Fraudulent Transfers and Conveyances

What is a fraudulent transfer (sometimes referred to as a fraudulent conveyance)?

FraudSometimes, parties who owe money, who have a judgment against them, or who know that a judgment against them is not far off, try to dispose of or to transfer assets that they want to shield from the reach of the impending collection efforts of their creditors. A "fraudulent transfer" of an asset by someone in debt (a debtor) is a transfer that the law will set aside or void because it would be unfair to other creditors if that transfer was allowed to stand. A "fraudulent transfer" can even result from a situation where the debtor does not transfer an asset, but where it grants a lien on the assets of the debtor to a particular creditor.

Fraudulent transfer law, which is embodied in Tennessee law in the "Uniform Fraudulent Transfer Act," is designed to help creditors collect lawful debts by providing remedies to creditors whose collection has been hindered by debtors who have transferred assets. Not every transfer of an asset by a debtor who knows that it owes a creditor or creditors is a fraudulent transfer. Where, however, a creditor can prove that a transfer was "fraudulent" under Tennessee law, the creditor may well be able to set aside the transfer, and to collect against the transferred asset. In some fraudulent transfer cases, a creditor may even be able to collect the money it is owed from the person or entity to whom the creditor transferred the asset.

The law regarding fraudulent transfers and conveyances is complex, and there are a countless number of factual scenarios which might be considered fraudulent transfers. Generally, and broadly speaking, there are three categories of transfers that should be a red flag for a creditor or a creditor’s lawyer that a fraudulent transfer may have been made:

  • Transfers made while the debtor was insolvent or that rendered the debtor insolvent;
  • Transfers made without the debtor receiving a "reasonably equivalent exchange" when the debtor’s assets were unreasonably small or when the debtor knew, or reasonably should have known, that it was about to incur debts it could not pay;
  • Transfers made with actual intent to hinder, delay or defraud a creditor

If the creditor did not have a judgment from a court against the debtor at the time the debtor made the fraudulent transfer, does that mean that the creditor cannot challenge or set aside the transfer as being fraudulent?

No. A creditor can set aside a transfer as fraudulent even if, at the time the debtor made the transfer, that creditor had not reduced its claim to a judgment. A creditor is entitled to the protection and remedies provided in the Uniform Fraudulent Transfer Act if it had a "claim" against the debtor at the time the fraudulent transfer was made. A "claim" includes any right to payment, even a right to payment that has not matured.

What if a creditor’s claim against the debtor arises after the debtor made the fraudulent transfer? For example, what if someone (a creditor) delivers goods or provides services to someone and it is later discovered that, because of a transfer that was made before the goods or services were supplied, the party who received the goods or services (the debtor) cannot pay for the goods or services?

In some circumstances, fraudulent transfer law allows a creditor whose claim did not even exist at the time of the fraudulent transfer to set aside the fraudulent transfer. The Uniform Fraudulent Transfer Act refers to creditors whose claims did not exist at the time of the fraudulent transfer as "future creditors." A "future creditor" can set aside a transfer in two situations:

  • If it can prove that the creditor made the transfer "with actual intent to hinder, delay or defraud any creditor"
  • If it can prove that the creditor did not receive a "reasonably equivalent value" for the asset; and the debtor, at the time of the transfer, was "engaged or about to engage" in a transaction (incurring debt for services or goods, for example) and the remaining assets of the debtor were "unreasonably small" to enable the debtor to pay for the debt incurred by virtue of the transaction; or the debtor intended to incur or reasonably believed that it would incur debts which would be beyond the debtor’s ability to pay

What if the debtor transferred ownership of a piece of real estate or other valuable asset to another person in order to keep the debtor’s creditors from collecting from the proceeds of the real property or the asset? Can a creditor collect against the real property or asset even if it is no longer owned by the debtor? What protection does the person to whom the real property or asset was transferred or sold have against a creditor of the debtor who wants to set the transfer aside?

Where a debtor transfers an asset like, for example, a piece of real estate, to another party (a "transferee"), a creditor may have some, or all, of the following rights if the transfer is deemed to be "fraudulent":

  • The right to set aside the transaction between the debtor and the transferee without paying any money to the transferee;
  • the right to "attach" the property which means the right to a court order directing the sheriff to seize the property in order to secure payment of the creditor’s claim;
  • the right to sell the transferred asset and to keep the proceeds to the extent necessary to satisfy the debt to it;
  • the right to receive a judgment against the transferee for the value of the asset transferred or the amount of its debt; or
  • the right to obtain an injunction preventing the transferee from transferring or selling the asset.

Which, if any, of the above remedies is available to a creditor will depend upon: (1) The value paid by the transferee for the asset; and (2) whether or not the transferee knowingly participated in the transfer to aid the debtor in hindering creditors. Where a transferee has acted in good faith, i.e., without knowledge that the debtor made the transfer to hinder creditors, and has paid a "reasonably equivalent value" for the asset, a creditor cannot set aside the transaction, or otherwise obtain a judgment or relief against the transferee.

What time limitations and statutes of limitation apply to actions related to fraudulent transfers?

In most cases, a legal action related to a fraudulent transfer must be brought within four (4) years of the transfer. In some cases, a party may have longer than four (4) years after the transfer if the party can prove that the fraudulent transfer could not reasonably have been discovered within four (4) years.