Fraudulent Conveyance Actions

Bankruptcy trial attorneys at Mark Anchor Albert and Associates are well-versed in prosecuting and defending against fraudulent conveyance actions in bankruptcy court, federal district court, and state court.

Section 548 of the Bankruptcy Code (11 U.S.C. § 548) codifies fraudulent transfer law for bankruptcy cases. Section 544 of the Bankruptcy Code (11 U.S.C. § 544) allows a trustee or a creditor to use state law to pursue fraudulent transfers. A majority of states have adopted the Uniform Fraudulent Transfer Act (the “UFTA”), which defines the criteria for establishing fraudulent transfers. California adopted the UFTA in 1986.

A transfer of an interest of the debtor in property within two years before the filing of the petition, or an obligation incurred by the debtor within two years before the filing of the petition, may be avoided as a fraudulent transfer if one of several tests is met. “Property” is not defined in the Bankruptcy Code, and the courts look to state law. See Butner v. United States (1979) 440 U.S. 48. However, what dispositions of a particular property interest in property constitute a transfer is a matter of federal law. See Barnhill v. Johnson (1992) 503 U.S. 393.

Whether a “transfer” of a debtor’s property interest has occurred is construed broadly. See, e.g., United States v. Sims (In re Feiler) (9th Cir. 2000) 218 F.3d 948; In re Russell (8th Cir. 1991) 927 F.2d 413; Guinn v. Lines (In re TransLines West, Inc.) (Bankr. E.D. Tenn. 1996) 203 B.R. 653.

Under Bankruptcy Code section 548(a)(1)(A), the bankruptcy trustee may avoid any made or obligation incurred with actual intent to hinder, delay, or defraud creditors. Direct proof is not required, because fraud is usually proved by circumstantial evidence, customarily referred to as “badges of fraud.” These include: (i) retention of control of the property by the debtor following transfer; (ii) whether the transferee was a relative; (iii) whether the transfer was for fair consideration; (iv) whether the transfer was concealed, and; (v) whether the debtor was insolvent or rendered insolvent by the transfer. See In re Frierdich (7th Cir. 2002) 294 F.3d 864.

Under Bankruptcy Code section 548(a)(1)(B), a transfer may be deemed constructively fraudulent where the debtor received less than reasonably equivalent value in exchange for such transfer or obligation, and (a) the debtor was insolvent or became insolvent as a result of the transfer or obligation; (b) the debtor was engaged in business for which any remaining property was unreasonably small capital, or (c) the debtor intended to incur debts that would be beyond the debtor’s ability to pay as they mature.

Whether the debtors received “reasonably equivalent value” for the property transferred presents a question of fact to be determined as of the date of the transfer. See Helms v. Roti (In re Roti) (Bankr. N.D. Ill. 2002) 271 B.R. 281. A two-step process is used. First, the court determines whether the debtor received value. Second, the court determines whether that value is reasonably equivalent to the value of the property the debtor transferred. See Grochocinski v. Reliant Interactive Media Corp. (In re General Search.com) (Bankr. N.D. Ill. 2005) 322 B.R. 836.

The California Uniform Fraudulent Transfer Act similarly provides, in pertinent part, as follows:

“A transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation incurred, if the debtor made the transfer or incurred the obligation as follows:

1. with actual intent to hinder, delay, or defraud any creditor of the debtor.
2. without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

1. was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business transaction; or
2. intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they become due.”

(See Cal. Civ. Code § 3439.04.)

The Legislative Committee Comments on these provisions (Cal. Civ. Code Ann. § 3439.04 (West) (Legislative Committee Comment—Assembly, 1986 Addition) notes several “badges of fraud” from which an inference of fraudulent intent may be drawn, including:

• Whether the transfer or obligation was to an insider. Johnson v. Drew (1963) 218 Cal.App.2d 614; Heath v. Helmick (9th Cir. 1949) 173 F.2d 157.
• Whether the debtor retained possession or control of the property transferred after the transfer.
• Whether the transfer was disclosed or concealed. Heath v. Helmick, supra, 173 F. 2d 157 (concealment).
• Whether the debtor was sued or threatened with suit before the transfer was made. Economy Refining & Service Co. v. Royal Nat’l Bank of New York, (1971) 20 Cal.App.3d 434.
• Whether the transfer was of substantially all the debtor’s assets. Burrows v. Jorgensen (1958) 158 Cal.App.2d 644.
• Whether the debtor absconded.
• Whether the debtor removed or concealed assets.
• Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred. Neumeyer v. Crown Funding Corp.(1976) 56 Cal.App.3d 178.
• Whether the transfer occurred shortly after or before a substantial debt was incurred.
• Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation incurred. Hansford v. Lasser (1975) 53 Cal.App.3d 364.
• Whether the debtor had transferred the essential assets of the business to a lienor who had transferred the assets to an insider of the debtor. Heath v. Helmick, supra, 173 F.2d 157 (concealment)).

Civil Code section 3439.05 further provides as follows:

“A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made...if the debtor made the transfer...without receiving a reasonably equivalent value in exchange for the transfer...and the debtor was insolvent at the time or the debtor became insolvent as a result of the transfer....”

(See Cal. Civ. Code § 3439.05.)

Bankruptcy litigation involving fraudulent transfers often involves relatives or close friends of insiders of the debtor. The bank records of the debtor need to be carefully scrutinized to analyze any checks, cash withdrawals, or wire transfers that appear to be outside the ordinary course of business or that are not properly tied to actual goods or services received in return, or that appear grossly excessive in relation to the goods or serviced received.