Asset Protection Steps Cannot Include Fraudulent Trasnfers

Asset protection planning is best done in advance of any claims or the person becoming insolvent. Planning opportunities after that point may constitute violations of the state and/or federal fraudulent transfer act. Leverage Leasing Co. v. Smith provides a good example of this concept.

Leverage Leasing Co. refinanced a $200,000 loan to Kenneth and Carol Smith. Prior to this refinancing loan the Smith's personal residence was titled in Carol's name only. At the request of Leverage Leasing Co. Carol quitclaimed or transferred her interest into a joint tenancy with her husband. The Smiths then pledged their interest in their home as collateral for Leverage Leasing Co.'s loan. A couple of years later Kenneth transferred his ownership in the residence to Carol. Kenneth did not get anything in return for this transfer.

It appears that the Smiths probably defaulted on their loan with Leverage Leasing Co. or Leverage Leasing Co. found out about the transfer. Either way, Leverage Leasing Co. brought suit to ask the court to set aside the transfer from Kenneth to Carol as a fraudulent transfer.

The trial court found that this transfer from Kenneth to Carol was not a fraudulent transfer. On appeal, the Colorado Court of Appeals disagreed.

Creditors have the option of using the federal or state fraudulent transfer statutes. In this case Leverage Leasing Co. opted to use the Colorado Fraudulent Transfer Act. In general this Act provides that fraudulent transfers are those made without an exchange of “a reasonably equivalent value” and those made by insolvent debtors.

The transfer from Kenneth to Carol failed both of these tests in that Kenneth received nothing in return for the transfer and he made the transfer when he was insolvent.

Had Kenneth or Carol consulted with an attorney, they might have been advised to (1) make the transfer at a time when Kenneth was not insolvent and (2) to ensure that Kenneth received some quid pro quo for the transfer.