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A Release of Potential Claims Can Constitute a Fraudulent Conveyance

In Potter v. Alliance United Ins. Co., 2019 Cal. App. LEXIS 666, the California Court of Appeal considered whether a "Release and Settlement Agreement" releasing an insurance company from any claims for negligence, delay, bad faith, etc. and an agreement to forego any assignment of such claims constituted a fraudulent conveyance.

In Potter, a motorcyclist was injured when he collided with an automobile. The owner of the automobile (the "Insured") was insured by Alliance United Insurance Company ("AUIC") and had a policy limit of $15,000.00. The motorcyclist offered to settle his claims with AUIC for the policy limits but AUIC did not respond to the offer. As a result, the motorcyclist sued the Insured and was awarded a judgment of $908,643.00. The trial court granted a motion for a new trial and vacated the jury verdict and judgment. Before the new trial began, AUIC entered into a confidential "Release and Settlement Agreement" ("Release") with the Insured which discharged all claims against AUIC for the underlying action. The Insured also agreed to forego any assignment of the claims. In the second trial an even larger judgment was awarded in the amount of $1,523,887.16.

From the time of the accident through both trials the Insured was insolvent. The motorcyclist sued AUIC on a fraudulent conveyance theory under California's Uniform Voidable Transactions Act ("UVTA") alleging that at the time the Insured entered into the Release he had a viable claim for breach of the implied covenant of good faith and fair dealing against AUIC for their failure to settle the claims with the motorcyclist within the policy limits. This claim was an asset the Insured could have used to pay down his civil liability. By entering into the release, AUIC prevented the motorcyclist from collecting all or a greater share of the judgment in his favor. Further, the Insured did not receive reasonably equivalent value for entering into the Release. AUIC argued that the bad faith claim was not an asset because there was no judgment in effect at the time AUIC and the Insured entered into the Release.

The Court of Appeal agreed with the motorcyclist and held that the Release constituted a fraudulent conveyance because the bad faith claim was an asset that could have been assigned prior to the trial in the underlying action and before a judgment was entered. The attempted transfer of a future right arising out of a breach of duty operates as an "equitable assignment or contract to assign, which becomes operative as soon as the right comes into existence." Furthermore, California courts have long enforced assignments of contingent expectancies. Because of this, the Court of Appeal held that the Release constituted a fraudulent transfer and remanded the case for further proceedings.

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