We have consistently seen in voidable transactions opinions that the sine qua non of a fraudulent transfer is that it is an action against the transferee for avoidance of the transfer. Everything starts from starts from there: If there is no avoidance against the transferee, then no remedies are available to the creditor and the action dies right there and then. These opinions focus, as they should, upon the transferee, being the party who receives the transfer of the asset from the debtor (the transferor).
But what about the debtor? In these cases, it is the debtor who initiates the transfer and causes this mess in the first place. Do the fraudulent transfer laws provide a remedy against the debtor only? This question was answered in a case before the U.S. Eleventh Circuit Court of Appeals, which wrote a detailed and well considered opinion in SE Property Holdings, LLC v. Welch, 65 F.4th 1335 (11th Cir., 2023).
Like so many other creditor-debtor cases, this one has its genesis in a failed real estate development in — not particularly surprising — Florida. The debtor, Neverve LLC, borrowed money from SE Property Holdings, LLC (“SEPH”) to fund a real estate project near Panama City, Florida. The project flopped, SEPH foreclosed, and the U.S. District Court for the Northern District of Florida in 2015 entered a default judgment in favor of SEPH and against Neverve for an amount close to $20 million.
The next year, 2016, Neverve received moneys from a settlement of a claim that it had against British Petroleum (“BP”) from damages caused by the Deepwater Horizon oil spill. The right thing for Neverve to do was to turn these proceeds over to SEPH to reduce the judgment. But that play wasn’t in Neverve’s cards, and instead Neverve wired $350,000 of the BP settlement proceeds to the personal lawyer of Neverve’s principal, David Stewart, to pay for Stewart’s legal fees for his ongoing personal bankruptcy in Oklahoma.
Why SEPH did not assert a lien on Neverve’s claim against BP, and thus keep Neverve from ever touching those funds, is not explained by the opinion. As a consequence of that failure, however, SEPH then sued Neverve and the Oklahoma lawyer for a fraudulent transfer under the Florida Uniform Fraudulent Transfer Act (“FUFTA”). SEPH sought to avoid the $350,000 transfer from Neverve to the Oklahoma lawyer, compensatory and punitive damages against the lawyer and Neverve, its attorneys fees and costs for bringing the FUFTA action, and whatever additional relief the court deemed proper — this last issue would be a biggie as we shall soon see.
The Oklahoma lawyer moved to dismiss the case on the jurisdictional grounds that he had no minimum contacts with Florida relating to this matter (recalling that Stewart’s personal bankruptcy proceeding was in Oklahoma). The District Court agreed with this and SEPH’s case against the Oklahoma lawyer was dismissed. That left Neverve, the debtor, as the only remaining party in this fraudulent transfer case.
Neverve itself sought dismissal of SEPH’s case on the grounds that the Oklahoma lawyer was, as the transferee, a necessary party to the litigation and, with the Oklahoma lawyer dismissed out, the case could not longer properly proceed. The District Court agreed with this, but only in part. The part of SEPH’s case that the District Court allowed to proceed was SEPH’s claim for money damages against Neverve and also SEPH’s claim for an equitable lien against the $350,000.
Neverve next moved for summary judgment as to this remaining claim which had survived dismissal. SEPH in response argued that the so-called “catch-all” provision in the FUFTA — being the clause that allows a court to award “[a]ny other relief the circumstances may require” — provided legal grounds for an additional award of compensation by SEPH against the debtor Neverve only. The District Court disagreed with SEPH on this legal point and on the equitable lien claim as well, noting that an equitable lien could only be placed if the $350,000 was still in Neverve’s possession and of course by this time it was not. Thus, the District Court granted Neverve’s motion for summary judgment on the remaining claims. SEPH then appealed to the U.S. Court of Appeals for the Eleventh Circuit which issued the opinion next to be related.
