the amount necessary to satisfy the creditor’s claim. (Cal. Civ. Code, §§ 3439.08, subds. (b), (c).) The judgment may be entered against (1) the first transferee of the asset or the person for whose benefit the transfer was made; (2) any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee. (Cal. Civ. Code, §§ 3439.08, subd. (b).) Notwithstanding the foregoing, a transfer or an obligation is not voidable against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee. (Cal. Civ. Code, § 3439.08, subd. (a).)
Attachment or other provisional remedies
A creditor who has commenced an action on a claim against the debtor may attach the asset transferred or its proceeds if the remedy of attachment is available in the action under applicable law and the property is subject to attachment in the hands of the transferee under applicable law. (Cal. Civ. Code, § 3439.07, subd. (b); see also Cal. Civ. Proc. Code, § 481.010 et seq.)
Execution
A judgment creditor may levy execution on the transferred asset or its proceeds. (Cal. Civ. Code, § 3439.07, subd. (c).)
Injunction against further disposition by the debtor or a transferee, or both
A creditor may obtain an injunction against further disposition by the debtor or transferee, or both. (Cal. Civ. Code, § 3439.07, subd. (a)(3)(A).)
Constructive trust
Constructive trust plainly a proper remedy under § 3439.07, subd. (a)(3)(C). (Monastra v. Konica Business Machines, U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 1645.)
Consequential Damages
Certain cases, while not awarding consequential damages, have recognized the availability of such damages. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1021.)
Punitive damages
Punitive damages are appropriate in fraudulent transfer actions only where compensatory damages, or their equivalent, are awarded. (Cheung v. Daley (1995) 35 Cal.App.4th 1673, 1676-77.)
Note: Case law has established the remedies specified in the UVTA are cumulative and not the exclusive remedy for fraudulent conveyances.
“They may also be attached by, as it were, a common law action.” By its terms the UVTA was intended to supplement, not replace, common law principles related to fraud. (Berger v. Varum (2019) 35 Cal.App.5th 1013, 1019.)
Statute of Limitations
The limitations period is four years after the transfer was made or the obligation was incurred, or one year after the transfer or obligation was or could reasonably have been discovered by the claimant, whichever is later, but no later than seven years after the transfer was made or the obligation was incurred. (Cal. Civ. Code, §§ 3439.09, subds. (a), (c).) Where a fraudulent transfer is alleged to have been made during a pending lawsuit that will establish whether the complaining party is in fact a creditor, the limitations period does not begin to run until the judgment in the underlying action becomes final. (Cortez v. Vogt (1997) 52 Cal.App.4th 917, 929-37.)
Affirmative Defenses
Statute of Limitations (Actual Fraud)
The UFTA is not the exclusive remedy by which fraudulent conveyances and transfers may be attacked. They may also be attacked by, as it were, a common law action. If and as such an action is brought, the applicable statute of limitations is section 333(d) and, more importantly, the cause of action accrues not when the fraudulent transfer occurs but when the judgment against the debtor is secured (or maybe even later, depending upon the belated discovery issue). (Macedo v. Bosio (2001) 86 Cal.App.4th 1044, 1051.)
Good Faith (Cal. Civ. Code, § 3439.08(a), (f)(1).)
Under section 3439.08, subdivision (b)(1)(A), judgment for a fraudulent transfer may be entered against the first transferee of the asset or the person for whose benefit the transfer was made. (Lo v. Lee (2018) 24 Cal.App.5th 1065, 1072.) If the transferee knew facts showing that the transferor had a fraudulent intent, there cannot be a finding of good faith regardless of any combination of facts; and one court has so held. (See Nautilus, Inc. v. Yang (2017) 11 Cal.App.5th 33, 46.)