RECOVERING ASSETS FROM INSOLVENT DEBTORS

By:       Thomas V. Keough and Wayne H. Lazarus

 

In deciding what, if anything, can be recovered on a Abad debt,@ it is always prudent to investigate the assets of the debtor.  In the current economic downturn, it is not uncommon for a defaulting construction company or land developer, and their guarantors, to be entirely uncollectible.  Many times, if the assets of the insolvent company are Aunder water,@ or non-existent the claim appears uncollectible.  In such circumstances, conventional wisdom would dictate that the debt be written off; after all, why throw good money after investigating a bad debt if there is no chance of collecting!  While this urge to Awrite-off@ may in many instances turn out to be the proper course of action, it is not always in the best interest of the creditor to end its investigation at that point. 

How often do these insolvent debtors continue to drive expensive cars and live in exclusive neighborhoods?  How often do these debtors continue to summer at a family vacation spot owned on paper by a close relative or a family trust?  How often do such Ainsolvent@ debtors continue to start up brand new companies engaging in the exact same business as their old company, at the same location, and using the same staff, but under a different corporate entity?  While these circumstances may be completely innocent, they might also indicate the presence of a fraudulent transfer that may be reversed by a creditor who is willing to spend the resources necessary to uncover them.

Georgia has adopted the Uniform Fraudulent Transfers Act codified at O.C.G.A. ‘18-2-70 et seq.  This law gives creditors a mechanism to have fraudulent transfers reversed so that the subject assets will be made available for the satisfaction of the diligent creditor=s claim. 

Any investigation into a debtor=s assets should include an investigation into any and all transfers of real or personal property by the debtor to any person within four (4) years prior to the default.  Some of the red flags which will indicate the presence of a fraudulent transaction and which may appear through such investigation include:

• The identity of the person to whom the transfer was made.  In many instances, transfers of real or personal property are made to immediate family members or close friends of the debtor for Alove and affection@ without actual consideration.  This is a common practice amongst business persons to shelter their assets from their business creditors.  These transactions may be innocent but, in many instances, they are not.

• The debtor=s insolvency.  In the event the debtor=s transfer of his or her property to a third party may render the debtor insolvent.  Insolvency can be defined in two separate ways, first, when the debtor=s assets are worth less than his or her liabilities; and second, when the debtor is unable to meet his or her obligations as they come due.  If the transfer being investigated rendered the debtor insolvent, this may indicate a fraudulent transfer. 

• The timing of the transfer.  Sometimes debtors transfer their property to third parties shortly before or after substantial debt is incurred.  This could indicate the debtor=s intent to hide this asset from persons seeking to satisfy that debt.  This may indicate a fraudulent transfer.

•  Retention of control of the property after the transfer.  It is not uncommon in a fraudulent transfer for the debtor to transfer property to a third person while retaining the use and enjoyment of the property herself.  A debtor who fancies herself a clever fraudster, will sometimes say AI have no property in my name.@  Under the Uniform Fraudulent Transfers Act, transferring the legal interest to a third party while retaining the equitable interest can be indicative of a fraudulent transfer, irrespective of whose name is on the deed.  

•  How much was paid for the transfer of the property.  In many instances, no consideration, or very little consideration, will flow from the debtor to the transferee.  This again, may be indicative of a fraudulent transfer which may be set aside pursuant to the Uniform Fraudulent Transfers Act.   

The foregoing list is non-exhaustive and there is no end to which a debtor determined to hide his assets from a creditor can go to hide such assets.  Imagine a scenario that debtor wishing to hide a business asset from an existing or future creditor, grants a security interest in his property to a third party, which third party then transfers such interest to an insider of the debtor.  This would give the illusion of a proper transaction for consideration, when in actuality it is merely a sham transaction set up with a third party straw man for the purpose of subordinating a creditor=s claim to that of an insider of the debtor corporation. 

Very often the resources expended by hiring qualified professionals to perform additional investigation, and if necessary and appropriate carrying out the necessary legal actions, will be greatly outweighed by the increase in recovery of otherwise lost assets.