Getting Blood from a Stone: How to Nail Fraudulent Judgment Debtors

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Nail through heart of cartoon painted on a stone wall

April 24, 2015

Recently we acted for the Plaintiff in litigation involving a partnership dispute and property settlement. One of the major assets of the Defendant in our case (“our Defendant”) was an unsatisfied judgment resulting from other commercial litigation in the vicinity of $1 million. This asset was relevant to the property settlement in our case, as it comprised a substantial part of the pool of assets owned by the parties at one point in time.

Not long after the judgment was delivered in the other case, a debtor’s petition was presented and accepted, and the judgment debtor thereby entered voluntary bankruptcy. The debtor’s petition was presented on the basis of the judgment in question, meaning it was captured within the bankruptcy. Usually, depending on the exact type of case or area of law involved, a judgment will still be enforceable for several years at the election of the judgment creditor. However, given the circumstances in this case, the judgment had to be recovered during, and as part of, the bankruptcy, and it would be lost once the bankrupt was discharged. As a bankrupt can generally be discharged in as little as three years, in some cases, a huge amount of work will be required to satisfy the judgment, a great deal of money might be involved and the trustee in bankruptcy may or may not make things either more difficult or easy. Further, a trustee in bankruptcy has to rely on the available information, most of which comes from the bankrupt themselves, and therefore is not always aware of all of the relevant debts or circumstances. The risk of losing out altogether is therefore heightened dramatically.

During the other commercial litigation in which the judgment was delivered, the lawyers acting for our Defendant identified that the judgment debtor had substantial assets, including a valuable waterfront home, and the Defendant proceeded with that complex and costly litigation on the assumption that those assets could and would be used to satisfy the debt, incurring legal fees in the process. However, for whatever reason, they were not able to obtain security for costs, no freezing or Mareva orders were obtained with respect to the assets and they were otherwise unable to obtain any real security for our Defendant. This meant that the judgment debtor’s property and cash was free to be dealt with, and as the case lasted a long time, there was a real risk that some or all of it could be transferred well before our Defendant bankrupted the judgment debtor and enforced the debt.

When the Defendant commenced the recovery process, it was discovered that the judgment debtor had in fact transferred assets to his (then) wife some time prior, including the house, leaving next to nothing in his name. The only assets he retained were legally off limits to the trustee in bankruptcy, and he had restructured his affairs such that his income was below the threshold for payment by him towards his unsatisfied debts. Both our client and our Defendant therefore assumed that the money was lost, until we commenced acting…

Although the judgment debtor had carefully documented the property transfers through a deed, expressed to be a gift made out of love and affection to his very soon thereafter ex-wife, the deed was not a compliant binding financial agreement within the meaning of the Family Law Act, and was not solidified through Orders of the Family or Federal Circuit Court. The effect was that the transfer was tax-free, but the division or adjustment of property between the husband and wife was not made final and irreversible by a Court. It therefore appeared to be a transaction designed solely to defeat creditors. In addition, the wife obviously knew about the bankruptcy, as she had been involved in the process. Further, the timing of the transfer was in very close proximity to the presentation of the debtor’s petition. Any one of these three facts may be enough legally for the trustee in bankruptcy to reverse the transaction, sell the assets and apply the proceeds towards our Defendant’s judgment.

We managed to present our case to the trustee in bankruptcy and work with the trustee in a cooperative manner that would benefit all creditors, to the extent that they are now pursuing the reversal of the transactions and will satisfy our Defendant’s judgment if successful, without our Defendant or our client even having to make upfront contributions to the costs of doing so. As such, there is a good chance our client will now receive a large component of the $1 million-odd thought to be lost, and this will also mean that both parties in our case can avoid having to sell other assets they wish to keep.

There are several implications from this story:

1. Without Court Orders or a compliant binding financial agreement, property transactions between spouses may be liable to recovery in satisfaction of judgments by third parties. Read our recent post on post-relationship property disputes for more.

2. Before embarking on lengthy and expensive litigation, it’s important to undertake accurate due diligence to ensure that any judgment is capable of satisfaction.

3. Provided the due diligence stacks up, depending on the circumstances and the evidence, there are steps that can be taken before and during litigation to freeze assets to ensure your judgment will be satisfied. Investigating and proceeding with these steps should be done as early on as possible.

4. Bankruptcy is not the end of the matter in all cases – there may be opportunities to recover still and to reverse transactions.

5. Don’t assume a trustee in bankruptcy knows all the facts or has the financial resources to pursue your debt. With a little assistance on either or both fronts, it may be possible to work with them to achieve your goals. To put yourself in the best position, revisit the due diligence mentioned above once a judgment is delivered, or better still, keep an eye on your findings during the litigation even before a judgment is delivered.

If you or someone you know is experiencing trouble enforcing or recovering a large debt, or is worried about commencing litigation and being unable to do so afterwards, feel free to contact us.

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