Fraudulent Transfers in Divorce and Child Support Collection

When divorce and creditor rights intersect, courts must balance the finality of marital settlements with creditors’ rights to collect legitimate debts. In California, this balance was tested in Mejia v. Reed (2002 DJDAR 3455), a case that concluded a Marital Property Settlement Agreement (MSA) and judgment of dissolution may be subject to creditor claims under the Uniform Fraudulent Transfer Act (UFTA). This ruling reshaped how courts address fraudulent conveyances in divorce proceedings and continues to impact how attorneys draft settlements and advise clients.

Case Background: Mejia v Reed

In Mejia v. Reed, the Court of Appeal for the Sixth Appellate District departed from the Fourth District’s earlier ruling in Gagan v. Gouyd (1999) 73 CA4th 835.

• Initial Proceedings: Mejia filed an action to establish paternity of her child with Reed. Less than a month after Reed was ordered to pay child support, his wife petitioned for dissolution of their marriage.
• Marital Settlement Agreement: The day after the petition was filed, a settlement agreement was signed. Reed kept his medical practice while his wife received the family residence.
• Asset Depletion: Reed later abandoned his practice, leaving him with only a car and a pension plan. He then moved in with his mother in San Francisco.

Mejia alleged that the property transfer awarding the residence to Reed’s ex-wife was a fraudulent transfer designed to hinder her ability to collect future child support.

Trial Court and Appeal

At trial, Reed argued there was no evidence of fraudulent intent, and the court granted his motion. On appeal, however, the Sixth District confronted the tension between two competing statutory frameworks:

1. California Family Code (Fam. Code §§ 2550–2556), which provides that property awarded in dissolution is shielded from the debts of the other spouse.
2. Uniform Fraudulent Transfer Act (Civ. Code §§ 3439–3439.12), which protects creditors from improper transfers meant to avoid liability.

Since neither code explicitly addressed the other, the appellate court concluded that the policy of deterring fraudulent conduct outweighs the interest in finality of dissolution judgments.

Legal Principles and Doctrines

Fraudulent Transfer Doctrine

The UFTA allows creditors to challenge transfers made with the intent to hinder, delay, or defraud. The court made clear that divorce settlements are not immune from scrutiny under these provisions.

Badges of Fraud

Courts look at circumstantial indicators known as “badges of fraud,” such as:

• The timing of the transfer relative to the debt or judgment.
• Whether the debtor retained control over the property.
• Transfers made for inadequate consideration.
• Transfers to close family members.

In Mejia v. Reed, the sequence of child support orders followed almost immediately by a settlement raised strong suspicions.

Actual vs Constructive Fraudulent Transfer

• Actual Fraud: Requires proof of intent to defraud.
• Constructive Fraud: Occurs when a transfer leaves the debtor insolvent, regardless of intent.

Practical Implications

For Custodial Parents and Creditors

The decision strengthens the ability of parents owed child support to challenge suspicious property divisions. It also provides a pathway for other creditors, such as medical malpractice claimants or business creditors, to reach assets that were transferred during the divorce.

For Divorcing Spouses

Spouses must understand that last-minute settlements or disproportionate transfers may be subject to review years later. Fairness, transparency, and accurate valuation are essential to avoiding later challenges.

For Family Law Attorneys

Attorneys must draft settlement agreements with creditor exposure in mind. This includes:

• Documenting consideration exchanged for property.
• Advising clients about UFTA risks.
• Avoiding settlements that leave one spouse insolvent.

Enforcement Mechanisms

If a fraudulent transfer is proven, courts may:

• Set aside the property transfer.
• Impose liens or constructive trusts on the transferred property.
• Garnish wages or seize accounts to enforce support obligations.
• Hold parties in contempt if they obstruct court orders through transfers.

Broader Policy Considerations

The ruling reflects California’s broader policy favoring the protection of creditors and children over rigid adherence to the finality of judgments. Divorce cannot be used as a tool to shield assets from legitimate obligations. This decision aligns with a trend across jurisdictions where courts scrutinize divorce-related property divisions under creditor protection laws.

Comparative Case Law

• Gagan v. Gouyd (1999): Held that property awarded in dissolution was insulated from fraudulent transfer claims.
• Mejia v. Reed (2002): Rejected that approach, prioritizing creditor rights.
• Other jurisdictions, such as New York and Texas, have also applied fraudulent transfer statutes to divorce settlements, demonstrating that this is not a California-only issue.

Citation History and Legacy

Since its decision, Mejia v. Reed has been cited in subsequent California cases involving child support enforcement and creditor challenges to marital settlements. While no legislative amendment has overturned its reasoning, it continues to guide both family courts and civil courts in balancing competing statutory schemes.

FAQs on Fraudulent Transfers in Divorce

Can creditors challenge a marital settlement agreement in California?

Yes. Under Mejia v. Reed, an MSA may be reviewed under UFTA if it appears to shield assets from legitimate creditors.

Does this ruling only apply to child support?

No. Although the case involved child support, its reasoning applies to any creditor with a valid claim.

How do courts prove a fraudulent transfer?

Courts use badges of fraud and may infer intent from suspicious timing, inadequate consideration, or transfers to insiders.

Can property be clawed back after a divorce judgment?

Yes. Property transferred in a marital settlement can be recovered if it is proven to be fraudulent, even after the judgment is final.

How long after a divorce can creditors file claims against the former spouse?

Creditors generally have up to four years under California’s UFTA to challenge fraudulent transfers, though timelines vary depending on the circumstances.

How does bankruptcy affect these claims?

If one spouse files for bankruptcy, fraudulent transfer claims may be litigated in bankruptcy court, where trustees also have the power to set aside improper transfers.

Get Legal Help with Divorce and Creditor Issues

If you are facing divorce, child support enforcement, or concerns about property transfers, it is essential to work with experienced counsel. At Reape Rickett, we guide clients through:

• Drafting and reviewing Marital Settlement Agreements with creditor issues in mind.
• Defending or pursuing fraudulent transfer claims.
• Protecting custodial parents’ rights to collect child support.
• Ensuring compliance with both the Family Code and UFTA.

Contact Reape Rickett today to schedule a consultation and protect your financial and family interests.