The creditors’ bar has a new weapon in its arsenal: the civil conspiracy claim against an asset protection planner. While an advisor’s conduct must be egregious for such a claim to advance, new conspiracy claims raise concerns about whether an attorney may be subject to civil or criminal liability for conspiracy to commit fraudulent transfers.

Creditors have brought civil conspiracy claims by using three theories. In the first type of claim, the creditor alleges civil conspiracy through an underlying tortious claim (such as a fraudulent transfer). The second type of claim is an intracorporate or institutional claim where there is fraud within a business entity. The third type of claim is made directly against attorneys and advisors. The following overview of recent civil conspiracy claims in the context of fraudulent transfers reveals that most courts faced with the issue at least have been willing to entertain the question of whether an attorney who advises or assists a client to transfer assets in order to avoid judgment creditors is liable for conspiracy.

CIVIL CONSPIRACY: UNDERLYING CAUSES
OF ACTION AS BASIS FOR THE CLAIM

The majority of jurisdictions allow a claim for civil conspiracy if there is an independent underlying cause of action. That is, there can be no civil conspiracy if there is no underlying claim, such as a fraudulent transfer.

The typical elements of a civil conspiracy include: (1) an agreement (2) by two or more persons (3) to perform an overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another. An essential element to a conspiracy is an “unlawful purpose,” or an “unlawful means.” Thus, even if there is an agreement to hide assets from a creditor, the creditor must show that the means to hide the assets was unlawful or served an unlawful purpose. Most courts require that “unlawfulness” be shown by proving every element of the underlying claim.

The most common underlying cause of action in a debtor-creditor case is based on a fraudulent transfer claim pursuant to the Uniform Fraudulent Transfers Act (“UFTA”). The following are recent civil conspiracy claims that have been filed based on alleged fraudulent transfers.

California

California does not recognize a separate tort for civil conspiracy or the civil action for conspiracy to commit a recognized tort, unless the wrongful act itself is committed and damage results from the wrongful act. In order to succeed on a claim of civil conspiracy, a plaintiff in California must prove that there is an underlying wrongful act.

The California Court of Appeals held that the trustee of an estate and the creditor’s brother did not commit civil conspiracy by transferring decedent’s assets into a family trust. Keitel v. Huebel, 2004 WL 853812 (Cal. App. 1 Dist 2004). In Keitel, the creditor tried to enforce a judgment that she obtained against her debtor brother for expenses from their late mother’s estate. The creditor claimed that her brother conspired with the trustees to transfer assets out of the estate. The creditor alleged that the day before the judgment was entered, the debtor attempted to transfer title of property to the family trust.

The creditor alleged that the transfers into their mother’s revocable living trust violated the Uniform Fraudulent Transfer Act (UFTA) because they were (1) made without consideration; (2) rendered the debtors insolvent; and, (3) done with the specific intent to defraud. The court held that the transfers did not violate the UFTA because they were not “transfers” within the meaning of the UFTA. The court relied on Gagan v. Gouyd, 73 Cal.App.4th 835 (Cal. App. 4th 1999), which held that a transfer into a revocable trust is not a transfer within the meaning of the UFTA because the property is not disposed of and is still available to creditors.

Since the transfers did not violate the UFTA, the court held that the conspiracy claim failed as a matter of law because there is no independent cause of action for conspiracy.

On the other hand, the California Court of Appeals ruled that there was a civil conspiracy where a debtor transferred property in violation of the UTFA in order to hide them from judgment creditors. Professional Collection Consultants Inc. v. Griffis, 2004 WL 759302 (Cal.App. 2 Dist., 2004). In Griffis, the collection agency assigned to collect the debt contended that various transactions initiated by debtor were fraudulent transfers in violation of the California UFTA. The creditors claimed that the transactions were part of a conspiracy to take the property out of creditor’s reach. The court found that the transfers were fraudulent, and that there was a conspiracy to hinder the creditor from collecting on the judgment.

