For over thirty (30) years, Washington has had a statutory schema that allows creditors to recover “fraudulent” transfers of money and other types of property directly from the persons or entities who received the “fraudulent” transfer. The statutory schema is called Uniform Fraudulent Transfer Act and/or Uniform Voidable Transactions Act. RCW 19.40.900
Any transfer of an asset to a third party or incurring of an obligation to a third party may be considered “fraudulent” under the Uniform Voidable Transfers Act. This generates a considerable amount of litigation, when a struggling or indebted business transfers assets to its owners, owners' close relatives, or other businesses. A creditor seeking to enforce a debt against a business or company can challenge any transfer on the basis that the transfer was done with intent to hinder, delay, or defraud creditors.
It is important to note that the Uniform Voidable Transfers Act recognizes that the “fraudulent” transfer by a business to its owners or to another business may not be intentionally “fraudulent.” In other words, the Uniform Fraudulent Transaction Act will recognize that a transaction can be “constructively” fraudulent even if there was no actual fraudulent intent.
In cases of a constructive fraudulent transfer, a creditor need only establish that a transfer was made to an insider of the business or that the business did not receive reasonably equivalent value in exchange and that one or more of the following three factors was present:
- The debtor was insolvent at the time of the transfer or insolvent as a result of the transfer or obligation (voidable only as to present creditors). RCW 19.40.051(1)
- The debtor was engaged in or about to engage in a business or a transaction for which the debtor's remaining assets were unreasonably small in relation to the business or transaction (fraudulent as to both present and future creditors). RCW 19.40.041(a)(2)(i)
- The debtor intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due (fraudulent as to both present and future creditors). RCW 19.40.041(a)(2)(i)
If a creditor can prove constructive fraud, then the creditor can try to recover the property (which can include money) from the actual person who received the property or money—the “transferee” RCW 19.40.071 The Uniform Fraudulent Transfer Act refers to this as “Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim.” RCW 19.40.071(1)(a). A creditor also may able to obtain an injunction, or court order, preventing further transfer of the property until their lawsuit is resolved against the business. RCW 19.40.071(1)(b) and RCW 19.40.071(1)(c)(i)
Our firm represents companies and business owners prosecuting claims or defending claims under the Uniform Fraudulent Transfer Act. We can provide advice to businesses regarding potential transfers and whether they could implicate the provisions of the Uniform Fraudulent Transfer Act. If necessary, our firm will litigate in Washington Courts and Federal Courts—including defending against claims brought by the Internal Revenue Service, Washington Department of Revenue or other governmental authorities. Please contact our firm with any questions, we will provide a free consultation.