CRG News

Oftentimes, fraudulently transferred funds end up being invested in the debtor or subsequent transferee’s personal residence under the mistaken belief that creditors cannot reach it if it is the transferee’s homestead. However, it is well-settled law that the homestead and exemption laws of Texas were never intended to be, and cannot be, the haven of wrongfully obtained money or properties. ^[1]Pace v. McEwen, 617 S.W.2d 816, 818 (Tex. App.—Houston [14^th Dist.] 1981, no writ); Baucum v. Texan Oil Corporation, 423 S.W.2d 434, 442 (Tex. Civ. App.—El Paso 1967, writ ref’d n.r.e.) 

Therefore, “funds wrongfully diverted from a corporation and subsequently diverted into property ordinarily exempt will be subject to a constructive trust.” ^[2]Baucum v. Texan Oil Corporation, 423 S.W.2d at 442. A constructive trust is “an equitable tool in the court’s power that can infer a fiduciary-like relationship within a transaction for the purpose of promoting justice.” ^[3]Harris v. Sentry Title Co., Inc., 715 F.2d 941, 946 (5th Cir.1983); see also Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App.—Corpus Christi 2002). The constructive trust will be for the benefit of the defendant’s creditors. Because the property was purchased with fraudulently transferred funds, it is not owned by the homestead claimant, rather it is owned by the trust. So, the homestead claimant cannot actually show ownership to prove up the homestead.

To attack a claim of homestead, a creditor should file a lawsuit that alleges violations of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) with regard to the homestead and request that a constructive trust be imposed. The creditor should also seek a preliminary injunction that would enjoin the debtor/subsequent transferee from further transferring the asset.

Furthermore, when a creditor has properly asserted that a debtor fraudulently transferred funds into a property designated as a homestead, a notice of lis pendens can be filed (as the creditor has asserted an interest in the alleged homestead property). ^[4]See Texas Kidney, Inc. v. ASD Specialty Healthcare, 2014 WL 3002425, at 9 (Tex. App.—Houston [14th Dist.] July 1, 2014, no pet.).   This will notice to all potential subsequent transferees, that conduct a title search, that the property is subject of a lawsuit.

If the jury finds that fraudulently transferred funds were used to purchase property designated as a homestead, the court can place the property in a constructive trust for the creditors and the creditors can sell it to satisfy their judgment.

The Texas Uniform Fraudulent Transfer Act allows injunctive relief to proceed against transferees in order to block the transferee from making further transfers of the assets. ^[1]Tanguy v. Laux, 259 S.W.3d 851, 859 (Tex. App. – Houston [1^st Dist.] 2008, no pet.) .  In particular, TUFTA states that . . . subject to applicable principles of equity and in accordance with applicable rules of civil procedure, TUFTA allows for the following remedies:

(A)      an injunction against further disposition by the debtor or a transferee or both of the asset transferred or of other property;

(B)       appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or

(C)       any other relief the circumstances may require. ^[2] See §24.008(a)(3)(A)-(C)

In Tanguy v. Laux, the First Court of Appeals made clear that one seeking an injunction did not have to have a lien on the real property against which the injunction was sought under TUFTA. ^[3]Id at 859. The Court’s holding shows that a creditor is not required to have lien on property, in order to pursue a claim against the property for having been fraudulently transferred pursuant to TUFTA. ^[4] See also Texas Kidney, Inc. v. ASD Specialty Healthcare, No. 14-13-00106-CV, 2014 WL3002425 (Tex. App – Houston [14^th Dist.] July 1, 2014, no pet.) (“Texas Kidney”) .

In Texas Kidney the Plaintiff was ASD Specialty Healthcare, (“ASD”) which sold medications to Texas Kidney, Inc. or “TKI”, a dialysis center.  TKI failed to pay for $405,909.73 in medications sold to TKI.  As a result, ASD sued TKI for the debt. ^[5] Id. at 1-2.

TKI sold the dialysis center for $3 million, but still did not pay ASD.  When ASD’s counsel (Cersonsky, Rosen & Garcia lawyers M.H. Cersonsky and Marianne G. Robak) learned of the sale and obtained evidence of the transferees who received TKI’s sales proceeds, the petition was amended to include the transferees of TKI who recieved over $1.3 million, e.g. (a) Ahmed Rabie and Sana Rabie approximately $800,000.000 used to buy a home which they declared to be their homestead; and (b) Ahmed and Sana Rabie $500,000.000 used to purchase a certificate of deposit. ^[6] Id. at 5-6.

After a two-day evidentiary hearing, the trial court issued an injunction against the transferees, Ahmed Rabie and Sana Rabie, enjoining them from selling, encumbering, or disposing of any interest in the real property in question and from withdrawing funds or otherwise disbursing the balance left in the certificate of deposit. ^[7] Id. at 2.  TKI and the Rabies appealed. However, the Court of Appeals affirmed the trial court’s injunction against the transferees because the evidence showed that fraudulently transferred funds were used to purchase the alleged homestead. ^[8]Id. at 5-6.  This clearly shows TUFTA reaches transferees and the assets transferred to them.

Obtaining an injunction is a powerful tool provided to creditors by way of TUFTA that is often not used in litigation. However, when an injunction is obtained in a TUFTA case, it can lead to a favorable outcome in collecting a debt.

The Texas Uniform Fraudulent Transfer Act (“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.

The definitions portions of TUFTA defines “creditor” as a person. . .who has a claim.” Tex. ^[1]Bus. & Com. Code.  § 24.002(4) . “Claim” is defined as a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. ^[2]See Tex. Bus. & Com. Code. § 24.002(3)(emphasis added) .

Texas courts have given a broad construction to the term creditor, so that TUFTA “protects the holders of unliquidated unmatured contingent claims.” ^[3]Zahra Spiritual Trust v. United States, 910 F.2d 240, 248 (5th Cir.1990) .  Therefore, creditors are “persons having subsisting obligations against the debtor at the time the fraudulent alienation was made or the secret trust created, although their claims may not have matured or even been reduced to judgment until after such conveyance.” ^[4]Burnett at 743; see also First State Bank of Mobeetie v. Goodner, 168 S.W.2d 941 (Tex.Civ.App.—Amarillo 1943, no writ) .

To summarize, a plaintiff does not need to first prove that a debt is owed or obtain a judgment before it can be considered a “creditor” entitled to relief by way of the TUFTA.

The next blog will answer the question: How does one obtain an injunction to stop further transfers from taking place during litigation?

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?