Cannabis Litigation: Fraudulent Transfer Claims and the UVTA

It might feel counterintuitive at first, but I always talk with clients about the end of the lawsuit before giving the option to file one. Why? Because I believe that true client advocacy includes walking through what you’re fighting for – and because in most cases, our clients are fighting for monetary relief, I want to make sure collecting that relief is possible at the end of the road. Especially because litigating is expensive.

One concern many clients voice goes something along the lines of: “what if the defendant or counter-defendant moves his assets around once he realizes his risk exposure so he effectively becomes judgment-proof?” The good news is, there is a California claim available for any judgment creditor in exactly that scenario. The bad news is, it means starting another lawsuit.

So, below is a breakdown of California’s fraudulent transfer claim for those who are considering their pre-litigation options, or maybe for those who have judgments in hand and feel defeated.

Overview

A fraudulent transfer claim is available when the debtor/owing party tries to avoid paying a debt by transferring his/her property to a third party. The Uniform Voidable Transactions Act (“UVTA”), codified at Civil Code § 3439 et seq. gives the creditor the right to set aside any such transfers, and further enables them to reach the property.

Statute of Limitations

The statute of limitations on a fraudulent transfer claim is four years from the date of transfer OR the judgment/obligation was incurred. If you can prove that there was actual fraud (more on that below), the four years is extended to five years from the date of transfer OR the judgment/obligation was or reasonably could have been discovered. In any case, the maximum period is seven years from the date of transfer OR the judgment/obligation was incurred.

Elements

To prove a fraudulent transfer claim, you must show:

1. You’re entitled to payment. This doesn’t necessarily mean you need to have a judgment in hand. You just have to show your entitlement.
2. The debtor transferred property to a third party (defendant). Transfers are broadly defined – they can be direct or indirect, voluntary or involuntary. And, under this claim, you can even pursue a defendant that had received the asset but no longer possesses it for damages.
3. Actual or constructive fraud.

Actual fraud requires a showing that there was intent to hinder, delay, or defraud a creditor. Since nobody is going to admit this was their intent outright, the determination is usually based on inferences from the circumstances surrounding the transfer. Civil Code § 3439.04 contains a non-exclusive list of “badges of fraud” that may constitute evidence of actual fraud:

• • whether the transfer was to an insider, such as a relative, business partner or close associate;
  • whether the debtor retained possession or control of the property after it was transferred;
  • whether the transfer was disclosed or concealed;
  • whether the debtor had been sued or threatened with suit before the transfer;
  • whether the transfer was of substantially all of the debtor’s assets;
  • whether the debtor “absconded”;
  • whether the debtor removed or concealed assets;
  • whether the value received by the debtor was “reasonably equivalent” to the value of the asset transferred;
  • whether the debtor was insolvent or became insolvent shortly after the transfer;
  • whether the transfer occurred shortly before or shortly after the debtor incurred a substantial debt;
  • whether the debtor transferred the essential assets of a business to a lienholder who retransferred the assets to an insider of the debtor.

There’s no minimum number of these factors to establish intent. Just one or two might be enough (it depends on which factors are present).

Constructive fraud involves the transfer of an asset for less than its reasonably equivalent value, and one of these factors (or similar) are present:

1. • The debtor was engaged in a business or transaction for which the debtor’s remaining assets were unreasonably small relative to the size of the business or transaction;
   • The debtor objectively should have known it would incur debts beyond its ability to pay; or
   • The debtor became insolvent because of the transfer.

4. You will have to prove the transfer was a substantial factor in causing you to suffer harm.
5. You were harmed.

Remedies

Under the UVTA, there are several different remedies to be sought. Typically, the lawsuit is brought for avoidance of the transfer or obligation. Other remedies include attachments, injunctions against further transfer of assets, or appointment of a receiver to oversee remaining assets.

Overall, fraudulent transfer claims may well be worth pursuing if you’ve got a judgment in hand and the debtor and/or defendants are clearly engaging in some funny business to avoid paying. It’s certainly not ideal, but it’s good to have a clear idea of what your potential road blocks to recovery are – and, as early as possible in the game.

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