However, in California, showing intent to defraud a creditor through a fraudulent creditor alone, without showing damages, is not sufficient to win a fraudulent transfer claim. Thus, where the creditor fails to prove damages, the fraudulent transfer claim fails along with the civil conspiracy claim.

In Mehrtash v. Mehrtash, the California Court of Appeals held that where a judgment creditor does not prove damages in the underlying fraudulent transfer case, the civil conspiracy claim as well as the claim pursuant to the UFTA both fail. 93 Cal.App.4th 75 (Cal.App. Dist.2 2001). In Mehrtash, plaintiff, as creditor of her former husband, brought an action to set aside the husband's transfer of residence to plaintiff’s stepsons as a fraudulent conveyance.

The court held that under the California Fraudulent Transfers Act, a creditor may sue to set aside a transfer of property by a debtor, where the transfer defrauds the and causes injury to the creditor. The court stated, "a transfer in fraud of creditors may be attacked only by one who is injured by the transfer; mere intent to delay or defraud is not sufficient."

The court ruled in favor of the debtor because the plaintiff-creditor failed to show that she was injured financially by the allegedly fraudulent conveyance. Without a successful underlying fraudulent transfer claim, plaintiff’s civil conspiracy claim also failed. The court stated, "there is no separate tort of civil conspiracy, and there is no civil action for conspiracy to commit a recognized tort unless the wrongful act itself is committed and damage results there from."

Missouri

Having held several years earlier, in Mark VII v. Barthol, 926 SW.2d 128 (Mo. App. 1996), that there is no separate tort for civil conspiracy against an attorney without an underlying unlawful action that supports the claim for civil conspiracy, the Missouri Court of Appeals recently sided with the minority view, finding that a case for civil conspiracy can exist even when there is no underlying fraudulent transfer. Fischer v. Brancato, 147 S.W.3d 794 (Mo.App. E.D. 2004).

In Fischer, the Missouri Court of Appeals found that the creditor had a valid claim for civil conspiracy where a debtor physician attempted to avoid a judgment on a partnership agreement by earning professional fees through two companies owned by his wife.

The trial court held that the fees paid to the physician were not a “transfer of assets” per se. Since there was no fraudulent transfer, there could be no claim of civil conspiracy. The appellate court reversed and held that the defendant used the wife's corporation to fraudulently assign income attributable to his professional services. In other words, the “opportunity shift” of the physician’s current income to his wife’s corporation was sufficient to support a civil conspiracy claim beyond a motion to dismiss. The court did not answer whether the shift was technically a fraudulent transfer.

Other Jurisdictions

Georgia, Illinois, North Dakota, and Texas share the majority view that an unlawful tort must be proven in order for a civil conspiracy claim to succeed. Unlike California, these jurisdictions have not ruled on the issue of whether creditors in fraudulent transfer cases must show damages in order to recover for a fraudulent transfer civil conspiracy.

The Georgia Court of Appeals allowed a fraudulent transfer conspiracy case to survive summary judgment where the trustee of an estate and children of the decedent transferred assets out of the reach of the estate’s beneficiaries. Miller v. Lomax, 596 S.E.2d 232 (Ga. App. 2004). In Miller, Estelle Miller and her children (“the Millers”) sued the estate of her late ex-husband for fraud and breach of contract. The Millers, who were beneficiaries of the decedent's estate, claimed that defendant Lomax acted in concert with the decedent’s children to transfer assets out of the estate in violation of a previous property settlement agreement between Estelle Miller and her ex-husband.

The court stated that, in order to recover damages for a civil conspiracy claim, a plaintiff must show that two or more persons, acting in concert, engaged in conduct that constitutes a tort. The plaintiff also must prove all elements of the underlying tort. Absent a proven underlying tort, there can be no liability for civil conspiracy.

The court held that there was sufficient evidence to conclude that decedent’s children participated in a scheme to fraudulently transfer assets, because the children transferred real property out of Miller’s reach and violation of the property settlement agreement. Since there was an underlying fraudulent transfer claim, the court held that the civil conspiracy claim could survive.

