INTENT TO DEFRAUD FUTURE CREDITORS

Fraudulent conveyance law may allow a creditor to recover assets transferred by a debtor to third parties. A common misconception is that a debtor can transfer assets to third parties (including trusts) without being subject to fraudulent conveyance rules if the transfer is made to protect the assets against FUTURE creditors of the debtor (as contrasted with EXISTING creditors at the time of transfer).

A recent appellate court decision demonstrates that this is incorrect. In the case, the U.S. sought to recover assets transferred to a trust by a taxpayer using provisions of the Washington state uniform fraudulent conveyance act. The appellate court upheld the trial court in finding a fraudulent conveyance, based on the taxpayers' repeated admissions that they transferred property to the trust in order to avoid potential future creditors. This intent to defraud FUTURE creditors was enough to find the requisite "actual intent to hinder, delay or defraud a[ ] creditor" required under the statute. Note that Florida has a substantially similar statute to Washington in this regard.

This is not to say that there is no difference in the application of fraudulent conveyance law regardless of whether the affected creditor is a present creditor or was a future creditor at the time of transfer. For example, a creditor in existence at the time of transfer at times will not need to show actual or constructive intend to hinder, delay or defraud if the transfer was made when the debtor was insolvent or the transfer renders the debtor insolvent. A mere future creditor cannot rely solely on insolvency under many fraudulent conveyance acts but instead must still show actual or constructive intent to hinder, delay or defraud.

U.S. v. Townley, Slip Copy, 2006 WL 1345248 (9th Cir. No. 04-35767)