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Remedies for Creditors Under FUFTA Chapter 726 – Part II: How much is a Fraudulent Transferree Liable For?
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Remedies for Creditors Under FUFTA Chapter 726 – Part II: How much is a Fraudulent Transferree Liable For?

January 31, 2017 Professional Services Industry Legal Blog

Reading Time: 17 minutes


In Part I of this two-part series, we analyzed who may be liable under Florida’s Uniform Fraudulent Transfer Act (“FUFTA”) and the broad categories of what transferors and transferees may be liable for. In this blog post, we seek to asses exactly what those transferors and transferees may be liable for if a money judgment is imposed.

FUFTA’s Scope and Limitations on Money Judgments

Now that we have established “who” may be liable to a creditor for a money judgment, it is important to understand the limits of that judgment as set forth in FUFTA. As previously stated in Part I, Sections 726.109(3) and 726.109(3) provide that a creditor’s money 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,” or “the amount necessary to satisfy the creditor’s claim, whichever is less.” Section 726.107(3) further provides that a transfer is made when it becomes effective between the debtor and the transferee. Again, the limitation on the damages comports with the policy that a creditor cannot benefit from a windfall, and it may only recover up to the maximum necessary to satisfy its claim.

Florida bankruptcy courts attempting to determine the value of the asset transferred have looked at the transaction in a vacuum. In re World Vision Entm’t, Inc., 275 B.R. 641, 657 (Bankr. M.D. Fla. 2002). The court in World Vision held that when valuing a fraudulent transfer, “Courts must assess value on a case-by-case basis looking at the surrounding circumstances and focusing on the precise transfer in question and not on the value of the transfer to the debtor’s overall fraudulent enterprise.” Id. The court declined to account for the immediate benefits afforded to a Ponzi scheme after the transaction occurred, instead focusing on the value of the transferred broker services at the usual rate. Id.

The “value of the assets transferred” presents issues for a creditor who seeks to prove what they were at the time of transfer. Under Texas’ codification and interpretation of the UFTA, the creditor must establish with sufficient evidence the fair market value of the debtor’s asset in order to be awarded damages. Qui Phuoc Ho v. MacArthur Ranch, LLC, 395 S.W.3d 325, 334 (Tex. App. 2013). If the purported value was speculative and conclusory, the court cannot enter an award for the creditor based on this amount. Id.

1. Defining “adjustment as the equities may require”

Section 726.109(3) states that if the money judgment is equal to the value of the asset at the time of the transfer, the judgment is also “subject to adjustment as the equities require.” Fla. Stat. § 726.109(3). This could be a downward or upward departure on what is due to the creditor based on what a court determines is fair.

The United States Bankruptcy Court in New Hampshire has interpreted the phrase “adjustments as equities may require,” as a tool for courts to prevent windfall profits for a creditor. In re Jackson, 318 B.R. 5, 27 (Bankr. D.N.H. 2004), subsequently aff’d, 459 F.3d 117 (1st Cir. 2006). The Jackson court stated “equitable adjustments are generally made to prevent the plaintiff from receiving a windfall of the post-transfer costs incurred by the transferee to improve the property. Equitable adjustments, however, are not limited solely to post-transfer improvements” Id. The court deducted the amount of the proceeds used to pay off the debtor’s business debts and ordinary family expenses from the judgment against the transferee. Id.

The Jackson court’s analysis of equitable adjustments has been adopted in federal bankruptcy courts in Florida. 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). The Kingsley court, in supporting its adoption of the Jackson court’s interpretation, stated that Bankruptcy courts have consistently held that UFTA “is designed to restore the estate to the financial condition that would have existed had the transfer never occurred.” Id. This echoes the court’s conclusion that the language “adjusted as the equities may require,” is intended to be a tool for courts to reach the most equitable result possible. Id.

2. Pre-judgment Interest

While much of Fla. Stat. §726.109 generally provides limitations as to liability, case law allows for the money judgment to include pre-judgment interest. Mansolillo v. Parties by Lynn, Inc., 753 So. 2d 637, 640 (Fla. 3d DCA 2000). In Mansolillo, the defendant challenged the amount of the judgment entered by the trial court under Section 726.109(2), which states that the creditor may recover judgment for the value of the asset transferred . . . or the amount necessary to satisfy the creditor’s claim, whichever is less. Id. However, with pre-judgment interest, the judgment amount exceeded the value of the asset at the time of transfer, which was more than the amount necessary to satisfy the creditor’s original claim. Id. The defendants argued that the entire judgment amount, including pre-judgment interest, cannot exceed the value of the asset at the time of the transfer, but the court disagreed. Id. The court held that once the loss is fixed as of a specific date, prejudgment interest is to be added to the judgment. Id.

