Fraudulent conveyance
A
fraudulent conveyance, also
fraudulent transfer is a
civil cause of action. It arises in
debtor/
creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by
bankruptcy trustees. The usual fact situation involves a debtor who donates his
assets, usually to an "insider", and leaves himself nothing to pay his creditors as part of an
asset protection scheme. However, it is not uncommon to see fraudulent conveyance applications in relation to
bona fides transfers, where the bankrupt has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to avoid giving certain business creditors an
unfair preference (see generally,
wrongful trading). If prosecuted successfully, the
plaintiff is entitled to recover the
property transferred or its value from the transferee who has received a gift of the debtor's assests.
There is and old equitable maxim: "One must be just, before one is generous."
In the
United States,
fraudulent
transfers are governed by two sets of laws that have been written to be consistent. The first is the Uniform Fraudulent Transfer Act that has been adopted by most of the states. [
1] The second is found in the Federal Bankruptcy Code, 11 USC ยง 548. Some of the most egregious fraudulent transfers occur in connection with leveraged buy outs, where the
management/owners of a failing
corporation will cause the corporation to borrow on its assets and use the loan proceeds to purchase the management/owner's stock at highly inflated prices. The creditors of the corporation will then often have little or no unencumbered assets left upon which to collect their debts.
While not all leveraged buy outs ("LBO's") are fraudulent transfers, a red flag is raised when, after an LBO, the company then cannot pay its creditors.
There are two manners of proving a fraudulent conveyance. The archetypical example lies when a transfer is made by a debtor with intent to defraud, hinder, or delay his or her creditors. A fraudulent conveyance can also be established when a debtor transfers property without receiving "reasonably equivalent value" in exchange for the transfer if the debtor is
insolvent at the time of the transfer or becomes insolvent as a result of the transfer.
Because this second type of transfer does not necessarily involve any actual wrongdoing, it is a common trap into which honest, but unwary debtors fall when filing a bankruptcy petition without an attorney. Particularly devastating and not uncommon is the situation in which an adult child takes title to the parents' home as a self-help
probate measure (in order to avoid any confusion about who owns the home when the parents die and to avoid losing the home to a perceived threat from the state). Later, when the parents file a bankruptcy
petition without recognizing the problem, they are unable to exempt the home from administration by the
trustee. Unless they are able to pay the trustee an amount equal to the greater of the equity in the home or the sum of their debts (either directly to the Chapter 7 trustee or in payments to a Chapter 13 trustee,) the trustee will sell their home to pay the creditors. Ironically, in many cases, the parents would have been able to exempt the home and carry it safely through a bankruptcy if they had retained title or had recovered title before filing.
Fraudulent conveyance (Actio Pauliana) under Dutch and Belgium law (Article in Dutch language Wikipedia)
