Fraudulent Transactions

William J. Tucker Law > Blog > Fraud > Fraudulent Transactions

There are four types of fraudulent transactions, sometimes referred to as fraudulent conveyances or fraudulent transfers.

  1. Transfers Made with the Intent to Defraud Creditors.

The first type of fraudulent transfer is one made with the actual intent to defraud creditors.  The creditors for whose protection these types of fraudulent transfers apply are not limited to current creditors of the transferor; they also include any future creditors of the transferor. Transfers with the actual intent to defraud creditors are unlawful regardless of whether or not the transfers are made for reasonably equivalent value, and regardless of whether or not the transferor is insolvent or incapable of paying his obligations as they become due.

          A creditor who is harmed by such a fraudulent transfer may seek damages and/or an order voiding the transfer.  Since the fraudulent transfer is a tort, the creditor may also seek punitive damages against the transferor.  The creditor may also seek punitive damages against the transferee if the transferee was aware of the transferor’s fraudulent intent and colluded with the transferor in connection with the transaction.

The creditor will have a claim against the transferee to void the transfer, unless the transferee can show that he (1) acted in good faith in accepting the asset transferred, and (2) provided the transferor with reasonably equivalent value.  “Good faith” means that the transferee acted without fraudulent intent and did not conspire with the transferor to effectuate the transfer.  If the transferee has further transferred the asset, the creditor may sue the transferee for damages, which will be in the amount of the lesser of the value of the asset transferred or the amount of the creditor’s claim.

The burden is on the transferee to prove that he was unaware of the transferor’s fraudulent intent (i.e., that the transferee acted in good faith) and that he provided the transferor with reasonably equivalent value. In the event the transferee did not act in good faith, and was aware of the transferor’s fraudulent intent, the transferee will be liable for conspiracy, and subject to claims for damages and/or voiding of the transfer, and may also be liable for punitive damages.

          Neither the transferor nor the transferee will be liable to the creditor, however, if the transferor in making the transfer was merely preferring one creditor over another.  Of course, if the transferor finds himself in bankruptcy, the trustee in bankruptcy may seek to avoid the transfer as a “voidable preference” under bankruptcy law.

          The burden of proving that the transferor acted with actual fraudulent intent is on the creditor. This will typically have to be shown by circumstantial, rather than direct evidence. Such circumstantial evidence would include evidence that the transferor was insolvent or that the transfer rendered the transferor insolvent, and evidence that the transfer was made to a member of the transferor’s family.

  1. No Reasonably Equivalent Value and the Transferor’s Inability to Pay his Debts.

The second type of fraudulent transfer is one in which the transferor does not receive reasonably equivalent value, and the transferor knew or had reason to know that the transfer would render him unable to pay his debts as they become due.

As with transfers with the actual intent to defraud creditors, such transfers are voidable not only with respect to current creditors, but also with respect to those who become creditors of the transferor after the transfer is made.

  1. No Reasonably Equivalent Value and the Transferor’s Insolvency.

The third type of fraudulent transfer is one in which the transferor does not receive reasonably equivalent value and the transferor is insolvent at the time of the transfer.  Unlike the first two types of fraudulent transfers, which provide a cause of action for future as well as current creditors, only current creditors have a claim against the transferor under this third type of fraudulent transfer.

          Both elements – no reasonably equivalent value and insolvency of the transferor — must be proven.  If the creditor fails to prove either one, his proof of the other is irrelevant, and his claim will fail.

          A transferor is insolvent if the value of his assets is less than the amount of his obligations.  However, certain items are excluded in the calculation of assets and liabilities.  For instance, if there is a valid lien on an asset, the value of the asset is excluded, as is the amount of the obligation.  As an example, if the transferor owns a house and there is a mortgage or trust deed on the house, neither the value of the house, nor the amount of the mortgage or trust deed are considered.  Similarly, assets which are exempt under non-bankruptcy law (i.e., state law) are also not included in the calculation of the value of the transferor’s assets.

          The date for determination of the value of the transferor’s assets and the amount of his obligations is the date of the transfer.

          The burden of proving this third type of fraudulent transfer is on the creditor, as it is with respect to all four types of fraudulent transfers.  However, the burden can shift.  Initially, the transferor is presumed to be solvent.  The burden, therefore, is on the creditor to submit sufficient evidence of insolvency of the transferor at the time of the transfer.  Once the creditor has done so, the burden shifts to the transferor to prove that he was solvent at the time of the transfer.  Similarly, if insolvency of the transferor is proven, or is admitted, the burden of proving that the transferor received reasonably equivalent value is on the transferor. 

          Although both current and future creditors have claims against the transferor – and transferee if he is not a good faith purchaser for value – under the first two types of fraudulent transfers discussed above, only current creditors have claims with respect to transfers made by an  insolvent transferor for less than reasonably equivalent value.  

  1. No Reasonably Equivalent Value and Unreasonably Small Assets.

The fourth type of fraudulent transfer is one made by a transferor who does not receive reasonably equivalent value, when the transferor was engaged, or was preparing to engage in a business or transaction that, due to the transfer, would leave him with unreasonably small assets in relation to the business or transaction.

          Both current creditors and future creditors have claims to void such transfers. 

  1. Remedies Available to Creditors.

If a transferor has made any of the four types of fraudulent transfers, a creditor may have the transfer declared void.  In that case, the asset returns to the transferor and is thereby available as an asset on which the creditor can execute to satisfy a judgment against the transferor.  If the creditor so wishes, he may sue the transferor for damages, and may also seek punitive damages by showing actual fraud, oppression or malice.

          To the extent the transferee is not a good faith purchaser for value, the creditor may also sue the transferee for damages.  The damages available to the creditor against the transferee are the value of the asset transferred or the amount of the creditor’s claim, whichever is less.  The creditor may also seek punitive damages against the transferee if the creditor can show the transferee conspired with the transferor in connection with the transaction, and can further show the essential elements for an award of punitive damages. 

          The creditor may also seek an attachment against the asset transferred, if he can show the requirements of the Attachment Law have been me.  The creditor may also seek an injunction against the transferor and/or transferee prohibiting further transfers of either or both of their assets. 

          If the requirements for appointing a receive can be shown, the creditor may also in an appropriate case, have a receiver appointed to take possession of the asset in question pending a determination of the action.

  1. The Transferee’s Right to Post an Undertaking.

          In an action to set aside a transfer, the transferee may avoid a ruling that the transfer is voidable by providing an undertaking to secure the creditor in the event the creditor prevails in the litigation.  The amount of the undertaking is the lesser of twice the value of the asset, or twice the amount of the creditor’s claim, whichever is less.  Once a bond is posted, the transferee may do what he wishes with the asset transferred, and may sell it or give it away without liability attaching to himself or any subsequent transferee. 

  1. Statute of Limitations.

If the fraudulent transfer was one made with actual intent to defraud, the statute of limitations is four years from the date of the transfer, or one year after the creditor knew or could reasonably have discovered the fraudulent transfer.  However, in no event may the creditor sue more than seven years after the transfer was made, regardless of whether or not he learned or could reasonably have learned of the transfer with those seven years.  If the fraudulent transfer is based on the transferor’s receipt of less than reasonably equivalent value, the action must be brought or a levy must be made within four years of the transfer.  

The Law Office of William J. Tucker is familiar with contract and tort principles, and provides free initial phone consultations to individuals and companies which have issues involving fraudulent transactions.  Feel free to Schedule an Appointment.