Similarly, the Eleventh Circuit Court of Appeals held that while “the Bankruptcy Code does not explicitly provide for prejudgment interest, [awarding interest] has become common practice, especially when transfers have been made with actual intent to hinder, delay, or defraud creditors.” In re Int’l Admin. Serv’s., Inc., 408 F.3d 689, 710 (11th Cir. 2005) (holding that assessing prejudgment interest from the date of the transfer was appropriate to compensate the debtor’s estate for the use of the funds “for the period of time in which they were wrongfully withheld . . .”) (citations omitted).

While Mansolillo authorizes awards of pre-judgment interest in fraudulent transfer judgments against the transferees, the court acknowledged that equitable considerations can be taken into account. Mansolillo, 753 So. 2d at 640 (“[We note that [§ 726.111] provides, ‘Unless displaced by provisions of ss. 726.101–726.112 [the Fraudulent Transfer Act], the principals of law and equity . . . supplement those provisions.”). As applied to the Fraudulent Transfer Action, the court may consider the fact that statutory post-judgment interest has already accrued on the final judgment, and additional accrual of “pre-judgment” interest on a FUFTA claim arising from a post-judgment claim, would result in the recovery of double interest on the same claim. Thus, in certain circumstances where the equities require, case law supports an award of pre-judgment interest as a possible measure of relief for FUFTA claims.

Are Attorneys’ Fees Available to Creditors Pursuing Florida UFTA Money Judgments?

“Under Florida law, each party generally bears its own attorneys’ fees unless a contract or statute provides otherwise.” United States v. Pepper’s Steel & Alloys, Inc., 289 F.3d 741, 742 (11th Cir. 2002) (citing Fla. Patient’s Comp. Fund v. Rowe, 472 So. 2d 1145, 1148 (Fla. 1985)). Creditor claims for attorneys’ fees under FUFTA will likely fail, as there is no express authority for the recovery of fees in the statute.

A. Statutory attorneys’ fees are not available under FUFTA.

At least one Florida court has held that the FUFTA does not authorize the recovery of attorneys’ fees. Euro RSCG Direct Response, LLC v. Green Bullion Fin. Servs., 872 F. Supp. 2d 1353, 1364 (S.D. Fla. 2012). In Euro RSCG, defendants—as alleged transferees of fraudulent transfers—moved to strike the demand for attorneys’ fees, citing plaintiff’s failure to articulate a statutory or contractual basis for fees. Id. In opposition, the plaintiff urged the court to interpret Section 726.108(1)(c)3—otherwise known as the “catchall provision”—as statutory authorization for an award of attorneys’ fees under FUFTA. See 872 F. Supp. 2d at 1364. The court refused to engraft entitlement to attorneys’ fees into the statute, granting the motion to strike plaintiff’s demands for attorneys’ fees under FUFTA. See id.

The Florida Supreme Court has also provided some guidance as to the interpretation of the catchall provision that “demonstrates the narrow focus of the FUFTA and its limitations.” Freeman v. First Union Nat‘l Bank, 865 So. 2d 1272, 1276–77 (Fla. 2004) (further stating “we believe that the Legislature intended it to facilitate the use of the other remedies provided in the statute . . . .”). Id. at 1276. In other words, the Florida Supreme Court reinforced the limits of the catchall provision, by circumscribing its purpose and effect to the enforcement of the other remedies enumerated in the statute. According to the reasoning of Freeman, the catch-all provision cannot be expanded to create an entitlement to attorneys’ fees, when there is no remedy for such fees expressed or enumerated in FUFTA.

B. Post-judgment contractual fees may be awarded if the underlying contract expresses an intent of the parties circumvent the merger doctrine.

To the extent permitted by law, when a debtor agrees to pay a creditor’s reasonable fees and costs, including but not limited to, fees and costs of attorneys, and other agents, which are incurred by creditor in collecting any amount due or enforcing any right or remedy under their agreement, including, but not limited to, all fees and costs incurred on appeal, in bankruptcy, and for post-judgment collection actions, then there is an argument to be made that contractual attorney’s fees may be additionally available against the transferor as to all efforts of the creditor to collect on fraudulent transfers effectuated by the transferor.

However, in these circumstances because the underlying contract likely has been reduced to a final judgment, the collection costs provisions are typically extinguished by the doctrine of merger. “The doctrine of merger provides that when a valid and final judgment is rendered in favor of a plaintiff, the original debt or cause of action upon which an adjudication is predicated merges into the final judgment, and, consequently, the cause’s independent existence terminates.” Weston Orlando Park, Inc. v. Fairwinds Credit Union, 86 So. 3d 1186, 1187 (Fla. 5th DCA 2012). See also, Vernon v. Serv. Trucking, Inc., 565 So. 2d 905, 906 (Fla. 5th DCA 1990) (“[A] debt reduced to a final judgment merges into the final judgment and loses its prejudgment identity.”).

