“Borrowers Gone Bad ” by John L. Waite III

What happens when your borrower, unbeknownst to you, begins liquidating the very assets that you relied upon when making the loan and that were represented by the borrower as evidence of their ability to repay your loan. And then uses the sale proceeds to pay other debt obligations or even to take that trip to Vegas? What about the borrower who begins transferring assets to family and friends before going bankrupt.
Under most circumstances, it is only after the damage has been done that the creditor learns of the borrower’s conduct. So what are the creditor’s options?
Missouri’s Uniform Fraudulent Transfer Act, found in Chapter 428 of Missouri statutes, provides legal remedies to certain creditors who find themselves the victims of such borrowers. Generally, once certain conditions are met and based upon the particular facts of the matter, the Act may allow a creditor to (i) set aside the improper transfer or sale, (ii) attach or levy the asset that was transferred or sold even though it is held by a third party (the “transferee”), (iii) prevent further transfers or sales by either the borrower or transferee, or (iv) have a receiver appointed to take charge of the asset. See R.S.Mo. § 428.039.
Another option, which has lost some of its prominence after the passage of the Uniform Fraudulent Transfer Act, is to assert a Creditor’s Bill against the sold or transferred asset. A Creditor’s Bill is normally limited to those creditors who, after obtaining a court judgment, learn that an asset was fraudulently transferred and is beyond the reach of the traditional legal process of garnishment/execution. See Schockley v. Harry Sander Realty Co., 771 S.W.2d 922, 925 (Mo.App.E.D. 1989).
A third option is the use of an equitable lien, which is a remedial device that provides a method for the enforcement of an obligation. See Dave Kolb Grading, Inc. v. Liberman Corp.,et.al., 837 S.W.2d 924, 930 (Mo.App. E.D. 1992). “An equitable lien attaches to property for the purpose of securing payment of the existing obligation and is ancillary to and separate from the debt.” Id. at 931. The Dave Kolb Appellate Court outlined three requirements to establish an equitable lien, they are: (1) a duty or an obligation owed by one person to another; (2) a res [or tangible asset] to which that obligation fastens and which can be identified or described with reasonable certainty; and (3) an intent, express or implied, that the property serve as security for the payment of the debt or obligation.
Finally, the last option that will be discussed in this article is a constructive trust. A constructive trust is appropriate where a party has been wrongfully deprived of some right, title, or interest in property as a result of fraud or in violation of confidence or faith reposed in another. See Checkett v. McGehee, et.al. (In re McGehee), 342 B.R. 587, 591 (Bankr.W.D.Mo. 2006). Historically, a constructive trust required actual or constructive fraud. But in 1955, the Missouri Supreme Court recognized that a constructive trust might be appropriate “upon the theory of unjust enrichment or of an unfair or wrongful holding, without any proof of fraudulent intent.” See Swon, et.al. v. Huddleston, 282 S.W.2d 18, 25-26 (Mo. 1955). A creditor is also entitled to impose a constructive trust upon property that is connected with, or traced from, the proceeds of the creditor’s original property. See U.S. Fidelity and Guaranty Co. v. Hiles, 670 S.W.2d 134, 137 (Mo.App.E.D. 1984).
There may be other options available based upon the particular facts of the situation. In addition, it should be noted that a creditor’s options may be impacted by whether they are secured or unsecured, in other words, does the creditor have a recognized security interest against the borrower’s assets. Furthermore, the creditor’s options can be drastically altered should the borrower file bankruptcy. For all of these reasons, it is strongly recommend that any creditor who finds themselves the victim of an unscrupulous borrower seek legal counsel immediately to ensure their rights and options are protected.