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Fraudulent Transfers Series: When Fraudulently Transferred Funds End Up in a “Homestead”

Oftentimes, fraudulently transferred funds end up being invested in the debtor or subsequent transferee’s personal residence under the mistaken belief that creditors cannot reach it if it is the transferee’s homestead. However, it is well-settled law that the homestead and exemption laws of Texas were never intended to be, and cannot be, the haven of wrongfully obtained money or properties. 1)Pace v. McEwen, 617 S.W.2d 816, 818 (Tex. App.—Houston [14th Dist.] 1981, no writ); Baucum v. Texan Oil Corporation, 423 S.W.2d 434, 442 (Tex. Civ. App.—El Paso 1967, writ ref’d n.r.e.) 

Therefore, “funds wrongfully diverted from a corporation and subsequently diverted into property ordinarily exempt will be subject to a constructive trust.” 2)Baucum v. Texan Oil Corporation, 423 S.W.2d at 442. A constructive trust is “an equitable tool in the court’s power that can infer a fiduciary-like relationship within a transaction for the purpose of promoting justice.” 3)Harris v. Sentry Title Co., Inc., 715 F.2d 941, 946 (5th Cir.1983); see also Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App.—Corpus Christi 2002). The constructive trust will be for the benefit of the defendant’s creditors. Because the property was purchased with fraudulently transferred funds, it is not owned by the homestead claimant, rather it is owned by the trust. So, the homestead claimant cannot actually show ownership to prove up the homestead.

To attack a claim of homestead, a creditor should file a lawsuit that alleges violations of the Texas Uniform Fraudulent Transfer Act (“TUFTA”) with regard to the homestead and request that a constructive trust be imposed. The creditor should also seek a preliminary injunction that would enjoin the debtor/subsequent transferee from further transferring the asset.

Furthermore, when a creditor has properly asserted that a debtor fraudulently transferred funds into a property designated as a homestead, a notice of lis pendens can be filed (as the creditor has asserted an interest in the alleged homestead property). 4)See Texas Kidney, Inc. v. ASD Specialty Healthcare, 2014 WL 3002425, at 9 (Tex. App.—Houston [14th Dist.] July 1, 2014, no pet.).   This will notice to all potential subsequent transferees, that conduct a title search, that the property is subject of a lawsuit.

If the jury finds that fraudulently transferred funds were used to purchase property designated as a homestead, the court can place the property in a constructive trust for the creditors and the creditors can sell it to satisfy their judgment.

References   [ + ]

1.Pace v. McEwen, 617 S.W.2d 816, 818 (Tex. App.—Houston [14th Dist.] 1981, no writ); Baucum v. Texan Oil Corporation, 423 S.W.2d 434, 442 (Tex. Civ. App.—El Paso 1967, writ ref’d n.r.e.) 
2.Baucum v. Texan Oil Corporation, 423 S.W.2d at 442.
3.Harris v. Sentry Title Co., Inc., 715 F.2d 941, 946 (5th Cir.1983); see also Mowbray v. Avery, 76 S.W.3d 663, 681 (Tex. App.—Corpus Christi 2002).
4.See Texas Kidney, Inc. v. ASD Specialty Healthcare, 2014 WL 3002425, at 9 (Tex. App.—Houston [14th Dist.] July 1, 2014, no pet.).  

Fraudulent Transfers Series: Obtaining an Injunction To Stop Further Transfers During Litigation

The Texas Uniform Fraudulent Transfer Act allows injunctive relief to proceed against transferees in order to block the transferee from making further transfers of the assets. 1)Tanguy v. Laux, 259 S.W.3d 851, 859 (Tex. App. – Houston [1st Dist.] 2008, no pet.) .  In particular, TUFTA states that . . . subject to applicable principles of equity and in accordance with applicable rules of civil procedure, TUFTA allows for the following remedies:

(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. 2) See §24.008(a)(3)(A)-(C)

In Tanguy v. Laux, the First Court of Appeals made clear that one seeking an injunction did not have to have a lien on the real property against which the injunction was sought under TUFTA. 3)Id at 859. The Court’s holding shows that a creditor is not required to have lien on property, in order to pursue a claim against the property for having been fraudulently transferred pursuant to TUFTA. 4) See also Texas Kidney, Inc. v. ASD Specialty Healthcare, No. 14-13-00106-CV, 2014 WL3002425 (Tex. App – Houston [14th Dist.] July 1, 2014, no pet.) (“Texas Kidney”) .

