Voidable Transactions Article by Jay Adkisson for 2020

Article 2020 Articles2020

Debtor’s Transfers From Non-Debtor Limited Partnership Set Aside In Cole
♦ This is an analysis of a complex legal case involving fraudulent transfers and bankruptcy. Here's a breakdown of the key points and takeaways: (1) The Case: (a) Parties: William Cole (debtor), Terre Cole (wife), PRN Real Estate & Investments (creditor), Cole of Orlando Limited Partnership (partnership), W&T Cole, LLC (general partner). (b) Background: William Cole, a real estate developer, guaranteed debts for his partnership, Cole of Orlando. After the 2008 financial crisis, he defaulted on the guarantees. (c) Fraudulent Transfers: Cole of Orlando transferred nearly $4 million to a joint account held by William and Terre as tenants by the entirety (TBE), which is generally protected from creditors. (d) Bankruptcy: William filed for Chapter 7 bankruptcy. The Bankruptcy Trustee sued the Coles, alleging fraudulent transfers. (2) Key Legal Issues: (a) Control Test: The court found that William had control over Cole of Orlando, even though he didn't technically own it. This allowed the court to treat the partnership's transfers as if they were made by William himself. (b) Reasonable Equivalent Value (REV): The court determined that the transfer to the TBE account lacked REV because PRN received nothing in exchange and the Coles' interest in the partnership became worthless. (c) Fraudulent Conversion: The court ruled that the transfer of funds from the non-exempt partnership interest to the exempt TBE account constituted fraudulent conversion under Florida law. (d) Statute of Limitations: The court denied Terre's motion for summary judgment on the Google stock transfer, finding that there were disputed facts about PRN's knowledge of the transfer. (3) Takeaways: (a) Control Test in Bankruptcy: The control test allows bankruptcy courts to unwind transactions where the debtor has control over assets, even if they don't technically own them. (b) Fraudulent Transfers and REV: Transfers lacking REV can be avoided in bankruptcy, even if the creditor might have received a limited benefit (like a charging order). (c) Fraudulent Conversion: Converting non-exempt assets into exempt assets can be a fraudulent act. (d) Bankruptcy and Asset Protection: Filing for bankruptcy can often backfire, as it gives the bankruptcy court broad powers to unwind transactions and recover assets. (e) Panicked Debtors: Debtors in financial distress often make poor decisions that worsen their situation. (4) Analysis: The court's decision highlights the dangers of transferring assets to protect them from creditors, especially when the debtor has control over the assets. The control test and the fraudulent transfer and conversion laws provide powerful tools for bankruptcy courts to protect creditors' interests. (5) Lessons Learned: (a) Seek Professional Advice: Debtors facing financial difficulties should consult with experienced legal and financial professionals to avoid making costly mistakes. (b) Understand the Risks of Asset Protection: Asset protection strategies can be effective, but they must be carefully planned and executed to avoid legal challenges. (c) Be Aware of the Consequences of Bankruptcy: Filing for bankruptcy can have unintended consequences, including the potential for asset recovery by the bankruptcy trustee. ♦

Eleventh Circuit Affirms Punitive Damages For A Fraudulent Transfer And Rejects Constructive Notice In Judkins
♦ This is an analysis of the case involving Russell Judkins and his fraudulent transfer of assets to Highway 59, LLC. You've effectively broken down the key legal issues and provided valuable takeaways for financial planners and anyone involved in asset protection planning. Here are some of the key points you've highlighted: (A) For Planners: (1) Primum non nocere: The primary responsibility of a financial planner is to avoid making the client's situation worse. (2) Debtors with personal guarantees are high-risk: Advising debtors with personal guarantees requires extreme caution due to the high risk of fraudulent transfer claims and potential punitive damages. (3) The estate planning defense is often ineffective: Using estate planning as a justification for asset transfers is rarely successful, especially when the debtor is insolvent. (4) LLC transfers are not a foolproof solution: Transferring assets to an LLC in exchange for a membership interest is not immune to fraudulent transfer claims and can expose both the debtor and the LLC to punitive damages. (5) Public recording does not guarantee notice: Simply recording a transfer publicly does not necessarily constitute notice to creditors, and additional steps may be required to avoid claims of concealment. (6) Attorney's fees can be significant: The potential for attorney's fees in fraudulent transfer cases adds another layer of risk for debtors. (B) For Anyone Involved in Asset Protection Planning: (1) Understand the risks: Asset protection planning is a complex area of law with significant potential consequences. (2) Seek expert advice: Consult with experienced professionals who specialize in creditor-debtor law and fraudulent transfer issues. (3) Be transparent: Avoid misleading creditors or engaging in practices that could be construed as fraudulent. (4) Consider alternatives: Explore legitimate asset protection strategies that do not involve transferring assets to avoid creditors. Overall, this case serves as a stark reminder of the potential pitfalls of asset protection planning when done improperly. It emphasizes the importance of careful planning, transparency, and seeking expert advice to avoid unintended consequences. ♦

