How the New Jersey Uniform Fraudulent Transfer Act Helps Creditors Collect Debts

New Jersey Uniform Fraudulent Transfer ActNew Jersey, like many other states, has enacted a law that helps creditors when debtors transfer property that could otherwise be used to satisfy their debts. The law is called the New Jersey Uniform Fraudulent Transfer Act (“NJUFTA”). Creditors’ rights under the New Jersey Uniform Fraudulent Transfer Act include:

Fraudulent Transfers

Typically, in a fraudulent transfer, the debtor transfers an asset to a third party to keep the asset beyond the reach of creditors. The transfer is in name only because the debtor doesn’t actually intend to give up ownership of the asset.

The most common scenarios where a fraudulent transfer may arise are:

  • Spouses conveying interests in real property to each other to avoid a creditor’s judgment.
  • Liquidating businesses.
  • Payments to shell corporations.
  • Divorces in order to manipulate distribution of assets.
  • Suspect payments or transfers to family members.
  • Transfers in anticipation of filing for bankruptcy.

Transfers That Violate the New Jersey Uniform Fraudulent Transfer Act

Two different types of transfers violate NJUFTA: (1) a transfer to intentionally hinder, delay, or defraud a creditor and (2) a transfer for less than reasonably equivalent value when the debtor was insolvent at the time of the transfer or became insolvent as a result of the transfer.  See N.J.S.A. 25:2-27.  To win a NJUFTA case you have to prove that the transfer fits into one of these categories.

Proving a New Jersey Uniform Fraudulent Transfer Act Claim

To succeed on theory (1) above, you will have to prove the debtor’s intent. Fraudulent intent is difficult to prove unless you are able to obtain something in writing, e.g. emails, writings, notes, etc., that are not protected by a privilege. Because of the difficulty of proving intent, courts have developed “badges of fraud,” which are circumstantial evidence of the debtor’s intent to hinder, delay, or defraud. The principal badges of fraud include:

  • The transfer was to someone close to the debtor (e.g., a family members or a business owned or controlled by the debtor).
  • After the transfer, the debtor continued to control the property;
  • The debtor concealed the transfer or the asset;
  • Before the transfer, the debtor was sued or threatened with suit;
  • The transfer was of substantially all the debtor’s assets;
  • The consideration received by the debtor for the transfer was inadequate;
  • The debtor was insolvent or became insolvent shortly after the transfer.

Relying on theory (2) requires you to prove the debtor’s insolvency, meaning that the debtor’s debts after the payment was made were greater than the aggregate value of the debtor’s assets.  To do so, you may need to engage a forensic accountant.

Creditor’s Remedies Under the New Jersey Uniform Fraudulent Transfer Act

If you can show a transfer is fraudulent, your remedies as a creditor include:

  • Avoidance of the transfer to the extent necessary to satisfy the debt (in other words, the transfer is rescinded);
  • An attachment (a court order seizing property) or other provisional remedies (court orders designed to preserve the status quo until the case is concluded) against the asset transferred or other property of the transferee (person to whom the asset is transferred);
  • An injunction against further disposition by the debtor or transferee, or both, of the asset transferred or of other property;
  • Appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or
  • Any other relief the circumstances may require. N.J.S.A. § 25:2-29

Minimizing the Risk of a Fraudulent Transfer

The best way for a creditor to minimize the risk that a debtor will transfer assets to prevent the creditor from collecting the debt is by ensuring the debtor is solvent on the closing of any lending transaction and is therefore likely to remain solvent in the foreseeable future.

As a creditor, you can take the following steps during due diligence before extending credit to gain adequate evidence regarding the debtor’s solvency:

  • Perform a cash flow and balance sheet analysis
  • Engage third party auditors
  • Request the CFO furnish a solvency certificate

Another method of minimizing risk is to include financial covenants in the loan agreement.  A forward thinking creditor will consider what pitfalls may be apparent for a fraudulent transfer and consult with an attorney to draft for those pitfalls.  For example, if a creditor has reason to believe that the borrower could liquidate its business and in the meanwhile hide or transfer assets to a shell corporation, the creditor should include representations pertaining to financial interdependence among all affiliated companies, restrictions on transfers, and delineated effects of liquidation.  Even though the debtor may breach these covenants, including them in the loan agreement provides evidence that the lender’s expectations regarding the debtor’s solvency were genuine and in good faith.

For More Information About the New Jersey Uniform Fraudulent Transfer Act

If you are a creditor in need legal help to collect a debt, call Snellings Law LLC at 973.265.6100 to speak with an experienced debt collection attorney.New Jersey Uniform Fraudulent Transfer Act