In Texas Kidney the Plaintiff was ASD Specialty Healthcare, (“ASD”) which sold medications to Texas Kidney, Inc. or “TKI”, a dialysis center.  TKI failed to pay for $405,909.73 in medications sold to TKI.  As a result, ASD sued TKI for the debt. 5) Id. at 1-2.

TKI sold the dialysis center for $3 million, but still did not pay ASD.  When ASD’s counsel (Cersonsky, Rosen & Garcia lawyers M.H. Cersonsky and Marianne G. Robak) learned of the sale and obtained evidence of the transferees who received TKI’s sales proceeds, the petition was amended to include the transferees of TKI who recieved over $1.3 million, e.g. (a) Ahmed Rabie and Sana Rabie approximately $800,000.000 used to buy a home which they declared to be their homestead; and (b) Ahmed and Sana Rabie $500,000.000 used to purchase a certificate of deposit. 6) Id. at 5-6.

After a two-day evidentiary hearing, the trial court issued an injunction against the transferees, Ahmed Rabie and Sana Rabie, enjoining them from selling, encumbering, or disposing of any interest in the real property in question and from withdrawing funds or otherwise disbursing the balance left in the certificate of deposit. 7) Id. at 2.  TKI and the Rabies appealed. However, the Court of Appeals affirmed the trial court’s injunction against the transferees because the evidence showed that fraudulently transferred funds were used to purchase the alleged homestead. 8)Id. at 5-6.  This clearly shows TUFTA reaches transferees and the assets transferred to them.

Obtaining an injunction is a powerful tool provided to creditors by way of TUFTA that is often not used in litigation. However, when an injunction is obtained in a TUFTA case, it can lead to a favorable outcome in collecting a debt.

References   [ + ]

1.Tanguy v. Laux, 259 S.W.3d 851, 859 (Tex. App. – Houston [1st Dist.] 2008, no pet.)
2. See §24.008(a)(3)(A)-(C)
3.Id at 859.
4. See also Texas Kidney, Inc. v. ASD Specialty Healthcare, No. 14-13-00106-CV, 2014 WL3002425 (Tex. App – Houston [14th Dist.] July 1, 2014, no pet.) (“Texas Kidney”)
5. Id. at 1-2.
6. Id. at 5-6.
7. Id. at 2.
8.Id. at 5-6.

Fraudulent Transfers Series: Who Is A “Creditor” Under the Fraudulent Transfer Act?

The Texas Uniform Fraudulent Transfer Act (“TUFTA”) provides that a transfer of an asset is fraudulent, as to a creditor, if the debtor made the transfer with the actual intent to hinder, delay or defraud any of the debtor’s creditors.

The definitions portions of TUFTA defines “creditor” as a person. . .who has a claim.” Tex. 1)Bus. & Com. Code.  § 24.002(4) . “Claim” is defined as a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. 2)See Tex. Bus. & Com. Code. § 24.002(3)(emphasis added) .

Texas courts have given a broad construction to the term creditor, so that TUFTA “protects the holders of unliquidated unmatured contingent claims.” 3)Zahra Spiritual Trust v. United States, 910 F.2d 240, 248 (5th Cir.1990) .  Therefore, creditors are “persons having subsisting obligations against the debtor at the time the fraudulent alienation was made or the secret trust created, although their claims may not have matured or even been reduced to judgment until after such conveyance.” 4)Burnett at 743; see also First State Bank of Mobeetie v. Goodner, 168 S.W.2d 941 (Tex.Civ.App.—Amarillo 1943, no writ) .

To summarize, a plaintiff does not need to first prove that a debt is owed or obtain a judgment before it can be considered a “creditor” entitled to relief by way of the TUFTA.

The next blog will answer the question: How does one obtain an injunction to stop further transfers from taking place during litigation?

