Fraudulent Transfer Series: Introduction

During the next few weeks, Cersonsky, Rosen & Garcia, P.C. (“CRG”) will be presenting a blog series on the Texas Uniform Fraudulent Transfer Act (“TUFTA”). This portion of the series is intended to provide a primer to the reader on what TUFTA is and how it can be used by companies, individuals, investors, vendors, and other creditors as a pre and post-judgment remedy. TUFTA is a very valuable statute of which any creditor, potential creditor, or business owner should be aware. However, it is often overlooked by attorneys and, in some circumstances, is misunderstood by the trial courts.

The purpose of TUFTA is to “prevent fraudulent transfers of property by a debtor who intends to defraud creditors by placing assets beyond their reach.” ^[1]Kaufmann v. Morales, 93 S.W.3d 650, 653 (Tex.App.-Houston [14th Dist.] 2002, no pet.)

TUFTA provides that a transfer of an asset is fraudulent, as to a creditor, if the debtor made the transfer with the actual intent to hinder, delay or defraud any of the debtor’s creditors. ^[2]Blackthorne v. Bellush, 61 S.W.3d 439, 443 (Tex. App .— San Antonio 2001, no pet.); Jackson Law Office, P.C. v. Chappell, 37 S.W.3d 15, 25 (Tex. App. — Tyler 2000, pet. denied); Tex. Bus. & … Continue reading. The UFTA lists 11 non-exhaustive “badges of fraud” to assist in determining whether the debtor made the transfer with the requisite fraudulent intent. ^[3]Id.; § 24.005(b)(1)-(11.) The list includes whether:

(1)  the transfer or obligation was to an insider;

(2)  the debtor retained possession or control of the property transferred after the transfer;

(3)  the transfer or obligation was concealed;

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5)  the transfer was of substantially all the debtor’s assets;

(6)  the debtor absconded;

(7)  the debtor removed or concealed assets;

(8) 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;

(9)  the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10)  the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11)  the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.  ^[4]Id.

In order to prove to a jury that a fraudulent transfer occurred (by way of showing that some of the badges of fraud listed above occurred), a creditor will have to ‘trace the assets’ of the debtor. Tracing assets, often times, requires the creditor to conduct litigation discovery such as sending requests for production of relevant documents to the debtor (to obtain bank records, wire reports, check images, contracts, accounts receivable/payable logs, employment records, accounting records, etc), subpoenas to non-parties and/or subsequent transferees and take depositions of the debtor and other key witnesses.

Ultimately, the evidence compiled will be presented to a judge or jury during trial (or an injunction hearing), and the decision will then be made as to whether a fraudulent transfer occurred. If the fact-finder determines that a fraudulent transfer has taken place, TUFTA permits a creditor, under certain circumstances, to set aside a debtor’s fraudulent transfer of assets. ^[5]See Tex. Bus. & Com.Code Ann. § 24.008(a) (West 2009); Wohlstein v. Aliezer, 321 S.W.3d 765, 776 (Tex.App. – Houston [14th Dist.] 2010, no pet.) . Depending the facts of the case, the subsequent transferee can be held liable for the full amount of the creditor’s claims, regardless of the value of the property transferred. ^[6]See Airflow Houston, Inc. v. Theriot, 849 S.W.2d 928, 933-34 (Tex. App. – Houston [1st Dist.] 1993 no writ.) (Using the broad language of §24.008(a)(3)(c) to permit the court to award a judgment … Continue reading

The next blog will answer the question: Who is a creditor under the Texas Uniform Fraudulent Transfer Act?