Remedies for Creditors Under FUFTA Chapter 726 – Part I: Who May Be Liable

Simply put, Florida’s Uniform Fraudulent Transfer Act (“FUFTA”) is a “powerful remedy.” See Brandon C. Meadow’s in-depth blog, Are Florida’s Fraudulent Transfer Claims Subject to Equitable Tolling? But what good is this powerful remedy if creditors do not understand what exactly it can do for them in light of misconduct by debtors? This blog post seeks to show creditors what rights and options they have for unwinding transfers and obtaining payback against those who assets were fraudulently transferred to.

The relevant statutory provisions governing “Remedies of Creditors” under Florida law are § 726.108 and § 726.1.09. § 726.108 lists five primary remedies:

  • Avoidance
  • Attachment
  • Injunction
  • Appointment of receiver
  • Levy and execution

726.109 provides, inter alia:

Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under s. 726.108(1)(a), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (3), or the amount necessary to satisfy the creditor’s claim, whichever is less.

Thus, under the right circumstances, creditors can get a judgment against the transferees and size the assets of the transferees to satisfy that judgment. Florida law provides that “If the judgment . . . is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer subject to adjustment as the equities may require.” Fla. Stat. § 726.109(3). Case law indicates that §§ 726.108 and 726.109 give the creditor a choice of remedies. “Reading these provisions together, it appears that the creditors seeking relief under Chapter 726 may choose their remedy—either to avoid a transfer and seek recovery against the asset fraudulently transferred, or to receive a money judgment against the transferee based on the lesser of the value of the asset or the amount of the creditor’s claim.” In re Davis, 403 B.R. 914, 920 (Fla. M.D. 2009).

“Must I choose one remedy over another?”

When a transfer is voidable, there is not a bright line rule to determine when courts will prefer avoidance over money judgments and vice versa. However, certain factual circumstances seem to influence the court’s decision between avoidance and money judgments. In some situations, where avoidance is “impracticable, if not impossible,” money judgments are favored. Winn & Lovett Grocery Co. v. Saffold Bros. Produce Co., 164 So. 681, 683 (Fla. 1935). Nevertheless, courts tend to determine appropriate relief on a case-by-case basis because of the various factors to consider (i.e., the good faith or lack thereof of trustees).

Florida state courts further clarify the choice of remedies available as suited to the purpose of FUFTA. “[FUFTA] is either an action by a creditor against a transfer directed against a particular transaction, which, if declared fraudulent, is set aside thus leaving the creditor free to pursue the asset, or it is an action against a transferee who has received an asset by means of a fraudulent conveyance and should be required to either return the asset or pay for the asset (by way of a judgment and execution).” Yusem v. South Florida Water Mgmt. Dist., 770 So. 2d 746, 749 (Fla. 4th DCA 2000).

Creditor Remedies: Avoidance of the Transfers vs. Obtaining a Money Judgment

The seemingly inconsistent choice of remedy between avoidance of the transfer and a money judgment against the transferee does not mean that the two forms of relief are mutually exclusive. In fact, the enumerated remedies are intended to be nonexclusive and cumulative. See Comment 6 to § 7, Uniform Fraudulent Transfer Act. However, the case law is not instructive as to whether courts will generally prefer an avoidance of a transfer over a money judgment. On one hand, some Florida courts hold that the creditor may elect its own remedy. In re Davis, 403 B.R. at 920. Other courts hold that the form of relief is ultimately left to the discretion of the trial court. Bakwin v. Mardirosian, 467 Mass. 631, 637, 6 N.E.3d 1078, 1084–85 (2014). Irrespective of the remedy sought or chosen, there are certain factual circumstances that may influence the decision of the court to employ a money judgment over avoidance.

Specifically, the Florida Supreme Court has held that avoidance of fraudulently transferred property is inappropriate when avoidance is impossible or impractical. Winn & Lovett Grocery Co. v. Saffold Bros. Produce Co., 164 So. 681, 683 (Fla. 1935) (holding that a money judgment was the appropriate remedy when the transferee “carried away and sold, and disposed of or so mingled or so damaged, said property that it was impracticable or impossible to reach or identify it . . . .”).

Courts in other states, interpreting the same codified version of the UFTA, have entered a monetary judgment as the more appropriate remedy, when the transferee caused dissipation or depreciation of the asset. For instance, Colorado courts have described what these unique circumstances may be:

Such special circumstances generally involve some activity of the fraudulent transferee in causing the property involved to be depreciated in value while in his hands or causing the property, either wholly or in part, to be placed beyond the reach of the court…. If a money judgment … will accomplish the desired result, it will be imposed in favor of the judgment creditor…. A personal judgment is to restore lost value in the property fraudulently conveyed, and is in lieu of returning this property fully to its prior ownership in the fraudulent transferor.

New Crawford Valley, Ltd. v. Benedict, 877 P.2d 1363, 1369 (Colo. App. 1993).

