What is a Fraudulent Transfer
A Fraudulent Transfer (a/k/a "Fraudulent Conveyance") is a transfer which a debtor makes for the purpose of defeating a creditor's collection efforts against the debtor. This typically happens when, say, a debtor attempts to "sell" everything to his wife, cousin or business partner for $5 to keep his stuff out of the hands of his creditors. If the court figures out that the transaction is a sham to defeat the creditor, the court will set aside the transaction and make the person holding the assets give them to the creditor. Basically, Fraudulent Transfer Law is this: You can't do anything which would impair the rights of your unsecured creditors, if you do then the courts will simply ignore what you have done.
Gifts and Donations
Fraudulent Transfer Law is primarily aimed at people who try to make gifts to other people to avoid their creditors.
The unexpressed rationale is that the gift was only made to keep creditors from getting it, and the gift will either be controlled by the person who made the gift, or they will get it back after the creditors go away. So right off the bat there is a control test: If you have made a gift to keep it away from creditors, but you really still control it, the gift will be a fraudulent transfer.
Another unexpressed rationale is that you shouldn't be making gifts if you are broke (if you are broke you should be receiving gifts!). So there is also an insolvency test: If you have made a gift while you are insolvent, the gift will be a fraudulent transfer.
You shouldn't be doing anything which would lessen your creditor's rights. So there is an intent test: If you make a gift with the intent of keeping it away from your creditors, the gift will be a fraudulent transfer. This is why you should never call an asset protection plan an asset protection plan, and why you should incorporate other planning into the plan. Call it anything else -- a tax plan, an estate plan, whatever -- just not an asset protection plan.
How Are Fraudulent Transfers Avoided?
The safest way to avoid fraudulent transfers is make sure that all transactions are at least close to being "for value." While "for value" transactions can still be set aside as a fraudulent conveyance, it is very, very hard for a creditor to prove.
Another factor is that the transaction must have economic substance. A transaction which does not have economic substance is likely to be deemed a fraudulent transfer, but a transaction which makes good economic sense under the circumstances is going to be very, very difficult for a creditor to defeat.
When Transfers Made
Timing, when the transfer was made, is often critical to the analysis as to whether a particular transfer amounts to a fraudulent conveyance.
Most fraudulent transfer issues arise where planning is undertaken only after the Client has incurred debts or suffered an unfavorable judgment. This is more dangerous for the planner than it is for the Client, because not only can a transaction be set aside, but a court in some states can award additional damages against both the Client and the planner.
Uniform Fraudulent Transfer Act
Section
1. Definitions
(1)
"Affiliate" means:
(i)
a person who directly or indirectly owns, controls, or holds
with power to vote, 20 percent or more of the outstanding voting
securities of the debtor, other than a person who holds the
securities,
(A)
as a fiduciary or agent without sole discretionary power to
vote the securities; or
(B)
solely to secure a debt, if the person has not exercised the
right to vote;
(ii)
a corporation 20 percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or
held with power to vote, by the debtor or a person who directly
or indirectly owns, controls, or holds, with power to vote,
20 percent or more of the outstanding voting securities of the
debtor, other than a person who holds the securities,
(A)
as a fiduciary or agent without sole power to vote the securities;
or
(B)
solely to secure a debt, if the person has not in fact exercised
the power to vote;
(iii)
a person whose business is operated by the debtor under a lease
or other agreement, or a person substantially all of whose assets
are controlled by the debtor, or
(iv)
a person who operates the debtor’s business under a lease
or other agreement or controls substantially all of the debtor’s
assets.
(2)
"Asset" means property of a debtor, but the term does
not include:
(i)
property to the extent it is encumbered by a valid lien;
(ii)
property to the extent it is generally exempt under nonbankruptcy
law; or
(iii)
an interest in property held in tenancy by the entireties to
the extent it is not subject to process by a creditor holding
a claim against only one tenant.
(3)
"Claim" means a right to payment, whether or not the
right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable,
secured, or unsecured.
(4)
"Creditor" means a person who has a claim.
(5)
"Debt" means liability on a claim.
(6)
"Debtor" means a person who is liable on a claim.
(7)
"Insider" includes:
(i)
if the debtor is an individual,
(A)
a relative of the debtor or of a general partner of the debtor;
(B)
a partnership in which the debtor is a general partner;
(C)
a general partner in a partnership described in clause (B);
or
(D)
a corporation of which the debtor is a director, officer,
or person in control;
(ii)
if the debtor is a corporation,
(A)
a director of the debtor;
(B)
an officer of the debtor;
(C)
a person in control of the debtor;
(D)
a partnership in which the debtor is a general partner;
(E)
a general partner in a partnership described in clause (D);
or
(F)
a relative of a general partner, director, officer, or person
in control of the debtor.
(iii)
if the debtor is a partnership,
(A)
a general partner in the debtor;
(B)
a relative of a general partner in, a general partner of,
or a person in control of the debtor;
(C)
another partnership in which the debtor is a general partner;
(D)
a general partner in a partnership described in clause (C);
or
(E)
a person in control of the debtor;
(iv)
an affiliate, or an insider of an affiliate as if the affiliate
were the debtor; and
(v)
a managing agent of the debtor.
