Remedies Generally | Money Judgment | Injunction | Insurance Penalties for a Frivolous Claim

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What happens when person or company tries to shield its  assets after incurring a debt? Attempting to move assets  beyond the reach of known creditors carries risk and potential  liability relative to the fraudulent conveyance act, which  prevents a “fraudulent transfer.” A “fraudulent” transfer does  not require actual fraud.

For example, let’s say Jake owes $2,000 to Sally and has  neglected to make good on the debt. Sally files suit and gets a  judgment for $2,000 against Jake. Sally goes to the Sheriff’s  office and asks the Sheriff to serve a writ of execution to levy  on Jake’s motor boat. Sally then learns through a neighbor that  Jake sold the motor boat to his sister for one dollar within the  past 30 days.

Obviously Sally thinks that there has been a “fraud”  perpetrated (or, at least, a very questionable transaction at a  time that Jake knew he owed money to a creditor and failed to  get money from the transaction to pay a creditor) and wants to  know what can be done to effect justice so that he can collect  the debt. transfer to defeat the rights of creditors may violate  criminal statutes relating to fraud, and also violates civil  statutes, which provide a procedure to recall the transaction  and satisfy the debtor’s obligation.

The courts will treat this this as a “fraudulent” transfer —  whether the creditor’s claim arose before or after the transfer  was made or the obligation was incurred — so long as the  debtor made the transfer with:

1. actual intent to hinder, delay or defraud any creditor of the  debtor; or
2. without receiving a reasonable equivalent value in exchange  for the transfer or obligation, and the debtor:
(a) was engaged or about to engage in a business or transaction  for which the remaining assets of the debtor were  unreasonably small in relation to the business or transaction;  or (b) intended to incur, or believed or reasonably believed  that the debtor would incur, debts beyond the debtor’s ability  to pay as they became due.

The definition of “actual intent” to hinder, delay or defraud  presents a problem. To ascertain actual intent, one considers  whether:

1. the transfer was to an insider;

2. the debtor retained control or possession after the transfer;
the transfer was concealed;

3. the debtor had been sued or threatened with suit before the  transfer was made;

4. the transfer was substantially all of the debtor’s assets;

5. the debtor absconded;

6. the debtor removed or concealed assets;

7. the value of the consideration received by the debtor was  reasonably equivalent to the value of the asset transferred or  the amount of the obligation incurred; and

8. the debtor was insolvent or became insolvent shortly after  the transfer.

If the creditors are present creditors, as opposed to “present  and future” creditors, the definition of a fraudulent transfer is  much less involved. For present creditors, the transfer is  deemed “fraudulent” if (1) the debtor made the transfer or  incurred the obligation without receiving a reasonably  equivalent value in exchange for the transfer or obligation and  the debtor was insolvent at that time or (2) the debtor became  insolvent as a result of the transfer or obligation. Once the  court finds “fraud,” there are powerful and harsh remedies  that the court may impose to correct the obvious wrong.
The court may void the transfer to the extent necessary to  satisfy the creditor’s claim.

The entire transaction might be actually set aside so that the  transferred property is actually returned to the ownership of  the debtor so that the creditor may proceed against it by legal  process.

The court may issue an attachment against the asset  transferred or other property of the transferee. This remedy  would permit the court to put the transferred asset directly  under the control of the court from where the creditor could  cause it to be sold and the proceeds used to pay the debt. This  remedy is especially strong in that it can be used not only  against the particular item that was fraudulently transferred,  but may also be used against any other property that might  belong to the transferee.

The court may enjoin against further transfers by either the  debtor or transferee or both. Once there is a finding that the  transfer was fraudulent, an injunction may be a very speedy  way of arranging that the property to be used to satisfy the  debt does not again become lost. The penalties for disobeying  an injunction can rise to the level of incarceration.

The court may appoint a receiver to take charge of the asset or  other property of the transferee and thereby take physical  possession of the asset or other property of the transferee with  the obvious advantage that the value may be preserved for the  creditor.

Finally, the court may directly issue execution process, that is,  authorize the sheriff to go out and seize the asset or its  proceeds and pay the claim of the creditor.

Sally’s path to securing payment on her judgment certainly is  not a simple one. It requires filing a separate lawsuit and/or  petition with the court to request that the transfer be deemed  “fraudulent” and asking that the court order some kind of  relief. Obviously the cost of doing this might be prohibitive for  a small claim, but the efficiency of proceeding in this manner  increases as the amount of the claim increases and the amount  of the property wrongfully transferred increases.

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