Similarly, Illinois also requires proof of an underlying tort in order for a civil conspiracy claim to succeed. In Bressner v. Ambroziak, the court refused to allow a civil conspiracy claim to go forth where plaintiffs alleged a conspiracy without showing a violation under the Illinois UFTA. 2003 WL 21145699 (N.D.Ill. 2003). The creditor alleged that defendants conspired to defraud plaintiff by hiding assets and income in order to prevent plaintiff from collecting his judgment.

The court defined a civil conspiracy as (1) an agreement (2) by two or more persons (3) to perform an overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another. The court reasoned that in order to state a cause of action for conspiracy, the creditor must allege not only that the conspirators committed the act, but also that the act was tortious in nature. The conspiracy alone is not enough to trigger a claim for civil conspiracy without the underlying tort.

The Texas Court of Appeals also held that where the defendant does not commit an unlawful tort, there is no valid claim for civil conspiracy. Martinek v. Farmers & Merchants State Bank, 2003 WL 2006607 (Tex.App. Dist.2 2003) In Martinek, the junior lien holder of two tracts of real property sued the bank that foreclosed on the property, alleging civil conspiracy to fraudulently transfer assets. The bank purchased the land at the foreclosure sale and resold it to the senior lien holder’s family members. The defendant bank’s actions extinguished plaintiff’s junior liens because the lien amounts exceeded the prices paid for the properties.

The court held that the bank did not commit a fraudulent transfer by selling the property at the auction to the debtor’s relatives, and that such a sale was done in the ordinary course of foreclosure of the senior liens. Thus, the conspiracy claim also failed.

CIVIL CONSPIRACY: INSTITUTIONAL AND INTRACORPORATE LIABILITY

Civil conspiracy claims may also be brought against business entities. Cases alleging intracorporate civil liability carry a tougher evidentiary burden than claims based on underlying fraudulent transfers against individuals. Many state and federal courts have adopted the “intracorporate conspiracy immunity doctrine,” which states that intracorporate conduct does not satisfy the plurality requirement necessary to establish an actionable conspiracy claim. In other words, because a corporation and its directors or a principal and his agent is viewed as one entity, a corporation and a director engaged in an agreement to commit unlawful acts cannot satisfy the “more than one party” element of a conspiracy.

The Tennessee Court of Appeals held that two or more persons or entities are required for a conspiracy to exist, so a civil conspiracy is not legally possible where a corporation and its alleged co-conspirators stand in a principal-agent relationship. Nelson v. Metric Realty, 2002 WL 31126649 (Tenn.App. 2002). In Nelson, the defendant hired the plaintiff to oversee one of his businesses. Plaintiff began to have conflict with defendant’s attorney, whom plaintiff worked with in the course of his business. Based on the advice of his attorney, defendant fired plaintiff when plaintiff complained about the conduct of the attorney. Plaintiff claimed that defendant and his attorney acted in concert to terminate plaintiff.

The issue is whether there can be a conspiracy where the agreement to act unlawfully is on an “intracorporate” level. Most courts have adopted the “intracorporate conspiracy immunity doctrine” to hold that wholly intracorporate conduct does not satisfy the plurality requirement necessary to establish an actionable conspiracy claim. A corporation can act only through the authorized acts of its corporate directors, officers, and other employees and agents, and the acts of the corporation's agents are attributed to the corporation itself. Because their identities are merged when the agent is acting on behalf of the corporation, the agent and the corporation cannot be accessories to one another.

The court adopted the intracorporate conspiracy immunity doctrine and held that a civil conspiracy claim may not go forth against a corporation and its officers, directors, or other agents, if the agent is acting in the scope of his or her employment. Because the attorney was acting in the scope of his employment, no conspiracy claim existed.

