Fraudulent Conveyance - Overview

Overview

A transfer will be fraudulent if made with actual intent to hinder, delay or defraud any creditor. Thus, if a transfer is made with the specific intent to avoid satisfying a specific liability, then actual intent is present. However, when a debtor prefers to pay one creditor instead of another that is not a fraudulent transfer.

There are two types of fraudulent transfer--actual fraud and constructive fraud. Actual fraud typically involves a debtor who as part of an asset protection scheme donates his assets, usually to an "insider", and leaves himself nothing to pay his creditors. Constructive fraud does not relate to fraudulent intent, but rather to the underlying economics of the transaction, if it took place for less than reasonably equivalent value at a time when the debtor was in a distressed financial condition. For example, where the debtor has simply been more generous than they should have or, in business transactions, the business should have ceased trading earlier to preserve capital (see generally, wrongful trading). In a successful suit, the plaintiff is entitled to recover the property transferred or its value from the transferee who has received a gift of the debtor's assets. Subsequent transferees may also be targeted, although they generally have stronger defenses than immediate transferees.

Although fraudulent transfer law originally evolved in the context of a relatively simple agrarian economy, it is now widely used to challenge complex modern financial transactions such as leveraged buyouts.

Fraudulent transfer liability will often turn on the financial condition of the debtor at a particular point in the past. This analysis has historically required "dueling" expert testimony from both plaintiffs and defendants, which often led to an expensive process and inconsistent and unpredictable results. Courts and scholars have recently developed market-based approaches to try to make this analysis simpler, more consistent across cases, and more predictable.