Fraudulent Conveyances

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

Fraudulent Conveyances

Section 548 of the Bankruptcy Code provides a bankruptcy trustee (or the debtor-in-possession) the power to set aside or “avoid” certain transfers of the debtor’s assets out of the bankruptcy estate that may otherwise place assets beyond creditors’ reach. Such a transfer of the debtor’s assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims, is known as a “fraudulent conveyance” or a “fraudulent transfer.”

Elements:

There are two types of fraudulent conveyances. The first, actual fraud, involves the intent to defraud creditors. The second, constructive fraud, involves a transfer that is made in exchange for grossly inadequate consideration. Both types of fraudulent transfers involve a two-year “look back period” and a two-year statute of limitations. Thus, to be considered a fraudulent conveyance, a transfer must occur within two years immediately before a bankruptcy filing. However, a trustee may be able to set aside certain transactions under state laws, which may provide for longer look-back periods. A transfer cannot be set aside if it occurs after a bankruptcy filing.

Actual Fraud:

Actual fraud is committed when a transfer is made with the intent to hinder or defraud a creditor. The intent of the transferee is irrelevant—the only relevant inquiry is the intent of the debtor. Actual fraud requires proof of intent from the individual challenging the transfer. Courts have set forth circumstances, the existence of which indicate the intent to defraud. Some examples of these circumstances are:

These are merely factors to be considered by the court in determining intent. Whether they do in fact prove the debtor’s fraudulent intent is determined on a case by case basis.

While not an absolute defense to actual fraud, establishing that the debtor received reasonably equivalent value for the transferred property tends to rebut inferences of intent to defraud.

Constructive Fraud:

Constructive fraud requires two conditions: 1) in exchange for the transfer, the debtor received less than “reasonably equivalent value”, and; 2) the debtor is unable to pay debts either at the time the transfer was made or as a result of the transfer itself. In this case, intent is irrelevant. The only important issue is whether the debtor received reasonably equivalent value. Of course, “reasonably equivalent value” is a subjective measure. When there is no value given in exchange for the transfer of the debtor’s property, the answer is an easy one. However, when something of value is given, the question becomes whether the value was truly adequate compensation for the property.

Courts will, again, look at the circumstantial evidence surrounding a transaction to determine whether the exchange appears fair. Some of the factors the courts consider include:

Generally, for an exchange to be considered legitimate, value does not have to be received directly by the debtor, but may exist in the form of additional business opportunities made available through new lines of credit or new affiliations created by the transfer. However, transfers made solely for the benefit of third parties are not reasonably equivalent value.

Timing of the Transfer

Again, to be considered a fraudulent conveyance, a transfer must occur within two years immediately before a bankruptcy filing. Thus, it is important to determine precisely when a transfer occurred. A transfer is deemed to be made once is it “perfected” under applicable state law. Perfection occurs when a bona fide purchaser buying property from the debtor cannot acquire an interest superior to that of the transferee. The transfer of certain types of property require multiple steps to complete the transaction. For example, the transfer is not complete until a deed is officially recorded.

Defenses to a Fraudulent Conveyance Action

Effect of a Fraudulent Conveyance

Once a transfer has been deemed fraudulent, the trustee may recover the property, or the value of the property, and make it part of the bankruptcy estate. One exception to this general rule, however, is the case of the “bona fide purchaser”. The bona fide purchaser is one who acted in good faith to purchase the property without notice of the outstanding rights of others to the property. The bona fide purchaser may retain the property.

Another exception is made where valuable improvements to the property have been made. In such circumstances, those that made the improvements to the property are provided with a lien on the property, securing the improvements they made. Finally, if the law places no other restrictions on the transfer, and the property was purchased for some value in good faith, in other words, with no knowledge of the fraudulent intent, the person receiving the transferred property may be allowed to retain the property or regain the value they paid for it in the settling of the estate.

Fraudulent transfers can have a negative effect on creditors. Creditors who suspect the fraudulent transfer of property may be able to obtain a temporary restraining order and preliminary injunction to prevent the transfer before it occurs.

Bankruptcy Attorneys

If you need assistance in managing the bankruptcy process, Freeman Law can help clients navigate bankruptcy laws.  We offer value-driven services and provide practical solutions to complex issues.

Contact Freeman Law Contact us now or Schedule a consultation or call (214) 984-3410 to discuss your tax or bankruptcy concerns.

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