Zambri Zaps Harrah’s Casino For $850,449.60 In Fraudulent Transfers Ordered Repaid To Bankruptcy Trustee
♦ This case, involving JVJ Pharmacy's bankruptcy and the subsequent lawsuit against Harrah's, highlights a complex legal battle surrounding fraudulent transfers and the role of service providers in such situations. Here's a breakdown of the key points and their implications: (A) The Facts: (1) JVJ Pharmacy's Financial Distress: JVJ Pharmacy, operating as University Chemists, was in financial trouble. (2) Zambri's Misuse of Funds: James Zambri, the principal of JVJ Pharmacy, used the company's debit card to withdraw $859,040 from their Chase Bank account at Harrah's Resort Atlantic City. (3) Cash Advance Mechanism: Harrah's used Global Cash Access, Inc. for cash advance services, where patrons received a slip from an ATM and then redeemed it at the casino cage. (4) Global's Role: Global acted as Harrah's agent for these services, collecting repayments from patrons' bank accounts and reimbursing Harrah's. (5) JVJ Pharmacy's Bankruptcy: JVJ Pharmacy filed for bankruptcy and the Trustee sued Harrah's to recover the funds. (B) The Legal Issues: (1) Choice of Law: The court determined that New Jersey fraudulent transfer law applied, as the transfers occurred within its borders and the majority of JVJ Pharmacy's creditors were located outside of New York. (2) Transferee Identification: The court ruled that Harrah's was the initial transferee of the funds, despite the involvement of Global, as Global acted as Harrah's agent and was contractually obligated to pass the funds to Harrah's. (3) Reasonably Equivalent Value (REV): The court found that Harrah's did not provide REV to JVJ Pharmacy in exchange for the funds, as the money was given to Zambri, not the company. (4) Unjust Enrichment: The court dismissed the unjust enrichment claim, as the Trustee had a valid fraudulent transfer claim. (C) The Court's Decision: The court awarded judgment to the Trustee for $850,449.60, finding that Harrah's had received a fraudulent transfer from JVJ Pharmacy. (D) Analysis and Implications: (1) Burden on Service Providers: The ruling places a significant burden on service providers like casinos to investigate the source of funds, even if they are unaware of any wrongdoing. (2) Commercial Unreasonableness: The requirement for extensive financial due diligence on patrons can be commercially unreasonable and impractical for businesses. (3) Potential for Legislative Fix: The case highlights the need for legislative changes to balance the rights of creditors and service providers in fraudulent transfer cases. (4) Casino Industry Concerns: The ruling raises concerns for the casino industry, as it could lead to increased financial risk and potential liability for accepting funds from financially distressed individuals. (5) Choice of Law Issues: The court's choice of law analysis, while ultimately correct, was unnecessarily complex and could be simplified by the Uniform Voidable Transactions Act (UVTA). (6) Transferee Identification: The court's analysis of the transferee identification was convoluted and could have been simplified by focusing on the direct transfer from JVJ Pharmacy to Zambri and then to Harrah's. (E) Conclusion: The JVJ Pharmacy vs. Harrah's case serves as a cautionary tale for businesses operating in the leisure and entertainment sectors. It highlights the potential for significant financial liability in fraudulent transfer cases, even when acting in good faith. The case also underscores the need for legislative reform to address the imbalance between the rights of creditors. ♦

