Types of Fraudulent Conveyances

In an earlier post on fraudulent conveyances, we discussed how a fraudulent conveyance works in very simple terms.  This post is a discussion of types of fraudulent conveyances and will discuss three general kinds of transactions that can be overturned by a court and cause a serious problem for wealth preservation strategies:

• Fraudulent Conveyances under Federal Bankruptcy Law
• Fraudulent Transfers under State Laws
• Fraudulent Conversions under State Laws

The federal bankruptcy code creates one type of fraudulent conveyance.  It essentially states that a transfer is fraudulent and voidable if it was done with the intent to defraud creditors OR if the person transferring assets received less than reasonably fair value and they were insolvent at the time of the transfer (or became insolvent as a result of it).  A fraudulent transfer made within two years of a bankruptcy petition can adversely affect a debtor (i.e. a person who owes money) in a bankruptcy proceeding in that a judge may refuse to discharge certain debts.  In addition to making use of the rules created by the bankruptcy code, a trustee or creditor in bankruptcy can also make use of the two types of transfers discussed below.

Fraudulent Transfers

The law in this area is derived from Twyne’s Case, which is an old English case where a debtor transferred legal title of his sheep to a friend but kept possession of the sheep.  In addition, the debtor sheered the sheep and sold their wool for his own account.  The English court ruled that the debtor had only transferred ownership of the sheep in order to keep his creditors from obtaining them.  In other words, the debtor had attempted to defraud the people to whom he owed money, and the court would not allow it.  While the law has changed over the years and evolved from common law (i.e. law made by the courts) to statutory law in the form of the Uniform Fraudulent Transfer Act (“UFTA”), the spirit of the law remains the same.

In determining whether a transfer was fraudulent, courts interpreting UFTA generally look to a number of factors, including the following:

• Were assets transferred to a relative or close friend?
• Was the transfer concealed?
• What value was received for the assets conveyed?
• Does the debtor continue controlling the assets transferred?
• Did the transfer leave the debtor insolvent?

Depending on the answers to the above questions, a court may determine that a transfer was fraudulent and “claw back” the assets or require the person to whom the assets where transferred to provide fair value.

This Article is Continued at Fraudulent Conversions . . .