Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which a former investment advisor at UBS sought to prevent the company from collecting on promissory notes the advisor owed to UBS upon his departure. After the former advisor established an investment company and gave his wife a 95% ownership in the company in exchange for a $140,000 capital contribution, UBS sued the advisor, the advisor’s wife and the company to prevent the transfer of assets. The wife argued that the investment was made in good faith and that she paid a “reasonably equivalent value” for her interest in the investment company.

In considering the wife’s challenge, the court considered whether a constructive fraud had occurred. To do so, the creditor must show that no “reasonably equivalent value” was received by the debtor in exchange for the transfer and either (a) existing or contemplated transactions by the debtor that would leave him with minimal remaining assets or (b) the debtor believed or should have reasonably believed he would incur debts beyond his ability to pay. Because the advisor received no financial or other benefits, the court concluded, the transfer was not one of “reasonably equivalent value” and was, therefore, void.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

UBS Financial Services, Inc. vs. Lacava, No. 106461 (Ohio App., 8/2/18)

*Under Ohio law, a creditor may seek to set aside a transfer by showing actual intent to defraud or constructive fraud. 

**A debtor may set aside a presumption of fraud by showing the transfer was made in good faith and reasonably equivalent value was paid by the transferee. 

In February 2010, a FINRA panel awarded UBS $196,953, the balance Albert Lacava owed on promissory notes following his termination from the firm (FINRA ID #08-04976 (Cleveland, 2/9/10)). UBS had the Award confirmed in state court, but Mr. Lacava appears intent on thwarting UBS’ collection efforts.

Upon leaving UBS, Mr. Lacava formed an investment management company (“AIM”), an LLC in which he was the sole member/manager. Before the arbitration ended, however, Mr. Lacava amended AIM’s operating agreement, giving his wife a 95% ownership interest in exchange for a $140,000 capital contribution. Unable to collect on its judgment directly from Mr. Lacava, UBS sued Mr. Lacava, his wife and AIM, seeking to set aside the transfer to AIM under the Ohio Uniform Fraudulent Transfer Act, O.R.C. §1336, et seq. (the “Act”). All parties filed motions for summary judgment, after which the trial court granted UBS’ motion, voiding the $140,000 transfer to AIM and freezing the Lacavas’ and AIM’s assets until the arbitration Award was satisfied. Describing Mr. Lacava’s actions as “‘the most blatant form of fraudulent conveyance this court has ever seen[,]'” the court also awarded UBS substantial punitive damages, attorneys’ fees and costs.

Conducting a de novo review, the Court considers Mrs. Lacava’s challenges to the summary judgment award and the remedies. Under the Act, a current or future creditor may set aside a transfer upon showing actual intent to defraud. If a future creditor cannot show actual intent to defraud, it may still set aside the transfer upon a showing of constructive fraud. To do so, the creditor must show that no “reasonably equivalent value” was received by the debtor in exchange for the transfer and either (a) existing or contemplated transactions by the debtor that would leave him with minimal remaining assets or (b) the debtor believed or should have reasonably believed he would incur debts beyond his ability to pay. If an inference of actual or constructive fraud is shown, a presumption arises that the debtor may rebut by showing the transfer was made in “good faith” and “reasonably equivalent value” was paid by the transferee.

On appeal, Mrs. Lacava argued that her transfer to AIM was made in good faith, because her husband believed he would prevail in the arbitration and that she paid a “reasonably equivalent value” for her interest in AIM. The Court finds these arguments insufficient to overturn the ruling below. First, Mr. Lacava’s self-serving assertions about the expected arbitration outcome, standing alone, do not demonstrate genuine issues of material fact as to good faith. Second, AIM, not Mr. Lacava, received the value of Mrs. Lacava’s financial contribution and any other benefits tied to Mrs. Lacava’s membership in the entity. Because Mr. Lacava received no financial or other benefits, the Court concludes, the transfer was not one of “reasonably equivalent value.” The Court summarily rejects Mrs. Lacava’s other arguments because they were not raised in the trial court. It also rejects her challenges to the remedies, deeming them premature since they were focused on statutory exemptions to collection efforts and UBS has not yet sought to execute on the judgment.

(Although it did not do so, the Court could have easily questioned the reasonableness of Mr. Lacava’s belief that he would win the arbitration, as most note cases are won by firms. UBS may have won this skirmish, but the battle is not over, because Mr. Lacava and AIM filed separate appeals, both of which remain pending.) (EIC: In early August, Securities Arbitration Commentator (“SAC”) produced a video podcast on employment arbitration that contains a discussion of statistical results in promissory note cases. The podcast will be posted on YouTube in September. A “Roundtable” article of the discussion will be published in the SAC newsletter in August.)