Litigating Claims Under the Colorado Uniform Fraudulent Transfer Act
| Publication year | 2016 |
| Pages | 35 |
Articles
The Civil Litigator
Litigating Claims under the Colorado Uniform Fraudulent Transfer Act
By Ellie Lockwood, Judge
The Civil Litigator articles address issues of importance and interest to litigators and trial lawyers practicing in Colorado courts. The Civil Litigator is published six times a year.
Coordinating Editor
Timothy Reynolds, Boulder, of Bryan Cave HRO—(303) 417-8510, timothy.reynolds@bryancave.com
About the Author
Ellie Lockwood is an associate attorney at Reilly Pozner LLP—(303) 893-6100, elockwood@rplaw.com. She focuses her practice on business and intellectual property litigation and has represented both plaintiffs and defendants in all stages of litigation, from preliminary relief through appeal. Lockwood also has an active pro bono practice, which includes serving as special counsel for the State Public Defender.
This article offers a litigator's perspective on the causes of action and remedies available to a corporation, partnership, or individual who has a judgment but cannot collect it because the debtor has rendered itself judgment proof. The article analyzes potential claims and remedies available to a claimant under Colorado's Uniform Fraudulent Transfer Act, including a recent amendment that allows for recovery of one and one-half the value of the asset transferred or one and one-half the amount necessary to satisfy the creditor's claim, whichever is less.
In the face of sophisticated asset planning mechanisms, including offshore trusts and domestic trusts created in states offering debtor-friendly laws, businesses and individuals alike face significant barriers to recovering assets that would otherwise be available to satisfy their claims. For example, a corporation sued for breach of contract that successfully defends the action and is awarded attorney fees under the fee-shifting provision in the contract cannot collect that judgment if the opponent has rendered itself judgment proof by transferring all assets to a shell entity or asset protection trust. Instead, the judgment holder may be forced to file a separate lawsuit under the Colorado Uniform Fraudulent Transfer Act, CRS §§ 38-8-101 et seq. (CUFTA or the Act), to collect its judgment.
Fraudulent Transfer Claims under CUFTA
CUFTA, enacted in 1991,[1] is based on the Uniform Fraudulent Transfer Act. The purpose of CUFTA is simple: to protect unsecured and secured creditors from the effects of debtor transfers designed to frustrate a creditor's effort or ability to collect on a debt. A creditor who sues under CUFTA may seek a variety of remedies, including pre-judgment relief and money damages—making CUFTA a powerful tool for pursuing an otherwise judgment-proof opponent.
Two Types of CUFTA Claims
CUFTA provides two general types of claims for recovery, for transfers made (1) with an actual intent to defraud, and (2) under circumstances that constitute constructive fraud.[2] Under the Act, a c reditor is defined broadly as "a person who has a claim."[3] A claim is defined as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured."[4] Because it is broadly defined under the statute, a claim may arise under CUFTA before a creditor is aware of its existence, or is a judgment creditor.
Fraudulent transfer as to present creditors.
Where a creditor's claim arose before a transfer was made or obligation incurred, the creditor must only establish that (1) the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange, and (2) the debtor was insolvent at that time or became insolvent as a result of the transfer or obligation.[5] For this type of claim under CUFTA, the judgment creditor need not establish fraudulent intent to establish constructive fraud under CRS § 38-8-106(1). Instead, the debtor's intent is immaterial to the issue, which is the equivalent of the consideration coupled with either insolvency, inadequacy of remaining capital, or inability to pay debts as they mature.[6]
The claim must be brought within four years after the debtor made the transfer or incurred the obligation.[7] In practice, it can be difficult to ascertain when a given transfer occurred, especially with private transactions, as opposed to publicly recorded transactions involving real estate. As a result, the statute of limitations on a constructive fraud claim under CUFTA may have run before the CUFTA litigant discovers the transfer. If this happens, the CUFTA litigant should consider bringing a claim under CRS § 38-8-105(1), as explained below.
Fraudulent transfer as to present and future creditors.
CUFTA provides a claim for relief when a creditor's claim arose before or after the debtor made the transfer or incurred the obligation (1) "with actual intent to hinder, delay, or defraud any creditor of the debtor," or (2) "without receiving a reasonably equivalent value in exchange for the transfer or obligation," when the debtor engaged in a business or a transaction "for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction," or the debtor "intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due."[8]
Whether a debtor intended to hinder, delay, or defraud creditors is a question of fact. As a result, when determining the existence of actual intent, a court will consider a variety of factors termed "badges of fraud," such as 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 disclosed or concealed;
4) the debtor had been sued or threatened with suit before the transfer was made or obligation was incurred;
5) the transfer was of substantially all of 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.[9]
"These factors, or 'badges of fraud,' are used because the intent to hinder, delay, or defraud creditors is seldom susceptible of direct proof. While a single badge of fraud may only create suspicion of fraud, several badges of fraud considered together may infer intent to defraud."[10]
When considering the badges of fraud, a court will impute fraudulent intent from the president and other insiders to a corporation that engages in a transfer.[11] There is also authority stating that fraudulent intent can be imputed from an agent or fiduciary of the debtor or transferor.[12] In addition, debtors who attempt to delay creditors by transferring property to another entity, such as a corporation or a partnership, will satisfy the test for intent to hinder or delay.[13]
Claims made under CRS § 38-8-105(l)(a) must be brought "within either four years after the transfer was made or obligation incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant."[14] On the other hand, claims made pursuant to CRS §§ 38-8-105(l)(b) and -106(1) must be brought within four years of the transfer, while claims made under CRS § 38-8-106(2) must be brought within one year of the transfer.[15] It is critical for a CUFTA litigant to pay close attention to the limitations periods because a judgment creditor often does not find out about the fraudulent transfer until long after the transfer has occurred, and the statute's discovery rule can save claims that otherwise would be barred.
Proper Parties
When pursuing a CUFTA action, a litigant should evaluate all potential interested persons to determine who should be sued. All parties to the transfers or those persons who may be affected by the judgment in the action should be made a party to the lawsuit.[16]If the transfer involves entities, such as partnerships, corporations, or trusts, the number of interested persons (and, importantly, potential avenues for recovery) may be much higher.
Potential interested parties include the trustees and beneficiaries.[17] "A trustee, holding legal title to property for the use of others, is usually considered a necessary party in a suit attacking a fraudulent conveyance, on the ground that the court can do no more than act on the legal title of the parties before it."[18] "In Colorado, suit against the trustee is a proper means of initiating an action for the recovery of trust property."[19] And because the beneficiaries will have an interest in the outcome of the proceeding, they too should be made a party to the action.[20]
Grantees or recipients of the fraudulently transferred property are also necessary parties to a CUFTA action because they have an interest in the property.[21] In addition, any third party who purchases the property from the grantee is a necessary party if the claimant seeks to set aside the conveyance to her grantor because...
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