Attorney Fees Held Awardable Under Nevada Fraudulent Transfer Law In Morgan Stanley Opinion
♦ This is an analysis of the legal issues surrounding attorney fees in Uniform Fraudulent Transfer Act (UFTA) and Uniform Voidable Transactions Act (UVTA) cases. Here's a breakdown of the key points and some additional insights: (A) Key Takeaways: (1) Attorney Fees in UFTA/UVTA Cases: The analysis highlights that while the UFTA/UVTA doesn't explicitly address attorney fees, courts can award them under the "any other relief the circumstances may require" provision of Section 7. This is a discretionary power, and courts may choose to award fees based on the specific facts of the case. (2) Two Potential Bases for Awarding Fees: (i) Section 7: This provision allows courts to award fees as a remedy to make the creditor whole. (ii) Supplementary Provisions (Section 10/12): These provisions allow courts to apply existing state law principles, including those that permit attorney fee recovery in post-judgment enforcement actions. (3) Distinction Between Debtor and Transferee: The analysis emphasizes that attorney fees may be awarded against the debtor under the Supplementary Provisions, but against both the debtor and the transferee under Section 7. (4) Good Faith Transferees vs. Non-Good Faith Transferees: The article suggests that good faith transferees should not be held liable for attorney fees, while non-good faith transferees (those in cahoots with the debtor) should be jointly liable with the debtor. (5) Conspiracy and Punitive Damages: The analysis extends the argument to conspiracy and punitive damages, suggesting that non-good faith transferees should be held liable for these damages, while good faith transferees should not. (B) Additional Insights: (1) Erie Doctrine: The article correctly points out that federal courts sitting in diversity jurisdiction must apply state law, including state law on attorney fees, under the Erie Doctrine. (2) American Rule vs. English Rule: The American Rule, followed in Nevada, generally requires each party to bear their own attorney fees, while the English Rule requires the losing party to pay the winning party's fees. (3) Professor Kettering's Commentary: The article highlights the influence of Professor Kettering's commentary on the interpretation of the UFTA/UVTA, demonstrating the weight given to the views of drafting committee reporters. (4) Future Drafting Considerations: The article suggests that future drafters of the UFTA/UVTA should consider explicitly addressing attorney fees, conspiracy, and punitive damages to provide clearer guidance for courts. ♦

Bank That Was Financially Involved With Debtor Gets Caught Up In Fraudulent Transfer Case In Wilson
♦ This case revolves around Amanda Wilson's attempt to collect a $4.2 million judgment against Jon Pauling for sexual assault. Jon Pauling, claiming to have no assets, transferred his 40% interest in Two Mile Ranch, a farming and ranching partnership, to his brother Mark. Wilson alleges this transfer was fraudulent and part of a larger conspiracy to shield assets from her judgment. (A) Key Players: (1) Amanda Wilson: Plaintiff, seeking to collect judgment against Jon Pauling. (2) Jon Pauling: Defendant, accused of sexual assault and fraudulent transfer. (3) Mark Pauling: Defendant, brother of Jon Pauling, allegedly benefited from the transfer. (4) Two Mile Ranch: General partnership owned by the Pauling brothers, subject of the fraudulent transfer allegations. (5) Farmers State Bank: Defendant, alleged to have colluded with the Paulings to facilitate the transfer. (6) Elyce York: Defendant, alleged straw woman for a shell company, Lardyn Consulting LLC, which purchased assets from Two Mile Ranch. (B) The Allegations: (1) Fraudulent Transfer: Wilson argues that Jon Pauling's transfer of his interest in Two Mile Ranch to Mark was a fraudulent transfer under the Colorado Uniform Fraudulent Transfers Act (CUFTA). She claims the transfer was made without consideration and with the intent to hinder, delay, or defraud her. (2) Conspiracy: Wilson alleges a conspiracy between Jon Pauling, Mark Pauling, Two Mile Ranch, Farmers State Bank, and Elyce York to violate the CUFTA. She argues that Farmers knew about the fraudulent transfer and facilitated it by providing loans and security interests to the shell company, Lardyn Consulting LLC, which purchased assets from Two Mile Ranch. (C) The Court's Decision: (D) The court denied the defendants' motion to dismiss, finding that Wilson's allegations were plausible and sufficient to proceed to trial. The court rejected the defendants' arguments that: (1) Two Mile Ranch was not a "debtor" under the CUFTA because Wilson only had a charging order against Jon Pauling's interest, not the partnership itself. (2) The property transferred to Lardyn was not an "asset" under the CUFTA because it was encumbered by Farmers' security interest. (3) Wilson's conspiracy claim against Farmers failed because she did not establish a "meeting of the minds" between Farmers and the Paulings. (E) Key Takeaways: (1) Broad Scope of CUFTA: The court emphasized the broad scope of the CUFTA, which aims to encompass various methods used by debtors to defraud creditors. (2) Plausibility Standard: The court applied the plausibility standard, finding that Wilson's allegations, while not conclusive, were sufficient to raise a reasonable inference of fraudulent transfer and conspiracy. (3) Danger for Financial Institutions: The case highlights the risks faced by banks and financial institutions when dealing with clients facing financial distress. Assisting such clients in questionable transactions can lead to liability for fraudulent transfer and conspiracy. (4) Importance of Vetting Transactions: The case underscores the need for financial institutions to carefully vet transactions involving distressed debtors to avoid potential liability. ♦

