Fraudulent Conveyance Transfers

By: James C. Busch

Some debtors, in an attempt to make themselves judgment proof, will attempt to transfer assets to others (usually family members) in an effort to avoid payment. While some transfers may be legal, there are statutory guidelines which govern transfers by debtors.

O.C.G.A. Section 18-2-22 prohibits and makes null and void:

(1) Every assignment or transfer by a debtor, insolvent at the time, of real property or personal property or chooses in action of any description to any person, either in trust or for the benefit of or on behalf of creditor, where any trust or benefit is reserved to the assignor or any person for him;

(2) Every conveyance of real or personal estate, by writing or otherwise, and every bond, suit, judgment and execution, or contract of any description had or made with intention to delay or defraud creditors, where such intention is known to the taking party; a bona fide transaction on a valuable consideration, where the taking party is without notice or ground for reasonable suspicion of said intent of the debtor, shall be valid; and

(3) Every voluntary deed or conveyance, not for a valuable consideration, made by a debtor who is insolvent at the time of the conveyance.

In Merrell v. Beckwith, Case No. S93A1272, February 7, 1994, the Georgia Supreme Court affirmed a jury verdict in favor of Beckwith in her fraudulent conveyance action against Merrell. In March of 1981 Merrell executed a promissory note to Beckwith. Although Merrell disputed it at trial, Beckwith made a verbal demand for payment of the note which was due on demand. Beckwith’s attorney then made a written demand for payment on the note on August 5, 1983. On August 10, 1983, Merrell executed a warranty deed conveying her home property to her grandson, McCart in exchange for little or no consideration. Merrell reserved a life estate for herself which entitled her to the use and possession of, but not the ownership to the property until her death.

Beckwith obtained a judgment in a suit against Beckwith for payment on a promissory note and then filed an action against Beckwith to set aside the conveyance, which she alleged, was prompted by the demand for payment on the note. Beckwith alleged the property was transferred in order to prevent the judgment on the note from becoming a lien on the property. The Georgia Supreme Court affirmed the decision of the jury to set aside the conveyance.

The evidence presented at the time of trial showed that the transfer was made to a close family member, that Merrell knew she owed Beckwith the money at the time of the transfer, that she had no other assets at the time, that she remained in possession of the property from 1983 until 1991, and that the consideration for the transfer was at best love, affection and “a little bit of money.” The Georgia Supreme Court found the evidence authorized the jury to find that Merrell’s conveyance of her home constituted a voluntary conveyance at a time when she was insolvent with intent to defraud and that sufficient grounds for reasonable suspicion (by McCart) of her intent existed.

The Court pointed out the following rulings in other cases: transfers to family members should be closely scrutinized and only slight evidence of fraud between them may be necessary to set the transaction aside; reservation of life estate by the debtor may avoid the conveyance; remaining in possession of the property after the transfer is sufficient evidence to show fraud; and, a debtor is insolvent when his assets are insufficient to pay his existing debts.

When attempting to collect from a debtor, it is always important to determine what assets the debtor had before, during and after litigation has begun in order to review any transfers. As outlined above, transfers to avoid paying a debt are void and transfers to family members are particularly subject to close scrutiny. While all transfers while in debt will not be rendered void if the creditor can make a showing that the transfer was designed to avoid a debt, the courts will generally render such a transfer null and void.

Thus, it is always a good idea to monitor as well as possible the assets and transfers of a debtor. It is also critically important to review transfers made by debtors since such transfers may be releasing the only assets of the debtor thereby releasing the only means of collecting your debt.

Mr. Busch is an attorney specializing in commercial and construction litigation for Busch, Reed, Jones & Leeper, P.C. in Marietta, Georgia