As it relates to a fraudulent transfer action, a contractual provision for a borrower to pay attorneys’ fees for post-judgment collections is not enforceable when the contract itself is merged into a final judgment. See Florida Pottery Stores of Panama City, Inc. v. Am. Nat. Bank, 578 So. 2d 801 (Fla. 1st DCA 1991). In Florida Pottery, the court addressed creditor’s entitlement to post-judgment attorneys’ fees, based upon the following standard provision in a promissory note: “I agree to pay the costs you incur to collect this note in the event of my default, including your reasonable attorneys’ fees.” Id. at 805. Relying on a collection of cases, the court acknowledged that “[a]s a general rule, when a valid final judgment for the payment of money is rendered, the original claim is extinguished and a new cause of action on the judgment is substituted for it. Thereafter the plaintiff cannot maintain an action on the original claim or any part of thereof.” Id. at 806 (citations omitted).

The court held that the principles underlying the merger doctrine prohibited a judgment creditor from entitlement to attorneys’ fees for enforcing the final judgment, reasoning that after the contract was reduced to a judgment, the provision concerning attorneys’ fees for collection was no longer in force or effect. Id. at 806.

While the merger doctrine may extinguish entitlement to post-judgment attorneys’ fees pursuant to a contract provision, there are a few recognized exceptions that may nonetheless open the door to post-judgment fees. One notable exception to the merger doctrine is a clear intention by the parties for a contract term to survive termination of the contract. See e.g. Engle Homes, Inc. v. Jones, 870 So. 2d 910 (Fla. 4th DCA 2004) (finding that the clause “this [arbitration] provision shall survive closing” contained in a purchase and sale agreement, precluded merger into the deed and allowed enforcement of the provision after closing).

In a non-binding case on point, the Maryland Court of Special Appeals addressed the very issue of enforcement of a post-judgment collection costs provision in the face of the merger doctrine. SunTrust Bank v. Goldman, 201 Md. App. 390, 29 A.3d 724 (2011). In SunTrust, the court reviewed the following collection costs provision in a credit agreement to determine entitlement to post-judgment attorneys’ fees:

We may hire or pay someone else to help collect this Agreement if you do not pay. You will pay us that amount. This includes, subject to any limits under applicable law, our costs of collection, including court costs and fifteen percent (15 percent) of the principal plus accrued interest as attorneys’ fees or reasonable attorneys’ fees as allowed by law, if any sums owing under this Agreement are collected by or through an attorney at law, whether or not there is a lawsuit, and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. If not prohibited by law, you will also pay any court costs, in addition to all other sums provided by law.

Id. at 394 (emphasis in original).

The SunTrust court acknowledged that a possible “method of avoiding the merger doctrine is for the parties to clearly state their intent in the contract that the fee provision shall not merge into the judgment.” Id. at 404–05. The court found that the parties’ agreement for a collection costs provision to survive merger into the judgment should be strictly construed, and the agreement must be sufficient clear to avoid the effect of merger. Id. at 406. Interpreting the fee provision, the court held that there is no express language stating that the costs of collection shall not merge into a judgment on the agreement, and therefore, the merger doctrine extinguished the post-judgment fee provision. Id.

I am not aware of any Florida cases in which merger of contract terms into a final judgment has been avoided by the intent of the parties as expressed in the underlying contract. However, the reasoning employed in SunTrust indicates that there may be circumstances where the parties may agree to post-judgment collections costs, provided that the parties sufficient express an intent for the merger doctrine to not extinguish the provision.

Are Punitive Damages Available to Creditors Pursuing Florida UFTA Money Judgments?

It is well settled that Florida law favors a limited interpretation of the Fla. Stat. §726.109 catchall provision to facilitate the use of other remedies provided in FUFTA—that is, the catchall provision does not create new causes of action or entitlement to fees. However, Florida courts have not decided on the issue as to whether one may recover punitive damages under FUFTA.

