By Gary Forster, JD, LLM

An effective asset protection plan must be implemented before any foreseeable clams, as existing debts and anticipated liabilities are not avoidable. Reactionary transfers (made to avoid a present or future creditor) are reversible. In fact, all U.S. states have legislation permitting creditors to reach otherwise protected assets if a move was part of a “fraudulent transfer.”¹ Such laws not only permit suit against the debtor but also generally authorize action against the transferee of the assets. These laws empower creditors (existing or anticipated at the time of an asset transfer²) to reach assets that had been moved outside the grasp of creditors.  

Creditors must prove either actual fraudulent transfer or constructive fraudulent transfer. Proof of actual fraudulent intent requires proof that the debtor intended to avoid the creditor and hinder collection. Proving actual intent (as a state of mind) is difficult, so the courts permit evidence of certain factors that may demonstrate intent, often referred to as “badges of fraud.” The “badges” generally include the following:

• The transfer was to an “insider” (e.g., a relative or close acquaintance of an individual debtor, a director, officer, or controlling shareholder of a corporate debtor, or an entity under common control with a debtor).
• The debtor retained possession or control of the property transferred (funding, for example, LLCs or “self-settled” trusts).
• The transfer was not disclosed or was concealed.
• Before the transfer, the debtor had been sued or threatened with suit.
• The transfer was of substantially all of the debtor’s assets.
• The debtor absconded.
• The debtor removed or concealed assets.
• The value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred.
• The debtor became insolvent after the transfer.  
• The transfer occurred shortly before or shortly after a substantial debt was incurred.

Proving a fraudulent transfer constructively (without proving actual intentions) generally requires proof that the debtor did not receive “reasonably equivalent value” for the assets transferred and became insolvent, undercapitalized, or unable to timely pay debts as a result of the transfer.³ Creditors are, therefore, not necessarily required to show that the debtor had any actual intent to defraud, delay, or hinder collection.

Fraudulent transfer remedies exist for all creditors, but defining who qualifies as a creditor is not always clear. Existing creditors are easily identifiable: anyone owed a monetary obligation – whether a lender, vendor, or judgement holder – is an existing (present) creditor. A contingent or future creditor is one who may have a claim at the time of transfer, depending on circumstances. An example of a contingent claim is a loan guarantee. The guarantor may be called upon to pay only if the principal borrower defaults. An example of a future creditor is the victim of a car accident before liability is determined.  

There are strict time limits for proving fraudulent transfer in order to reach assets transferred to a protective structure, such as limited liability companies and trusts. All U.S. jurisdictions except Nevada allow claims of fraudulent transfer within either four or six years of the protective transfer or, if later, one year following discovery of the transfer. Nevada substantially reduced the claims period to just two years of the transfer or six months after the discovery of a claim.  

Protective transfers must, therefore, be accomplished before creditor clouds start to form. Virtually all states permit creditors to unwind “fraudulent” transfers by debtors intending to avoid paying a legitimate debt. Unwinding transfers by criminals hiding exposed assets (“bad actors”) is usually easy. Keep in mind that fraudulent transfers can become criminal acts if conveyances involve theft, fraud, bankruptcy, or government creditors.

Consider the following criminal transfers.

• Dennis Gaito, CPA, a former principal of Moore Stephens PC, aided Jordan Belfort (aka, “The Wolf of Wall Street”) by fraudulently transferring ill-gotten assets. Belfort testified against Gaito (as a secret government witness) to avoid a 30-year prison term. Belfort testified against Gaito by exposing cash transfers overseas. The court jailed Gaito for 10 years for criminal transfers.⁴ Gaito was also engaged in offshore “planning” for Robert Brennan of First Jersey Securities. Brennan was sued by the Securities and Exchange Commission (SEC) for $75 million in securities fraud. Brennan was ultimately jailed for bankruptcy fraud and criminal contempt. Gaito made transfers to irrevocable foreign trusts benefitting Brennan, with all assets reverting back to Brennan after 10 years. Gaito was disciplined and convicted of 17 counts of financial crimes, including money laundering.⁵
• Kathleen Smith, former COO of Alliance Bancorp, made a series of transfers during a lawsuit and after entry of a $6 million judgment (arising from mismanagement of bank assets). The court awarded compensatory damages of over $4.8 million against Smith and her transferee (husband), along with $10 million in punitive damages.⁶  
• Denny Patridge hid business income through trusts and offshore accounts. Although two of the three trusts used in the scheme filed tax returns, each claimed expenses exactly equal to taxable income. The third trust never filed a tax return. Patridge himself filed returns in some years and claimed negligible income. After audit, the IRS concluded that Patridge failed to report significant income. Rather than pay the IRS, he implemented sham trusts, phony mortgages, and two consulting companies to hide assets. Partridge was charged with tax evasion, wire fraud, and money laundering, and sentenced to 60 months of imprisonment, fined $100,000, and ordered to pay his back taxes and accumulated penalties.⁷

