A FRAUDULENT transfer in bankruptcy typically involves a transfer of property near the time of filing bankruptcy for the purpose of keeping the property away from the creditor or the bankruptcy trustee. Sometimes clients will tell me that they owned a house but had just transferred the house to their son in contemplation of the bankruptcy filing. This is a classic definition of a fraudulent transfer. If there is no equity in the house at the time of transfer, there is no problem as long as the transfer is disclosed in the bankruptcy petition. Bankruptcy trustees are not interested in houses that have no equity.
But, if the house had a large equity at the time of transfer, the bankruptcy trustee can file a complaint in bankruptcy court against the transferee to avoid the transfer and return the property to the bankruptcy estate. Trustees can reach back and avoid transfers made 4 years pre-filing. In one case, client transferred her house with equity of $100,000 to her boyfriend, received nothing for the transfer, and continued to live in the house. I informed her that the transfer was useless and if she filed a bankruptcy, the trustee will avoid the transfer and get back the property and I declined the case. She then went to another lawyer who filed the bankruptcy case for her. After 2 months she came back and told me what happened. She told me she still wanted to stay in the house and keep the property. I negotiated a settlement with the trustee for $70,000 to allow her to keep the house. Considering that she only owed $50,000 of credit card debt, filing for bankruptcy given her situation did not make sense because bankruptcy trustees can reach back 4 years to get properties fraudulently transferred.
There are two types of fraudulent transfers in bankruptcy law, actual fraud and constructive fraud. Actual fraud involves the intent to defraud creditors and happens when: 1. transfer is made one year pre-filing, and 2. with intent to hinder, delay or defraud a creditor. To illustrate, debtor transfers his house with equity of $200,000 to a newly formed corporation. Corporation has no capital except for the house. A month before transfer was made, creditor sued debtor for $500,000 for breach of contract. Transfer is made 6 months before filing for bankruptcy. This is a clear cut case of a fraudulent transfer to defraud a creditor and in contemplation of filing a bankruptcy. Bankruptcy trustee will be able to avoid the transfer and get the property back. Transfers to related parties where no value is exchanged are also suspect. These are some circumstances that come into play. Bankruptcy courts look at the totality of circumstances and consider all applicable factors to determine if debtor had fraudulent intent.
Constructive fraud requires that debtor received less than ‘reasonably equivalent value’ and that debtor became insolvent at the time of the time of transfer or because of the transfer. In this situation, intent to defraud is irrelevant. The test is the existence of ‘reasonably equivalent value.’ To illustrate, using the same example above, debtor received a business that was valued at $50,000 in exchange for the house that had equity of $200,000. Clearly, debtor did not receive ‘reasonably equivalent value’ because there is a difference of $150,000. Again, bankruptcy courts will consider the totality of circumstances to determine if a reasonable exchange of value took place.
If the court determines that a fraudulent transfer took place, the trustee will be allowed to recover the asset from the transferee. However, a bonafide purchaser in good faith without notice of the problems surrounding the property transfer will have a good defense and will be able to keep the property.
Hence, if you are thinking of doing a fraudulent transfer in contemplation of future bankruptcy, forget it. It’s not going to work. You are going to end up losing the property in bankruptcy. You might as well not file a bankruptcy and handle your debts out of bankruptcy court.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.
( Published February 17, 2010 in Asian Journal Los Angeles p. B5 )
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