Fraudulent Transfers

The term fraudulent transfer has a specific meaning in the U.S. Bankruptcy Code. To prevent a debtor from giving away assets or selling assets at less than their fair market value prior to the filing for bankruptcy protection, the bankruptcy code permits a trustee to recover certain types of transfers made while the debtor was insolvent prior to the bankruptcy filing.  The term "fraudulent" includes the intent to hinder, delay, or defraud creditors, or a constructive intent where the transfer is for less than the equivalent value and the debtor is insolvent.

Regardless of whether there is fraudulent intent, transfers may be recovered if the debtor transfers valuable property for less than fair market value.  A trustee may prevent any transfer of property or obligation incurred by the debtor that was made within one year before the start of the bankruptcy case with intent to hinder, delay, or defraud creditors, or was made for less than a reasonably equivalent value, if the debtor were any of the following:

• Insolvent or became insolvent on the date of the transfer;
• Engaged or was about to engage in a transaction for which any property remaining with the debtor was unreasonably small capital;
• Intended to or believed he or she would incur debts beyond his or her ability to pay as they matured

Source: "Manual of Credit and Commercial Laws," edited by Charles M. Tatelbaum and John K. Pearson, available at the NACM Bookstore.