Identifying protective transfers as fraudulent can be unpredictable under typical business circumstances. Consider the following scenarios:

Scenario 1: An engineer performed soil testing in connection with site preparation for swimming pools. About eight years later, swimming pool owners sued the construction company and engineer for alleged construction defects. Meanwhile, four years after the construction and four years before the lawsuit, with no knowledge of any issues or claims (from the swimming pool owner or anyone else), the engineer created three separate domestic asset protection trusts (“DAPTs”). He transferred substantially all of his assets to the trusts. A judgment was ultimately entered against the engineer in favor of the homeowners. To enforce the judgement, the homeowners sought to invalidate the creation and funding of the DAPTs as part of a fraudulent transfer scheme. This is the California case of Kilker v. Stillman.⁸

Scenario 2: A construction loan went into default. Three months later, the bank sued the developer and the loan guarantors. Six months after the lawsuit was filed, one of the guarantors transferred almost all of his assets (nearly $1.7 million) to an offshore trust. After obtaining a $4.9 million judgment, the bank sought to invalidate the transfers to the trust as fraudulent transfers. This is the Florida case of BB&T v. Hamilton Greens.⁹

Based on the requirements of intent under fraudulent transfer statutes, Scenario 2 presents circumstances clearly suggesting a fraudulent transfer. Scenario 1 does not. In the first scenario, the engineer would have had no reason to believe he was engaging in fraudulent transfers because he knew of no creditor when he funded the DAPTs. Four years would pass before the homeowners even filed suit. Nevertheless, in the first scenario, the debtor’s transfers were invalidated, and the transfers in the second scenario withstood judicial scrutiny. The cases illustrate the difficulty of collecting when a transferor is not a clear “bad actor.”

In the first scenario, the engineer testified that he had engaged in “asset protection” by transferring all of his assets into the DAPTs, which left him with almost nothing. From the available court records, his testimony seemed candid and unapologetic. The court seemed annoyed by the engineer’s protective planning, and stretched the bounds of the fraudulent transfer law to undermine the engineer’s asset protection plan.¹⁰

In the second scenario, the loan guarantor testified that he did not intend to evade any judgment from the bank but, instead, “he transferred approximately $1.7 million in assets to the trust in order to protect his future financial security.” Little more than his testimony was required to convince the court that he had no intention to avoid paying the bank (despite the questionable timing of the transfers, which came just after default).

Protective planning should be coupled with intentions beyond pure asset protection. Courts will generally respect planning for unknown contingencies, but they will expose assets seemingly transferred to avoid creditors.

¹ As all states have adopted some form of the Fraudulent Transfer Act, courts routinely look to other states and to analogous provision under the Federal Bankruptcy Code to interpret certain provisions of the act. As such, we look to other jurisdictions outside of our home state of Florida to aid in our analysis.
² The same remedy available to an existing creditor is available to reasonably foreseeable future creditors who have not yet established a payment obligation or obtained a judgment at the time of the transfer.
³ Transfers for which the debtor receives “reasonably equivalent value” fall outside of the constructive fraudulent transfer statute. Berndoll v. Sobik’s Franchises Inc., 681 So.2d 1164 (Fla. 5th DCA 1996).
⁴ Associated Press, “Accountant Convicted of Stock Fraud.”
⁵ In re Dennis M. Gaito, CPA, U.S. Securities and Exchange Commission, Administrative Proceeding File No. 3-9904. 
⁶ Elie v. Smith, Case No. 26-53342 (Cal.Super.Napa, Oct. 13, 2011).
⁷ U.S. v. Patridge (U.S. 7th Cir. 2007); Case Nos. 06-3635 and 06-3785. Indicted.
⁸ Kilker v. Stillman, 2012 WL 5902348 (Cal. Ct. App. Nov. 26, 2012) (unpublished).
⁹ Branch Banking & Tr. Co. v. Hamilton Greens LLC, Case No. 11-80507-CIV-MARRA/MATTHEWMAN (S.D. Fla. Jun. 14, 2016)
¹⁰ Kilker v. Stillman

Gary Forster, JD, LLM, is managing partner and co-founder of ForsterBoughman in Maitland, Fla. He can be reached at forster@fbl-law.com.  

Sign up for weekly professional and technical updates from PICPA's blogs, podcasts, and discussion board topics by completing this form.