Fraudulent conveyance is the act of moving assets with the willful intention of placing them beyond the reach of a creditor who has a legitimate claim to them. A statute of limitations is a written law specifying a time limitation on pursuing certain legal remedies. So, the statute of limitations on fraudulent conveyance sets a time limit beyond which a legal opponent can no longer bring a fraudulent transfer claim. Once this lookback period has expired, the courts will no longer consider a creditor’s fraudulent transfer claims against a debtor.
Under the Uniform Fraudulent Transfer Act (UFTA) adopted by many states a fraudulent transfer is a civil, not a criminal matter. In fact, the Uniform Voidable Transactions Act (UVTA) was recently accepted by the Uniform Law Commission as the successor to the Uniform Fraudulent Transfer Act, which replaces “fraudulent” with “voidable” in the title and body of the act. Thus, it more clearly conveys the meaning of the Act as providing merely a civil remedy.
Proving intent in a court of law can be difficult. But US courts look for certain badges of fraud that, taken together, provide acceptable legal proof of a debtor’s intent to avoid payment of a debt.
The origins of fraudulent conveyance legislation go all the way back to 16th century England. It was enacted into law by the English Parliament as a way to give creditors a means to collect on legitimate debts from reluctant debtors. It is also sometimes referred to as the Statute of Elizabeth. It was adopted early on by England’s former colonies, which later became collectively known as the United States of America.
Among other provisions, UFTA and UVTA, clearly set a statute of limitations on fraudulent conveyance claims. Within a specified time frame, a creditor can file a claim of fraudulent transfer against a debtor in court. Outside of this time period, any asset transfer is deemed legitimate. Therefore, the creditor cannot ask the court to give them access to the assets as a means to satisfy a debt. It is important to note that each state is empowered to determine the length of this fraudulent transfer lookback period, even if they adopt one of the uniform acts as a whole. Variances in statutes of limitations become even more pronounced when examining offshore jurisdictions.
Simply put, a fraudulent conveyance is the transfer of assets by a debtor with the intent of placing such assets beyond the reach of a creditor’s just claim. It is sometimes referred to as fraudulent transfer or fraudulent conversion and, as stated, is mainly a civil, not criminal, matter. This means, as a rule, you cannot go to jail if you commit a fraudulent transfer. That said, know that in some jurisdictions, there is a potential for criminal prosecution for fraudulent conveyance. Though, in practice, we have yet to see such action pursued against any of our clients.
The United States widely adopted UFTA in 1984. There are currently 43 so-called uniform fraudulent transfer act states, including the District of Columbia and the U.S. Virgin Islands. In 2014, the UFTA was amended to become the UVTA (as mentioned above). Both acts basically still support the original intent of the Statute of Elizabeth; that is, a transfer of assets is deemed to be fraudulent when the intent is to place them beyond a creditor’s lawful claim. However, the question begs to be asked—how does one establish intent in court? After all, no defendant will readily admit to fraudulent intentions. To satisfy this criteria, courts have come up with “badges of fraud” that are used to determine a defendant’s intent when transferring assets.
Here are what are known as “badges of fraud,” which is set of criterion to determine whether or not once has engaged in a fraudulent conveyance.
Courts tend to scrutinize asset transfers more closely when they render a debtor insolvent. This means, the transfer or conveyance of assets stripped the debtor of the ability to satisfy his or her debts. This is a glaring red flag.
Another badge of fraud is when a debtor transfers assets yet retains possession or continues to enjoy the benefits stemming from the assets. An example of this would be parents transferring the title of their residence in the name of their children, yet continuing to use the property as their prime residence. Or, when stocks change hands but it is still the debtor who receives the dividends from the stocks.
Courts also often examine a “sale” closely when an asset is sold for much less than its normal market value.
Courts will examine such a transfer even more closely when the transaction takes place between close relatives or friends.
Was there a threat of ligation or did was a lawsuit already filed when the transfer was made?
Other badges include the debtor’s financial condition. Additionally, the counts may look at the cumulative effect of a number of transfers, the chronology of events, the degree of secrecy and deviation from normal behavior.
Evidence of one or two badges of fraud may not be enough to prove the intent to defraud in court. But more than that and a court will be more likely to rule in favor of a creditor in a fraudulent conveyance case. When a debtor-defendant loses in a fraudulent transfer case, the courts attempt to place the assets back within reach of creditors. However, the plaintiff-creditor is not typically entitled to any other punitive financial compensation from the court. The transferred assets simply revert to their previous status prior to the transfer, that is, they may now be used to satisfy a creditor’s claim.
