Transfer Can Be Fraudulent Even If It Occurs Before Loan, Default, And Lawsuit Over Default On Loan

Fraud (PD)A recent Appellate Division decision should serve as a warning to anyone thinking about transferring assets and rendering themselves judgment proof before entering into a business deal. If the deal goes bad, the transfer might be deemed fraudulent and creditors might be able to look to the fraudulently transferred assets to satisfy their judgments. 

In Anastasi v. Barmbatsis, defendants, husband and wife, held all of the shares in a single-purpose entity that owned and operated a Stewart's Root Beer in Franklin Park, New Jersey. Shortly before procuring a loan to open a new Stewart's location with a partner, husband transferred his interest in the entity to wife, along with nearly all of his interest in another entity that the two owned. Husband then entered into a deal with plaintiff — verbal, but "apparently sealed with a handshake" — to borrow $50,000 to use to open the new restaurant. Defendants used this money, along with other funds, to open the restaurant.

Husband agreed to repay the loan in five to seven months. This was subsequently extended but husband failed to repay the loan even with the extension. Plaintiff sued and obtained a default judgment against husband for $50,000. In post-judgment discovery, plaintiff learned about the pre-loan transfers from husband to wife. Thereafter, he sued both husband and wife alleging, among other things, that the transfers violated New Jersey's Uniform Fraudulent Transfers Act (the "UFTA"). The trial court ruled in plaintiff's favor. It held that wife was not personally responsible for paying back the loan, but plaintiff could satisfy his judgment with the interests in the two entities that husband had transferred to wife.


Defendants appealed, arguing that the transfers were not fraudulent because they were not made with the intent to hinder, delay, or defraud. The Appellate Division affirmed the trial court's ruling.

The Appellate Division began by observing that the purpose of the UFTA was to "prevent a debtor from placing his or her property beyond a creditor's reach." Claims brought under the UFTA allow creditors to undo such transactions "so as to bring the property within the ambit of collection." To prevail on a UFTA claim, however, the creditor must demonstrate: (1) that the debtor moved an asset, which would have been available to the creditor, beyond the creditor's reach; and (2) that the debtor did so with the intent to defraud, delay, or hinder the creditor. 

Because intent is nearly impossible to prove — no debtor would ever admit to doing something for the purpose of defrauding, delaying, or hindering its creditors — the UFTA enumerates eleven "badges of fraud" that "represent circumstances that so frequently accompany fraudulent transfers that they presence gives rise to an inference of intent." Not all eleven need to be present for an inference of fraud to arise, but courts must analyze all of them when making that determination.

In Anastasi, defendants argued that the purpose of the transfers from husband to wife could not have been to defraud plaintiff because the parties did not anticipate that plaintiff would loan husband $50,000 when the transfers took place. The trial court rejected this argument, and the Appellate Division agreed. Both held that husband's intent to defraud could be inferred because several of the badges of fraud were present, including: the transfers were made to husband's wife; after the transfers, husband's role in the existing restaurant did not change in any substantial way; husband concealed the transfers from plaintiff when the loan was made; the transfers consisted of substantially all of husband's assets; and the transfers effectively rendered husband judgment proof.

Once plaintiff was found to have the requisite intent, the timing of the transfer, the loan, the default, and the judgment became irrelevant because, under the UFTA, a transfer can be fraudulent "whether the creditor's claim arose before or after the transfer was made or the obligation incurred," provided the transfer was made with the intent to hider, delay, or defraud the creditor. Accordingly, the transfers in Anastasi were deemed to have been fraudulent, and plaintiff was allowed to satisfy his judgment through the transferred assets.

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