Litigants in other states have argued that UFTA’s “catchall provision” provides the courts expansive authority to grant any relief requested—including attorneys’ fees and punitive damages. However, the results in these jurisdictions are mixed. CompareVolk Constr. Co. v. Wilmescherr Drusch Roofing Co., 58 S.W.3d 897, 900 (Mo. Ct. App. 2001) (allowing punitive damages under Missouri’s UFTA), Locafrance U.S. Corp. v. Interstate Distribution Servs., Inc., 451 N.E.2d 1222, 1225 (Ohio 1983) (same under Ohio’s Uniform Fraudulent Conveyance Act), and Macris & Assocs., Inc. v. Neways, Inc., 60 P.3d 1176, 1181 (Utah Ct. App. 2002) (same under Utah’s UFTA), with N. Tankers (Cyprus) Ltd. v. Backstrom, 968 F. Supp. 66, 67 (D. Conn. 1997) (no authority to allow punitive damages under Connecticut UFTA), Morris v. Askeland Enters. Inc., 17 P.3d 830, 832–33 (Colo. App. 2000) (no authority to allow punitive damages under Colorado UFTA), Bank of Am. v. WS Mgmt., Inc., 33 N.E.3d 696, 734 (Ill. App. Ct. 2015) (no attorneys’ fees allowed as punitive damages under state version of UFTA and rejecting the “catchall provision” as a basis for providing that relief), and C & A Invs. v. Kelly, 792 N.W.2d 644, 646–47 (Wis. Ct. App. 2010) (remedies under Wisconsin’s UFTA are exclusive and punitive damages are unavailable).

In absence of Florida case law addressing whether FUFTA allows for an award of punitive damages, Courts are compelled to construe the statute to give effect to legislative intent. See Raymond James Fin. Servs., Inc. v. Phillips, 126 So. 3d 186, 190 (Fla. 2013). Courts must begin with the actual language of the statute because legislative intent is determined primarily from the statute’s text. Id. If the statute is clear and unambiguous, the courts will not look beyond the plain language for legislative intent. Fla. Dep’t of Highway Safety & Motor Vehicles v. Hernandez, 74 So. 3d 1070 (Fla. 2011). If the meaning of the statute is clear, the court’s task goes no further than applying the plain language of the statute. Trinidad v. Fla. Peninsula Ins. Co., 121 So. 3d 433, 439 (Fla. 2013). In this case, the statute is unambiguous.

The recovery of any money damages under the catchall provision does not include punitive damages. To the contrary, the money judgment is expressly limited to the value of the asset at the time of the transfer or the amount necessary to satisfy the creditor’s claim, whichever is less. See § 726.109(2), Fla. Stat. There is no ambiguity that the measure of damages is determined by the value of the asset or the creditor’s claim—neither of which could possibly include an additional award of punitive damages. To allow punitive damages would convert FUFTA from a statute with express limitations on recovery into a statute designed to punish debtors and transferees.

Conclusion

In summary, there is currently no binding authority on whether or not the catch-all provision permits the recovery of punitive damages. Courts in other states have found that UFTA warrants the recovery of punitive damages. See, e.g., Volk Constr. Co. v. Wilmescherr Drusch Roofing Co., 58 S.W.3d 897 (Mo. Ct. App. 2001); Locafrance U.S. Corp. v. Interstate Distribution Servs., Inc., 451 N.E.2d 1222, 1225 (Ohio 1983); Macris & Assocs., Inc. v. Neways, Inc., 60 P.3d 1176, 1181 (Utah Ct. App. 2002). Nevertheless, a conservative reading of the catch-all provision is reluctant to allow the recovery of punitive damages. The purpose of FUFTA is to make creditors “whole,” not to punish debtors and transferees. See, e.g., Yusem, 770 So. 2d 746. It is unlikely that Florida courts will invoke punitive relief from a fraudulent transaction.

Despite the tendency of Florida courts to conservatively interpret FUFTA, case law illustrates the manifestation of equity outside the explicit statutory language. One example of this is pre-judgment interest. In Mansolillo v. Parties by Lynn, a roofing company was found liable for the entire amount of prejudgment interest, even though this amount was greater than the value of the asset fraudulently conveyed and the amount necessary to satisfy the creditor’s claim. 753 So. 2d 637, 640 (Fla. 3d DCA 2000) Prejudgment interest is common, especially in situations where debtors have “actual intent to hinder, delay, or defraud creditors.” In re Int’l Admin. Serv’s., Inc., 408 F.3d 689, 709 (11th Cir. 2005).

However, case law alludes to a wariness of courts to depart from FUFTA’s clear and unambiguous statutory language. In Freeman v. First Union Nat’l Bank, the Florida Supreme Court held that the purpose of the catch-all provision is to enforce the enumerated remedies in the statute. 865 So. 2d 1272, 1276-77 (Fla. 2004). There is currently no statutory authority that provides for obtaining attorney’s fees under FUFTA claims. Absent express intention of the parties in applicable contracts, creditors should not look too far beyond §726 of FUFTA in search of applicable remedies.

In conclusion, FUFTA is a powerful remedy for creditors. Florida case law suggests that creditors do not have to look further than the Act’s plain language in order to discover how to become whole again in light of misconduct by debtors.

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