Motive (Intent)

 

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In a creditor's challenge of asset transfers under the Uniform Fraudulent Transfers Act (UFTA), actual fraud is predicated on a court's finding that the debtor intentionally transferred assets to avoid a creditor's claim. Absent proof of such an intent, or motive, the creditor's challenge fails.

Simply put, to avoid actual fraud, the debtor must be able to convince the court that the transfer was motivated by some legitimate reason, unrelated to the desire to place the asset out of the reach of creditors.

Explanations are derived from common sense and will vary depending on the nature of the transfer. For example, you might pay down a home mortgage to avoid interest charges, which, over the life of a mortgage, can double or even triple the cost of a home. You might take out a second mortgage on a home to invest the funds in a new business, make improvements in your family's home, enable the family to take a vacation or invest the proceeds, etc.

With respect to the business entity, courts have sometimes ruled that payments were not fraudulent when they were made for legitimate business expenses, including payments to the owner for services actually rendered to the entity, or capital leased or loaned to the entity.

Work Smart Payments from the business entity to the owner can be legitimized if services and capital are actually provided to the entity. Here, it is essential that these payments be regular and supported by written agreements between the owner and the entity. Payments that occur only when a financial crisis arises, or that are not supported by written agreements, have the appearance of being fraudulent.

Frequently, a debtor incurs a debt when he or she does not have the resources to pay it back. Courts have ruled that if, at the time the debt was incurred or a transfer was made, the debtor had a reasonable expectation of receiving future resources, there is no fraudulent intent in the transaction. After all, that's the nature of taking on debt--you borrow money now with the intention of paying it back later when you have greater resources.

Using this theory, it is possible to sustain a purchase on an unsecured credit card, or an asset transfer, at a time when the debtor was insolvent. You could show, for example, that you reasonably anticipated receiving a bonus or a raise, or perhaps an inheritance.

A business entity could show that it anticipated excellent results from a new marketing plan or contacts the owner had made. That the results were not achieved is not important, provided that the expectation had some basis in fact.

Similarly, an individual or a business entity that is solvent at the time of a transfer, but becomes unable to pay a debt, can disprove fraudulent intent by establishing that it could not reasonably anticipate the events that led to the insolvency. For example, fraudulent intent is disproved by an unexpected loss of a job; pay cut; loss of a major customer, client or contract; or default on receivables of significant value.

In these ways, you can preserve the validity of a transfer even in the face of a finding of insolvency, at least in an actual fraud case.

Another effective strategy, of course, is to establish that these other factors do not apply to the case (e.g., the debtor was actually solvent at all relevant times).

Relationship of motive and timing. Sometimes the timing of a transfer reveals the real intent behind it.

A Wisconsin couple liquidated all of their property and moved to Florida, investing the $228,000 they raised into a Florida home, which, of course, was an exempt asset due to Florida's unlimited homestead exemption. A little more than one year after the conversion, they filed for bankruptcy. The court ruled that the move and conversion were fraudulent, and relegated the couple to the lower $40,000 homestead exemption that had been available in Wisconsin. The couple tried to explain that the move was motivated by a desire to find better jobs. The court was not convinced. Given the importance of the one-year period prior to filing a bankruptcy proceeding, what do you think the bankruptcy judge inferred from the timing of the move? Don't expose motive by filing a bankruptcy action just after the one-year time period. Doing so gives the court the very evidence it needs to prove fraudulent intent. This case also illustrates the fact that courts can examine transfers more than a year before filing (but not more than four years prior to filing). (Note: This may no longer represent the law in Florida. Recently, a U.S. Court of Appeals ruled that the Florida homestead exemption, as embodied in the state's constitution, is absolute and protected even when transfers involving the homestead are predicated on actual or constructive fraud. This decision is unique and not likely to be followed even in other states, such as Texas, where the homestead exemption is provided by the state's constitution.)

Two UFTA factors specifically provide that motive can be inferred from the timing of transfer. Thus, fraudulent intent can be inferred if a transfer occurs when a lawsuit is threatened or initiated, or if it takes place at the time a substantial debt is incurred.

Similarly, transfers that suddenly occur on the eve of a bankruptcy filing, when the debtor receives notice of a lawsuit, or is in the midst of a financial crisis will only rarely succeed, because the courts can infer fraudulent intent from the circumstances and, in particular, the timing of the transfers. This is why transfers from the business entity to the owner must be ongoing and supported by written agreements.

Work Smart It is essential that the debtor be able to prove that the transfer was motivated by legitimate reasons unrelated to a desire to protect the asset from a creditor. Some bankruptcy courts recognize the validity of asset exemption planning, in general. However, the majority of courts do not follow this same rationale. Most transfers can be explained in a rational way unrelated to asset exemption planning. Of course, this is a lot easier if the transfers occur well in advance of a bankruptcy filing or, for example, notice of a lawsuit. Within the business, a record proving that payments to the owner have been ongoing, regular and supported by written agreements will be important in convincing a court that the transfers are legitimate. Salary, lease and loan payments from the entity to the owner that meet these requirements can be sustained in the face of creditor challenges even when other factors, such as insolvency, work in the creditor's favor.

Relationship of motive and future creditors. The UFTA outlaws fraud as to existing and future creditors. In other words, to make a claim based on a fraudulent transfer, a creditor does not have to prove his or her claim existed at the time of the transfer.

Some courts have narrowly construed this provision to require proof that the debtor had that particular future creditor in mind when he made the transfer. However, most courts simply require that any future creditor must prove that he or she could have made a claim based on the law that existed at the time of the transfer.

Thus, absent some new enactment of law after the transfer that, for the first time, creates a right to sue, generally you will not be able to defeat a claim based on the fact that the creditor did not exist at the time of the transfer.

Nevertheless, a transfer made to protect assets from existing creditor, or in anticipation of a specific future creditor, is much more likely to be ruled fraudulent because intent can be inferred from the circumstances.