Asset Protection

HOW CREDITORS RECOVER FRAUDULENTLY TRANSFERRED PROPERTY

A creditor who suspects a fraudulent transfer has several remedies. The precise remedies will partly depend upon whether the claim has reached judgment or is a pending or future claim.

A judgment creditor who suspects a fraudulent transfer can file suit directly against the transferee and have the court:

1. set aside the transfer and restore title to the original owner-debtor for seizure by the creditor;

2. enjoin further transfer, encumbrance or depletion of the asset (freezing the asset), pending the outcome of the fraudulent conveyance action;

3. award damages from the transferee and supplemental damages from the transferor (equal to the legal costs to recover the asset);

4. appoint a receiver over the conveyed asset if the asset may disappear or be dissipated;

5. recover from the debtor the proceeds received when the property was sold (but the creditor cannot void the sale to a subsequent good faith purchaser who paid fair value).

While these and numerous other remedies are available to a creditor in a fraudulent conveyance case, a court, to the extent practicable, will simply attempt to restore the creditor to his position before the fraudulent transfer. Whether this can be practicably accomplished, of course, depends largely on whether the transferee still holds the asset and whether it has been since altered, destroyed or sold.

A non-judgment creditor has considerably greater difficulty, but even the non-judgment creditor has his remedies. For instance, he can challenge the transfer and freeze the assets still in the hands of the transferee if he can convince the court: 1) there is reasonable expectation of a future judgment, 2) other assets are unavailable to satisfy the prospective judgment, and 3) the transfer will probably be found fraudulent. The creditor's case strengthens when the court sees a pattern of fraudulent transfers, and that the creditor will lose any future rights to recover unless the remaining assets are attached for the benefit of the creditor.