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Creditors Can Turn Back Time: Potential Recovery from Insolvent Debtors

5/1/10

By Bart Gary and Will Tate
The Georgia Uniform Fraudulent Transfer Act allows a creditor to reverse, receive value for or attach certain transfers of a debtor. The Act protects creditors from a debtor’s transfers in two situations.
Imagine that you are a widget producer. A new customer comes in with a huge order. You do some due diligence. You check references and call the customer’s bank to confirm lines of credit. You call other suppliers. You also find out that the customer owns a large manufacturing plant in Florida where it will utilize your widgets. Everything seems on the up and up. You deliver your widgets along with your invoice.
After months of trying to collect the debt, you are forced to file a lawsuit. Through the course of the litigation, you find out that the customer has no assets. The customer maxed out his line of credit and sold the plant, disbursing the proceeds to the CEO’s brother. There’s nothing left in the company’s coffers to go after. What can you do now? Write it off? You certainly can’t get blood from a stone, right?
While you can’t go back in time and prevent yourself from delivering the widgets, Georgia law might be able to go back and prevent that conveyance of the customer’s assets allowing you to get the money owed to you. The Georgia Uniform Fraudulent Transfer Act (UFTA) allows a creditor to reverse, receive value for or attach certain transfers of a debtor. The UFTA protects creditors from a debtor’s transfers in two situations. First, the UFTA applies where the debtor transfers property or assets with intent to hinder, delay or defraud its creditors. Second, the UFTA applies where an insolvent or under-capitalized debtor, regardless of intent, receives less reasonable value in a transaction. An example here would be where a soon-to-be insolvent business sells property to a related entity for pennies on the dollar. In either case, the creditor may be able to reverse the transaction, recover its value or attach the property in the hands of the new owner up to four years or possibly more after the conveyance took place.
Recently, a gasoline supplier was able to pursue a claim under the UFTA in Georgia involving the sale of a gas station. The former owners owed over $200,000 to the gasoline supplier. The gas station owners sold the station to their friends and took the proceeds of the sale and dispensed it among themselves, neglecting to pay off their creditors. The court allowed the supplier to proceed with its claim under the UFTA and seek to rescind the sale of the gas station because there was evidence of bad faith. Both the owners and the friends knew of the debt, but neither did anything to satisfy it. By utilizing the protections under the UFTA, the supplier stands a much better chance of collecting its debt.
Even though you think a debtor was a poor business person, it does not mean that they are not a rich cheater. It is worth doing some research to determine whether past transactions fall under the protections of the UFTA and enable you to get paid for your services.
For more information regarding this article, please contact Mr. Gary at 770.818.1403 or by email at bgary@fmglaw.com, or Mr. Tate at 770.818.1429 or by email at wtate@fmglaw.com.