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Fraudulent Conveyance

Fraudulent Conveyance or fraudulent transfer is attempting to avoid a debt by moving assets to another person or legal entity. It is a civil matter, not a criminal one. It is commonly addressed in creditor/debtor law to attempt to restore assets that were transferred away in order to avoid payments to one or more creditors. It is a common action brought by judgment creditors and trustees in bankruptcy cases.

Fraudulent conveyance is the hallmark of the person who didn’t have an asset protection plan in place and tried to move their assets after legal action was taken against them. This underlines the importance of having an asset protection plan in place or one that can be activated when the need arises. By utilizing the proper legal tools in a timely fashion, one can typically move assets out of legal reach of a legal enemy and and not be concerned about a fraudulent transfer violation.

Fraudulent Conveyance

Anytime you convey an asset in order to defraud or delay a legitimate individual, you are engaging in fraudulent conveyance. If you are aware that your assets are at risk and could be used to satisfy a legal obligation and you move that asset out of reach, you have NOT committed a crime. In almost all cases it  is merely a civil matter and you cannot go to jail for it.

This includes moving your assets into an asset protection vehicle in the heat of legal battle. Asset protection is best conducted when you are not at risk. This means that you are conveying your assets at the time you asset protection plan is created, not when you are in a legal situation, therefore it is no longer fraudulent. However, there are ways to protect assets even after you have been sued.

Asset Protection

Proving Fraudulent Transfer

An asset protection plan helps prevent creditors from seizing your assets. The most common scenario where a creditor can reach your assets is through proving fraudulent transfer. This is done by proving that you have done the following:

  1. Transferred your property
  2. Received less than fair market value for the property, and
  3. The transfer left you unable to satisfy a creditor

It must be all three of these to be fraudulent transfer of your property. Creditors have their own process to convince a court that your assets should be within their reach by proving that your transfer was fraudulent. There are various paths a creditor can take to your assets in these types of cases which supports the biggest point in asset protection; act now when there is no legal duress.

Fraudulent transfer laws are based on the principle that your property constructively belongs to a creditor if you are unable to satisfy your obligations as a debtor. In order to establish this there are a couple of questions that must be answered;

  1. What represents fair market value or fair consideration? and
  2. At what point do you become insolvent?

Addressing the first question, fair market value and consideration for your property is what you can reasonably sell your property for. Not necessarily the exact price your property is worth, but what you can reasonably expect to gain from selling your property. Case law suggests that around 70% of the property’s value is reasonable. If assets are transferred for less than fair market value, there are a couple of outcomes in this case;

  1. The transferee can return the property in exchange for their purchase price
  2. The transferee can be forced to pay the difference between the price they paid and the property’s full value

When the property is purchased for fair value and the transferee had no knowledge of fraudulent intent, he or she is fully protected. Courts scrutinize exchanges of services for property and only services rendered at the time of the exchange or previously suffice; a guarantee of future services does not succeed.

The second point is: At what point do you become insolvent? If your property is transferred and you still have the ability to satisfy a creditor, there isn’t any fraudulent transfer of assets. You become insolvent when your assets are not sufficient to satisfy existing debt. You can gift your property, however you must be able to satisfy your obligations as a debtor with your remaining wealth.

When there is no clear case of actual fraud, a creditor will look to prove fraud through circumstances that imply fraudulent intent. To whom did you give your assets? Was the transfer private and did the transferee have any information that would make the courts believe that the transfer was fraudulent? If you are ever faced with a legal storm where your assets are jeopardized, you may have to defend challenges to your property or assets being transferred for less than fair value. This is especially the case if the transfer left you insolvent to satisfy your obligation.

Fraudulent transfer can become indisputable within statutes of limitations. The strongest asset protection is a plan that has been in place for several years before it is needed. Although laws vary in each state, most of them have a 4 year statute of limitations for fraudulent transfer, or 1 year after the discovery of a transfer. In the case of Bankruptcy, property transfers in the previous year will most likely be examined closely for intent to delay or hinder a creditor. If you commit fraudulent transfer of your property, your Bankruptcy proceedings could be unpleasant, as the court could refuse to release you of other debts, based on your conduct.

Be selective when you choose who receives your property. Your transferee can become involved very quickly if it is discovered that they were involved in fraudulent conveyance of your property. This means that they could be forced to return the property, or if they transferred it again, they could be liable to repay the amount of the property, or worse, find themselves in a criminal court case, in some states. It is rare that civil or criminal charges result from transfer of assets unless there is a clear case of deception or bad faith.

If the court finds basis for raising fraudulent transfer of your property, the outcome is essentially to restore the debtor to his or her position, prior to the transfer of property. This can get complicated if the property is no longer recoverable. The transferee and debtor can be held jointly liable for the property value as well as the creditor’s attorney fees for recovering the value of the property.

Proper Conveyance of Assets

Transfer your assets into a protective structure before you need protection. Perform this with asset protection, estate planning and/or business advancement as your goal. When your assets are protected properly, creditors have a difficult case to prove fraudulent transfer, which is their only gateway to your assets.

Establish your entire asset protection plan and create the tools and vehicles you will use. Place your assets into these containers and then the owner of the assets is the legal structure. You can set up your asset protection plan so that it can be activated when you are in a legal battle. This is the key to properly creating an asset protection strategy, you do this when you don’t have to, set up all of your tools and move your assets legally and when you need to, you activate your asset protection plan and your wealth is protected.

You can activate your asset protection plan all the way into a legal battle and your assets are moved out of reach of the U.S. legal system – only if you set up your asset protection before you need it. There are some things that can be done after legal action has started, it just gets more complicated.

