It may not feel intuitive at first, but I always speak to clients about the end of the lawsuit before giving the option to file one. Why? Because I believe that real customer advocacy is going through what you are fighting for – and because our customers are fighting for financial relief in most cases, I want to make sure that collecting that relief is possible at the end of the way. Mainly because litigation is expensive.
One concern expressed by many customers is, “What if the defendant or counter-defendant moves their assets once they understand their risk so that they can effectively be judged?” The good news is that in precisely this scenario for a California claim is available to every believer. The bad news is that it means filing another lawsuit.
Below is a breakdown of California’s fraudulent referral claims for those considering their options before litigation or for those who have judgments in hand and feel defeated.
A fraudulent transfer claim occurs when the debtor / owed party tries to avoid paying a debt by transferring ownership to a third party. The Uniform Voidable Transactions Act (“UVTA”), codified in the Civil Code Sections 3439 et seq., Gives the obligee the right to void such transfers and also enables them to obtain ownership.
Statute of limitations
The statute of limitations for a fraudulent transfer claim is four years from the date of the transfer OR the judgment / commitment. If you can demonstrate that there was indeed fraud (more on this below), the four years will extend to five years from the date of the transfer OR the judgment / obligation was or could reasonably have been discovered. In any event, the maximum period is seven years from the date of transfer OR the judgment / commitment has arisen.
To prove a fraudulent transfer claim, you will need to provide evidence of the following:
- You are entitled to payment. This does not necessarily mean that you have to have a judgment in hand. All you have to do is provide evidence of your claim.
- The debtor has transferred ownership to a third party (defendant). Transfers are broad – they can be direct or indirect, voluntary or involuntary. And under that claim, you can even prosecute a defendant who received the asset but no longer owns it for damages.
- Actual or constructive fraud.
Actual fraud requires evidence of intent to obstruct, delay, or defraud a creditor. Since no one will admit that this was their intention, the determination is usually based on inferences from the circumstances surrounding the transfer. The Civil Code § 3439.04 contains a non-exclusive list of “fraud badges” that can be evidence of actual fraud:
- whether the transfer was made to an insider such as a relative, business partner, or close associate;
- whether the debtor retained possession or control of the property after its transfer;
- whether the transfer was disclosed or hidden;
- whether the debtor was sued or threatened with lawsuit prior to the transfer;
- whether the transfer involved essentially all of the debtor’s assets;
- whether the debtor has “escaped”;
- whether the debtor has removed or hidden assets;
- whether the value received by the debtor was “reasonably equivalent” to the value of the asset transferred;
- whether the debtor was or became insolvent shortly after the transfer;
- whether the transfer occurred shortly before or shortly after the debtor incurred significant debt;
- whether the debtor has transferred the essential assets of a company to a pledgee who has transferred the assets back to an insider of the debtor.
There is no minimum number of these factors to determine intent. Just one or two might be enough (it depends on what factors are present).
Constructive fraud involves the transfer of an asset at a price less than its reasonable equivalent and one of these factors (or something similar) is present:
- The debtor was involved in a deal or transaction for which the debtor’s remaining assets were unreasonably small in proportion to the size of the deal or transaction.
- The debtor should have known objectively that he would incur debts that exceeded his solvency. or
- The debtor became insolvent as a result of the transfer.
- You need to prove that transmission was a major contributor to the damage.
- You got hurt.
Various means are to be sought within the framework of the UVTA. Usually the lawsuit is brought to avoid the transfer or obligation. Other remedial measures include attachments, orders against further transfers of assets, or appointing a recipient to monitor the remaining assets.
Overall, fraudulent transfer claims can be well worthwhile when you have a judgment in hand and the debtor and / or defendants are clearly doing funny business to avoid paying. It’s certainly not ideal, but it’s good to have a clear idea of what your potential barriers to recovery are – as early as possible in the game.