Business owners take on a great deal of responsibility every time they extend credit to a customer. Unfortunately, there are times when that person or entity may try to avoid debt by transferring property to a third party, putting the creditor at risk. However, these transactions are illegal under Texas law and can be voided when proven.
It’s crucial for all creditors to have a basic understanding of their rights and remedies when a debtor engages in this type of fraudulent activity. Our Houston business law attorneys at Hendershot Cowart P.C. can help.
What is a Fraudulent Conveyance?
According to the Texas Uniform Fraudulent Transfer Act (TUFTA), a “transfer” is defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset [tangible or intangible], and includes payment of money, release, lease, and creation of a lien or other encumbrance.” Texas permits a range of transfers, but certain ones can violate TUFTA’s laws, such as fraudulent conveyances. Also known as a fraudulent transfer, this occurs when there is an attempt to hinder, delay, or avoid a debt or judgment by transferring an asset to another entity or individual. As we mentioned previously, these transfers can be voided under TUFTA.
An asset transfer is fraudulent if the debtor:
Made the transfer with an actual intent to hinder, delay, or defraud a judgment creditor;
Received a reasonably equivalent value in exchange for the property transferred;
Was engaged or about to engage in business or a transaction for which their remaining assets were unreasonably small; and
Intended to or believed they would incur debts beyond their ability to repay.
Having proof of intentional fraud is often not enough to win a case of fraudulent conveyance.
Courts will consider a number of additional factors in determining fraudulent activities, such as:
Whether the transfer was to an insider (i.e., a family member)
The debtor kept possession of the asset after the transfer
The debtor had been previously sued or threatened with a suit prior to the transfer
The transfer was concealed
The transfer included all of the debtor’s assets
The transfer occurred shortly after or before they incurred a substantial amount of debt
If the courts find that several of these factors are present, they may support that a transfer is fraudulent. Creditors may have grounds to pursue legal action so that they can return the assets and remedy the fraudulent activity.
Remedies and Statute of Limitations to Fraudulent Transfers
Naturally, after noticing a potentially fraudulent transfer, you’ll want to take steps to remedy the situation. There are several ways a creditor may obtain relief, including:
Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim;
An attachment or provisional remedy against the asset transferred or other property of the transferee in accordance with the applicable Texas Rules of Civil Procedure and the Civil Practice and Remedies Code relating to ancillary proceedings; or
Subject to applicable principles of equity and in accordance with applicable rules of civil procedure:
(a) an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property;
(b) appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or
(c) any other relief the circumstances may require.
If you are seeking to void a fraudulent transfer, you will have four years from the date it was made. However, if discovered later, you must file a claim within one year from when the transfer should have been reasonably detected.
Proven Business Litigation Lawyers
Whether you are a creditor looking to take legal action or require defense against claims of fraudulent conveyance, Hendershot Cowart P.C. is the firm to call. Through proven strategies and decades of experience, our attorneys can provide the legal services you need.
Call (713) 909-7323 to speak with our experienced legal team today.