For no consideration, an allegedly insolvent individual transferred valuable real property to a corporation that he controlled, but the transfer was not fraudulent under Georgia’s version of the Uniform Fraudulent Transfer Act.
Why? The property was fully encumbered and therefore was not an “asset” subject to UFTA, according to Bankruptcy Judge Wendy L. Hagenau of Atlanta.
A man had judgments against him for about $15 million. The judgments became liens on the man’s home, which already had mortgage debt exceeding $20 million. Evidently for no consideration, the man transferred the home to a corporation he controlled, subject to existing encumbrances. The corporation later filed a chapter 11 petition, but the man apparently is not himself in bankruptcy.
The home was later sold for less than $6 million.
The judgment creditors filed suit against the corporate debtor, contending that the transfer of the home was a fraudulent transfer under Georgia law, and sought damages against the individual for the value of the transfer. In her Aug. 1 opinion, Judge Hagenau dismissed claims that the transfer was constructively fraudulent or was made with actual intent to hinder or delay.
Judge Hagenau said that the viability of a fraudulent transfer claim under Georgia law depends on whether there was a “transfer” of an “asset.” She said that the Georgia statute defines an “asset” to exclude property “to the extent it is encumbered by a valid lien.”
If the property indeed was worth only the sale price of less than $6 million, it was not an “asset” because it was worth less than the $20 million first mortgage lien. Since there was no “asset,” there could not be a transfer in contravention of the UFTA, “even if the property was ‘transferred with nefarious intent,’” she said, quoting a Georgia precedent.
Even if the sale price were grossly inadequate and the property was worth more than the mortgage, giving the judgment liens some value, Judge Hagenau said the property “still is not an ‘asset’ the ‘transfer’ of which may be avoided because the Property is encumbered by the plaintiffs’ [judgment] liens.”
If the property were worth more than the combined mortgage and judgment liens, Judge Hagenau said there still would be no fraudulent transfer claim, because the plaintiffs “would obviously have suffered no damage by the transfer” since the judgment liens survived the transfer and remained as encumbrances on the property. She cited an 1882 Pennsylvania decision for the proposition that a transfer is not fraudulent as to a lienholder because the secured creditor can pursue the land in the hands of the transferee.
Judge Hagenau cited other authorities holding that there must be a diminution in the assets available to the creditor even if the transferor had fraudulent intent.
“Since the transfer fully protected Plaintiffs’ liens, no claim for fraudulent conveyance exists,” Judge Hagenau held.
Would the result be the same if the suit were under Section 548 or under the law of other states? Comments from readers will be appreciated.