Fraudulent conveyance

From ArticleWorld

In the broadest sense, a fraud is a deception made for personal gain, although it has a more specific legal meaning, the exact details varying between jurisdictions. The illegal transfer of property to another party in order to defer, hinder or defraud creditors.In order to be found guilty of fraudulent conveyance, it must be proven that the accused's intention for transferring the property was to put it out of reach of a known creditor.

In order to be found guilty of fraudulent conveyance, it must be proven that the accused's intention for transferring the property was to put it out of reach of a known creditor.

A conveyance of property without any consideration of value, for the purpose of delaying or bindering creditors. Such a transfer will, when proven to the satisfaction of judge or jury, be declared void. Any transfer of a debtor's assets made for the purposes of hindering, delaying or defrauding actual or potential creditors may be determined to be a fraudulent conveyance.

In legal parlance, fraudulent conveyance refers to the illegal transfer of property to another party in order to defer, hinder or defraud creditors. A transfer made or 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 was incurred, if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud any creditor of the debtor or without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor 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 or transaction or 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 became due.

Fraudulent conveyance law is a powerful tool for creditors. All states have some form of fraudulent conveyance laws. In general, there are two kinds of fraudulent conveyances: a “constructive” fraudulent conveyance and an “actual” fraudulent conveyance.

Constructive Fraudulent Conveyance. This is generally the easier of the two kinds of fraudulent conveyance to prove. It requires that you prove two essential things: first, you must show that the transferor (in your case, the customer)transferred something to a third person, but did not get “reasonably equivalent value” in return; second, you must show that the transferor was either insolvent at the time of the transfer or that the transfer rendered the transferor insolvent.

An intentionally fraudulent transfer is defined as a: "transfer" made, or obligation incurred with the actual intent to hinder, delay or defraud any creditor of the debtor. The statutory authority for the avoidability of an intentionally fraudulent transfer includes: 11 U.S.C. §548(a)(1) (Bankruptcy Code); 12 Pa.C.S.A. §5104(a)(1) (Pennsylvania UFTA); and §7 of the UFCA.

There is seldom extrinsic evidence of intent. Courts use what are referred to as "badges of fraud" as circumstantial evidence of fraudulent intent. The badges of fraud, as set forth at 12 Pa.C.S.A. §5104(b), are as follows: (1) the transfer was to an insider;

(2) the debtor retained possession or control of the property transferred after the transfer;

(3) the transfer or obligation was not disclosed and/or otherwise concealed;

(4) the debtor had been sued or threatened with a suit before the transfer was made or the obligation incurred;

(5) the transfer was of substantially all the debtor's assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) the transfer occurred shortly before or after a substantial debt was incurred; and

(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

An intentionally fraudulent transfer can be avoided by both present creditors (i.e., those in existence when the fraudulent transfer occurred), and future creditors (i.e., those that extend credit to the debtor after the transfer).

There are a number of sources of fraudulent transfers law. These sources include: (i) the Bankruptcy Code (11 U.S.C. §548); (ii) the Uniform Fraudulent Transfer Act ("UFTA") (enacted into law in Pennsylvania at 12 Pa. C.S.A. §§5101 - 5119, effective February, 1994); (iii) the Uniform Fraudulent Conveyance Act ("UFCA") (previously located in Pennsylvania at 39 P.S. §§ 351 - 363, repealed by the enactment in Pennsylvania of the UFTA); (iv) the Statute of 13 Elizabeth Ch. 5 (1570) (replaced by the enactment in Pennsylvania of the UFTA); and (v) the common law of fraudulent transfers as derived from the principles underlying 13 Eliz. ch.5 (replaced by the enactment in Pennsylvania of the UFTA except to the extent the case involves the disposition of property that does not constitute an asset as defined in the UFTA).