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Financial Forensic Report 6.14.2021


THE GOOD NEWS ABOUT FRAUDULENT TRANSFERS

By: Joe H. Dickerson, CFE, CFI

When a fraudulent transfer is found, it can be good news for your judgment-enforcement case: The documentation of the debtor’s transfer of assets becomes the very evidence needed to recover those assets.

“Judgment for the plaintiff,” declares the judge. “This court is adjourned.” Down comes the gavel: Bang!

If you are the plaintiff in a civil action to restore your crucial assets, those are sweet sounds. They sound like justice. They sound like vindication. They also sound like closure, but they are not.

Most people don’t realize that a whopping 80 percent of winning plaintiffs never succeed in collecting their civil judgments. While the courts can do their part to “make you whole” on paper, the courts are not collection agencies, and losing defendants have a huge bag of tricks from which to draw in hampering your attempts to collect what’s rightfully yours. Worse, the usual approach to collections—involving legal interrogatories, debtor’s exams, subpoenas duces tecum, and so on—often only serve to cost you more money while giving the debtor more time to hide assets and cover tracks.

Business people and professionals usually operate with a good, working definition of fraud: Intentionally inducing someone to act against his or her interests through lies, misrepresentation, or concealment. There is, however, a different and less-well-known type of fraud called fraudulent conveyance or fraudulent transfer. If you find yourself a creditor in the collections process, you need to know about it because discovering and undoing fraudulent transfers can serve you well.

The “Other” Fraud

When a debtor tries to hinder, delay, or defraud a creditor by shifting assets to others for less than fair value, that is fraudulent transfer by definition. A common example is when a debtor transfers the title to his home into his wife’s name to keep it from creditors. Does it matter that he transfers assets to a spouse? No, nor does it matter if he transfers assets to a child, a cousin, a business partner, a trust, or a straw entity. It does not even matter that the transfer takes place before a court renders a judgment, so long as the intent to hinder, delay, or defraud was present.

The assets to look for may include almost any real or personal property: cash, bank accounts, investments, jewelry, furniture, collections of all kinds, herds of animals, houses, land, water or mineral rights, industrial inventories and equipment, cars, boats, aircraft, and so on. It can include the liquidated value of loans owed by others to the debtor. It can even include intellectual property like patents, copyrights, or trademarks. Some exemptions exist; among them are retirement funds, tools of the debtor’s trade, and homestead exemptions, which vary from state to state.

If you find yourself a creditor in the collections process, you need to know about fraudulent transfers because discovering and undoing them can serve you well. 

When a fraudulent transfer is found, it can be good news for your judgment-enforcement case: The documentation of the debtor’s transfer of assets becomes the very evidence needed to recover those assets. When you show the judge that the transfer was a sham, the judge can simply void the transaction, enjoin any subsequent transfers, and you can seize it immediately. The legal precedents for handling fraudulent transfer date from the 17th century. 

The Four Tests

There are four tests for fraudulent transfer:

Test 1: Subsequent Creditors
If a debtor, while insolvent, entered into an agreement with you and the transfer was for less than fair value, the transaction was fraudulent.

Test 2: Existing Creditor
If, after your claim arose, the debtor became insolvent and transferred property for less than fair value to an insider, such as a spouse or a business partner who should have known about this insolvency, the transaction was fraudulent.

Test 3: No Consideration
If the debtor entered into the transaction with you without receiving reasonable value in return, or if the debtor had insufficient assets to enter into the transaction or was unable to make payments on time, the transaction was fraudulent.
NOTE: These first three tests require judges to adhere strictly to facts, as proved in court, to determine whether fraudulent transfer has occurred.

Test 4: Circumstantial Evidence
If the debtor undertook an obligation to you or transferred any assets with the intent to subvert your rights as a creditor, that transaction was fraudulent.
NOTE: The fourth test uses the “Badges of Fraud” (See p.53), which gives judges great latitude in determining whether a fraudulent transfer has been made. It may apply even if the first three are inconclusive.

The Best Approach

In our practice, we find that the best approach to collecting judgments is to investigate the debtor’s finances in depth before engaging in the legal process of interrogatories, debtors exams, subpoenas, and so on. When a fraudulent transfer is found, it is good news. The transfer documents what assets the judgment debtor has attempted to hide and how. The transfer provides proof to the Badges of Fraud, and having that proof in hand leads to expedient settlement. If you find yourself a creditor in the collections process, you need to know about fraudulent transfers because discovering and undoing them can serve you well.

When a fraudulent transfer is found, it can be good news for your judgment enforcement case: The documentation of the debtor’s transfer of assets becomes the very evidence needed to recover those assets. When you show the judge that the transfer was a sham, the judge can simply void that transaction, enjoin any subsequent transfers, and you can seize it immediately. The legal precedents for handling fraudulent transfer date from the 17th century. (See the “Badges of Fraud”.)

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The Badges of Fraud
 The nine “Badges of Fraud” are well established in law. Simply put, these behaviors are outward evidence or indicators of fraud. They provide great latitude for a judge’s discretion in determining whether fraudulent transfer has taken place.

