What Is A Fraudulent Conveyance?


What Is A Fraudulent Conveyance?

11 U.S.C. § 548 empowers bankruptcy trustees to avoid certain transfers made by a debtor of assets that place them beyond the reach of creditors. A “fraudulent conveyance” is a transfer of the debtor’s assets to a third party with the intent to prevent creditors from reaching these assets in satisfaction of their debts.

Federal bankruptcy law addresses two types of fraudulent transfers, those transfers made by actual fraud and those made by constructive fraud. Actual fraud involves the debtor’s intent to defraud creditors while constructive fraud typically involves a transfer made in exchange for grossly inadequate consideration. § 548 addresses constructive fraud and fraudulent conveyances.

Constructive fraud requires that the debtor received less than “reasonably equivalent value” in exchange for the transfer, and the debtor is insolvent or unable to pay debts either at the time the transfer was made or as a result of the transfer. Bankruptcy trustees examine whether the debtor received reasonably equivalent value rather than the debtor’s intent. If absolutely nothing of value is exchanged for the transfer of the debtor’s property, the debtor has received less than “reasonably equivalent value.” Yet, on most occasions, something of value is exchanged for the debtor’s property and a determination must be made if the value received by the debtor was adequate compensation.

Bankruptcy courts examine all of the circumstances surrounding a transaction to determine whether an exchange involved “reasonably equivalent value.” Some of the factors considered in their analysis include whether a sale was for fair market value, whether a transaction was made in good faith in the ordinary course of business by independent parties, whether the transfer was to a family member, the competitiveness of bids for the property, and the effect on the debtor’s estate as to funds available to unsecured creditors. A transfer also includes granting a security interest in property to a creditor even though a debtor retains onwership of the property.

Once the trustee has deemed a transfer as fraudulent, the trustee may recover the value of the property or the property itself and make it part of the bankruptcy estate. While a trustee may recover the property from the immediate recipient or a subsequent transferee, the trustee geberally may not recover the property from a bona fide purchaser (BFP), who is any person or entity who acted in good faith and purchased the property without notice of any other claims or outstanding rights related to the transferred property. If valuable improvements have been made to the property by a transferee, it may be given a lien on the property to secure the value of the improvements.

Prospective bankruptcy debtors considering the transfer of an asset of their future bankruptcy estate must consult with an experienced bankruptcy professional to determine whether such transfer is fraudulent under federal bankruptcy law. H. Lehman Franklin, P.C. is located at 127 North Main Street in Statesboro, GA (30458). We proudly serve Bulloch County, as well as the surrounding counties of Chatham, Candler, Evans, Bryan, Effingham, Screven, and Jenkins. Contact our office by telephone at 912-764-9616, by email at info@hlfranklin.com, or browse our website at hlfranklin.com. We’re available to meet your legal needs Monday through Friday from 8:30 AM until 5:30 PM.