Fraudulent Conveyance Defined

A bankruptcy trustee is given far reaching discretion or power to investigate, recover, and liquidate assets in a debtor’s bankruptcy case. One such power is the ability to “avoid” or unwind certain transfers of assets out of the debtor’s bankruptcy estate to the detriment of creditors. Such a gift or transfer to a third party (family member, friend or even stranger), with the intent by the debtor to put assets outside the reach of creditors is a “fraudulent transfer” or “fraudulent conveyance” and can be invalidated by the bankruptcy trustee pursuant to 11 USC § 548.

Types of Fraudulent Conveyances

There are two types of fraudulent conveyance actions: “actual fraud” and constructive fraud. Actual fraud is a situation where the debtor subjectively intended to knowingly put assets outside the reach of creditors by transferring them with the intent to hinder, delay or defraud creditors. Actual intent can be difficult to prove because it requires proof of the debtor’s subjective or internal mindset at the time of the transfer. However, certain factors can be used by the Court to deem a transfer fraudulent.

A second type of fraudulent conveyance action is based on “constructive fraud.” Constructive fraud is easier for a trustee (or creditor) to prove in that it does not require proof of the debtor’s subjective intent, but rather allows for certain inferences based on the debtors actions. Generally, the outright transfer for no value (a gift), or the transfer or “sale” for clearly less than reasonably equivalent value while the debtor was insolvent or facing financial troubles, will very likely be considered a fraudulent transfer.

Fraudulent Transfer Defenses

In many situations, the alleged fraudulent transfer was not a gift but rather a “sale” or transfer for some value. The question becomes what price was “reasonable,” and how to prove it. Oftentimes, debtors sell assets in a distressed sale situation to raise to survive or sell assets on a “best offer” basis. A typical “distressed sale” does not usually give rise to a fraudulent transfer, but many factors can contribute to that determination. If the asset was sold to a close friend or relative the court will certainly look more suspiciously at it. Anytime an alleged fraudulent transfer was made for some value, especially to a third party, the issue usually becomes highly fact specific and will be taken on a case by case basis by the Court.

Call us at (949) 570-5025 or contact us online to discuss your case with us today.