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Attacking Fraudulent Transfers in Tennessee State and Federal Courts

It happens sometimes that someone, or some company, which owes a debt will transfer assets that could have been used to pay the debt in order to avoid paying it. Such transfers are often to family members, related or successor businesses, or preferred creditors, and often, when the asset transferred is not cash, are made so that the debtor/transferor receives well below the value of the asset transferred.

Fraudulent transfers can come in an endless variety of forms. Some are obvious and easy to spot. (One of the first ones I ran into involved a defendant which had transferred a piece of real estate to another entity just after my client obtained a judgment against it.) Often, however, they cannot be spotted absent access to the transferor’s financial records, and perhaps even, a deposition or two or a review of financial records by a forensic accountant.

Tennessee has adopted the Uniform Fraudulent Transfer Act (the “Act”) to allow creditors to set aside fraudulent conveyances. If the debtor/transferor transferred the asset to a bona-fide purchaser who paid a value reasonably equivalent to the asset, a court may not set aside the transfer, but, in such a situation, it may well be possible to obtain a judgment against the entities or individuals responsible for the transfer, if they are different from the transferor.

Under the Act, it is important to remember that you do not have to have obtained a court judgment for the amount owed to you before a transfer can be considered fraudulent and set aside. A transfer can be fraudulent as to any creditor who has a “claim” against the transferor. Under the Act, “claim” has a broad definition, and odds are, if you were owed money by the transferor, you can avail yourself of the Act.  Moreover, the definition of “claim” includes unliquidated debts, meaning debts the exact amount of which are not known, but which, at some point, can be reduced to a dollar value.

As discussed below, even if your claim arose after the transfer, you might still be able to set it aside under the Act. Also, it is not just a transfer of an asset that can amount to a fraudulent transfer, though, in my experience, those types of transfers constitute the large majority of fraudulent transfers. If a creditor who owes you money grants a lien or security interest in assets it owns to someone besides you, such a grant can, in some circumstances, comprise a fraudulent transfer.

Broadly speaking, fraudulent transfers under the Act can be divided into two categories: (1) “Actual fraud” fraudulent transfers (T.C.A. §66-3-305); and (2) “constructive fraud” fraudulent transfers (T.C.A. §66-3-306).  One of the key differences between §305 and §306 is to which creditors each applies. In legal parlance, a creditor whose claim arose before the alleged fraudulent transfer is a “present creditor,” and a creditor whose claim arose after the alleged fraudulent transfer is a “future creditor.” Unlike §305, which can be used by both present and future creditors, §306 can only be used by present creditors (creditors whose claims arose before the alleged fraudulent transfer).

Under the actual fraud statute (§305), to be successful, a creditor must prove either of two parts of the statute. Under the first part, it must prove that the transfer was made “with actual intent to hinder, defraud, or delay” creditors. Under the second part, to paraphrase, it must prove that the debtor/transferor did not receive a reasonably equivalent value for the thing transferred and either (1) that the debtor/transferor was about to engage in business or a transaction for which its remaining assets were inadequate; or (2) that the debtor/transferor knew it would incur, or reasonably should have known it would incur, debts it could not pay.

The constructive fraud statute (§306) does not require a creditor to prove the transferor’s intent, but contains a formula for determining whether the transfer was fraudulent. Under that statute, to be successful, a creditor must prove that the debtor/transferor did not receive a reasonably equivalent value for the thing transferred and that, at the time of the transfer, the debtor/transferor was insolvent or became insolvent as a result of the transfer. The Act has a formula for determining insolvency.

This post is not intended to be a substitute for a thorough review of the Act, which is detailed and somewhat complicated, but it does provide a good overview of the Act. If you believe that your right to be paid has been thwarted by a fraudulent transfer, you should consult with a lawyer experienced with fraudulent transfer cases.

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