Debtor Fraudulent Transfers

August 10, 2023


I am a judgment broker, not a lawyer, and this article is my opinion, please consult with a lawyer if you need legal advice. My opinion about this topic comes from my actual experience, and is limited to California, however the concepts discussed here apply in most places.

Many judgments start when a lawsuit is won, after one entity steals from or defrauds another. There are varying degrees and kinds of fraud, including misrepresenting financial risks, falsifying official documents, and flagrantly stealing money or assets. The only way of undoig such a fraudulent transfer is by starting and a new lawsuit for the fraudulent transfer.

If you are dealing with multiple pieces of property, I would consider a multi-pronged approach. You have to carefully consider which property to use for which strategy, but, you could pursue the Uniform Fraudulent Transfer Act (UFTA) action on one property and a straight levy on another, which will likely be met with a 3rd-party claim of ownership. While it is not trivial to bring a UFTA action, this two pronged approach may help settle the matter, as the debtor will be facing both an immediate threat by way of levy, together with the long-term prospects of defending the fraudulent transfer action. And, the debtor may not appreciate the fact that the target of the fraudulent transfer action, is their own fault.

Often, when you sue a fraud, the defendant does not answer the lawsuit complaint, and you end up with a default judgment. Scammers like default judgments because they save money and time, there is less chance they will have to pay the judgment, and there is less opportunity for pre-judgment discoveries of fraudulent transfers.

Many plaintiffs feel lucky when the defendant does not answer the lawsuit complaint, and the plaintiff gets a default judgment. However, default judgments are harder to domesticate, are more easily vacated or appealed, and are considered the weakest kind of judgment. Often, it is more difficult to recover money from a default judgment.

After your lawsuit is won and the debtor will not pay you, you can find a judgment enforcer or collections lawyer to recover your judgment. You can also try to enforce your judgment yourself. You may choose to perform post-judgment discovery of the debtor’s assets, for example, their bank records.

What if you find a bank funds transfer, right after the debtor had taken your money, to a third-party, such as the debtor’s spouse, business partner, or their friend? How can you add this newly discovered crooked party to your judgment? You do not, you must start a new fraudulent transfer lawsuit, if the statutes of limitation for fraud have not passed because over time fraud is legal. When a lawsuit is filed, you can record a lis pendens.

Note, if there is no equity in the property when it is transferred, courts will usually decide that means there was no fraudulent transfer because no equity was transferred. In California, see CCP 3439. Of course, if equity was stripped just to defeat a creditor, that may also be considered a fraudulent transfer.

California Civil Procedure Code (CCP) 989 says: “When a judgment is recovered against one or more of several persons, jointly indebted upon an obligation, by proceeding as provided in Section 410.70, those who were not originally served with the summons, and did not appear in the action, may be summoned to appear before the court in which such judgment is entered to show cause why they should not be bound by the judgment, in the same manner as though they had been originally served with the summons.”

There is also another lawsuit action to hold parties accountable, other than the named judgment debtor, on a judgment. This is a joint debtor action, and you must serve the party(s) with a SUM-120 and a declaration why they should be responsible for the payment of the judgment. As with any lawsuit, there are a set of rules and requirements for attempting this.

If the fraudulent transfer was obvious and clear-cut, you might be able to toll any statute of limitations under the doctrine of fraudulent concealment (just like delayed discovery under CCP 338(d)). However, if you discovered the fraud, or had reason to investigate the fraud sooner, such a toll attempt will not work. If the fraudulent transfer happened ten or more years ago, you are probably out of luck.

A creditor’s lawsuit does not add anyone to the original judgment, it is a new lawsuit against a third-party who is in possession of debtor property. You get a new judgment plus interest against the third-party, if you prevail in a creditor’s lawsuit.

You can also get a Temporary Restraining Order (TRO) when start your lawsuit. TROs can be an annoying monkey wrench in the works of a party owing money to a judgment debtor.

Proving fraudulent transfers in court is usually difficult. Alter-ego and reverse veil piercing is also difficult. Presuming that you have recent evidence of fraudulent money transfers between the bad guys and your debtor, you can try a creditor’s lawsuit (CCP 708.210) against the new party.

To prepare for an alter-ego or veil piercing, one might:

1) Apply for a third-party (corporate) debtor examination, and subpoena the documents you need. These will be typically credit card transaction, and any corporate property or bank accounts.

2) Look to see what violations may be present. Remember, the corporation is a separate “person” so it cannot legally co-mingle funds with corporate owner, or use corporate funds to pay for personal, non-corporate items. You need to prove conclusively that it was a regular order of business that the corporate funds were/are used for private means.

3) The hire a lawyer, or head to the law library and ask for their books on alter ego. In many states, the Matthew Bender series is great as it points you to the codes and the case law regarding alter ego and piercing the corporate veil.

In cases of a fraudulent transfer, you are alleging that the new party, holds property or owes a debt, to the debtor. You must assert, provide proof, and try and persuade a judge to agree and sign your new judgment against the new party.

If you can find admissible evidence of any foreign bank accounts in your judgment debtors’ name, you can seek a turnover order of those funds per CCP 699.040, although this law is only for judgment debtors, not third-parties.

The PDF at https://tollefsenlaw.com/wp-content/uploads/2014/08/ >Reverse-Piercing-Corporate-Veil.pdf is very helpful for understanding various kinds of alter ego and piercing the corporate veil.

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