Fraudulent Conveyance

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Fraudulent Conveyance

A transfer of property that is made to swindle, hinder, or delay a creditor, or to put such property beyond his or her reach.

For example, a man transfers his bank account to a relative by putting the account in the relative's name. He informs the relative that he has not relinquished ownership of the funds, but merely wants to isolate the money from the reach of his creditors. This is a fraudulent conveyance that can be set aside by the court at the request of the defrauded creditor.A creditor who seeks to set aside a fraudulent conveyance must comply with state statutes. Most states have adopted some version of either the Uniform Fraudulent Transfer Act (UFTA) or the older Uniform Fraudulent Conveyance Act (UFCA). Generally, the individual must acquire a lien (a right or claim) or a judgment (a court decision) against a debtor's property. A judgment is usually required to show with certainty the existence of a valid and enforceable debt, but it can be dispensed with, depending upon the particular circumstances of the case. In many jurisdictions, a court will not set aside the conveyance if the debtor owns property, other than that which has been fraudulently conveyed, that is sufficient to pay the debt.

Fraudulent Intent

Just because an individual in debt makes a conveyance of his or her property does not mean that it is a fraudulent conveyance. Whether a transaction constitutes a fraudulent conveyance depends upon the existence of the intent to defraud at the time that the challenged transfer was made. Because it may be difficult for the courts to determine an individual's intent, rules have been established to help in the process. Such rules are called "badges of fraud." For example, if the Transfer of Assets was concealed, an inference of Fraud can be made. The failure to record a conveyance, such as a deed to land, might indicate the existence of fraud. Another example is if the transfer included virtually all of the debtor's assets.

If a voluntary conveyance renders a debtor insolvent or leaves the debtor without the means of paying the debts existing at the time of the conveyance, it is fraudulent and without any legal effect, regardless of the intent of the parties.

Family Relationships

A conveyance by one spouse to the other based upon a fictitious or nominal consideration is generally treated as fraudulent if it is made to defeat the spouse's creditor's claims. However, if one spouse pays the other the market value of the property, the transfer is valid and will not be set aside as a fraudulent conveyance. Where a conveyance between spouses is made in consideration of love and affection, it is voluntary and fraudulent if it renders the debtor spouse unable to pay existing personal debts.

Property purchased in the name of one spouse (e.g., the wife), but paid for with the funds of the other (e.g., the husband), can be challenged by the husband's existing creditors. A bona fide debt due by one spouse to the other, which can be established by showing that the spouses dealt with each other as debtor and creditor, is sufficient consideration to support a conveyance of property in payment of a debt as long as the debt bears a reasonable proportion to the value of the property conveyed.

Creditors will lose their attack upon a conveyance between family members unless the transfer is for a grossly inadequate consideration and is surrounded by other circumstances that establish fraud.

Preferences

A debtor, although insolvent or in failing financial circumstances, can prefer one or more of his creditors by paying these persons first, provided no fraudulent intent exists to cheat the other creditors. The debtor's motives for a preference among the creditors are immaterial unless they establish fraudulent intent. The property transferred must not unreasonably exceed the amount of the claim, and the transaction must not provide for special benefits to the creditor. A debtor can give a preference to his creditors because as absolute owner of his Personal Property, the debtor can do with it as he pleases, as long as the law is not violated. By law, however, certain debts—such as those owed to the United States, or debts created by secured transactions—must be satisfied before any others.

The existence of a family relationship between the debtor and preferred creditor does not, in itself, affect the validity of a preference. The relationship between the parties is just one factor to be considered, and is given commensurate weight, along with other factors, in determining the Good Faith of the transaction. A transaction involving a family relationship, however, will be more closely examined than if it had taken place between strangers.

Remedies

Once a conveyance is declared void because of fraud, the court can do full justice by ordering a sale of property under its direction. Every kind of property that can be used for the payment of debts can be reclaimed by creditors in a proper case. By statute many states exempt personal items—such as clothing, kitchen appliances, and household furniture—from being reached by creditors to satisfy debts.The proceeds are used to pay off the costs of the lawsuit and to provide restitution to the creditors who brought the claims before the court. A debtor who has fraudulently transferred property to cheat his or her creditors might also be subject to statutory penalties and criminal prosecution, depending upon the law in the debtor's home state.