Utah Supreme Court Rejects Mixed Motive Test For Intentional Fraudulent Transfers In Jones Case
♦ This case revolves around a dispute between attorney Gregory Jones and his former law firm, Mackey Price et al., over his share of fees from a successful Fen-Phen litigation. Jones sued the firm, alleging he was owed more than the $165,000 he received from the firm's $1 million award. He claimed the firm made fraudulent transfers by distributing excessive funds to partners Mackey and Price, hindering his ability to collect any judgment. The firm countered that the distributions were primarily for tax reasons, not to avoid Jones's potential claim. The district court dismissed some of Jones' claims, including breach of fiduciary duty and fraudulent transfer, but allowed the jury to decide on his claim for a larger share of the fees. The jury awarded him $647,090. Following the verdict, the firm effectively ceased business and a new firm, Mackey Price, LLC, was formed at the same address with the same lawyers, website, and clients. The district court added Mackey Price, LLC, to the judgment as the successor entity. Mackey and Price then formed a third firm, "Mackey Price Law," with security agreements leveraging all its assets. Jones attempted to add this firm to the judgment, but the district court refused. The Utah Supreme Court reversed the district court's decision on the fraudulent transfer claim. It rejected the "mixed motive" approach, stating that any intent to hinder, delay, or defraud creditors, even if not the sole motive, is sufficient to establish a fraudulent transfer. The Court also reinstated Jones's punitive damages claim and remanded the case back to the district court for further proceedings. (A) Key Takeaways: (1) Mixed Motives Don't Matter: A fraudulent transfer can be found if the debtor had any intent to defeat creditors' rights, even if other motives existed. (2) Distributions Can Be Voidable: Distributions from a business entity to its owners can be considered voidable transactions under the UFTA/UVTA. (3) Burden of Proof: The creditor must prove fraudulent transfer by a "preponderance of the evidence" standard under the UVTA. (4) Planning Must Be Watertight: Simply claiming "business planning" or "tax planning" won't shield a transaction from fraudulent transfer claims if there's any evidence of intent to defeat creditors. (B) This case highlights the importance of carefully considering the potential impact of business transactions on creditors and ensuring that any planning is not perceived as an attempt to hinder their rights. ♦

Twyne’s Case And The Most Infamous Flock Of Sheep In Anglo-American Law
♦ Twyne's Case, decided in 1601, is significant for being the first case to define the "Badges of Fraud," a set of suspicious circumstances used to determine the true intent behind a transfer of property. This concept significantly shaped Anglo-American fraudulent transfer law for centuries. (A) The Case: (1) Debtor: Pierce owed Twyne £400 and another creditor £200. (2 Transfer: Pierce secretly assigned all his property (sheep) to Twyne, supposedly to satisfy the £400 debt. (3) Fraud: Pierce continued to possess and use the sheep, even selling some. He claimed the transfer was legitimate, but it was meant to prevent the other creditor from collecting. (4) Court: The Star Chamber found the transfer fraudulent based on six "Badges of Fraud" (including secrecy, Pierce's continued possession, and a misleading clause in the deed). (B) The Importance of Twyne's Case: (1) Badges of Fraud: The case introduced the concept of examining the circumstances surrounding a transfer to uncover a debtor's true intent, even if they claimed a legitimate reason. (2) Prevention of Fraud: The court emphasized the importance of interpreting the law expansively to prevent debtors from defrauding creditors. (3) Precedent: The court cited previous cases where transfers were avoided due to the debtor's intent to cheat, showcasing a growing understanding of fraudulent transfers. (C) Challenges in Understanding Twyne's Case: (1) Unreliable Records: The lack of official records makes it difficult to pinpoint the court's exact reasoning. (2) Reporter's Bias: The reporter might have injected their own opinions and interpretations, making it challenging to separate the court's actual ruling from the reporter's perspective. (D) Legacy: Twyne's Case established a key principle in fraudulent transfer law: focusing on the objective circumstances surrounding a transfer, rather than simply accepting the debtor's explanation. The "Badges of Fraud" concept, though sometimes misinterpreted and applied mechanically, continues to be relevant in modern fraudulent transfer cases. ♦