References   [ + ]

1.Bus. & Com. Code.  § 24.002(4)
2.See Tex. Bus. & Com. Code. § 24.002(3)(emphasis added)
3.Zahra Spiritual Trust v. United States, 910 F.2d 240, 248 (5th Cir.1990)
4.Burnett at 743; see also First State Bank of Mobeetie v. Goodner, 168 S.W.2d 941 (Tex.Civ.App.—Amarillo 1943, no writ)

Fraudulent Transfer Series: Introduction

During the next few weeks, Cersonsky, Rosen & Garcia, P.C. (“CRG”) will be presenting a blog series on the Texas Uniform Fraudulent Transfer Act (“TUFTA”). This portion of the series is intended to provide a primer to the reader on what TUFTA is and how it can be used by companies, individuals, investors, vendors, and other creditors as a pre and post-judgment remedy. TUFTA is a very valuable statute of which any creditor, potential creditor, or business owner should be aware. However, it is often overlooked by attorneys and, in some circumstances, is misunderstood by the trial courts.

The purpose of TUFTA is to “prevent fraudulent transfers of property by a debtor who intends to defraud creditors by placing assets beyond their reach.” 1)Kaufmann v. Morales, 93 S.W.3d 650, 653 (Tex.App.-Houston [14th Dist.] 2002, no pet.)

TUFTA provides that a transfer of an asset is fraudulent, as to a creditor, if the debtor made the transfer with the actual intent to hinder, delay or defraud any of the debtor’s creditors. 2)Blackthorne v. Bellush, 61 S.W.3d 439, 443 (Tex. App .— San Antonio 2001, no pet.); Jackson Law Office, P.C. v. Chappell, 37 S.W.3d 15, 25 (Tex. App. — Tyler 2000, pet. denied); Tex. Bus. & Com. Code. § 24.005(a)(1) . The UFTA lists 11 non-exhaustive “badges of fraud” to assist in determining whether the debtor made the transfer with the requisite fraudulent intent. 3)Id.; § 24.005(b)(1)-(11.) The list includes whether:

(1)  the transfer or obligation was to an insider;

(2)  the debtor retained possession or control of the property transferred after the transfer;

(3)  the transfer or obligation was concealed;

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5)  the transfer was of substantially all the debtor’s assets;

(6)  the debtor absconded;

(7)  the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9)  the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10)  the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11)  the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.  4)Id.

In order to prove to a jury that a fraudulent transfer occurred (by way of showing that some of the badges of fraud listed above occurred), a creditor will have to ‘trace the assets’ of the debtor. Tracing assets, often times, requires the creditor to conduct litigation discovery such as sending requests for production of relevant documents to the debtor (to obtain bank records, wire reports, check images, contracts, accounts receivable/payable logs, employment records, accounting records, etc), subpoenas to non-parties and/or subsequent transferees and take depositions of the debtor and other key witnesses.

Ultimately, the evidence compiled will be presented to a judge or jury during trial (or an injunction hearing), and the decision will then be made as to whether a fraudulent transfer occurred. If the fact-finder determines that a fraudulent transfer has taken place, TUFTA permits a creditor, under certain circumstances, to set aside a debtor’s fraudulent transfer of assets. 5)See Tex. Bus. & Com.Code Ann. § 24.008(a) (West 2009); Wohlstein v. Aliezer, 321 S.W.3d 765, 776 (Tex.App. – Houston [14th Dist.] 2010, no pet.) . Depending the facts of the case, the subsequent transferee can be held liable for the full amount of the creditor’s claims, regardless of the value of the property transferred. 6)See Airflow Houston, Inc. v. Theriot, 849 S.W.2d 928, 933-34 (Tex. App. – Houston [1st Dist.] 1993 no writ.) (Using the broad language of §24.008(a)(3)(c) to permit the court to award a judgment against the transferee for the full amount of the debt, regardless of it the full value of assets or interest was received by the transferee.); Trigeant Holdings, Ltd. v. Jones, 183 S.W.3d 717, 727 (Tex. App. – Houston [1st Dist.] 2005, pet. denied).

The next blog will answer the question: Who is a creditor under the Texas Uniform Fraudulent Transfer Act?

