Texas law prohibits a debtor who is subject to a valid judgment from moving assets out of reach of creditors in order to hinder, delay, or defraud a judgment creditor. This legal restriction applies even if the transfer takes place before the entry of a judgment against them. A fraudulent transfer is voidable under Texas law. So, one may ask, what is a fraudulent transfer? The Texas Uniform Fraudulent Transfer Act (TUFTA) supplies an answer.
Texas Uniform Fraudulent Transfer Act (TUFTA)
The Texas Uniform Fraudulent Transfer Act (TUFTA) prohibits a debtor from defrauding creditors by placing assets beyond their reach. The TUFTA provides creditors with legal recourse when a debtor engages in a fraudulent transfer. Where a debtor engages in a fraudulent transfer,[1]a creditor may void the transfer.
What Is a Fraudulent Transfer?
Chapter 24 of the Business and Commerce Code, commonly referred to as TUFTA, broadly defines a “transfer.” Under Tex. Bus. & Com. Code § 24.002(12), a transfer is “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and included payment of money, release, lease, and creation of a lien or other encumbrance.”[2] An asset for these purposes is any property of a debtor, but excludes (1) property encumbered by a valid lien; (2) property to the extent it is generally exempt under bankruptcy law; and (3) an interest in property held in tenancy by the entireties to the extent it is not subject to a claim against a tenant under the law of another jurisdiction.[3]
Under Section 24.005(a), a transfer is fraudulent if the debtor made the transfer (1) with actual intent to hinder, delay, or defraud a creditor or (2) without receiving a reasonably equivalent value in exchange for the transfer, assuming the debtor satisfies one of two conditions.[4] The first condition is that the debtor engaged in a transaction in which the debtor’s remaining assets are unreasonably small in relation to the transaction.[5] Alternatively, the second condition is that the debtor incurred or reasonably believed he or she would incur debts that the debtor would not be able to repay.[6] In addition, under Section 24.006, a fraudulent transfer also includes one made to an insider while a debtor is insolvent.[7]
TUFTA does not actually require a showing of fraudulent intent in order to establish a fraudulent transfer. Instead, with respect to actual intent, TUFTA provides a series of relevant factors to determine whether a fraudulent transfer occurred. These factors[8] include:
- the transfer or obligation was to an insider;
- the debtor retained possession or control of the property transferred after the transfer;
- the transfer or obligation was concealed;
- before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
- the transfer was of substantially all the debtor’s assets;
- the debtor absconded;
- the debtor removed or concealed assets;
- 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;
- the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
- the transfer occurred shortly before or shortly after a substantial debt was incurred; and
- the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Creditor’s Remedies for a Fraudulent Transfer
In the event of a fraudulent transfer, a creditor has several remedies under Tex. Bus. & Com. Code § 24.008. For instance, a creditor may seek to avoid the transfer or obligation to the extent necessary to fulfill the creditor’s claim.[9]Or a creditor may obtain other provisional remedies against the transferred asset, pursuant to the Texas Rules of Civil Procedure and the Civil Practice and Remedies Code.[10]
Alternatively, a creditor may be entitled to equitable relief. This includes an injunction against further disposition by the debtor or transferee; appointment of a receiver to take charge of the transferred asset; and other appropriate relief under the circumstances.[11]
In addition, if a creditor obtains a judgment against the debtor, the creditor may levy execution on the transferred asset or proceeds if the court so orders.[12]
Finally, any costs and reasonable attorney’s fees incurred through this process are recoverable if the recovery of such amounts is equitable and just.[13]
Criminal Tax Defense Attorneys
Freeman Law represents companies, executives, and individuals in regulatory and white-collar government investigations and prosecutions. We employ a proactive approach to defend vigorously and strategically position our clients. White-collar matters often involve parallel regulatory and civil proceedings. Freeman Law can navigate the complexities and collateral consequences of multiple proceedings. And when it comes to the court of public opinion, we employ ethical and strategic tactics to manage publicity. Schedule a consultation or call (214) 984-3000 to discuss your allegations and investigations concerns.
[1] Englert v. Englert, 881 S.W.2d 517, 517 (Tex. App.—Amarillo 1994).
[2] Tex. Bus. & Com. Code § 24.002(12)
[3] Tex. Bus. & Com. Code § 24.002(2).
[4] Tex. Bus. & Com. Code § 24.005(a).
[5] Tex. Bus. & Com. Code § 24.005(a)(2)(A).
[6] Tex. Bus. & Com. Code § 24.005(a)(2)(B).
[7] Tex. Bus. & Com. Code § 24.006.
[8] Tex. Bus. & Com. Code § 24.005(b)(1)—(11).
[9] Tex. Bus. & Com. Code § 24.008(a)(1).
[10] Tex. Bus. & Com. Code § 24.008(a)(2).
[11] Tex. Bus. & Com. Code § 24.008(a)(3)(A)–(C).
[12] Tex. Bus. & Com. Code § 24.008(b).
[13] Tex. Bus. & Com. Code § 24.013.