(8)
"Lien" means a charge against or an interest in property
to secure payment of a debt or performance of an obligation, and
includes a security interest created by agreement, a judicial
lien obtained by legal or equitable process or proceedings, a
common-law lien, or a statutory lien.
(9)
"Person" means an individual, partnership, corporation,
association, organization, government or governmental subdivision
or agency, business trust, estate, trust, or any other legal or
commercial entity.
(10)
"Property" means anything that may be the subject of
ownership.
(11)
"Relative" means an individual related by consanguinity
within the third degree as determined by the common law, a spouse,
or an individual related to a spouse within the third degree as
so determined, and includes an individual in an adoptive relationship
within the third degree.
(12)
"Transfer" means every mode, direct or indirect, absolute
or conditional, voluntary or involuntary, of disposing of or parting
with an asset or an interest in an asset, and includes payment
of money, release, lease, and creation of a lien or other encumbrance.
(13)
"Valid lien" means a lien that is effective against
the holder of a judicial lien subsequently obtained by legal or
equitable process or proceedings.
Section
2. Insolvency
(a)
A debtor is insolvent if the sum of the debtor’s debts is
greater than all of the debtor’s assets at a fair valuation.
(b)
A debtor who is generally not paying his [or hers or its] debts
as they become due is presumed to be insolvent.
(c)
A partnership is insolvent under subsection (a) if the sum of
the partnership’s debts is greater than the aggregate, at
a fair valuation, of all of the partnership’s assets and
the sum of the excess of the value of each general partner’s
nonpartnership assets over the partner’s nonpartnership debts.
(d)
Assets under this section do not include property that has been
transferred, concealed, or removed with intent to hinder, delay,
or defraud creditors or that has been transferred in a manner
making the transfer voidable under this Act.
(e)
Debts under this section do not include an obligation to the extent
it is secured by a valid lien on property of the debtor not included
as an asset.
Section
3. Value
(a)
Value is given for a transfer or an obligation if, in exchange
for the transfer or obligation, property is transferred or an
antecedent debt is secured or satisfied, but value does not include
an unperformed promise made otherwise than in the ordinary course
of the promisor’s business furnish support to the debtor
or another person.
(b)
For the purposes of Sections 4(a)(2) an 5, a person gives a reasonably
equivalent value if the person acquires an interest of the debtor
in an asset pursuant to a regularly conducted, noncollusive foreclosure
sale or execution of a power of sale for the acquisition or disposition
of the interest of the debtor upon default under a mortgage, deed
of trust, or security agreement.
(c)
A transfer is made for present value if the exchange between the
debtor and the transferee is intended by them to be contemporaneous
and is in fact substantially contemporaneous.
Section
4. Transfers Fraudulent as to Present and Future Creditors
(a)
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;
(1)
with actual intent to hinder, delay, or defraud any creditor
of the debtor; or
(2)
without receiving a reasonably equivalent value in exchange
for the transfer or obligation, and the debtor:
(i)
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
(ii)
intended to incur, or believed or reasonably should have believed
that he [or she or it] would incur, debts beyond his [or her
or its] ability to pay as they became due.
(b)
In determining actual intent under subsection (a)(1), consideration
may be given, among other factors, to whether:
(1)
the transfer or obligation was to an insider;
(2)
the debtor retained possession or control of the property transferred
after the transfer;
(3)
the transfer or obligation was disclosed or concealed;
(4)
before the transfer was made or obligation was incurred, the
debtor had been sued or threatened with suit;
(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 reasonably
equivalent to the value of the asset transferred or the amount
of the obligation incurred;
(9)
the debtor was insolvent or become insolvent shortly after the
transfer was made or the obligation incurred;
(10)
the transfer occurred shortly before or shortly 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.
Section
5. Transfers Fraudulent as to Present Creditors
(a)
A transfer made or obligation incurred by a debtor is fraudulent
as to a creditor whose claim arose before the transfer was made
or the obligation was incurred if the debtor made the transfer
or incurred the obligation without receiving a reasonably equivalent
value in exchange for the transfer or obligation and the debtor
was insolvent at that time or the debtor became insolvent as a
result of the transfer or obligation.
(b)
A transfer made by a debtor is fraudulent as to a creditor whose
claim arose before the transfer was made if the transfer was made
to an insider for an antecedent debt, the debtor was insolvent
at that time, and the insider had reasonable cause to believe
that the debtor was insolvent.
