When a Losing Defendant Attempts to Place Assets Beyond the Reach of a Prevailing Plaintiff

     Under Texas law is there a remedy available to a prevailing plaintiff (“judgment creditor”) who, when seeking to collect on her judgment, finds that the losing defendant (“judgment debtor”) has attempted to transfer assets beyond her reach?

     Shore Answer:  Yes.  Look to the Uniform Fraudulent Transfer Act (the “Act”).

Overview of the Act

     The general rule is that a judgment debtor’s transfer of assets with the intent to hinder, delay, or defraud his or her creditors by placing his property beyond the creditor’s reach is fraudulent.  In determining the judgment debtor’s intent, it is relevant that—before the transfer was made—the debtor had been sued or threatened with suit.  Importantly, the Act not only creates liability against the person for whose benefit the transfer was made, but also against the first transferee of the asset, or any subsequent transferee.

Remedies under the Act

     If a judgment debtor’s transfer is fraudulent under the Act, the judgment creditor has several remedies—including, but not limited to:  (1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim; (2) attachment or other provisional remedy against the asset transferred or other property of the transferee in accordance with Texas law relating to ancillary proceedings; or (3) 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.

What about transfers to other creditors?

     In the absence of a law declaring preferences invalid, every judgment debtor has the legal right to pay one or more of his debts with his money or property.  A “preference” is a conveyance of property by an insolvent debtor to an unsecured creditor in payment of a debt.  Texas courts have long recognized an exception to the fraudulent conveyance statute in the case of preferences.  Such conveyances are held valid, notwithstanding the statute, but only if the value of the property did not exceed the amount of the debt and the grantee creditor received the conveyance in good faith, meaning without a secret agreement to benefit the judgment debtor in some way other than by discharge of the debt owed to the grantee creditor.

     Under these circumstances, the conveyance is held valid even though the judgment debtor actually intended to prefer one creditor over another creditor and the grantee creditor had notice of this intent.  However, the transaction must not embrace any secret trust for the benefit of the judgment debtor; instead, the grantee creditor receiving the money or property must take for the sole purpose of securing the debt and not for the object of aiding the judgment debtor to cover up the property or the proceeds thereof for the benefit of the judgment debtor and to the prejudice of other creditors.

What if the judgment debtor declares bankruptcy, attempting to avoid the judgment creditor’s remedies under the Act?

     The elements of a violation under the Act are similar—if not, the same as—the exceptions to a discharge under the bankruptcy code.  Specifically, a bankruptcy court will not grant the judgment debtor a discharge if the judgment debtor, with intent to hinder, delay, or defraud a creditor . . . , has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed . . . property of the judgment debtor, within one year before the date of the filing of the petition; or property of the estate, after the date of the filing of the petition.