For a creditor, obtaining a judgment against a debtor is only the first step to recovering a debt owed. Executing on that judgment is the next, trickier step to satisfying the debtor’s obligation. The creditor must find the debtor’s assets in order to levy, attach, and garnish them. However, occasionally, when dealing with a sophisticated and savvy debtor, the creditor will find that the debtor has transferred some of his assets so that there is nothing left for the creditor to execute against.
For example, a bank confessed judgment against a corporate borrower and its individual guarantor in the amount of $470,000. A few days after the judgment was entered, the guarantor deeded title to his 50 ft yacht to his wife, who was not a judgment-debtor. In trying to collect the judgment 30 days after it was entered and notices were served, the sheriff was dispatched to levy upon the yacht, only to learn of the transfer to the wife. Investigation revealed that the yacht, worth over $500,000, was transferred to the wife for no consideration. The bank considered the transfer to be fraudulent and brought an action against the guarantor. This was an actual case that occurred in 2006 in Delaware County.
A transfer to defeat the rights of creditors violates civil statutes known as the Pennsylvania Uniform Fraudulent Transfers Act, (PUFTA) 12 Pa.C.S.A. § 5101 et seq. PUFTA grants a statutory remedy to creditors where a debtor has acted to hinder his creditors and identifies several factors for scrutinizing transfers as fraudulent to creditors.
The general rule is that a transfer made or obligation incurred by a debtor is fraudulent 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 any creditor of the debtor; or
- 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.
To ascertain actual intent, a court will consider whether:
- the transfer was to an insider;
- the debtor retained control or possession after the transfer;
- the transfer was concealed;
- the debtor had been sued or threatened with suit before the transfer was made;
- the transfer was 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 reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; and
- the debtor was insolvent or became insolvent shortly after the transfer.
If the court determines that the transfer was fraudulent, PUFTA provides remedies that the court may impose. The court may void the transfer, or set aside the entire transaction 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 which 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. The court may issue an injunction against further transfers by either the debtor which is an efficient way to ensure that the property to be used to satisfy the debt does not again become lost. The court may appoint a receiver to take physical possession of the asset so 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.
If you are a creditor and you believe that your judgment-debtor may have transferred assets fraudulently, the law offices of Unruh Turner Burke & Frees may be able to assist you with you claim. PUFTA limits the period in which you can bring your claim to four years from the date of actual or constructive notice of the fraudulent transfer.