Section
6. When Transfer is Made or Obligation is Incurred
For
purposes of this Act:
(1)
a transfer is made:
(i)
with respect to an asset that is real property other than
a fixture, but including the interest of a seller or purchaser
under a contract for the sale of the asset, when the transfer
is so far perfected that a good-faith purchaser of the asset
from the debtor against whom applicable law permits the transfer
to be perfected cannot acquire an interest in the asset that
is superior to the interest of the transferee; and
(ii)
with respect to an asset that is not real property or that
is a fixture, when the transferee is so far perfected that
a creditor on a simply contract cannot acquire a judicial
lien otherwise than under this Act that is superior to the
interest of the transferee;
(2)
if applicable law permits the transfer to be perfected as provided
in paragraph (1), and the transfer is not so perfected before
the commencement of the action for relief under this Act, the
transfer is deemed made immediately before commencement of the
action;
(3)
if applicable law does not permit the transfer to be perfected
as provided in paragraph (1), the transfer is made when it becomes
effective between the debtor and the transferee;
(4)
a transfer is not made until the debtor has acquired rights
in the asset transferred;
(5)
an obligation is incurred:
(i)
if oral, when it becomes effective between the parties; or
(ii)
if evidenced by a writing, when the writing executed by the
obligor is delivered to or for the benefit of the obligee.
Section
7. Remedies of Creditors
(a)
In an action for relief against a transfer or obligation under
this Act, a creditor, subject to the limitations of Section 8,
may obtain:
(1)
avoidance of the transfer or obligation to the extent necessary
to satisfy the creditor's claim;
(2)
an attachment or other provisional remedy against the asset
transferred or other property of the transferee in accordance
with the procedure prescribed by [other statute]
(3)
subject to applicable principles of equity and in accordance
with applicable rules of civil procedure,
(i)
an injunction, against further disposition by the debtor or
a transferee, or both, of the asset transferred or of other
property;
(ii)
appointment of a receiver to take charge of the asset transferred
or of other property of the transferee; or
(iii)
any other relief the circumstances may require.
(b)
If a creditor has obtained a judgment on a claim against a debtor,
the creditor, if the court so orders, may levy execution on the
asset transferred or its proceeds.
Section
8. Defenses, Liability, and Protection of Transferee
(a)
A transfer or obligation is not voidable under Section 4(a)(1)
against a person who took in good faith and for a reasonably equivalent
value or against any subsequent transferee or obligee.
(b)
Except as otherwise provided in this section, to the extent a
transfer is voidable in an action by a creditor under Section
7(a)(1), the creditor may recover judgment for the value of the
asset transferred, as adjusted under subsection (c), or the amount
necessary to satisfy the creditor's claim, whichever is less.
The judgment may be entered against:
(1)
the first transferee of the asset or the person for whose benefit
the transfer was made; or
(2)
any subsequent transferee other than a good faith transferee
who took for value or from any subsequent transferee.
(c)
If the judgment under subsection (b) is based upon the value of
the asset transferred, the judgment must be fore an amount equal
to the value of the asset at the time of the transfer, subject
to adjustment as the equities may require.
(d)
Notwithstanding voidability of a transfer or an obligation under
this Act, a good-faith transferee or obligee is entitled, to the
extent of the value give the debtor for the transfer or obligation,
to
(1)
a lien on or a right to retain any interest in the asset transferred;
(2)
enforcement of any obligation incurred; or
(3)
a reduction in the amount of liability on the judgment.
(e)
A transfer is not voidable under Section 4(a)(2) or Section 5
if the transfer results from:
(1)
termination of a lease upon default by the debtor when the termination
is pursuant to the lease and applicable law; or
(2)
enforcement of a security interest in compliance with Article
9 of the Uniform Commercial Code.
(f)
A transfer is not voidable under Section 5(b):
(1)
to the extent the insider gave new value to or for the benefit
of the debtor after the transfer was made unless the new value
was secured by a valid lien;
(2)
if made in the ordinary course of business or financial affairs
of the debtor and the insider; or
(3)
if made pursuant to a good-faith effort to rehabilitate the
debtor and the transfer secured present value given for that
purpose as well as an antecedent debt of the debtor.
Section
9. Extinguishment of Claim for Relief / Cause of Action
A
claim for relief or cause of action with respect to a fraudulent
transfer or obligation under this Act is extinguished unless action
is brought:
(a)
under Section 4(a)(1), within 4 years after the transfer was
made or the obligation was incurred or, if later, within one
year after the transfer or obligation was or could reasonably
have been discovered by the claimant;
(b)
under Section 4(a)(2) or 5(a), within 4 years after the transfer
was made or the obligation was incurred; or
(c)
under Section 5(b), within one year after the transfer was made
or the obligation was incurred.
Section
10. Supplementary Provisions
Unless
displaced by the provisions of this Act, the principles of law
and equity, including the law merchant and the law relating to
principal and agent, estoppel, laches, fraud, misrepresentation,
duress, coercion, mistake, insolvency, or other validating or
invalidating cause, supplement its provisions.
Section
11. Uniformity of Application and Construction
This
Act shall be applied and construed to effectuate its general purpose
to make uniform the law with respect to the subject of this Act
among states enacting it.
Section
12. Short Title
This
Act may be cited as the Uniform Fraudulent Transfer Act.
Section
13. Repeal
The
following acts and all other acts and parts of acts inconsistent
herewith are hereby repealed.
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