Fraudulent transfers may also be referred to as fraudulent conveyance, and is associated with the bankruptcy process. A fraudulent transfer may also be connected to debt discharge attempts, as well as debt collection efforts. It is a transfer in which the debtor rearranges, or moves, some of their assets to a different account or owner. This is done in order to hide those assets from creditors.

Prior to filing for bankruptcy, there are some legal steps that a debtor may take in order to protect their assets. This would be done through pre bankruptcy planning. Transferring assets with the sole intention of preventing or avoiding a creditor’s collection attempts would be considered a fraudulent transfer, which is prohibited by law. Any violation of fraudulent transfer laws would be subject to civil and/or criminal liability.

What Constitutes a Fraudulent Transfer?

Before determining what constitutes a fraudulent transfer, it would be helpful to first clarify what constitutes a transfer. Generally speaking, the movement of property is considered a transfer. This includes property both tangible and intangible, as well as interest in property that reduces the value of the transferor’s assets. Transfers can also include the incurring of a new, additional obligation that will reduce a debtor’s assets by increasing debt.

It is also helpful to define solvency, as well as insolvency. In regards to bankruptcy, solvency refers to a company’s ability to meet any long-term debts, as well as other financial obligations. Insolvency, then, can be defined as the inability to pay those debts when they come due. A person may be insolvent without being bankrupt, although a person cannot be bankrupt without also being insolvent.

A fraudulent transfer is a transfer in which the debtor moves assets in order to hide them to delay payment of a debt, or otherwise defraud a creditor. Fraudulent transfers can be done with actual intent, or constructive (unintentional) intent. In order to determine whether a transfer was fraudulent, evaluators will consider the transferor’s solvency. If a financial accounting indicates that the transferor is insolvent, then the transfer itself will be evaluated for fraud.

Although the elements for proving fraudulent conveyance in bankruptcy vary by state, generally in order to prove fraudulent transfer a creditor must show:

  1. That they are in fact a creditor to which the debtor owes a debt;
  2. That the debtor transferred property that could have been used to pay off the debt; and
  3. That the debtor was intending to defraud the creditor. 

If all of the above elements are present, a creditor may initiate a fraudulent transfer lawsuit against the debtor. 

Actual Fraud vs. Constructive Fraud

If the asset transfer was made by an insolvent transferor, and without adequate value in return, then the transaction is clearly fraudulent and prohibited. The same is true if the transfer was made in secrecy with the intent to hide assets, delay payment of debt, or defraud a creditor.

However, it is also entirely possible for a transfer to be constructively fraudulent. Constructive fraud refers to a situation in which conduct is treated like fraud under the law due to the fact that it violates some type of public interest. This type of fraud is generally only considered in civil cases, and not criminal. 

The complicated part is that constructive fraud applies even if the person did not intend to deceive another person or entity. In situations involving constructive fraud, one party only needs to gain some type of advantage over the other, that they would not have obtained if not due to the circumstances.

The transfer may also be considered fraudulent and prohibited, even if there is no actual intent to defraud, under the following circumstances:

  • A transfer is made when the debtor is insolvent;
  • A transfer is made before the debtor is about to incur debts beyond their ability to pay; or
  • The transfer leaves the debtor with unreasonably small assets.

What Is Fraudulent Intent? What Can Be Used as Evidence of Fraudulent Intent?

In order for a debtor to be found liable for fraudulent transfer, it must be proven that they acted with fraudulent intent. What this means is that their act must be motivated by the intent to deceive, hinder, delay, or defraud the creditor who is trying to obtain a proper statement of their assets. 

An example of this would be if a person accidentally fails to record a certain transfer. It is unlikely that they would be held liable for fraudulent transfer, due to the fact that they didn’t act intentionally. Alternatively, if a person demonstrates an intent to hinder or frustrate the efforts of a creditor, they could be held liable for fraudulent transfer. This would be true even if the act was not necessarily fraudulent in and of itself. An example of this would be when a person intentionally avoids responding to collection communications. 

A court can use a variety of means to prove that the person acted with fraudulent intent. A judge may look to circumstantial evidence, as well as evidence based on the person’s conduct. In most fraud cases, the defendant is not likely to testify that their intent was fraudulent. As such, the court may need to look to the following as evidence of fraudulent intent:

  • A history or continuing pattern of fraud when dealing with creditors;
  • Transfers made within one year of a lawsuit, bankruptcy hearing, or debt collection proceeding;
  • Transfers of all or a majority of the debtor’s assets;
  • Situations in which the debtor transferred property to another person while retaining the possession, use, or benefit of the property;
  • Transfers made to a spouse, other close relatives, or friends;
  • Shifting of property to a corporation or other business that is wholly owned by the debtor; and/or
  • Transfers that are unequal in nature and thus result in lopsided benefits in favor of the debtor.   

While these circumstances may not necessarily prove fraudulent transfer by themselves, they can definitely imply intent to a sufficient enough degree to be damaging for the debtor’s defense. This is especially true if it can be proved that the debtor engaged in several of the acts listed above.

What Happens If a Transfer Is Deemed Fraudulent?

If a transfer is deemed to be fraudulent, the transfer itself will be considered voidable. The transferor, as well as anyone party to the fraudulent transfer, are subject to civil and potentially criminal prosecution.

The most common defense in a fraudulent transfer case is lack of intent. If the debtor did not act purposefully, or did not intend to defraud their creditor, they cannot be held liable for fraudulent transfer. In most jurisdictions, the burden of proof is on the debtor to show that they lacked the required intent.

Another commonly used defense in response to fraudulent transfer is that of mistake. If the creditor made an error or mistake in any of their communications, it could be used as a defense in court. A common mistake is for creditors to confuse the identity of their clients, especially those who have a very common name. A generic example of this would be a debtor named John Smith. 

Do I Need a Lawyer If I Am Accused of a Fraudulent Transfer?

If you are going through the bankruptcy process and are being accused of a fraudulent transfer, you should speak with a skilled and knowledgeable bankruptcy lawyer as soon as possible. An experienced and local financial attorney can inform you of your options and any potential defenses. Finally, an attorney can also represent you in court, as necessary.