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Fraudulent Transfers: A lesson in persistence and asset recovery

Jordan A. Finfer

Litigation is like a maze; there are twists, turns and uncertainties. To successfully navigate the maze of litigation you need to utilize many different skill sets and resources: preparedness, collaboration and organization are major components of any successful litigation. But in some matters, persistence is the litigator’s chief asset. This was so in our recent representation of a bank whose bankrupt borrowers secretly transferred their sole unencumbered asset to a family member.
We assisted the client in successfully foreclosing on one of the Bank’s customers who had defaulted on a commercial loan. The Bank was the successful bidder at the judicial sale and became the record title holder of the property. However, the Bank was not made whole as the value of the real estate was substantially less than the amount due it under the note. As such, the Bank obtained a deficiency judgment against the borrower.
The Bank believed that the borrower had other real property that could be used to satisfy the deficiency judgment. One of those properties was no longer owned by the borrower, having been transferred to a third party (“transferee”). The Bank believed that the transferee was related to the borrower. Based on the information provided to us by the Bank, we filed suit against the transferee, invoking sections 740 ILCS 160/5(a) and 740 ILCS 160/6(a) of the Illinois Uniform Fraudulent Transfer Act (“UFTA”). Unbeknownst to the Bank, the transferee was the borrower’s brother with a different surname.
The UFTA is a wonderful tool in asset recovery matters that permits a party to recover assets that were transferred from a judgment debtor to a third party. For the UFTA to apply there must be either (under section 5 – Fraud in Fact) the presence of statutorily defined 11 “badges of fraud” or (under section 6 – Fraud in Law) a transfer made after a claim arose and the transfer results in the transferor becoming insolvent. We pursued both claims, uncertain at the outset whether the proofs would support a Fraud in Fact or Fraud in Law claim. What unfolded over the next two years was one of the most trying and rewarding cases I have been involved in.
After initiating discovery we learned that the transferee was in fact a close relative of the borrower (one of the badges of fraud). Thereafter, we focused on learning who was actually in control of the real estate (another badge of fraud). After months of discovery disputes we were able to obtain both the borrower’s and transferee’s bank statements. However, the statements only told us that other bank accounts existed that had been withheld from production in discovery by both the borrower and the transferee. As a result, we issued additional subpoenas to the new bank accounts, engaged in additional discovery disputes and another three months later, obtained the additional bank account records. The results provided us with the proverbial smoking gun: evidence that the borrower had paid back the transferee for the purchase price of the real estate and that the transferee was signing over rent checks paid to it from the real estate to the borrower. Despite the avalanche of evidence we had, the case did not settle until the day of trial, when the transferee and his attorney could no longer ignore the magnitude of the evidence we had gathered.
The lesson from this case was persistence, because early on in the case it appeared the transaction was at arm’s length. But through hours of researching public records, obtaining and reviewing the financial records of the borrower and transferee, we were able to piece together a clear line of proofs to support both our fraud in fact and fraud in law claims. By staying true to the planned course of action and leaving no stone unturned, the maze became a path, clear and straight to a successful conclusion.

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