SEPH’s primary argument started with the FUFTA provision which stated that if a transfer is voidable, i.e., a fraudulent transfer under one of the five tests of the FUFTA, then a creditor could obtain “[s]ubject to applicable principles of equity … [a]ny other relief the circumstances may require.” As mentioned above, this is known as the “catch-all remedy” of the FUFTA and it basically empowers a court to do whatever it seems equitable under the circumstances. SEPH then concluded that because it could not get the $350,000 back from the Oklahoma lawyer because of the jurisdictional issues, then SEPH should be awarded an additional $350,000 on top of its existing judgment against Neverve, i.e., a money judgment against the transferor. The Eleventh Circuit found this argument to be deeply flawed on several fronts.
First, the FUFTA provided for the award of a money judgment in another section — but the FUFTA expressly stated that such money judgment could only be entered against a transferee, not a transferor. Thus, there was a conflict between the general “[a]ny other relief the circumstances may require” clause and the specific clause that awarded a money judgment but only against the transferee. In such situations, the specific controls the general according to an ancient principle of statutory construction known as expressio unius est exclusio alterius which has been interpreted as the mention of one thing implies the exclusion of another. In other words, by restricting the award of money judgments against transferees only, this meant that such relief would not be allowed under the more general “circumstances may require” clause.
Second, the FUFTA also provides that a creditor holding a judgment may levy directly on the transferred asset, which provides a form of relief against the transferor, since a transferee is not a judgment debtor in a fraudulent transfer scenario and thus is not subject to a levy. Again, the specific would control the general.
Third, the phrase “[a]ny other relief the circumstances may require” is itself controlled by its predecessor clause “[s]ubject to applicable principles of equity”. Thus, the relief that a court may grant under the “circumstances may require” clause is strictly limited to equitable remedies. But equitable remedies only allow the award of money judgments in certain situations (such as restitution), and this was not one of them.
Fourth, and arguably most importantly, the entire scheme of a fraudulent transfer case is one which is to grant relief against a transferee who is not a party to, not subject to, the judgment. Between the creditor and the debtor, there are already a bevy of remedies available to the creditor and thus there is no need to torture fraudulent transfer law into providing an additional such remedy by the creditor against the debtor.
For all these reasons, the Eleventh Circuit refused to apply the “circumstances may require” clause to award additional money damages in favor of SEPH against Neverve.
SEPH’s next argument on appeal was that the “circumstances may require” clause allowed it to pursue punitive damages against Neverve for the fraudulent transfer. This argument largely failed for the same reasons as getting money judgment against Neverve in the first place, such as that punitive damages are not an equitable remedy. Going further on this issue, however, the Eleventh Circuit noted that punitive damages in Florida must be based on statutory authority, and there was no statutory authority for punitive damages in fraudulent transfer cases. Next, punitive damages must be based on some egregious conduct, but it was possible for SEPH to avoid the transfer by Neverve based on an insolvency analysis which has no tortious element at all. So the SEPH’s punitive damages claim went down the tube.
SEPH also tried to use the catch-all provision to justify an award of attorneys fees against Neverve. The Eleventh Circuit pointed out, however, that that attorneys fees cannot be recovered unless there is a statute that authorizes their recovery or the parties have a contractual agreement that attorneys fees will be paid by the losing party in a dispute. Neither of those circumstances were present here and so this argument died too.
The last argument by SEPH was that the District Court erred by not imposing an equitable lien on the $350,000 and recalling that the District Court had not done so for the simple reason that an equitable lien requires that the debtor be in possession of the asset to be liened and Neverve was no longer in possession of the $350,000. The Eleventh Circuit agreed with the District Court’s decision for the same reasons, and thus the last of SEPH’s arguments also failed.
The bottom line was that the Eleventh Circuit affirmed the District Court’s granting of summary judgment in favor of Neverve and against SEPH.
ANALYSIS
The indelible impression that one gets from this opinion is that SEPH’s counsel fundamentally didn’t understand what a fraudulent transfer case is all about, being a case against the transferee to bring it into the lawsuit so as to make it disgorge the fraudulently-transferred asset. Had SEPH’s counsel understood this, they would have realized that the important party was the Oklahoma lawyer and instead brought this action in Oklahoma, where a court would have had personal jurisdiction over the Oklahoma lawyer, and not in Florida. Although we don’t know all the facts, but instead are just going off the Eleventh Circuit’s brief summary here, it seems quite likely that a court with personal jurisdiction over the Oklahoma lawyer would have avoided the transfer of the $350,000 because Neverve did not get anything back in exchange for the transfer since the legal services were rendered instead to Neverve’s principal. Instead, SEPH basically wasted the attorneys fees and costs of the Florida action trying to do something that it fundamentally could not do. Note that we do not know whether this decision was made by SEPH’s general counsel or their local counsel who ended up bringing the case; in either event, somebody made a costly boo boo.
