Where Did the Money Go?

By Gerard W. Ittig | Dec 15, 2005
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This unfortunate circumstance occurs every day: A company, concerned about mounting claims and litigation against it, decides to get rid of its assets by conveying them to the company owners, shareholders and others. The stripped company is now “judgment proof” in the sense that only a shell remains.

As a creditor, you may be tempted to walk away and not pursue your claims. That business judgment may be the best course of action. You should be aware, however, that there could be other avenues of redress. One of the potential remedies may be with the Uniform Fraudulent Transfer Act (UFTA).

The Uniform Acts

In previous articles, I have discussed the nature of some “Uniform Acts.” These statutes start life as a recommendation to state legislatures across the country. In many instances, each state modifies the proposed act before passage. As a result, the exact wording of one state’s uniform statute may be different from that of another state. You must review the statute for your own state before proceeding.

Among the Uniform Acts are the Uniform Commercial Code, the Uniform Arbitration Act and a host of other statutes addressing wills, joint tortfeasors, etc. These acts are all attempts to bring some consistency to the laws throughout the country and to collect related laws in each state under one banner.

What the UFTA does

There are hundreds of laws, created by case law as well as by statute, on fraud, fraudulent transfers and fraudulent busi-ness practices. The UFTA is aimed at a class of fraud between debtors and creditors involving the debtor’s transfer of property.

Specifically, the UFTA addresses transfers of property with the intent to defraud a creditor. Under this act, the fraud can be a transfer of property to avoid an existing obligation or a transfer made to avoid a debt that is about to be incurred. The latter circumstance could occur, for example, if a company used its assets to show its credit worthiness, knowing that it was going to dispose of those assets.

The intent here can be actual intent or presumed to be intentional fraud. Actual intent is usually the harder of the two to prove. The act provides a list of factors for the proof that the transfer was for the purpose of hindering, delaying or cheating a creditor. These factors include the -following:

A. A transfer to an insider

B. The transfer of title only, while control of the property remained with the debtor

C. The transfer occurred after the debtor was sued or threatened with suit

D. The transfer occurred close in time (before or after) to the imposition of a substantial debt

Fraud is presumed if the debtor transferred property for an unreasonably low sum of money or equivalent property before entering into a transaction with a creditor so that the creditor could not be paid out of the remaining assets of the debtor.

What does this mean?

For the law, the moment the word “fraud” appears, bells and whistles go off, as the concept has both civil and criminal implications. For example, in a recent case, an unlicensed contractor entered into agreements with homeowners for renovation projects.

Under state law, the contracts were void, a fact the unwitting homeowners did not know. The “contractor” then proceeded to collect advances from customers and actually performed some work on his jobs before he abandoned them. He was convicted in federal court for mail fraud. State actions may also be prosecuted.

The fraud discussed in this article is not so much concerned with continuing schemes, like with the home renovation crook, but with a discrete event of a transfer (read “hiding”) of assets to cheat creditors.

In many if not most instances, the disappointed creditor first learns about the fraud when he tries to collect a debt or enforce a judgment. At that point, the creditor is not only out-of-pocket on his accounts receivable, but he has also incurred collection costs, including attorney fees.

The creditor must then file separate lawsuits against the parties who received the transferred assets, with the burden to prove that fraud was involved. As an alternative, creditors may instead place the defaulting debtor in bankruptcy, thus allowing the bankruptcy trustee to collect the assets by setting aside conveyances, fraudulent or otherwise.

However, the bankruptcy approach may be less desirable because the debtor’s assets become available to all creditors.

Other state laws

There are large numbers of fraud cases where insolvent companies have transferred assets to their officers, directors and related companies, but no fraud was proved. For good or bad reasons, the courts will not define a list of fraudulent transfers. There are, instead, lists of “badges of fraud” or “considerations.”

Generally speaking, officers of a company are under no duty to preserve corporate assets for the benefit of creditors. And the courts are hesitant to review corporate financial decisions, no matter how foolish those decisions may be, even though creditors are injured.

A fair summary of the case law concerning this issue was made by the court in Bank of America v. Musselman, 222 F. Supp.2d 792 (E.D.Va. 2002). The court surveyed decisions from a number of jurisdictions, including Illinois, Delaware, New York and North Carolina. The holding was:

“[T]he law of other jurisdictions is that directors and officers owe a limited fiduciary duty to creditors during insolvency; this duty extends only to refraining from self-dealing acts.”

The “self-dealing acts” were divided into five categories:

1. Withdrawing corporate assets from an insolvent corporation to pay debts owed to directors or officers

2. Using corporate funds to pay off debts personally guaranteed by the director or officer

3. Engaging in transactions for the benefit of a parent company

4. Appropriating proceeds from the sale of corporate assets, thereby rendering the company insolvent

5. Using corporate assets as collateral for personal stock purchases.

“Self dealing” is so central because the creditor wants the assets returned to the company. An innocent buyer of corporate assets is considered a “bona fide purchaser for value” who should not be dragged into the fray. Accordingly, you need to investigate the five categories above before deciding to pursue a fraudulent conveyance claim.


Being aware of the law of fraudulent transfers is important from two very different perspectives. On the one hand, you should consult an attorney if you are the creditor seeking funds from an insolvent debtor and, on the other hand, if you find your company in financial straits, you should obtain good counsel so that your efforts to protect your company’s assets don’t involve fraudulent transfers. EC

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, [email protected] or


About The Author

ITTIG, of Ittig & Ittig, P.C., in Washington, D.C., specializes in construction law. He can be contacted at 202.387.5508, [email protected] and





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