Transferring Away Assets to Avoid Debt in Pennsylvania
The fear of losing one’s assets can drive a person to do desperate things, especially when facing the prospect of being sued or — worse — facing garnishment of assets relative to an existing money judgment. For the debtor, it is always tempting to transfer his assets away — to a friend or family member — to try to avoid the debt. But doing so can make problem worse. This is true for the both debtor and the party receiving the debtor’s assets.
Voidable Transfer of Assets in Pennsylvania
In regard to the collection of debt — including credit card debt — Pennsylvania has enacted a powerful tool to help debt collectors obtain a debtor’s assets, namely 12 PA Cons Stat § 5104 (2022) — the Voidable Transfer or Conveyance Act, former Uniform Fraudulent Transfer Act (“UFTA”).
The UFTA created a claim against not only a debtor but also the party receiving the debtor’s property, if that party paid less than fair market value for the assets. Such a transfer suggests “fraud” (to avoid a debt). However, no proof of actual “fraud” was necessary.
And, while the UFTA has since been amended, proof of “fraud” is still not required to void a transfer of assets from a debtor to someone else who gets the property on the cheap.
§ 5104. Transfer or Obligation Voidable as to Present or Future Creditor
The current version of the UFTA — now called the Voidable Transfer Act — casts a wide net in terms of debtor liability. The Voidable Transfer Act provides:
(a) General rule.–A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation.
Other key factors to prove “intent” include whether:
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- The transfer was to an insider (family member or person aligned with the defendant corporation).
- The transfer was for substantially of the debtor’s assets or was concealed, or made shortly after receiving a demand from a creditor, etc.
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Under § 5104 it’s also necessary to show the debtor was potentially engaged in a transaction or pattern of conduct for which the remaining assets would not be sufficient to cover liabilities.
Remedies Pursuant to the Voidable Transfer Act (formerly the Uniform Fraudulent Transfer Act or “UFTA”)
§ 5107 provides certain remedies for the creditor. These include:
(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.
(2) An attachment or other provisional remedy against the asset transferred or other property of the transferee if available under applicable law.
Moreover, the creditor may also obtain an injunction against the debtor and/or transferee (party receiving the debtor’s assets) to prevent disposition of the property. Further, the creditor may also levy execution on the asset transferred or its proceeds. Further, if all that weren’t enough, the creditor may ask a judge to appointment a receiver to manage the assets, pending final disposition.
Defenses to a Voidable Transfer Act Claim (or Uniform Fraudulent Transfer Act)
It is always a good defense to show that the transfer of assets occurred for fair market value. With that, the debtor’s asset is replaced with money, so there’s little or no risk of harm to the creditor seeking money from the debtor.
Another good defense is the statute of limitations. For “fraud,” Pennsylvania imposes a two years statute of limitations. However, in regard to the transferee of a voidable transfer — the person buying the asset for less than fair market value — the statute of limitations is four (4) years. If, however, the creditor fails to discover the voidable transfer despite the exercise of reasonable diligence, then the creditor has even longer: up to one year from when he could have discovered the transfer.
Lastly, the party receiving the debtor’s assets may have certain options if he purchased the assets in good faith. That is to say, a purchaser of assets in good faith can get a lien against the assets for the value he paid, to not be “left in the cold” after paying a delinquent debtor for certain assets.
Recent Case: Voidable Transfer Act (Uniform Fraudulent Transfer Act “UFTA”)
A group of prominent lawyers in Pittsburgh failed to pay their rent to their landlord — Trizechahn Gateway, LLC. The landlord sued, resulting in a judgment of more than $3,000,000. The debtor-lawyers (owing over $3M) then merged their law practice into a prominent firm called Schnader, Harrison, Segal & Lewis, LLP (“new firm”). Upon joining the new firm, the lawyers allegedly transferred their assets to the new firm — for less than fair market value, to avoid paying $3M to the former landlord.
Then, the landlord sued the new firm Schnader, Harrison, Segal & Lewis, LLP (Schnader) for improperly receiving assets. See Trizechahn Gateway, LLC v. Schnader, 1174 WDA 2020 (Pa. Super. Ct. Aug. 6, 2021).
The debtor lawyers tried to justify the transfer of their assets to the new firm, claiming the new firm provided “legal services” in exchange for the assets, which the landlord found questionable. Nevertheless, the trial court failed to see any violation of Pennsylvania’s Uniform Fraudulent Transfer Act (PAFTA) because the judge (incorrectly) looked or actual “fraud.” Then, finding no “fraud,” the court dismissed the landlord’s claims against Schnader!
So, Schnader Was in the Clear, Right?
Far From It.
On appeal to the Superior Court, the appellate court evaluated the trial court’s decision to look for actual fraud:
The judge stated [the landlord] could only prevail under Section 5104(a)(1) if it proved intent to defraud. Id. at 6-7. However, a plaintiff may prevail under Section 5104(a)(1) if it proves intent to hinder or delay [collection] 12 Pa.C.S.A. § 5104(a)(1).
With that, on August 6, 2021, the appellate court reinstated the landlord’s claims against Schnader for improperly receiving a debtor’s assets, in violation of Pennsylvania’s Uniform Fraudulent Transfer Act (PAFTA).
On September 12, 2022, a different trial court judge heard the case and applied the correct standard (such that proof of actual fraud was unnecessary where the party receiving a debtor’s assets has paid less than fair market value). With that, the trial court ruled in favor of the landlord and voided the transfer of assets to the Schnader firm.
Schnader was therefore on the hook to pay the landlord $3M+, potentially.
How Important Is PA’s Uniform Fraudulent Transfer Act (PAFTA)?
On August 07, 2023 at 3:24 pm EDT, the Pittsburgh Business Times reported:
“Schnader, once one of Pittsburgh’s biggest law offices, is closing.”
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Each Pittsburgh lawyer at our firm is available to defend any Voidable Conveyance Act or debt collection matter in Western Pennsylvania.