  • Badge 1: Lack of consideration for the conveyance. Any valid contract requires consideration that meets the test of law, which means that the consideration must have value a reasonable person could agree to. For instance, conveying a million-dollar property in exchange for $10,000 doesn’t pass the “sniff” test of reasonability.
  • Badge 2: Transfer of the debtor’s entire estate. A person in good health and a rational state of mind doesn’t ordinarily dump everything he owns at once. To do so without a valid reason other than avoiding a creditor’s claim constitutes fraud.
  • Badge 3: Relationship between transferor to transferee. Any unusual “insider” transfer of assets may be suspect: wife to husband, child to parent, president to vice president, parent company to subsidiary, and so on. (Estate planning or tax planning or inheritance transfers may be “normal” when not done under pending or threatened litigation.)
  • Badge 4: Pendency or threat of litigation. This is a key provision, and it may apply from any time the debtor realizes she may
  • become party to litigation, including the date of contract.
  • Badge 5: Secrecy or hurried transaction. This may seem obvious, but if a debtor takes actions to cover the tracks of his financial dealings, or if he transfers assets without going through what a reasonable person would consider the normal steps or normal precautions, it may indicate fraud.
  • Badge 6: Insolvency or indebtedness of transferor. It the debtor makes herself insolvent, it may indicate fraud.
  • Badge 7: Departure from the usual method of business. If the debtor abruptly starts doing business with radically different or inappropriate customers or suppliers or changes his policies regarding payables and receivables, it may indicate fraud.
  • Badge 8: Retention by the debtor of possession. Suppose a debtor transfers her vacation home to her child, but leaves her own furniture in it and continues to use it for her own vacations? This indicates fraud.
  • Badge 9: Reservation or belief to the transferor. If the debtor continues to use the vacation home from 8, above, to entertain friends and clients or attempts to borrow money by offering the vacation home as collateral, it may indicate fraud.

Badges 1, 3, 5, and are all prominent issues in the first three tests cited in the article. Most of the other badges are aimed at discerning the intent of the transferor.

The landmark case on fraudulent transfer law is Twyne’s Case from 1601. The Uniform Law Commission adopted the Uniform Fraudulent Conveyance Act in 1918. After changes in the Uniform Commercial Code and the Bankruptcy Reform Act of 1978, the Commission adopted the Uniform Fraudulent Transfer Act in 1984, and it has subsequently been adopted by at least 40 states; the other states and US jurisdictions have similar laws in place. A state-court judgment will have to be domesticated in each state before you can seize assets there.

Twyne’s Case, 3 Coke 80b, 76 Eng. Rep. 809 (Star Chamber 1601)

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By: Joe H. Dickerson, CFE

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“When I was general counsel for First Interstate Bank, I used Joe Dickerson for locating assets, investigating behavior and asset discovery. He did excellent work and always got the information I needed without compromising the bank in any way. He’s more thorough and kept in better touch with me than other investigators. I’d give him a grade of 96 or 97 out of 100.”

Frank Brainerd, Retired
Banker/Attorney

2014-11-11T18:20:20+00:00

Frank Brainerd, Retired
Banker/Attorney

“When I was general counsel for First Interstate Bank, I used Joe Dickerson for locating assets, investigating behavior and asset discovery. He did excellent work and always got the information I needed without compromising the bank in any way. He’s more thorough and kept in better touch with me than other investigators. I’d give him a grade of 96 or 97 out of 100.”

” I was prepared to dismiss a federal case involving millions of dollars against a local individual who claimed to have no substantial assets. After your staff hit the records and delved into the transactions behind the transactions, you discovered the individual to actually be worth a few million dollars. We continued the case to conclusion. We were also very happy with the financial background examinations you conducted of the former directors of two failed national banks. The heart of any civil case is whether there is a pot at the end of the lawsuit. You were our lucky leprechaun in finding such pots.”

R. Michael Sentel
, Former Section Chief Legal Division, FDIC

2014-11-11T18:13:08+00:00

R. Michael Sentel
, Former Section Chief Legal Division, FDIC

” I was prepared to dismiss a federal case involving millions of dollars against a local individual who claimed to have no substantial assets. After your staff hit the records and delved into the transactions behind the transactions, you discovered the individual to actually be worth a few million dollars. We continued the case to conclusion. We were also very happy with the financial background examinations you conducted of the former directors of two failed national banks. The heart of any civil case is whether there is a pot at the end of the lawsuit. You were our lucky leprechaun in finding such pots.”

“They went overboard in providing excellent service. I was very pleased with what they provided for me as their end product. Financial Forensic Services really understands how a case needs to be put together in order to be presented to a jury. Their PowerPoint presentation tied everything together. It was thorough, it was concise, and it got the job done.”

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2014-11-11T18:21:32+00:00

Jim Thomas
, Prosecuting Attorney

“They went overboard in providing excellent service. I was very pleased with what they provided for me as their end product. Financial Forensic Services really understands how a case needs to be put together in order to be presented to a jury. Their PowerPoint presentation tied everything together. It was thorough, it was concise, and it got the job done.”

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Jan Schlichtman
, Attorney at Law

2014-11-11T18:20:55+00:00

Jan Schlichtman
, Attorney at Law

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Tim Gabelhouse
, Attorney at Law

2014-11-11T18:20:41+00:00

Tim Gabelhouse
, Attorney at Law

“As an environmental law firm, we use Joe Dickerson to locate prior business owners and do corporate genealogies. He is persistent, that’s the key to a good investigator, and he has a knack for understanding how people move money and do business. That tells him what rocks to look under. Joe is vastly superior to other investigators in two ways: he lets you know what’s going on and he’s honest with you, because he tells you if there’s really anything there worth pursuing. He is unusually thorough and creative finding people. Joe has earned his fee every time.” “If the information is to be found, then I believe that they will find it. Their service enabled me to do a much better job for my client.”

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Andrew Quiat
, Attorney

2014-11-11T18:12:51+00:00

Andrew Quiat
, Attorney

“Joe is the most competent investigator I’ve ever found. He has rare ability to find hidden assets. Others claim it, Joe has it. He understands the Rules of Evidence, he knows how to talk to people to develop a fact pattern, and he has a sixth sense for fraud. Joe has unquestioned integrity and delivers value for his services.”

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2014-11-11T18:21:13+00:00

Michael Whalen, 
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Attorney

2014-11-11T18:20:05+00:00

Thomas E. Root, 
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