The Tennessee Court of Appeals held that no conspiracy existed between a creditor bank and the debtor against the plaintiff-creditor where the plaintiff entered into a subordination agreement with the bank, and the bank foreclosed on the debtor’s property. Burton v. Hardwood Pallets, Inc., 2001 Tenn. App. LEXIS 912.In Burton, Blake and Michael Burton sold their business to defendant Hardwood Pallet in exchange for a promissory note for $1,000,000. Hardwood also paid the Burtons with an $800,000 loan from the bank. However, as a condition to the loan, the bank insisted that the Burtons enter into a subordination agreement. When Hardwood defaulted, the bank foreclosed on the business in a private sale. The Burtons sued Hardwood Pallets and the bank for conspiracy to defraud.

The court held that the plaintiffs did not show that the bank intended to defraud them or that the bank knew of any fraudulent intent on the part of the other defendants. The court explained that in order to be liable under a claim of civil conspiracy, each conspirator must have the intent to accomplish a common purpose and know of the other co-conspirators’ intent. Further, the court noted, the Burtons voluntarily entered into a valid subordination agreement with the bank.

A corporation may be held liable for conspiracy when it engages in fraudulent acts with other corporations, as each corporation is an separate entity. The California Court of Appeals reversed the trial court’s decision to grant summary judgment to the defendant corporations and ruled that two defendant corporations could be held liable for conspiracy to defraud a creditor in breach of the UFTA. Monastra v. Konica Business Machines, U.S.A., Inc, 43 Cal.App. 4th 1628 (1996). In Monastra, plaintiff Nicholas Monastra had a $400,000 judgment against Master Technology when Master transferred all of its assets to Konica Business Machines for $600,000. Monastra alleged that the value of the assets was $3 million, and that the transfer rendered Master insolvent, which demonstrated a fraudulent transfer. The court noted that a judge or jury could find a conspiracy based on such evidence.

CIVIL CONSPIRACY CLAIMS INVOLVING ATTORNEYS

Should an attorney engaged in asset protection planning for the defendant debtor also be subject to civil conspiracy violations? The primary issue in conspiracy cases where the attorney is a named defendant is whether the attorney is acting in pursuit of his or her professional duties to the client or is acting in concert with the client to commit a wrong. Although most courts require proof of an underlying claim in order to hold the attorney liable for conspiracy, the Sixth Circuit Court of Appeals held, in Morganroth v. Delorean, that attorneys who assisted their clients in fraudulent transfers were liable for civil conspiracy, even without proving an underlying claim of fraud. 123 F.3d. 374 (6th Cir. 1997). A review of conspiracy suits against attorneys reveals that Morganroth is somewhat of an anomaly. Despite the harsh ruling in Morganroth, most states have only been willing to charge attorneys with civil conspiracy or professional disciplinary violations if the plaintiff-creditors proved the underlying tortuous claim.

JURISDICTIONS WHERE ATTORNEYS HAVE BEEN SUBJECT TO PROFESSIONAL DISCIPLINE FOR FRAUDULENT TRANSFERS

New Jersey

Although it did not find conspiracy, the New Jersey Supreme Court reprimanded an attorney for advising his clients to transfer title to their home to an uncle in order to avoid creditors. In re DePamphilis arose out of a disagreement over attorney’s fees at which time the clients filed a bar complaint and revealed attorney’s advice to the court. 30 N.J. 470, 153 A.2d 680 (1959). The attorney responded that he acted pursuant to the wishes of the clients. Nonetheless, the court recommended the attorney be reprimanded.

Oregon

Similarly, the Oregon Supreme Court found that an attorney violated the Oregon Code of Professional Responsibility by assisting his clients in transferring assets out of the reach of creditors. In re Conduct of Hockett, 734 P.2d 877 (1987). The attorney was suspended for two months.

JURISDICTIONS WHERE ATTORNEYS HAVE BEEN HELD LIABLE FOR CONSPIRACY TO DEFRAUD

Wisconsin

The Wisconsin Supreme Court held an attorney liable for conspiracy to transfer company assets out of the reach of a former employee. Lane v. Sharp Packaging System, Inc., 640 NW.2d 788 (Wis. 2002). Lane, the executive vice president of Sharp Packaging Systems, was terminated. Prior to his termination, Lane used his authority as a member of the Board of Directors to replace Sharp’s attorney. Sharp’s attorney then advised Sharp to gradually transfer money out of the business to avoid making a stock option sale available to Lane. Lane claimed that the attorney aided the client in the transfer of assets in retaliation.

