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.  

The Illinois Fraudulent Transfer Act – An Illinois Case Note

Heartland Bank v. Goers, 2013 IL App (3d) 12084-U illustrates the procedural and substantive hurdles a creditor’s counsel must clear to enforce a judgment against a guarantor who transfers his personal assets into a trust.

The plaintiff bank in sued the defendant for breach of a commercial guarantee after defendant’s company defaulted on a $650,000 loan.  The bank obtained a money judgment against the defendant and issued citation proceedings against him.  During post-judgment proceedings, the bank learned that before the money judgment entered against the defendant, he transferred all  his assets, including a house, cars and bank accounts into a family trust (the Trust).

The trial court ordered the defendant to relinquish one-half of his bank and stock accounts, two cars, and 50% of the sale proceeds of his residence. Defendant appealed.

Result and Reasons:

The Court first held that the trial court wrongly ordered the sale and turnover of 50% of the house sale proceeds under the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (the UFTA).

The UFTA deems a transfer fraudulent against a creditor where (1) for claims arising before or after the transfer, the debtor transfers property with the actual intent to impede the creditor; or (2) for claims arising before the transfer, the debtor was insolvent or became insolvent as a result of the transfer.  740 ILCS 160/5, 6; ¶ 16.

A “transfer” means the disposal of an “asset” – defined by the UFTA as property of the debtor that is not held in tenancy by entirety. ¶ 16

It’s difficult to prove a debtor’s subjective intent to impede a creditor (a UFTA Section 5 claim) so most UFTA claims are brought under UFTA Section 6: that the debtor’s transfer caused its insolvency.

The court found the defendant and his wife owned the home in tenancy by entirety at the time they transferred the home to the trust.  Because of this, the UFTA didn’t apply to the transfer.

An interest in tenant-by-the-entirety property cannot be fraudulently transferred against a creditor of only one of the tenants. (¶ 18).

Reversing the turnover and sale of the house, the Court cited Illinois’ post-judgment statute which dictates that real property held in tenancy by the entirety is not liable to be sold upon judgment entered against only one of the tenants.  (¶ 18,) 735 ILCS 5/12-112.

The Court did uphold the trial court’s turnover order involving the defendant’s investment account funds.

Under UFTA Section 6 – which governs pre-transfer claims – a creditor must show by a preponderance of the evidence (it’s “more likely than not”) that:

  • its claim arose before the transfer,
  • the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transferred property; and
  • the debtor was insolvent at the time of the transfer or was rendered insolvent as a result of the transfer.

Here, the corporate borrower’s default in July 2009 immediately triggered defendant’s obligations under the guarantee.  And since the corporation’s default predated defendant’s transferring his bank account to the trust by two months, plaintiff’s claim against defendant arose before he transferred the investment account to the Trust. ( ¶¶ 31-33)

The court also found that at the time defendant transferred the account, he was insolvent within the meaning of the UFTA.  The defendant’s financial statements revealed that the guaranteed loan amount far exceeded defendant’s total assets.  As a result, plaintiff established all required elements of a UFTA Section 6 constructive fraud claim. ( ¶ 35)

Take-aways:

1/ A judgment creditor can’t force the sale of debtor’s real estate that’s held in tenancy by entirety property;

2/ A UFTA claim applies to any right to payment; regardless of whether or not the claim is liquidated (reduced to a fixed numerical amount);

3/ The Court’s UFTA  insolvency calculus takes into account a debtor’s contingent liabilities; not just its current ones.