Bankruptcy Court Says No Liability For Assisting A Debtor's Fraudulent Transfers Or Conversions

A fraudulent transfers and fraudulent conversions prior to filing Chapter 7 bankruptcy can be detrimental in two ways. First, the Chapter 7 trustee can reverse the transfer or conversion, take the property back from the transferee (recipient), and sell the property for the benefit of your creditors. In addition, egregious fraudulent transfers within two years of filing Chapter 7 bankruptcy can cost the debtor the bankruptcy discharge. If discharge is denied the transferred property will be recaptured and sold and none of the debtor’s debts will be wiped out so that the creditors could pursue collection after the bankruptcy is over.

Fraudulent transfers involve a transferee and drag the transferee in to the debtor’s bankruptcy. In more complicated transfers other people often assist the debtor’s transfers. These assistants include, for example, the debtor’s attorney, his business partners, financial professionals and friends. Can these assistants also be liable for damages because they assisted with a debtor’s fraudulent transfers or conversions?
A recent bankruptcy court decision addressed the issue of whether people who assist a debtor’s pre-bankruptcy fraudulent transfers can be held liable for damages in the bankruptcy proceeding. In this case, a trustee hired to liquidate debtor property filed a complaint pursuant to Section 544(b) of the Bankruptcy Code against a group of people for conspiring with the debtor to make fraudulent transfers.

The Court said that the bankruptcy Code provides for avoidance of fraudulent transfers, but it does not permit the trustee to pursue non-avoidance actions such as claims based upon civil conspiracy or aiding and abetting under applicable state law. The court held that the same claims cannot be asserted under Florida law either because Florida law does not permit claims for either civil conspiracy to make a fraudulent transfer or for aiding and abetting a fraudulent transfer. Only the transferee shares liability with the debtor under federal bankruptcy law or Florida law.

Florida attorneys, accountants, and other professionals generally need not fear advising clients about transfers that might later be deemed to defraud the client’s creditors. Be careful, however, not to become an agent of the transfer by, for instance, taking title to the debtor’s property or moving the debtor’s cash through your own trust accounts.

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