When Fraudulent Transfers are of No Value – Advanced Asset Protection

Let’s think about fraudulent transfers in a different way, just for a moment.  Consider the example of Doc Holliday, a dentist who has recently lost a malpractice suit (but really it can be any type of person who has lost any type of claim–even a personal injury claim arising from a car accident).  Because Doc Holliday has an ironclad asset protection plan in place, there are really no assets under his control for the judgment creditor to attack except for one.  In this case, let’s assume that Doc Holliday owns a parcel of real estate that is underwater, the type of property where a strategic default would make a lot of sense, and that the property is not part of his asset protection planning.

A Smart Gamble

Doc Holliday’s judgment creditor can take a risk free gamble in the scenario.  The creditor can file a lien on the underwater real estate.  If Doc Holliday bets that the real estate market is going to recover (i.e. if he chooses to keep the property rather than strategically default), then the lien will follow the property, putting it even further underwater.

So the question is this: Can Doc Holliday get out of this situation by transferring the property to his spouse, a family member or a friend, or would such a transfer be considered a fraudulent conveyance?  Because the creditor’s lien is only against Doc and can only be executed on property owned by Doc, a transfer of the property would be free and clear of the lien (but not the original mortgage, of course).  So if the real estate market does “come back,” you can bet the creditor will argue the transfer was a fraudulent conveyance.  But would it be?

An Asset Protection Risk Worth Taking

Based on the way several fraudulent transfer statutes read, there is a very strong argument to be made that Doc Holliday’s transfer would not constitute a fraudulent conveyance.  The reason is that property that is “upside down,” (i.e. where the mortgage is more than the value of the property) is probably not an “asset,” as that term is defined in the statutes, and it is certainly a liability in the practical sense.  Transferring liabilities is not prohibited by the fraudulent transfer statutes.  Of course, in transferring title to the property, Doc Holliday is making a huge gamble on real estate.  But hey . . . it’s Doc Holliday, and he’s a gambler.