What is a Fraudulent Conveyance?

First, a fraudulent conveyance has nothing to do with “fraud” per se.  A fraudulent conveyance is an asset transfer that is voidable.  In other words, the transfer can be undone or clawed back in order to satisfy a creditor’s claim.  “Clawing back” a transaction is like pulling a nail out of a board with the claws of a hammer.

Undoing such a transfer is a remedy implemented as a creditor’s right in debt collection actions.  It only happens in court proceedings, either civil litigation or bankruptcy.  It is generally not a criminal matter.  A fraudulent conveyance may result in a creditor taking something you thought you had put out of harms way, but it won’t land you in jail.  It is important to note that a fraudulent conveyance can also result in a judgement against the person who first received the transferred property.  Notably, lawyers may also get caught up in the liability.

In the U.S. a Fraudulent Conveyance is most often determined pursuant to Uniform Voidable Transactions Act (UVTA), until 2014 known as The Uniform Voidable Transfer Act of 1984, 11 USCA § 548 (“UFTA”).

There is essentially a two pronged test to determine if an asset transfer is a fraudulent conveyance:  1) was the asset transferred without adequate consideration (sometimes called “constructive fraud”) UFTA , Sections 4(a)(2)(i), 4(a)(2)(ii), 5(a), and/or 2) was the asset transferred with the actual intent to hinder, delay or defraud any creditor (sometimes called “actual fraud”)  UFTA, Section 4(a)(1).

There is generally a limit to how far back a creditor may go to void a transaction.  In most cases, after four years a transaction is not voidable.  This is called a statute of limitations.  It is for this very reason that Asset Protection is best served cold.

History of Fraudulent Conveyance

In the common law tradition, fraudulent conveyances were first formally recognized under The Fraudulent Conveyances Act 1571 (13 Eliz 1, c 5), also known as the Statute of 13 Elizabeth.  Another famous case involving a transaction claimed to be voidable is known as  Twyne’s Case (3 Coke 80b)
Adopted by 26 states (1918).  The current law, UVTA (as of 2014) (formerly known as UFTA updated in 1979) has been enacted in 43 states (including Delaware), the District of Columbia, and the US Virgin Islands.

Proving Actual Intent

Proving fraudulent conveyance is a hard fought battle.  More often than not, the prospect of the fight brings the parties on both sides of the conflict to the negotiating table.  Of the two tests for whether or not a transfer is voidable, the lack of adequate consideration is the easiest to prove.  It comes down to the numbers.  It is much more difficult to prove intent.

Proving actual intent is tough because it requires evidence of what is going on in someone’s head.  As a result, in order to prove such intent creditors must rely on the circumstances of the transaction in question. The courts have come to call such circumstances “badges of fraud”.   Such badges of fraud alone or individually are conclusive.  However, collectively courts may determine that they rise to the level of evidence of of intent.  The list varies slightly from place to place, but badges of fraud generally include the following:

• Becoming insolvent because of the transfer (“insolvent” means debts in excess of assets)
• Lack or inadequacy of consideration
• Transfers to Family or insiders
• The retention of possession, benefits or use of the transferred property
• The existence of the threat of litigation at the time of the transfer
• The financial situation of the debtor at the time of transfer or after transfer (i.e., insolvency)
• The existence or a cumulative effect of a series of transactions after the onset of debtor’s financial difficulties
• The general chronology of events
• The secrecy of the transaction in question
• Deviation from the usual method or course of business

What is NOT a Fraudulent Conveyance?

Doing asset protection is not a fraudulent conveyance.  Everyone does asset protection.  If you lock your doors at night you do asset protection.  Segregating personal assets from business risk by forming a corporation or other business entity in which to conduct business is asset protection, but not a fraudulent conveyance.  Conveying an asset to a business entity in exchange for an interest in that entity of equivalent value is not a fraudulent conveyance.  Selling an asset for fair market value to an unrelated third party buyer is not a fraudulent conveyance.  Using an asset as collateral to borrow money to defend against predatory litigation is not a fraudulent conveyance.  Forming a business for the purpose of making money in order to pay lawful obligations is not a fraudulent conveyance.  Doing estate planning or succession planning or forming cross generational business structures is not a fraudulent conveyance.

Often, the difference between effective asset protection and a fraudulent conveyance is how and why structures and transactions are put together.

Having said all this, it has been my experience that plaintiff’s counsel and bankruptcy trustees will allege fraudulent conveyance where there is clearly no such thing.  Sadly, for the uninformed or those unable to wage a defense, the mere allegation even in the absence of any evidence of a fraudulent conveyance is enough for a transaction to be voided.  Having the right defense counsel knowledgeable of the defenses and with the courage to pursue them is vital in such events.

How to Avoid Fraudulent Conveyances

• Do asset protection planning long before you need it.
• Consider appropriate jurisdictional diversification and offshore planning.  Certain jurisdictions have rules that make it very tough on creditors.
• In the ordinary course of estate and business succession planning, make sure that conveyances are made for adequate consideration, and for the purpose of making more money rather than for avoiding obligations

This article is for general educational purposes only.  Readers are encouraged to obtain appropriate legal counsel.