Bankruptcy

In the context of Bankruptcy law, a fraudulent conveyance can be the basis for an objection to discharge (the legal elimination of debt). Federal law denies a discharge to a debtor who transfers property with intent to hinder, delay, or defraud within the 12 months immediately prior to the filing of the bankruptcy petition or after the filing of bankruptcy petition.

Further readings

Suess, Erin. 2002. "Fraudulent Conveyance not Discharged When Debtor Files a Bankruptcy Action." Daily Record (St. Louis, MO/St. Louis Countian) (May 8).

Wait, Frederick S. 2000. A Treatise on Fraudulent Conveyances and Creditors' Bills. New York: St. Martin's Press.

Alces, Peter A. 2002. The Law of Fraudulent Transactions. Eagan, Minn.: Thomson/West.

Coulson, Richard E. 1996. "Fraudulent Transfers: History, Overview, and Developments—State Law." Consumer Finance Law Quarterly Report 50 (summer): 300–11.

Glenn, Garrard. 2001. Fraudulent Conveyances and Preferences. Rev. ed. Buffalo, N.Y.: W.S. Hein.

fraudulent conveyance

n. the transfer (conveyance) of title to real property for the express purpose of putting it beyond the reach of a known creditor. In such a case the creditor may bring a lawsuit to void the transfer. However, if the transfer was made without knowledge of the claim (or before a debt has matured), for other legitimate reasons, and/or in the normal course of business, then the creditor's attempt obtain a judgment setting aside the conveyance will probably fail.

References in periodicals archive ?
The insurer denied based on an exclusion: "[T]he Insurer shall not be liable for any loss resulting from any Fraudulent Transfer Request."
The Florida Supreme Court held that the fraudulent transfer of nonexempt assets to purchase an exempt homestead did not fall within the court's equitable lien jurisprudence.
But her claim of civil conspiracy to commit a fraudulent transfer presented a "cause of action and remedy mismatch."
In this live webcast, a panel of thought leaders and professionals brought together by The Knowledge Group will provide the audience with an in-depth analysis of the fundamentals as well as recent trends and case developments involving fraudulent transfer claims.
Ritz, the Court held that "actual fraud" in section 523(a)(2)(A) is broad enough to encompass debts arising from a debtor's participation as a transferee in an intentionally fraudulent transfer. (8) The Court read "actual fraud" according to its long established common law meaning, (9) but gave a strained interpretation to the words "obtained by," (10) which most naturally mean, "obtained from the creditor." The transferee of a fraudulent transfer does not, of course, obtain anything from the transferors creditors.
Focus: Successor Liability and Fraudulent Transfer Claims
ISLAMABAD -- The investigators probing last October's online fraudulent transfer of money have claimed that the bank concerned was trying to hide the matter, which could further expose vulnerabilities in the banking sector.
One reference was filed on the charges of fraudulent transfer of three residential plots (Gulistan-e-Jauhar) of genuine allottees to other beneficiary persons.
Finally, the Eleventh Circuit rejected the Trustee's argument that Section 547(c)(4) requires that a payment made on account of new value must be "otherwise unavoidable" under another avoidance statute (and not the preference statute), such as statutes dealing with the fraudulent transfers. The Eleventh Circuit concluded that this requirement would eviscerate the new value defense because a creditor would only be able to avail itself of the new value defense for new value that was paid by a fraudulent transfer, which is unlikely.
The Supreme Court, in a judgment issued on 28.9.2018, states that the court can annul a fraudulent transfer and can order the cancellation of the registration and the re-registration of the property in the name of the debtor, with the simultaneous registration of the judgment debt as a charge over the property.
Subsequently, the purchase of vehicles was made and about Rs 9.7 million have been misappropriated in shape of exorbitant rates and fraudulent transfer from PARC's account to the Alpha Motors and Wings Motors.
class="MsoNormalHe said EACC officers sought to obtain warrants to inspect and lift copies of statements, account opening documents, original cheques, mandate cards, bankers books and other materials over fraudulent transfer of public funds to his personal accounts as well as involvement in corrupt practices.