Uniform Fraudulent Transfer Act: Actual Fraud, Constructive Fraud and Transfers for Insufficient Value: IL Law Basics

The Illinois Fraudulent Transfer Act (“FTA”) – 740 ILCS 160/1 et seq. – is a powerful creditor enforcement tool aimed at capturing assets transferred by a judgment debtor to elude a money judgment.  

In United Central Bank v. Sindhu, 2014 WL 3748555, the bank obtained a $4.3M judgment against the defendant.  After initiating various citations to discover assets, the bank learned that several months after the judgment, the defendant transferred three properties to his sister – including one residence property valued at over $3M.   He also received and turned over several rent checks on one of the transferred commercial properties.

 The plaintiff filed an FTA suit against the defendant and his sister seeking the turnover of the $3M property and the rent checks.  The defendants moved to dismiss all complaint counts.  The Court denied the bulk of the motion.

Operative Rules and Reasoning:

FTA Sections 5(a)(1), (2) and 6 govern claims based on actual fraud, constructive fraud and for pre-transfer claims, respectively.

The FTA’s actual fraud provision – Section 5(a)(1) – requires a plaintiff to plead that a debtor transferred property with actual intent to hinder or defraud a creditor, whether the claim arose before or after the transfer was made. 

Actual fraud factors include whether (1) the transfer or obligation was to an insider;

(2) the transfer or obligation was disclosed or concealed;

(3) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(4) the transfer was of substantially all the debtor’s assets;

(5) the debtor removed or concealed assets;

(6) 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. 

To plead FTA constructive fraud (Section 5(a)(2)), the plaintiff must allege that the transfer was made, before or after a creditor’s claim matured, and the debtor never received reasonably equivalent value in exchange for the transfer.

The constructive fraud plaintiff must also allege that the debtor engaged in or was about to engage in a transaction that left the debtor with zero or unreasonably small remaining assets, or should have believed that he (the debtor) would incur debts beyond his ability to pay as they became due. (*3).

FTA Section 6(a) applies only to creditor claims that arose before a debtor’s transfer of assets.  

An FTA Section 6(a) plaintiff must establish that (1) the debtor made a transfer without receiving a reasonably equivalent in exchange for the transfer; (2) that the debtor was insolvent at that time or became insolvent as the result of the transfer; and (3) the creditor’s claim arose before the transfer.  (*3).

The Court found that the plaintiff sufficiently alleged valid FTA claims under all three sections.

The thrust of the complaint was that (a) several months after the money judgment, (b) the defendant secretly transferred multiple million dollar properties and rent checks to a family member (an insider) and (c) received little or nothing in return for the transfers. 

Defendant’s sister (the transferee) argued that she retired over $1.5M in the debtor’s mortgage debt in return for the conveyance of the $3M residence property. 

However, since the property was worth more than twice the amount of the retired mortgage debt, the Court found that the defendant didn’t receive a reasonably equivalent value in exchange. 

Taken together, the Court found these allegations satisfied the pleading standards for an FTA actual fraud and constructive fraud claim for transfers made before or after a creditor’s claim arose. 

Take-aways:

Sindhu shows in sharp relief the fruits of aggressive post-judgment collection efforts.  

Had the plaintiff not so ardently pursued its claims, the defendant could have transferred substantial assets properties and likely escaped the judgment.  

When The Person You Have A Judgment Against Has His Property Tied Up In A Trust: What Then?

images (photo credit: www.dreamstime.com; Google images (visited 11.26.14)

In earlier posts, I’ve discussed how time-consuming and frustrating it can be to collect on a money judgment.  The primary creditor enforcement methods include freezing the debtor’s bank accounts, garnishing his wages, and liening his real estate by recording the judgment in the county where his land is located.  Recording a lien against a debtor’s real estate is an especially strong tactic.  Once a creditor records the judgment, he can sue to foreclose the property and force its sale.  But where a debtor has no assets or source of income, the judgment is worthless. 

Adding yet another layer of difficulty to the collection process is where a debtor’s property is sheltered in a trust.  The most common scenario I encounter this in my practice is with real estate held in a land trust.  Typically, the property will be owned by a trustee (usually a bank) and lived in by the debtor who most likely is the trust beneficiary. 

In Illinois, a debtor’s beneficial interest in a land trust is regarded as personal property: he (the debtor) doesn’t possess a direct ownership interest in the trust real estate.  The practical effect: you can’t lien the real estate by recording the judgment since the trust – not the debtor – owns the land.  The debtor’s beneficial interest in a land trust is considered intangible personal (not real) property.  

Illinois’ post-judgment statutory scheme expressly allows a creditor to impress a lien on a debtor’s intangible property via the citation to discover assets.  Once a citation is served on the debtor, the judgment becomes a lien on all of a debtor’s nonexempt personal property (including a beneficial interest in a land trust) on the date the citation is served. 

The citation results in the judgment binding the debtor’s personal property (everything that’s not land basically: cars, jewelry, stereo equipment, stocks, bonds, etc.) in his possession or which later comes into his possession before the citation expires.  735 ILCS 5/2-1402(m)(1). 

Code Section 2-1403 (735 ILCS 5/2-1403) provides that no court can order the satisfaction of any judgment out of property held in trust if (a) the trust was created in good faith; and (b) created by someone other than the debtor.  So, if the trust was created by a third party, the trust property is protected from creditors.  However, once any trust property is distributed “out of” the trust, the creditor can attach and lien the disbursement.

Creditor’s counsel should be leery of property held in trust for the debtor’s benefit and be cognizant of other standard exemptions (property that creditor’s can’t touch) like pension funds, retirement accounts, unemployment benefits, etc. 

Assuming there is no fraud or other suspicious circumstances surrounding the trust’s creation, the trust property will be shielded from creditors.  However, once the trust income is disbursed to the debtor, it’s fair game.  The creditor should then promptly move for a turnover order or ask the court to impress a judicial lien on the trust funds being distributed to the debtor.