The issue in this case was whether a lawyer and a client can engage in a conspiracy, as a matter of law. The court listed the following elements that are required to prove civil conspiracy: (1) the formation and operation of the conspiracy; (2) wrongful act or acts done pursuant thereto; and, (3) damage resulting from such act or acts. To form a conspiracy there must be an actual agreement to violate or disregard the law, and the persons involved must knowingly be members of the conspiracy. The court held that Sharp’s attorney was liable to Lane for fraudulent acts committed while acting in the scope of their attorney-client relationship.

Arizona

The Arizona Court of Appeals held that a “fraudulent transfer is a legal wrong which may be the subject of a complaint for damages arising out of a conspiracy to commit a fraudulent transfer.” McElhanon v. Hing 728 P.2d 256 (Ariz. Ct. App. 1 1985). McElhanon was an inter-shareholder’s suit where the defendant transferred stock with the aid of his attorney in order to keep the assets away from the plaintiff.

The court held the attorney liable for conspiracy to commit a fraudulent transfer, but noted that an action for damages arising out of a conspiracy to commit a fraudulent transfer is a remedy that should only be used where a remedy under the Uniform Fraudulent Conveyances Act is inadequate.

The Arizona Court of Appeals reiterated its holding in McElhanon, by holding that an attorney was liable for conspiracy to make a fraudulent transfer in Pearce v. Stone. 720 P.2d 542 (Ariz. Ct. App. 1986). The attorney in Pearce was held liable for setting up a spendthrift trust in order to hide assets for his client. The court held that the transfer was fraudulent and established an underlying tort to support a civil conspiracy claim.

New Jersey

Similarly, a New Jersey Court held that an attorney who advised his client that it was lawful if the client transferred his property to his wife prior to defaulting on a loan was subject to a civil conspiracy claim. Banco Popular North America v. Gandi, (N.J. Super. App. Div. 2003).

The issue was whether the attorney participated in the conspiracy by offering defendant legal advice. Generally, an attorney is not liable for a client's tort unless the he or she assisted the client through the conduct itself or gave substantial assistance to the client knowing the client's conduct was tortious. That is, an attorney may be charged with conspiracy if he or she is an active participant in the client’s unlawful activity. The court grounded its decision to allow a claim against the attorney in Restatement Second, Torts § 876, which states:

In general, a lawyer is not liable for a client’s tort unless the lawyer assisted the client through conduct itself tortious or gave substantial assistance to the client knowing the client’s conduct to be tortious; whether a more onerous standard applies to a lawyer who assists a client’s conduct depends on applicable law, which in general requires negligent or intentional misconduct for civil liability to attach to a principal and often requires a higher level of awareness for a lawyer than for a principal.

JURISDICTIONS THAT HAVE REFUSED TO HOLD ATTORNEYS LIABLE FOR CONSPIRACY WITHOUT AN UNDERLYING CLAIM

Kansas

In Kansas, mere involvement in a fraud does not necessarily make one an active participant in a conspiracy to defraud. In McKibben v. Chubb, the Tenth Circuit Court of Appeals in held that an attorney who drafted and executed a will for a plaintiff’s brother was not liable for civil conspiracy. 840 F.2d 1525 (10th Cir. 1988). The attorney brought a will to the brother’s home, where it was executed and witnessed. Under the will, he left all of his assets to his roommate. The plaintiff claimed that, since the roommate asked the attorney to draft his brother’s will, the attorney and the roommate conspired to leave all of the brother’s assets to the roommate.

