In today's Freedom Friday blog and email newsletter, I'm going to talk about an issue which came up with a client today, and it's a complicated issue, but one that's easy to avoid. In fact, a few years ago, I got a call from a lawyer in California wanting to hire an attorney here in Oklahoma to domesticate a judgment for him. We did that, but afterwards, we found out that the defendant(s) were hiding the asset we wanted, which was a house in rural Oklahoma. We filed a second lawsuit in Oklahoma against the defendant(s) violating Oklahoma's version of the Uniform Fraudulent Transfers Act. Unfortunately, the defendant(s) filed for bankruptcy which ended the case. However, I still get questions from clients about selling assets or liquidating in the middle of a lawsuit when they've been sued. So, that's what we're talking about in the Freedom Friday blog and email newsletter today, “What is a fraudulent transfer?” Or better asked, “I've been sued… can I sell my (fill in the blank) to protect myself?”
So, the answer to the second question is emphatically, “No, don't do that.” In fact, if you've been sued, and the creditor discovers you've sold an asset like your house (or if your small business has sued and has sold a major asset or transferred owners), you may open yourself or your business to additional liability. This is because of the Uniform Fraudulent Transfer Act (UFTA), which has been adopted in Oklahoma. The consequences of violating the UFTA can include an order of court which voids the transfer, and the asset can be clawed back to satisfy the judgment. This is because the UFTA is designed to prevent transfers which would harm a creditor if assets are sold (or transferred) for less than a reasonable equivalent value, with the actual intent to hinder, delay, or defraud a creditor. If the claim arose before the transfer, a judge can undo it if he or she finds the UFTA was violated.
So, what are some red flags for fraudulent transfers? Usually, the telltale sign is that a debtor (either an individual or business entity) transfers assets to family, friends, or a related business entity. This is usually done to avoid a judgment which may be coming in a lawsuit. If the transfer or sale is made for reasonable equal value, this may not be an issue, because the creditor could have cash or other assets which can be pursued post-judgment. However, if the transfer or sale was made for less than the equivalent value, it may appear the debtor was transferring in order to avoid a judgment. Not only can the debtor be liable to a fraudulent transfer lawsuit, but the recipient of an asset can also be sued under the UFTA. The UFTA also has a special definition of “family,” and its not just your immediate family; it also includes any relative by consanguinity to the third degree, which includes nephews, nieces, great-grandchildren and great-grandparents.
Not every transfer can be scrutinized as a fraudulent transfer. The UFTA is only an issue if the transfer of assets is done when the transferor knew or should have known of a pending claim. In Oklahoma, this means they were either served with a demand letter or a lawsuit regarding the underlying prospective judgment. Once that happens, you shouldn't be transferring any assets until the issue with the creditor is resolved. So, the best time to transfer assets and protect yourself and your business is long before you're aware of a potential claim against you or your business.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at [email protected] to schedule a FREE strategy session.
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