church interiorThis is the sixth and last post in a series in which I discuss fraudulent transfers.  This one deals with defenses against fraudulent transfers avoidance actions.

F.         Defenses To Fraudulent Conveyance Avoidance

Aside from the problem of collectability — the recipient of the fraudulent transfer may be an impecunious, judgment-proof person — the trustee may face an insurmountable impediment to a fraudulent transfer avoidance action if the transferee successfully applies the defenses provided in the Bankruptcy Code.

            1.        The Charitable Donation Defense

The first defense to an avoidance action is found in § 548(a)(2):

A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which —

(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made; or

(B) the contribution made by a debtor exceeded the percentage amount of gross annual income specified in subparagraph (A), if the transfer was consistent with the practices of the debtor in making charitable contributions.

Thus, the debtor who regular tithes will not hear that the trustee has filed an avoidance action against the church, provided that either the amount tithed is less than 15% of the debtor’s gross income, or if more, then at the level the debtor consistently makes donations.  This comes up most frequently with Mormon clients who are required to contribute at least ten percent of their incomes to the church to remain in good standing.  Not being a Mormon myself, I am basing this assertion on the sense I have gotten from Mormon clients, and from the text at http://mormon.org/faq/church-tithing.  If you are a Mormon and have a different perspective, I mean no offense and have no axe to grind.  In any event, § 548(a)(2) insulates the church from fraudulent transfer avoidance actions.

The types of contributions covered by this defense are just what you might expect, and are listed in §§ 548(d)(3) and (4):

(3) In this section, the term “charitable contribution” means a charitable contribution, as that term is defined in section 170(c) of the Internal Revenue Code of 1986, if that contribution —

(A) is made by a natural person; and

(B) consists of —

(i) a financial instrument (as that term is defined in section 731(c)(2)(C) of the Internal Revenue Code of 1986); or

(ii) cash.

(4) In this section, the term “qualified religious or charitable entity or organization” means —

(A) an entity described in section 170(c)(1) of the Internal Revenue Code of 1986; or

(B) an entity or organization described in section 170(c)(2) of the Internal Revenue Code of 1986.

This means that only legitimate charities qualify for the defense.  “Charities” such as the American Society for the Elimination of the Cuticle will not qualify.  And remember, it’s the recipient of the transfer, not the debtor, who must mount the defense.
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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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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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If you’ve been following my blog posts on preferential transfers and would like more in-depth coverage, I will be speaking on this topic on May 8 in Orange, California and again on May 15 in Pasadena, California.  In addition to the topic of Preferential Transfers: Preference Actions and Substantive Defenses, I will also cover the

I’m back.  I have been busy writing a book on Chapter 13 bankruptcy — I was asked to do so by a publisher.  I should have it completed in a few months, so watch for it.  In any event, I am ready to start posting again.

Some time ago I posted on preferential transfers (a.k.a. preferences).  Since I will be speaking on preferential transfers (and on fraudulent transfers) in May these topics have been on my mind.  Today’s post will look at the statutory definition of a preference.  It’s complicated, which is why the post a bit long.  However, it’s worth the read.  Subsequent posts will look at preference avoidance and defenses to preference avoidance.

I.          Introduction

There are two main goals of bankruptcy.

The first goal is to give the debtor a fresh financial start .  This goal has a laudable pedigree that has its origins in the Bible, ancient Roman law, and the U.S. Constitution .

The second goal is to ensure that all creditors who are similarly situated are treated equally and fairly.  There are two ways in which debtors sometimes violate this second big goal:  (1) They don’t list all of their creditors in their bankruptcy papers, and (2) They make preferential payments to certain creditors in anticipation of bankruptcy.

If a debtor omits a creditor from the list, then the debt to that creditor will not be discharged at the conclusion of the case.  (See 11 U.S.C. §§ 523(a)(3) and 1328(a)(2). But see In re Beezley, 994 F. 2d 1433 (9th Cir. 1993) (Unscheduled debt is discharged in a no-asset Chapter 7 case if the debt would have been discharged if it had been listed).)  If the debtor purposely omitted the creditor, and thus “made a false oath,” i.e., committed perjury, the debtor may either be denied a discharge, or have a discharge revoked.  (See 11 U.S.C. §§ 727(a)(4)(A), 1144, 1230, and 1328(e)(1).)  However, there can be a bright side to this scenario:  the debtor may end up receiving free room and board at government expense, which could greatly reduce any stress over finances .

The focus of these posts is on the other way debtors violate the second big goal:  preferential transfers.  We begin with the definition.
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I will be covering the topics of :  1) Preferential Transfers: Preference Actions and Substantive Defenses, 2) Fraudulent Transfers: Actual Intent and Affirmative Defenses, and 3) Appellate Procedure and Strategies: Appeals from Final Orders and Interlocutory Appeals.  I will present this talk at the National Business Institute’s “Bankruptcy Litigation 101” seminar in Orange, CA on

In a previous posting I discussed the concept of preferential transfer.  A somewhat related topic that has serious implications to bankruptcy filers is fraudulent transfer – also known as fraudulent conveyance. 

I.          Fraudulent Transfer Outside Of Bankruptcy

            A.        The Origins Of Fraudulent Transfer Law

The concept of fraudulent transfer has its origins in ancient