Waldron & Schneider, LLP : Attorneys at Law

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BASIC INFORMATION ON FRAUDULENT TRANSFERS
WHAT RELIEF IS THERE FOR A FRAUDULENT TRANSFER?

The remedies available under TUFTA are quite broad.  In an action for relief against a transfer or obligation under TUFTA, a creditor may obtain (1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim; (2) an attachment or other provisional remedy against the asset transferred or other property of the transferee in accordance with the applicable Texas Rules of Civil Procedure and the Civil Practice and Remedies Code relating to ancillary proceedings; or (3) subject to applicable principles of equity and in accordance with applicable rules of civil procedure: (A) an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property; (B) appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or (C) any other relief the circumstances may require. At least one court has recognized the broad powers that the last option provides.  Additionally, if a creditor has obtained a judgment on a claim against the debtor, the creditor, if the court so orders, may levy execution on the asset transferred or its proceeds. All of the remedies above are subject to the specific defenses identified in TUFTA.  

The substantial reach of TUFTA provides a basis for seeking relief from a broad field of potential defendants. Under the plain meaning of TUFTA, persons who received the asset made the basis of the fraudulent transfer claim or for whose benefit the fraudulent transfer was made can be joined in the lawsuit. A judgment under TUFTA may be entered against the first transferee of the asset or the person for whose benefit the transfer was made.  Fraudulent Transfers can give rise to claims against out of state defendants under the long arm statute.  

Although TUFTA does not define who is a "transferee” under the statute, it does specifically define the term "transfer,” which means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.  The dominion and control test provides that the minimum requirement before a defendant may qualify as a transferee for purposes of liability under a fraudulent transfer claim is dominion over the money or other asset - that is, the right to put the money to one’s own purposes. A party has dominion over the funds when it is in essence, free to invest the whole amount in lottery tickets or uranium stocks if it wishes. Therefore, TUFTA provides a broad brush of potentially liable parties. 

Realistically, the purpose of a fraudulent transfer claim is to either obtain possession of property that has been transferred in an attempt to avoid obligations, or more likely obtain money damages as noted above. TUFTA outlines specific relief that can be requested: (1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim; (2) an attachment or other provisional remedy against the asset transferred or other property of the transferee in accordance with the applicable Texas Rules of Civil Procedure and the Civil Practice and Remedies Code relating to ancillary proceedings; or (3) subject to applicable principles of equity and in accordance with applicable rules of civil procedure: (A) an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property; (B) appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or (C) any other relief the circumstances may require. Therefore, any or all of the specific relief that will assist the creditor should be pled. 

Additionally, to the extent a transfer is voidable in an action by a creditor for actual intent to hinder, delay or defraud, the creditor may recover judgment for the value of the asset transferred or the amount necessary to satisfy the creditor's claim, whichever is less, as adjusted under TUFTA.  This relief is available against the first transferee of the asset, the person for whose benefit the transfer was made or any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee.  A judgment of this type is based upon the value of the asset transferred, and the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.  The value of the asset transferred is not to be adjusted to include the value of improvements made by a good faith transferee, including physical additions or changes to the asset transferred, repairs to the asset, payment of any tax on the asset, payment of any debt secured by a lien on the asset that is superior or equal to the rights of a voiding creditor under this chapter or preservation of the asset. 

As discussed above, at least one court has recognized the broad powers TUFTA which provides any other relief the circumstances may require.  Therefore, a creditor filing a fraudulent transfer case should not feel limited to the relief outlined under TUFTA if there is a reasonable basis for asserting additional relief, including, dependent on the situation, punitive damages.  Additionally, attorney’s fees may be awarded under TUFTA, so a request for attorney’s fees should be pled. 

An action for a fraudulent transfer under the Bankruptcy Code lies against the initial, immediate or mediate transferees, or the beneficiaries of such transfers--all persons in whose hands assets of the debtor come to rest.  Because the code does not specifically define who may be an "initial transferee” for purposes of liability, and it is often difficult to determine liability when the initial transferee is not the intended recipient but merely someone entrusted to receive payment on behalf of the intended beneficiary, many courts have adopted the "dominion and control” test.  Therefore, the Bankruptcy Code provides a similarly broad brush of potentialy liable parties. 

In bankruptcy, a fraudulent transfer cause of action generally will only be asserted by a trustee or a chapter 11 debtor-in-possession. However, an individual creditor may be able to bring a claim.  A single creditor in a Chapter 11 case may be allowed to initiate an action to avoid a preferential or fraudulent transfer instead of the debtor-in-possession if the creditor 1) has alleged a colorable claim that would benefit the estate, if successful, based on a cost-benefit analysis performed by the bankruptcy court; (2) has made a demand on the debtor-in-possession to file the avoidance action; (3) the demand has been refused; and (4) the refusal is unjustified in light of the statutory obligations and fiduciary duties of the debtor-in-possession in a Chapter 11 reorganization.


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