The Supreme Judicial Court of Massachusetts has also deemed the avoidance of assets to be inappropriate in situations where the value of the asset has been significantly dissipated, instead opting for monetary damages against the transferee who dissipated the property. Bakwin v. Mardirosian, 6 N.E.3d 1078 at 1094 (collecting cases, and stating “[i]ndeed, other jurisdictions that have adopted UFTA have concluded that money judgments against fraudulent transferees are particularly warranted in circumstances in which the transferee has dissipated the asset.”); see United States v. Verduchi, 434 F.3d 17, 22–23 (1st Cir. 2006) (holding that a money judgment is appropriate “where such transferee has disposed of or dealt with the property … in such fashion that a return of the property is impossible or in situations in which the property has been diminished in value . . . .”); Robinson v. Coughlin, 266 Conn. 1, 9, 830 A.2d 1114, 1119 (2003) (entering a money judgment against the transferee where the property depreciated in value during the period that the transferee held the property). But what happens when the value of the asset significantly increases?

A. What Happens if the Value of the Transferred Asset Appreciates?

From the foregoing cases, it is clear that courts will favor a money judgment when avoidance is impractical or when the transferee dissipated the value of the assets. However, it is less clear whether courts favor a money judgment over avoidance when the value of the asset appreciates or increases in value. “Cases in which the value of transferred property appreciated after the transfer are rare.” In re Integra Realty Res., Inc., 354 F.3d 1246, 1267 (10th Cir. 2004).

The few cases that address post-transfer appreciation are cases involving the transfer of stock. See In re Colonial Realty Co., 226 B.R. 513, 526 (Bankr. D. Conn. 1998) (holding that the trustee was entitled to recover the appreciated value of the stock minus the amount of consideration paid); In re Morris Communications NC, Inc., 914 F.2d 458 (4th Cir. 1990) (holding that the clear legislative intent of [UFTA] is that the fraudulently transferred property and all proceeds and profits derived therefrom should be returned to the trustee subject only to certain specific liens in favor of a good faith transferee); In re Am. Way Serv. Corp., 229 B.R. 496, 531 (Bankr. S.D. Fla. 1999) (holding that because the transferees were not in good faith, the judgment will be for the value of the stock at the time of transfer without an offset for consideration paid).

In sum, there are no bright-line rules as to whether a court will prefer avoidance over a money judgment, and such relief will likely be awarded on a case-by-case basis to balance the equities between aggrieved creditors and transferees. However, the policies underpinning the statutory scheme of FUFTA provides guidance as to what a court can and should do in every case. Specifically, the remedial goal of FUFTA is to put the creditor back in the same position it would have been, but for the fraudulent transfer—no more, no less. See In re Kingsley, 06-12096-BKC-PGH, 2007 WL 1491188, at *5 (Bankr. S.D. Fla. 2007), aff’d, 518 F.3d 874 (11th Cir. 2008) (finding that the UFTA “is designed to restore the estate to the financial condition that would have existed had the transfer never occurred.”); Marine Midland Bank v. Murkoff, 120 A.D.2d 122, 133, 508 N.Y.S.2d 17, 24 (1986) (stressing that a remedy under the UFTA cannot leave a creditor in a better position than before the fraudulent transfer took place).

The limitations on liability and protections of the transferees as set forth in FUFTA, which are set forth more fully under the compensatory damages section below, support the contention that a creditor may not benefit from a windfall by virtue of avoidance of an appreciated asset. See Comment 3 to § 8, UFTA (“The premise of [the limitations on a money judgment] is that changes in the value of the asset transferred that occur after the transfer should ordinarily not affect the amount of the creditor’s recovery . . . Thus, if the value of the asset . . . has been enhanced by improvements of the asset transferred . . . a good-faith transferee should be reimbursed . . . to the extent the sale proceeds were increased thereby.”). While the case law and comments to the UFTA do not affirmatively state that an appreciated or improved asset will not be subject to avoidance, the policy considerations lend support to the remedy of a money judgment in the value of the asset at the time of the transfer, rather than an outright avoidance of the appreciated asset.

“May creditors request compensatory damages? What about punitive damages?”

In addition to requests for avoidance of the transfers, aggrieved creditors often request compensatory damages in the form of a money judgment against transferors, transferees and “persons for whose benefit the transfer was made.” Entitlement to monetary relief against those classes of person is found through two separate provisions of FUFTA, §§ 726.108(c)(3) and 726.109(2)(a). This section analyzes the law pertaining to those rights and entitlements for a creditor.

A. Section 726.109(c)(3) allows a money judgment against a transferor, but only if the transferor is not already a judgment debtor of the creditor.

