Fraudulent Conveyance

A creditor can claim fraudulent conveyance if you deliberately frustrated, delayed, hindered or defrauded the recovery of assets to pay for a legitimate debt. “Gifting” assets to family or a business associate to avoid paying a debt is an example of fraudulent conveyance. The creditor can ask the court to undo the “gift”, or asset transfer, and place the asset back in your hands. The creditor then takes your control of that asset to satisfy the debt. That’s a simplified explanation of fraudulent conveyance.

  • Transactions intended to protect assets don’t run afoul of fraudulent conveyance issues if structured correctly. Consider these examples:
  • An asset is placed into the LLC for the member interest in the LLC. This is considered a “for value” exchange.
  • A privately controlled corporation serves as a supplier to your current business operation and as a friendly creditor. This is best served through a business relationship that existed before the hostile creditor claim. Aged corporations function nicely in this area.

It’s Difficult To Trigger A Fraudulent Conveyance Claim When Assets Are Exchanged For Value.

To avoid a possible fraudulent conveyance claim, consider the following issues:

  • Timing:  Move the asset before the threat.  Transfer the asset to the corporation or LLC before the threat is even foreseeable.  As time passes, the asset transfer increases it’s safer from a potential fraudulent conveyance claim.

  • The biggest threat to asset protection is procrastination.
  • In cases where the threat exists and you’re left vulnerable, transfer the threatened assets to an LLC immediately, to take advantage of the charging order protection. Alternatively, form a C Corporation with the necessary nominee officer services and develop a customer relationship with this new corporation.
  • Plan when the financial and legal seas are calm. If turbulence already exists, call 484.256.4563, immediately to discuss your options.
  • Solvency: It’s critical that you’re able to meet your financial obligations after the asset transfer. In other words, you can’t instantly accumulate thousands in unsecured and other debt, and immediately run off with the money.

  • Communication: Keep quiet about your holdings and how they are controlled. Many times, it’s a best friend, a jealous ex-lover, hostile spouse or frustrated business associate that turns on the debtor and blazes a trail of financial disaster.

  • Fair Market Value: You can’t sell a $100,000 real estate property to a sibling for $10,000. It’s suspicious. Transactions must make sense and follow standard business procedure, reasoning, and documentation. Follow the 70% rule. When transferring assets, make certain it’s for at least 70% of its fair market value.

  • Appearance & Intent: If it walks, acts and quacks like a duck, it’s not a goose. Transactions must look reasonable from all directions. Ask yourself these questions about the debtor:

  • Did the debtor know, or tell anyone, he was going to be sued?
  • Were financial difficulties or legal problems readily or easily foreseeable?
  • Was the asset transferred to the trust or corporation?
  • Does the plaintiff have an interest in the property?
  • Does the asset transfer or the debtor fall within the statute of limitations of the Bankruptcy code, UFCA or UFTA?
  • Did the debtor intend to delay, hinder or defraud a creditor?
  • Did the debtor lack adequate financial means to meet his debts after the asset transfer?
  • How secret was the transaction?
  • How did the debtor’s financial situation change before and after the transfer of assets to the trust or corporation?
  • What does the timing or sequence of financial events indicate or imply?
  • What is the cumulative effect of these transfers?
  • Are parties in the transactions close friends or family?
  • Did the debtor flee after he conveyed the property?
  • Did the asset transfer make up most or all of the assets?
  • Did he become insolvent after he conveyed the property?
  • Did he intentionally incur debt that he could not pay?