Creditor, who was the court-appointed guardian of elderly two sisters, sued and ultimately won a judgment of $11,989 against the Debtor for what amounted to embezzlement when Debtor was their caretaker.
Soon after that case was filed, the Debtor and her Husband divorced, and the Debtor tried to give her Husband all her interests in three properties and their vehicles, totaling $466,000 in value.
Creditor intervened in the divorce. Debtor then dismissed the divorce proceeding in that county, and (without the Creditor's knowledge) re-filed it in another county -- whereupon Husband ended up with the $466,000.
Creditor then sued, alleging that the divorce transfers amounted to a fraudulent transfer.
Debtor defended on the basis that she never really owned the property, and actually had been living in a camper since she left her husband (because he was bringing home women he met on the internet). Husband's testimony was similar to Debtor's in that she never really owned the properties that were transferred in the divorce.
The jury apparently didn't believe any of it, and awarded the Creditor $11,989 in actual damages, plus another $35,968 in punitive damages. The Court then tacked on another $28,000 in attorney's fees to the award.
On appeal, among many other things, Debtor complained that the Creditor was awarded damages for the fraudulent transfers (instead of just being able to set aside the transfers), and of the punitive damages and attorney's fees. In two succinct paragraphs, the Appellate Court disagreed:
>>>The Uniform Fraudulent Transfer Act provides not only for the setting aside of a fraudulent transfer to the extent necessary to satisfy a debt; a creditor may also obtain "any other relief that the circumstances may require." * * * Other laws, including the common law of fraud, supplement the UFTA. * * * The amount of damages recoverable is fact-specific and requires consideration of what is necessary to compensate the creditor for harm flowing from the fraud. * * * A person injured by fraud is entitled to such damages as will fairly compensate him for the wrong suffered; that is, the damages sustained by reason of the fraud or deceit, and which have naturally and proximately resulted therefrom. * * *
>>>If appropriate, the trial court may also determine whether punitive damages and attorney fees are warranted. * * * Under Ohio law, punitive damages and attorney fees may be awarded in fraudulent conveyance cases. * * * In order to recover punitive damages, a creditor must establish the underlying cause of action for the fraudulent transfer and that the debtor acted with actual malice when making the fraudulent transfer. * * *"Actual malice" requires proof that the debtor acted with (1) hatred, ill will, or a spirit of revenge, or (2) a conscious disregard for the rights of others that had a great probability of causing substantial harm. * * *
[Internal Quotations and Citations Omitted]
Analysis
One of the biggest misconceptions about fraudulent transfer law, something which is oft-repeated at asset protection seminars, is that "if a Court finds a fraudulent transfer, the only thing it can do is to reverse the transfer."
Not true, as this Opinion indicates. To the contrary, Section 7 of the Uniform Fraudulent Transfers Act ("UFTA"), allows the Court to award a creditor "any other relief the circumstances may require."
Here, the Creditor was awarded damages in the amount of his underlying judgment -- and nearly six times that in combined punitive damages and attorney's fees!
By transferring assets after a claim arose, the Debtor and her husband found a way to make things worse, and much worse. This is what happens when a case of "debtor panic" sets in, as so often precipitated by a process server showing up at the door.
The crazy thing about this case is that Debtor and her husband could easily have paid the judgment -- it was hardly a fraction of the $466,000 in property that they owned. Had they simply paid the $12,000 judgment, they would have avoided the $64,000 in combined punitive damages and attorney's fees. It didn't make sense on any level.
Some of my previous articles have pointed out that another significant downside of being caught in a fraudulent transfer is that a bankruptcy court can (and often do) use that to deny a debtor a discharge.
What does this have to do with asset protection planning? Nothing really. Asset protection is all about avoiding fraudulent transfers, not making them. Unfortunately, too many asset protection planners are all about marketing, and too little about what actually happens in creditor-debtor litigation.
So, the next time that you hear from somebody that "the only thing that a Court can do with a fraudulent transfer is set the transfer aside," please speak up and say, "You don't know what you're talking about."
Cite
Renbolt v. Kern, 2013 Ohio 1359, 2013 WL 1390607 (April 5, 2013). Full Opinion at http://goo.gl/sC344
This article at http://onforb.es/13tUNRt and http://goo.gl/ETLBl