Of course, not all transfers fall under the fraudulent transfer criteria. The UVTA generally allows for a 4-year lookback period. This means that transfers made at least four years prior to a debtor being sued by a creditor will likely be deemed safe from a fraudulent conveyance claim. Keep in mind, however, that the UVTA amendments have not yet been popularly adopted by majority of the states. To date, there are only 15 states that adhere to the UVTA and its amendments to the UFTA. It is entirely possible for states to adopt the UVTA and limit or expand this 4-year lookback period. Under the UFTA, most states give creditors an additional one year from the time they discover an asset transfer to go after a debtor’s assets. Again, this varies from one state to another, with some states not having this added one year window at all.
A recent ruling by a southern Florida judge may have extended this lookback period as long as 10 years. The IRS enjoys a 10-year statute of limitations on fraudulent conveyance. If the IRS is a creditor in a bankruptcy case, which happens often enough, the bankruptcy trustee can use the 10-year statute of limitations of the IRS to pursue a fraudulent transfer claim against the debtor-defendant. This means even when assets are transferred way ahead of any claim by a creditor, or filing for bankruptcy, and without any intent to conceal the transfer, it may still be challenged in a US court. Ten years is a long time to guard oneself or one’s business against fraudulent transfer, or any legal claim for that matter.
Differences in statutes of limitation become even more pronounced when looking at offshore locations. Several of these offshore jurisdictions have much shorter limitation periods than four years. For example, Nevis has a 2-year statute of limitations on fraudulent transfers for LLCs and one to two years for trust. Likewise, Cook Islands only has a 1-year statute of limitations from the date a lawsuit was filed or 2-years from the “cause of action” or reason why the lawsuit was filed. However, even if the judgment was obtained within the requisite time, there are significant barriers in place to keep creditors from reaching trust assets.
Belize, for certain circumstances, doesn’t have a lookback period at all. Under current Belizean laws, assets transferred to a trust in Belize are immediately protected from a fraudulent conveyance claim. In this respect, The Belize Trust Act statutorily protects assets within trusts created under that. Section 7, subsections (6) and (7) provide the following: 7 (6) where a trust is created under the law of Belize, the court shall not vary it or set it aside or recognize the validity of any claim against the trust property pursuant to the law of another jurisdiction or the order of a court of another jurisdiction in respect of:
In the Cayman Islands, on the other hand, the statute of limitations on fraudulent conveyance is six years. It is the same in Bermuda. Delaware asset protection trusts have a four-year statute as does Alaska and New Hampshire and Missouri. Hawaii two. Michigan two. Mississippi two. Nevada, two, unless the transfer is published, in which case this can be reduced to six months. The challenge with domestic trusts is that ever reaching theories of legal liability have allowed the breach of such trusts on a repetitive basis.
Because of these marked differences in the statute of limitations for fraudulent conveyance and the vulnerability of domestic options, a number of Americans who wish to protect their hard-earned assets from frivolous and baseless lawsuits opt for offshore asset protection vehicles. Given the balance of asset protection and jurisdictional reputation, Cook Islands and Nevis stand above the rest.
It is tempting to transfer threatened assets to close family members and trusted friends because we know they will honor our wishes regarding these assets. However, if the transfer is judged to be fraudulent by a court, the family member or friend may find themselves embroiled in a legal mess. In the case of an intentional fraudulent transfer, the process is relatively simple. Once the court determines that a debtor willfully transferred assets to prevent a creditor from taking them, the court simply reverts the debtor to his or her state before the asset transfer. This means, the assets are deemed as not having been transferred and the creditor can use them to satisfy a debt.
However, in the case of a constructive fraudulent transfer, the intent of the debtor is immaterial. Instead, the court determines fraudulent transfer to have occurred when the debtor did not receive a reasonable equivalent value for the transferred asset. Or, in some cases, when the debtor was rendered insolvent by the transfer. When a family member or friend, or even a legitimate buyer acting in good faith, receives an asset deemed to be part of a constructive fraudulent transfer, he or she may face unpleasant legal consequences.
Fraudulent conveyance legislation is a powerful legal tool for creditors to get satisfaction on a debt. However, it can easily be abused in court. Creditors often use it to cast doubts on and to overturn legitimate asset transfers even if there was no willful intent to defraud on the part of the debtor. The statute of limitations on fraudulent conveyance is meant to create an even playing field between creditor and debtor. Within a prescribed amount of time, creditors can file a petition in court to declare a transfer as fraudulent. Beyond this allotted time, however, an asset transfer is deemed non-fraudulent and legally beyond the reach of creditors.
Clearly there are many nuances to this matter. This is why it is always best to seek the advice of a competent and experienced asset protection professional before taking making any major decisions about transferring your assets. It is always best to transfer them to a solid asset protection vehicle before you become involved in a lawsuit over them. However, even in cases when you have to transfer assets in the midst of a legal battle, there are ways retain assets in spite of a fraudulent transfer judgement ruling. There are few, if any, options domestically. To protect assets when the legal fire has been set ablaze, an international vehicle such as an offshore asset protection trust is one of the few options.