June 2014

This post is the fourth in a series in which I will discuss fraudulent transfers.  The second post discussed the sources for a trustee’s authority to avoid a fraudulent transfer.  This one deals with the mechanics of fraudulent transfer avoidance. 

            D.        Avoiding Fraudulent Conveyances

            1.        The Power To Avoid

The Bankruptcy Code’s fraudulent transfer avoidance power is found in beginning of 11 U.S.C. § 548(a):  “. . . the trustee may avoid any transfer . . . of an interest of the debtor in property . . .” and in 11 U.S.C. § 548(b):

The trustee of a partnership debtor may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, to a general partner in the debtor, if the debtor was insolvent on the date such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.

The first avoidance passage — from § 548(a) — is quite general and encompasses any sort of fraudulent conveyance, whether or not the debtor was insolvent.  The second provision is much more narrowly tailored, and applies only to a debtor that is a partnership that was insolvent at the time of transfer, or immediately after the transfer.

The trustee will learn of the transfer because the debtor is required to report it in item 10 of the Statement of Financial Affairs.  Failure to report the transfer is perjury, which can be redeemed for free room and board at government expense.

The vehicle for avoiding a fraudulent transfer is an adversary proceeding pursuant to Fed. R. Bankr. Proc. 7001(1): 

The following are adversary proceedings:  a proceeding to recover money or property, other than a proceeding to compel the debtor to deliver property to the trustee, or a proceeding under §554(b) or §725 of the Code, Rule 2017, or Rule 6002.

An adversary proceeding is a full-blown lawsuit, so it’s a big deal.

Why does the Bankruptcy Code provide for the avoidance of fraudulent transfers?  When a debtor files bankruptcy papers an estate is created that consists of all of the debtor’s assets (except those the debtor can exempt).  In theory, the debtor ceases to be liable for those debts (this ultimately happens when the debtor receives a discharge, though some types of debts may not be dischargeable), and the debtor’s debts become claims against the estate.  The estate is the pot from which creditors are to be repaid.  A fraudulent transfer diminishes that pot.  
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This post is the third in a series in which I will discuss fraudulent transfers.  It covers the statutory definitions.  This one’s a bit long because the definitions are a bit labyrinthine.  If you think it’s dry, then avoid Syrahs and stick to Rieslings.

C.        The Definition Of Fraudulent Transfer

1.        The Intent Definition

i.          The Bankruptcy Code’s Definition

11 U.S.C. § 548(a) contains two independent definitions of fraudulent transfer.  We begin with the first definition, found in § 548(a)(1)(A).  A transfer is fraudulent (with emphasis added):

if the debtor voluntarily or involuntarily — made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.

An interesting feature of this definition is that the transfer need not have been voluntary on the part of the debtor.  Thus, even though the term “fraudulent transfer” seems to imply ill intent on the part of the debtor, the debtor might not have wanted the transfer to take place.  The statutory ill intent is on the part of the transferor, who may or may not be the debtor.

This first definition in the Bankruptcy Code captures the essence of Horace’s behavior.  (Horace was the ancient Roman we met in our first fraudulent transfer post.)  The transfer was done with the intent to hinder, delay, or defraud the creditor.  An important feature of this definition is that it requires the transfer to have been made after the debt in question was incurred.  Therefore, using § 548 the trustee would be unable to avoid transfers that antedated the incurrence of the debtor’s debts.  This is in contradistinction to the first definition given in California’s UFTA.  (As with the Bankruptcy Code, the UFTA has two independent definitions of “fraudulent transfer.”)
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This post is the second in a series in which I will discuss fraudulent transfers.  I have been told that my posts are too long.  Therefore, today I’ll briefly discuss the source of a bankruptcy trustee’s fraudulent transfer avoidance powers.

B.        The Trustee As Heir To Creditors’ Avoidance Power

One of the complications associated with fraudulent transfer jurisprudence in bankruptcy is found, not in 11 U.S.C. § 548 (the statutory section dealing with fraudulent transfers), but in 11 U.S.C. § 544(b)(1) (emphasis added):

Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502 (e) of this title.

This means that the trustee  can appeal to nonbankruptcy law to avoid a fraudulent transfer.
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In this series I will discuss fraudulent transfers, a concept that has some similarities to preferential transfers — our previous topic — but has much more serious consequences, especially in bankruptcy.  Today I’ll start with a folksy introduction.  In subsequent posts I’ll deal with the much more technical legal aspects of fraudulent transfers.

A.        Introduction

I frequently have conversations with potential clients who assure me that I needn’t worry about the principal residence because the potential client transferred title of the house to a relative.  I used genderless terms in the previous sentence, but the reality is that my interlocutor is usually a man who has transferred title to his wife.  He tells me this with some measure of pride, perhaps believing he’s the first person ever to have thought of this clever idea.

My response is to tell the gentleman that he did what the law refers to as a fraudulent transfer (a.k.a. fraudulent conveyance).  I let him know that the ancient Romans were well aware of this “clever” idea, and had laws to address it.  (See, e.g., Theodor C. Albert, The Insolvency Law Of Ancient Rome, 28 Cal. Bankr. J. 365 (2006).  Sorry, I don’t have a link, so you’ll have to consult your local library to get a copy.)  I add that over the last two thousand years, in response to all sorts of machinations that debtors have tried in their attempts to avoid the strictures of fraudulent transfer law, the law has become extremely sophisticated and now has two independent definitions to the term fraudulent transfer.  I then tell him that careful prebankruptcy planning may be required to prevent problems in the bankruptcy.
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