How Can Creditors Pursue Fraudulently Transferred Assets? Answers to Common Questions

In California, creditors are often faced with debtors who have transferred assets to prevent collection. When this happens, what can creditors do? Specifically, when is a debtor’s transfer fraudulent or avoidable? If the debtor’s transfer is avoidable, what exact remedies are available to the creditor?

This entry seeks to answer common questions regarding California’s Uniform Voidable Transactions Act (Civil Code § 3439).

When Is A Transfer Voidable / Fraudulent?
Debtors transfer assets all of the time. Some transfers are innocent. Others are not. When is a transfer voidable / fraudulent under California law?

First, why do we refer to problematic transfers as “voidable / fraudulent”? Because, until recently, California law referred to such transfers as “fraudulent transfers” but since adoption of the Uniform Voidable Transactions Act, such transfers are now known as “voidable transactions.” To avoid confusion, we refer to “voidable / fraudulent transfers.”

When is a transfer voidable? Pursuant to Civil Code § 3439.04, a debtor’s transfer is voidable / fraudulent if either:

  1. The debtor made the transfer with actual intent to hinder, delay or defraud any creditor. Pay attention to the words “any creditor.” A creditor can void a transfer if the debtor intended to hinder any creditor, not only the creditor filing the lawsuit.
  1. The debtor did not receive reasonably equivalent value in exchange for the asset transferred and either: (ii) the debtor’s assets were unreasonably small compared to a debt that the debtor recently incurred or was about to incur, or (ii) the debtor had incurred debts beyond its ability to pay the debts as they came due.

In addition, pursuant to Civil Code § 3439.05, a debtor’s transfer is voidable / fraudulent if “the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”

Civil Code § 3439.05 is similar to § 3439(a)(1), but not identical. Under § 3439.05, a transfer is voidable if: (1) the debtor did not receive reasonably equivalent value in exchange for the asset transferred, and (2) the debtor was insolvent at the time of the transfer or became insolvent because of the transfer.

I Think The Debtor Had “Actual Intent to Hinder, Delay or Defraud,” But How Do I Prove It?
Actual intent can be difficult to prove. A debtor never admits making a transfer to hide assets from his creditors. Fortunately, the court can find “actual intent” without any such admission by the debtor.

Pursuant to Civil Code § 3439.04(b), the following factors can be considered in determining

  1. whether the debtor had “actual intent to hinder, delay or defraud” any creditor:
  2. Whether the transfer or obligation was to an insider.
  3. Whether the debtor retained possession or control of the property transferred after the transfer.
  4. Whether the transfer or obligation was disclosed or concealed.
  5. Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit.
  6. Whether the transfer was of substantially all the debtor’s assets.
  7. Whether the debtor absconded.
  8. Whether the debtor removed or concealed assets.
  9. Whether 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.
  10. Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  11. Whether the transfer occurred shortly before or shortly after a substantial debt was incurred.
  12. Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

If I Establish That The Debtor’s Transfer Is Voidable, What Remedies Can I Get?

Pursuant to Civil Code § 3439.07, the creditor may obtain the following remedies:

  1. Avoidance of the transfer to the extent necessary to satisfy the creditor’s claim. In other words, the transfer can be “reversed.”
  2. An attachment or other provisional remedy against the asset transferred.
  3. An injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or other property of the transferee.
  4. Appointment of a receiver to take charge of the asset transferred.
  5. Any other relief the circumstances may require.

Also, if a creditor has obtained a judgment on a claim against the debtor, the creditor may levy execution on the asset transferred or its proceeds.

What Is The Statute of Limitations to File a Lawsuit to Void a Voidable / Fraudulent Transfer?

Pursuant to Civil Code § 3439.09, a lawsuit to avoid a voidable / fraudulent transfer must be filed within four years of the date of the transfer. But there are exceptions to this rule. Specifically, if the creditor is suing under CCP section 3439.04(a)(2) or 3439.05, the creditor’s lawsuit can be filed within one year after the date the transfer could reasonably have been discovered by the creditor, but in no event later than seven years after the date of the transfer.

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