FUFTA authorizes a money judgment against the transferors through the catchall provision. See McCalla v. E.C. Kenyon Constr. Co., 183 So. 3d 1192, 1194 (Fla. 1st DCA 2016) (citing Hansard Constr. Corp. v. Rite Aid of Fla., Inc., 783 So. 2d 307, 309 (Fla. 4th DCA 2001) (concluding “that a plaintiff may recover money damages against the transferor under the so-called catchall provision, section 726.108(1)(c)3, of the Uniform Fraudulent Transfer Act”)). However, a money judgment is not always authorized against a transferor. Specifically, McCalla and Hansard do not directly address whether a money judgment is appropriate against a transferor who is already a judgment debtor of the plaintiff.

 Taking the issue head-on, Florida’s Fourth District Court of Appeals reversed a money judgment under a FUFTA action against a judgment debtor for his failure to pay a prior judgment amount. Yusem v. S. Fla. Water Mgmt. Dist., 770 So. 2d 746, 749 (Fla. 4th DCA 2000). In Yusem, the appellant sought reversal of an “additional judgment” of $210,000 after the trial court found that appellant fraudulently transferred $210,000 to an offshore account to avoid paying a prior judgment against him for $224,695.42. Id. The appellate court stated that this was in error because there is nothing within FUFTA that states a creditor that has a judgment against a debtor can obtain an “additional judgment” against the same debtor for fraudulently transferring funds to avoid creditors. Id.

The appellate court reasoned that the trial court misunderstood the purpose of the fraudulent transfer statutes. Id. Most notably, “a fraudulent conveyance action, under section 726.108, is not an action against a debtor for failure to pay an amount owing from a prior judgment.Id. (Emphasis added). The reasoning in Yusem is supported by principles of Florida law and equity, which supplement the provisions of FUFTA. See Fla. Stat. § 726.111. Moreover, the catchall provision of Section 726.108(1)(c)(3) is expressly “[s]ubject to the principles of equity.” Fla. Stat. § 726.108(c).

To allow a plaintiff to recover an additional money judgment against a transferor on the basis of a prior judgment debt would violate the well-established principle—applied both at law and in equity—that a plaintiff is entitled to only a single recovery for a distinct harm. See Minotty v. Baudo, 42 So. 3d 824, 833 (Fla. 4th DCA 2010) (“A double recovery based on the same elements of damages is prohibited.” (citing Montage Group, Ltd. v. Athle-Tech Computer Sys., Inc., 889 So. 2d 180, 199 (Fla. 2d DCA 2004).

The holding in Yusem is further supported by the decisions of other state courts construing parallel provisions of UFTA. See Renda v. Nevarez, 167 Cal. Rptr. 3d 874, 880 (2014) (holding that a judgment creditor was not entitled to recover a money judgment against a judgment debtor under UFTA); Miller v. Kaiser, 164 Colo. 206, 433 P.2d 772, 775 (1967) (“[A] judgment creditor cannot in a fraudulent conveyance action be the recipient, as against the fraudulent transferor, of a money judgment, for the very basis of this action is the judgment debt he is endeavoring to collect.”).

B. Section 726.109(2) authorizes a money judgment against transferees and a “person for whose benefit the transfer was made.”

Section 726.109 provides, among other things:

(2) Except as otherwise provided in this section, to the extent a transfer is voidable in an action by a creditor under s. 726.108(1)(a), the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (3), or the amount necessary to satisfy the creditor’s claim, whichever is less. The judgment may be entered against:

(a) The first transferee of the asset or the person for whose benefit the transfer was made; or

(b) Any subsequent transferee other than a good faith transferee who took for value or from any subsequent transferee.

(3) If the judgment under subsection (2) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.

Fla. Stat. § 726.109(2)–(3) (emphasis added).

It is clear that the statute allows the creditor to recover judgment against the transferees. See McCalla, 183 So. 3d at 1194 (“The statute authorizes such awards [for money damages] against both fraudulent transferor and transferee, jointly and severally.”). Notably, §726.109(2) states “the creditor may recover judgment for the value of the asset transferred…” (emphasis added). Nowhere in §726.109(2) does the statute authorize a money judgment to be held by or payable to the transferor. This proposition is further supported by apparent nature of a FUFTA claim, as set forth in Yusem—that is, FUFTA may be an action against the transferee “to either return the asset or pay for the asset (by way of a judgment and execution).” Yusem, 770 So. 2d at 748 (emphasis added). Per Yusem, the transferee will pay for the value of the asset to the aggrieved creditor by way of a new judgment and execution thereon. Accordingly, the creditor may execute on its new judgment, and the creditor may freely execute against the property of the transferee subject to the priority of liens that exist on the transferee’s property. There seems to be nothing in the statute or case law interpreting FUFTA that indicates that the new money judgment against the transferee will be subject, or subordinate, to any liens of other creditors. Stay tuned for future blog posts and analysis on who is a beneficiary subject to FUFTA liability, and FUFTA’s scope and limitations on money judgments.

 

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