Where the defendant allegedly transferred real property via a gift deed after learning about an IRS audit, but the transfer wasn’t recorded in land records, the consideration was just 0.0025% of the $400,000 value and he continued using the property after the transfer, the transfer was actually or constructively fraudulent.
In 2017, the United States filed a civil action against Constantin Kotzev related to Kotzev’s failure to disclose his interest in foreign bank accounts. On Dec. 28, 2017, the court entered a monetary judgment against Kotzev in the amount of $1,297,695.43, plus interest. On April 19, 2018, the United States recorded the judgment in the land records of Arlington County.
The United States has now initiated this action, seeking to enforce its judgment lien by foreclosing on a condominium and parking space at 3800 Fairfax Drive in Arlington. Pending before the court is plaintiff’s motion for summary judgment.
The parties agree that Kotzev and the Chylas signed an agreement regarding transfer of the real properties in May 2000, but that Kotzev did not execute any deeds at that time or record the agreement in county land records. Second, the parties agree that the IRS began to audit Kotzev’s tax returns as early as 2011, including by interviewing Kotzev and issuing summons in 2012 and 2013.
Third, the parties agree that Kotzev transferred the real properties by “Deed[s] of Gift” to the Chylas in Dec. 2013, but that Kotzev continued to be the sole user of, and to pay all fees associated with, the real properties. Finally, the parties agree that, in Dec. 2017, the United States secured a $1.3 million judgment against Kotzev, and that a judgment lien attached to Kotzev’s assets in Arlington County after the United States recorded the judgment.
Constructive fraudulent transfer
The undisputed facts leave no plausible doubt that the Dec. 2013 conveyance satisfies the three elements for constructive fraudulent transfer. First, the record discloses no “consideration deemed valuable in law” in support of the conveyance. Kotzev considered the conveyance to be a gift and transferred the real properties in instruments entitled “Deed[s] of Gift,” which took advantage of a Virginia tax exemption for gift transfers. The only consideration explicitly referenced by the deeds is a sum of $10 – just 0.0025% of the $400,000 value of the condominium estimated by Kotzev – and nothing in the record indicates that the Chylas paid even that trivial sum.
Defendants contend that consideration was supplied by the promise of future care expressed in the May 2000 agreement between Kotzev and the Chylas. That argument fails for three reasons. First, the “Deed[s] of Gift” do not reference or incorporate the May 2000 agreement.
Second, defendants never recorded the May 2000 agreement in the Arlington County land records and therefore that agreement has no legal effect on a subsequent claim by a creditor. Third, even if the May 2000 agreement had legal effect, there is significant doubt that a promise of far-off future care constitutes consideration deemed valuable in law.
Next, the record leaves no doubt that Kotzev was insolvent following transfer of the real properties. The only remaining question in the constructive fraudulent transfer analysis is when Kotzev’s tax-related liabilities arose, which impacts both the insolvency analysis and the third element, namely that the debt must have existed before the transfer.
With respect to the $1.3 million judgment, plaintiff argues that the debt arose when Kotzev failed to file the requisite Report of Foreign Bank and Financial Accounts from 2009 to 2013; defendants assert that the debt did not exist until penalties were assessed in 2017. Persuasive authority from other circuits confirms that plaintiff is correct.
Actual fraudulent transfer
In the alternative, the undisputed factual record plainly satisfies the four elements of actual fraudulent transfer under Virginia law. There is no dispute that Kotzev transferred the real properties to the Chylas by “Deed[s] of Gift” in December 2013. There is no dispute that the United States is a valid creditor with respect to Kotzev’s assets or that the Chylas did not provide valuable consideration.
Finally, actual fraudulent transfer requires that property was “given with the intent to delay, hinder, or defraud creditors.” The requisite fraudulent intent may be established by proof of one or more “badges” of fraud. The undisputed factual record makes clear that several badges of fraud are inarguably satisfied by Kotzev’s transfer of the real properties. And the record contains no evidence to dispel the presumption of fraud created by the fact that Kotzev, following two years of investigation by the IRS, transferred all of his assets other than an automobile to family members in a gift deed.
Plaintiff’s motion for summary judgment granted.
United States v. Kotzev, Case No. 1:18-cv-1409, Jan. 24, 2022. EDVA at Alexandria (Ellis). VLW 022-3-029. 12 pp.