Keeping It Safe

  • Protect yourself now. There are ways to safely transfer your assets once a liability exists, but it is best to do so beforehand.
  • Transfer your property for reasons other than delaying or hindering a creditor.
  • Seek experienced help in your Asset Protection Planning.

If your assets are held in a skilled protection plan before the need arises, you could very well weather a legal storm that would otherwise destroy your lifetime accumulated wealth.

Fraudulent Conveyance Legal Actions

Can a judge “make you dissolve an asset protection structure and force you to turn money over to the plaintiff?”

A Judge woule be hard pressed to have the legal ability to force you to dissolve a legal entity that you have established. What he can do is evaluate the following “badges of fraud.” If part of your asset protection planning is challenged as a fraudulent conveyance and the other side wins, a court can only try to put you back into essentially the same financial condition you were before your asset protection plan was implemented.

It is important to note that the terms “fraudulent transfer” and “fraudulent conveyance” are often misunderstood. Many people mistakenly confuse these two technical legal terms with the civil tort of common law fraud or even with criminal fraud. It is not either. However, as a result of this misconception, some people become fearful that asset protection planning could result in their being held liable for damages in tortious fraud or even charged with criminal fraud. It is just the opposite. The assets are yours and you have the right to protect them if it is in your best interest. Several state court decisions, as well as most federal courts have held that fraudulent conveyances to avoid creditors’ claims are not tortuous fraud and are not criminal fraud. Thus, a creditor who tries to assert that part of your asset protection planning involved some sort of fraudulent conveyance does not have the legal capacity to charge you with the crime of fraud and cannot seek additional civil damages based on the common law theories of fraud, deceit, or misrepresentation. (Grupo Mexicano De Desarrolla, S.A., et al v. Alliance Bonde Fund, Inc.) Moreover, since there are no penalties to doing so, if the asset protection plan keeps the asset away from your creditors, as has been the case when using a Cook Islands Trust, why does it matter if a court claims that it was a fraudulent transfer?

Supreme Court Justice Antonin Scalia observed the following: “There is nothing whatever wrong with respondents pursuing their own interest. Indeed, the fact that it is entirely proper and entirely predictable is the very premise of the point we are making. That this new remedy will promote unregulated competition among the creditors of a struggling debtor.” A fair and proper reading of the opinion suggests, clearly, that the transfer of freely alienable property by a debtor is lawful and the creditors, likewise, are free to pursue their legal rights.

“Badges of Fraud”

The following are badges of fraud used by courts to determine whether or not the transfer should be deemed a civil fraudulent conveyance:

  1. That the transfer or obligation was made to an insider.
  2. That the debtor had retained possession or control of the property transferred, even after the transfer.
  3. That the transfer or obligation had not been disclosed or was concealed.
  4. That before the transfer was made or the obligation was incurred, the debtor had already been sued or threatened with suit.
  5. That the transfer had been substantially all the debtor’s assets.
  6. That the debtor had absconded.
  7. That the debtor had removed or concealed the assets.
  8. That the value of the compensation received by the debtor was relatively close to the value of the transferred asset or the amount of the obligation incurred.
  9. That the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred.
  10. That the transfer occurred shortly before or shortly after a substantial debt had been incurred.
  11. That the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

In summary, just as any creditor can try to attack the creation of an asset protection plan, any debtor has the right to establish one. The creditor may suggest that certain transfers of your assets to other people or entities or investing money in exempt asset vehicles (such as annuities) constitute a fraudulent transfer or fraudulent conversion. They can claim that the conveyances were done with the intent, or effect, to hinder, avoid, or delay creditor collection. Just about any asset protection conveyance can be challenged as “fraudulent” for a time period between six months to four years dependent on state specific statutes. This is the case even if you had no obligation or duty to the challenging creditor when your asset protection planning was implemented.

In order to prevent the discharge of a particular debt because of a debtor’s misrepresentation, a creditor must prove the following: That the debtor made a false representation with the purpose and intention of deceiving the creditor; the creditor relied on such representation; his reliance was reasonably founded; and the creditor sustained a loss as a result of the representation. See, In re Lange, 40 B.R. 554 (D.C.Ohio 1984); In re McGrath, 7 B.R. 496 (D.C.N.Y.1980); In re Hunt, 30 B.R. 425 (M.D.Tenn.1983). The debtor must be guilty of positive fraud, or fraud in fact, involving moral turpitude or intentional wrong, and not implied fraud, or fraud in law, which may exist without the imputation of bad faith or immorality. Neal v. Clark, 95 U.S. 704, 5 Otto 704, 24 L.Ed. 586 (1887); Gabellini v. Rega, 724 F.2d 579 (7th Cir.1984); In re Pedrazzini, 644 F.2d 756 (9th Cir.1981); Massachusetts v. Hale, 618 F.2d 143 (1st Cir.1980); In re Preston, 47 B.R. 354 (E.D.Va.1984); In re Byrd, 4 C.B.C. 205, 9 B.R. 357 (D.D.C.1981); [1978] U.S.Code Cong. & Ad.News, 6453. The burden is on the creditor to prove the debtor’s culpability by clear and convincing evidence. In re O’Karma, 46 B.R. 422 (D.C.Pa.1984); In re Schwartz, 45 B.R. 354 (S.D.N.Y.1985); In re Browning, 31 B.R. 995 (S.D.Ohio 1983); In re Musser, 24 B.R. 913 (W.D.Va.1982); In re Colasante, 12 B.R. 635 (E.D.Pa.1981).

So, whereas it may have been ideal to establish an asset protection structure well before the litigious event, if properly implemented, it will not harm you. Moreover, when a new issues arises that occurs after you have established the “Asset Protection” strategies, having the structure in place before the event will certainly give you a strong foundation in making you “creditor remote” or “judgment proof.”