The court stated the necessary elements for a civil conspiracy claim in Kansas are: (1) two or more persons; (2) an object to be accomplished; (3) a meeting of the minds in the object or course of action; (4) one or more unlawful overt acts; and, (5) damages as the proximate cause thereof. The court held there was no evidence in the record to suggest that the attorney was anything more than a casual acquaintance of the decedent and was merely retained to draft his will. The court found there was no cause for a finding of civil conspiracy. The attorney’s mere involvement as an advisor did not rise to the level of a conspiracy.

THE WRATH OF MORGANROTH

Unlike most courts, the Sixth Circuit Court of Appeals did not hesitate in holding that, under New Jersey law, a law firm conspired with its client to transfer assets in order to avoid a judgment creditor. Morganroth & Morganroth v. Delorean shows that a court may be willing to subject attorneys engaged in asset protection planning to conspiracy claims, without underlying fraudulent transfer claims. Of course, this could result in substantial financial liability and dire professional consequences. 123 F.3d 374 (6th Cir. 1997). In Morganroth, the Morganroth law firm sued its former client, John DeLorean, and his attorneys for conspiring to transfer DeLorean’s assets in order to avoid a $6 million judgment for past due legal fees in favor of Morganroth. Further, Morganroth alleged that DeLorean and his law firm actively, knowingly, and intentionally participated in unlawful efforts to avoid execution on DeLorean’s property. The court held that the behavior of defendant law firm was so egregious that it rose to the level of conspiracy, even without an underlying tort claim. The court held:

When a complaint alleges that an attorney has knowingly and intentionally participated in a client’s unlawful conduct to hinder, delay, and/or fraudulently obstruct the enforcement of a judgment of a court, the plaintiff has stated a claim under New Jersey law for creditor fraud against the attorney. This is so even if the complaint does not allege any misrepresentation by the attorney to the judgment creditor and does not allege that the creditor detrimentally relied on such misrepresentation.

THE FLORIDA EXCEPTION (?)

The highest court of one jurisdiction in the United States expressly has so far declined to extend the UFTA to include civil conspiracy claims or aiding and abetting claims for fraudulent transfers: Florida.

The Florida Supreme Court was not willing to expand the Florida UFTA, reasoning that it was not intended to serve as a vehicle by which a creditor may bring a suit against a non-transferee party monetary damages arising from the non-transferee party's alleged aiding-abetting of a fraudulent money transfer. Freeman v. First Union Bank, 329 F.3d 1231 (Fla. 2004). In Freeman, the issue was whether Florida's UFTA Act creates a cause of action for damages in favor of a creditor against an aider or abettor to a fraudulent transaction. The plaintiff-creditors sought monetary damages for defendant-bank’s role in an alleged fraudulent Ponzi scheme conducted by a company called Unique Gems. The plaintiffs alleged that defendants, as a banking institution servicing Unique Gems' financial transactions, aided and abetted in the fraudulent transfers of money by Unique Gems to the harm of Unique Gems’ creditors.

Even though Florida courts will not expand the FUFTA to include conspiracy claims against attorneys or other advisors, attorneys still may be sanctioned for ethical violations for their participation in a fraudulent transfer.

For example, the Florida Supreme Court suspended an attorney for one year after the attorney advised his son to transfer real property in an effort to avoid creditors. Florida Bar v. Rood, 622 So.2d 974 (Fla. 1993). The court found that the attorney was in clear violation of the Code of Professional Conduct for his involvement with the fraudulent transfer.

SUMMARY

There is no clear answer as to what constitutes civil conspiracy arising from a fraudulent transfer. With the exception of Missouri, the majority of jurisdictions require an underlying claim of fraud to establish a claim of civil conspiracy.

Clearly, an attorney cannot assist a client when the client is seeking to hide assets via fraudulent transfer without risking some sort of liability or ethical sanctions. Whether a court is willing to enforce a civil conspiracy claim for a fraudulent transfer is uncertain and depends on the circumstances of the particular case. Nonetheless, Morganroth demonstrates that when an attorney’s conduct is particularly egregious - which is an entirely subjective issue - courts are more willing to apply the civil conspiracy theory to fraudulent transfers.

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