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Fraudulent Transfers & Preferences

The Callan Law Firm, P.C. defends individuals and companies against fraudulent transfer and preference lawsuits. A fraudulent transfer is a lawsuit in which a bankruptcy trustee seeks to recover property a bankruptcy debtor gave to someone else within two years before you filed bankruptcy. Generally speaking, a preference lawsuit is when a trustee seeks to recover money that was paid to a creditor prior to the filing of the bankruptcy.  To speak with an attorney now about your fraudulent transfer or preference litigation, contact us here.  To learn more about fraudulent transfers and preferences, read on.

What is a Fraudulent Transfer?

A fraudulent transfer is any transfer made by a debtor with the intent to hinder, delay or otherwise evade creditors’ claims.  Under the Bankruptcy Code, the trustee can look back two years from the date of the bankruptcy filing and avoid any such transfers during that time period.  Generally, the trustee can avoid either transfers made with the actual intent to hinder, delay or evade creditors’ claims, or the trustee can avoid those transfers that are deemed constructively fraudulent.  Here, in Virginia, however, trustees are not limited by the two year period under the bankruptcy code, as Virginia law allows an indefinite look back period (as far back as time itself), if the trustee can prove actual (as compared to constructive) fraud.


Actual Fraud

Actual fraud is not that difficult to prove — Generally, the trustee must show that the debtor transferred the property with actual intent to hinder, delay or defraud creditors. For example, if the debtor has a house with a $100,000.00 im equity and puts his brother on the deed a year before the bankruptcy, the Trustee will have to prove that the transfer was made with the intent to commit fraud.  This could be difficult because proving a person’s state of mind can be nearly impossible unless the judge is willing to look at indirect evidence.  Accordingly, the common law has historically looked to what are commonly referred to as “badges of fraud” to determine a debtor’s intent at the time of transfer.  These badges include:

  • Becoming insolvent because of the transfer;
  • Lack or inadequacy of consideration;
  • Family, or insider relationship among parties;
  • The retention of possession, benefits or use of property in question;
  • The existence of the threat of litigation;
  • The financial situation of the debtor at the time of transfer or after transfer;
  • The existence or a cumulative effect of a series of transactions after the onset of debtor’s financial difficulties;
  • The general chronology of events;
  • The secrecy of the transaction in question; and
  • Deviation from the usual method or course of business.

If you have been the recipient of a fraudulent transfer or are considering making a transfer which might be deemed fraudulent, you should speak with an attorney right away to plan your legal strategy.

Constructive Fraud

Constructive fraud is also easy to prove. Here, the Trustee need not prove intent, but can instead prove that no (or little) value was given for the transfer, i.e. the transfer was a “gift” and the debtor was insolvent at the time of such gift.  The elements for a constructive fraud transfer include:

The debtor did not receive “reasonably equivalent value” for the transfer (i.e., gave something away or accepted a low amount for it) and one of the following occurred:

  • the debtor was insolvent at the time of the transfer (his debts exceeded his assets)
  • the debtor was doing business and the transfer left the debtor with unreasonably low capital
  • in making the transaction, the debtor intended to incur debt that he knew was beyond his ability to pay, or
  • the debtor made the transaction for the benefit of a business insider under an employment contract.

Most fraudulent transfer adversary proceedings are brought because the debtor did not receive reasonably equivalent value and was insolvent at the time of the transfer.

There are defenses to such litigation, but they must be brougtht vigorously and early in order to help ensure a favorable outcome in your litigation.  To schedule a time to speak with an attorney about your fraudulent transfer or preference issues, click here.