Yet, in the defense of SEPH’s counsel who made the decision to go forward, the misconception that a fraudulent transfer case is primarily against the debtor (and not the transferee) is a very common one. In litigation, where the debtor has not only lost the case but also had the audacity not to pay the judgment, the debtor quickly becomes the “bad guy” from the view of the creditor. Indeed, it was the debtor who made the decision in the first place to transfer the asset with the specific intent of screwing the creditor. It should not then be surprising at all that the creditor wants the debtor to suffer additional pain for making the fraudulent transfer.
Except, as the Eleventh Circuit correctly describes here, getting back at the debtor is not the purpose of a fraudulent transfer action: That purpose is no more than to restore title of the asset back into the name of the debtor so that the judgment can then be enforced against that asset in the normal course. This is why a fraudulent transfer action is almost exclusively against the transferee and not the debtor — indeed, some jurisdictions do not even require the debtor to be a party to a fraudulent transfer action.
Where the debtor can suffer additional monetary pain is having to pay for the attorneys fees incurred by the creditor in having to unwind the fraudulent transfer. The debtor will have to be responsible for those fees, but the question is how. The Eleventh Circuit here concluded that such fees could not be awarded under the catch-all remedy clause. I am somewhat skeptical of that conclusion, but in practice it really doesn’t matter. Because a fraudulent transfer action is simply another judgment enforcement remedy, if attorneys fees for the fraudulent transfer action are taxable to the debtor in the original action where the judgment was entered, the attorneys fees should be awardable in the case resulting in original judgments, but not necessarily in the fraudulent transfer case. Moreover, a creditor cannot win a “double recovery” by getting attorneys fees in both action. In other words, the debtor will still be on the hook for attorneys fees (assuming they are awardable at all), just not in the fraudulent transfer case itself. We will leave for another day whether a transferee should properly be responsible for attorneys fees in a fraudulent transfer case, at least outside proof of a civil conspiracy between the debtor and the transferee.
Another interesting issue in this case goes to the statutory result that a creditor can either have the transfer avoided (meaning title to the transferred asset goes back to the debtor so the creditor can execute against the asset) as opposed to a money judgment against the transferee for value of the asset transferred. The best remedy is usually avoidance, since that allows a creditor to collect immediately against the asset, whereas a money judgment means that there is now a second unsecured judgment that the creditor must collect upon, just against the transferee instead of the debtor. Thus, a money judgment is not very efficient. So why would a creditor ever choose a money judgment instead of avoidance?
The answer goes to whether the transferred asset has retained its value as opposed to depreciating. For example, let’s say that a debtor has transferred an expensive yacht to the transferee. If the yacht is still floating and in good shape, then the creditor will seek avoidance of the transfer of title to the yacht such that title returns to the debtor and the yacht can then be seized and auctioned off towards payment of the judgment. But if the yacht has sunk and has no value because it is on the bottom of the harbor, then the creditor may opt to instead take a money judgment against the transferee for the value of the yacht at the moment that it was transferred — and hope that the transferee has assets with which to satisfy that judgment.
This also segues into the question why a money judgment may not be entered against a debtor: That would cause an impermissible double-recovery by the creditor against the debtor. Which is to say that the entire point of a fraudulent transfer action is to reduce the judgment by applying the applied asset against it. If Neverve owed $20 million to SEPH, then if the transfer of the $350,000 were avoided and returned to Neverve so that SEPH could execute upon it, then the judgment would accordingly be reduced by $350,000. The purpose of a fraudulent transfer lawsuit is not to somehow add another $350,000 to the judgment against the debtor. Which itself doesn’t make much sense when the debtor doesn’t have the assets to pay the full amount of the judgment anyway.
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