strategy

Using TUFTA to Spot Fraud and Collect for Your Client

By Robyn Brumbelow, Lone Star Legal Aid

“Look at who died!” my receptionist exclaimed as I opened my office door to see her shoving a local newspaper in my face.  There, above the fold, was the obituary of a client’s former judgment debtor, which read, “She’d worked to get her affairs in order.” The last time I saw her was when she offered to settle a judgment after my negotiations had broken down with her former attorney.

While I was drafting the order for my client’s favorable judgment, I received a settlement call from that attorney.  We ended up 25 percent apart.  He said that instead of paying any more, his client would either discharge the judgment in bankruptcy or transfer the title of the property in question to her innocent spouse. “Wouldn’t that be a fraudulent transfer?” I asked.  The next sound I heard was the click of him hanging up on me. “Fraudulent transfer,” I mused, “a negotiation stopper.”  But fraudulent transfer is much more than just that.

Though I know collecting on even modest judgments helps to improve the asset stripping our clients experience in their free fall down the slippery slope of poverty, I felt my practice left little or no time to pursue post-judgment relief for them.  I really hadn’t delved into fraudulent transfers until the Legal Access Division gave me the opportunity to attend the 20th Annual Texas Bar College Summer School CLE at Moody Gardens and hear an excellent presentation regarding the Texas Uniform Fraudulent Transfer Act (TUFTA).   Now, when no private attorney will accept a case for collection of my client’s judgment, I will consider pursuing collection by analyzing the judgment debtor’s past and present assets under TUFTA.

Spotting a Potential Fraudulent Transfer Claim  

Although TUFTA may be better known for its role in commercial litigation, there is nothing in the act to stop us from using it to collect on behalf of legal aid clients.  A “claim” is defined as a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

A client, who has a “claim” as defined by the act, may petition the court to declare a property transfer voidable if it was made with “actual intent” to hinder, delay, or defraud creditors. Most transfers involving homestead property and other exemptions cannot fall under this act, but other transfers are fair game.          

The claimant does not actually have to prove fraud. A transfer could be actionable under the act if the transferor’s intent was only to hinder or delay a creditor. Actual intent need not be proven. The fact finder can consider circumstantial evidence and the badges of fraud to determine whether the transfer is actionable.  The badges are as follows:   

  1. The transferee was an insider — business partner, family member, etc.
  2. The debtor retained control of the property after the transfer.
  3. The act or the assets were concealed by the debtor.
  4. The debtor was sued or threatened with a lawsuit before the transfer.
  5. Substantially, all of the debtor’s assets were transferred.
  6. The debtor absconded.
  7. The debtor did not receive reasonably equivalent value for the transfer.
  8. The debtor was insolvent at the time.
  9. The transfer occurred shortly before or after the substantial debt was incurred.

This list is not finite. The courts recognize that new schemes to hinder creditors are invented every day. Additionally, the claimant doesn’t have to prove all the badges, or even a majority, because there is no magic number of factors that must exist. However, the more badges of fraud, the stronger the case. Some are more definitive than others. For example, if a debtor transfers the property to an insider, it’s considered constructive fraud without any further proof of other badges, when the insider had reasonable cause to believe the debtor was insolvent.  See section 24.002 (7).

Who is an insider?

The statute defines who an insider is in the case of individual and corporate debtors, but the list is not exhaustive.        

Again, the list is not exhaustive of possible insider relationships, but is only provided for purposes of exemplification. Texas courts have looked beyond formal relationships—finding an insider relationship where the transferee lived with the debtor for a time, had once been business partners and were lovers.      

These determinations are very fact-specific, but claimants can use out-of-state authority from other states. The comments to TUFTA specifically instruct courts to effectuate the general purpose of the law and apply the law in a manner consistent with the other states which have adopted the uniform code.

What relief is available?        

The range of remedies is extensive. The act enumerates avoidance, attachment, execution, injunction, receivership, money damages, costs, and attorney’s fees.  The act also expressly provides that the court may grant any other relief the circumstances may require.  Many of these remedies are pre-judgment and can also be sought in the underlying lawsuit.          

The authors of the paper also provided helpful analysis regarding identification of potential defendants, limitations, good faith defenses, and other items that exceed the word limitation for this synopsis.  I recommend their paper to anyone considering pursuing post-judgment relief.

Editor’s note: If you work with a legal aid organization or are a member of the Pro Bono College, you have free access to the CLE Online Library. If you have questions regarding access, ask your training coordinator or contact the Legal Access Division at (512) 427-1855.

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