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Fraudulent Conveyance of Assets


Fraudulent conveyance is a cause of action, typically brought by the trustee of the bankruptcy estate, against a debtor.  The trustee has the power to set aside fraudulent transfers that wrongfully place the debtor’s assets out of reach of creditors.  Fraudulent conveyance is when a debtor transfers an asset to another person in order to put that asset out of reach of creditors.  This might happen in the case of a Chapter 7, liquidation bankruptcy.  In a Chapter 7 bankruptcy, a trustee is appointed to see that the debtor’s nonexempt assets are liquidated in a manner that would maximize the return to creditors.  A fraudulent conveyance would occur if a debtor were to transfer a nonexempt asset to a third party so that asset would not be sold, or liquidated, as part of the bankruptcy estate.  If the trustee is successful in the fraudulent conveyance claim, the trustee can receive the property itself or the value of the property.

There are two types of fraudulent conveyances: actual fraud and constructive fraud.  Actual fraud focuses on the intent of a debtor to defraud creditors.  An action for actual fraud requires that the debtor transferred an asset within one year before filing for bankruptcy and intent to defraud creditors.  The party challenging the transfer must prove the debtor’s intent to defraud creditors.  Because debtors will try not to be obvious about the fraudulent transfer, courts have recognized situations that indicate a fraudulent conveyance.  Some of the situations include threats of litigation against the debtor, the debtor has transferred most of his or her assets, and some kind of close or special relationship with the person who received the property as a result of the transfer.  These factors will not automatically prove intent to defraud and intent must be determined case by case.

With constructive fraud, the focus is on the consideration, or the value, received in exchange for the transfer of the property.  To show constructive fraud, the party bringing the action must show that the debtor did not receive “reasonably equivalent value” for the property, and that the debtor cannot pay his or her debts either at the time of transfer or because of the transfer.  It can be difficult to determine whether “reasonably equivalent value” was exchanged.  Courts are faced with the dilemma of distinguishing a bargain from a fraud.  Some factors courts consider in making that distinction include whether fair market value was exchanged, whether the debtor heard other bids for the item, and the effect on the funds available to creditors.

After a transfer is considered fraudulent, the trustee of the bankruptcy may recover either the property or the value of the property.  After recovery, the property or the value becomes part of the bankruptcy estate that is subject to liquidation.  An exception to this rule exists: the case of the “bona fide purchaser.”  A bona fide purchaser is a good faith purchaser who acquired the property without notice of another’s interest in the property.  In this case, the bona fide purchaser has the right to keep the property.

To avoid a fraudulent conveyance claim, one should work to protect his assets as soon as possible rather than later.  A debtor should do his or her best to protect his or her assets before any financial or legal difficulties.  It will not look good if a debtor transfers his or her property in the face of bankruptcy.  To avoid a fraudulent conveyance claim, a debtor should transfer any property he or she wishes to transfer more than one year before filing a bankruptcy petition.  Also, a debtor should make sure to receive fair market value, or very close to it, for any property transferred.

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