References   [ + ]

1.Kaufmann v. Morales, 93 S.W.3d 650, 653 (Tex.App.-Houston [14th Dist.] 2002, no pet.)
2.Blackthorne v. Bellush, 61 S.W.3d 439, 443 (Tex. App .— San Antonio 2001, no pet.); Jackson Law Office, P.C. v. Chappell, 37 S.W.3d 15, 25 (Tex. App. — Tyler 2000, pet. denied); Tex. Bus. & Com. Code. § 24.005(a)(1)
3.Id.; § 24.005(b)(1)-(11.)
4.Id.
5.See Tex. Bus. & Com.Code Ann. § 24.008(a) (West 2009); Wohlstein v. Aliezer, 321 S.W.3d 765, 776 (Tex.App. – Houston [14th Dist.] 2010, no pet.) 
6.See Airflow Houston, Inc. v. Theriot, 849 S.W.2d 928, 933-34 (Tex. App. – Houston [1st Dist.] 1993 no writ.) (Using the broad language of §24.008(a)(3)(c) to permit the court to award a judgment against the transferee for the full amount of the debt, regardless of it the full value of assets or interest was received by the transferee.); Trigeant Holdings, Ltd. v. Jones, 183 S.W.3d 717, 727 (Tex. App. – Houston [1st Dist.] 2005, pet. denied).

The Debtor Disputed Your Debt, Now What?

Under Section 1692g of the Fair Debt Collection Practices Act, if a consumer disputes a debt within 30 days of the first Miranda warning[1], the debt collector must cease collection efforts until the debt collector “obtains verification of the debt or a copy of a judgment, or the name and address of the original creditor, and a copy of such checklist photoverification or judgment, or name and address of the original creditor.” 15 U.S.C.A. § 1692g (West). The statute seems straight forward, but with the advice  on the internet (good, bad or indifferent), it has become more complicated. Debtors are now retrieving form letters and sending those off in response to demand letters in efforts to trip up debt collectors. Many times, those expansive letters request anything from the attorney employment agreements with their clients to the law firm’s insurance. The question is, does the law firm have to respond with every document request in order to have properly verified the debt under Section 1692g of the Fair Debt Collection Practices Act?

Fortunately, the courts have answered this question “no.” The courts have developed two tests. First, the traditional and more lenient test still applied by many courts was originally expounded in Chaudhry v. Gallerizzo, 174 F.3d 394, 406 (4th Cir. 1999). It required “nothing more than the debt collector confirming in writing that the amount being demanded is what the creditor is claiming is owed.” Haddad v. Alexander, Zelmanski, Danner & Fioritto, PLLC, 758 F.3d 777 (6th Cir. 2014) (citing Chaudhry 174 F.3d at 406 (4th Cir. 1999); see also, Clark v. Capital Credit & Collection Servs., 460 F.3d 1162 (9th Cir. 2006)). A second test was held in Haddad, where the the Sixth Circuit stated that sufficient “verification” requires the debt collector to “provide the consumer with notice of how and when the debt was originally incurred or other sufficient notice from which the consumer could sufficiently dispute the payment obligation.” Haddad, 758 F.3d at 786.

So what does this mean for a debt collector when responding to these letters? Generally, if the debt collector can give the basis for the original charge, an accounting of the debt and the name of the original creditor, the response to the verification will be sufficient. See e.g. Ritter v. Cohen & Slamowitz, LLP, 118 F.Supp.3d 497, 502, 504 (E.D.N.Y. 2015); Stoneheart v. Rosenthal, No: 01-CV-651, 2001 WL 910771, at *23 (S.D.N.Y. Aug, 13, 2001); and Hawkins-El v. First American Funding, 891 F.Supp. 2d 402 (E.D.N.Y. 2012); Hawkins-El v. First Am. Funding, LLC, 529 Fed.Appx. 45 (2d Cir. 2013) (affirming District Court’s opinion). However, in one instance, a court found that a verification contained internal inconsistencies, and was therefore insufficient. See Mack v. Progressive Financial Servs., Inc., No. 4:13cv544, 2015 WL 123742, at *1 (E.D. Tex. Jan. 8, 2015). Thus, it is important to make sure that the information given is accurate and consistent, otherwise the verification may be deemed insufficient, and all subsequent collection efforts may be in violation of the FDCPA.

Once the debt is verified, the debtors may continue their collection attempts, as stated in Hawkins-El “Plaintiff’s debt already had been verified for purposes of the FDCPA. Plaintiff cannot forestall collection efforts by repeating the same unsubstantiated assertions and thereby contend that the debt is ‘disputed.’ If Plaintiff were permitted to do so, debtors would be able to prevent collection permanently by sending letters, regardless of their merit, stating that the debt is in dispute. Such a result is untenable as it would make debts effectively uncollectible.” Hawkins-El, 891 F.Supp.2d at 410.

[1]See 15 U.S.C.A. § 1962g (a)(4) requiring “a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of a judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector.”