A Primer on Fraudulent Transfer Law F. Hale Stewart, JD, LLM, CAM, CWM, CTEP The Law Office of Hale Stewart Assetprotectionlawyerinhouston.com Author of the book U.S. Captive Insurance Law 832.330.4101 email@example.com Skype name: bonddad
First, What is Asset Protection? There are several events which can negatively impact an individual’s financial well-being. In general, these are bankruptcy, litigation, divorce, physical/mental incapacitation and death (this actually impacts the decedents family, but it can still harm a family financially if not dealt with properly). Asset protection looks at each of these events, and then asks this fundamental question: "how can we mitigate the financial damage these events have the potential to cause?" Or, put another way, asset protection is the legal discipline of mitigating , or attempting to mitigate, the negative impact of various financially and legally catastrophic events.
When Can We Engage in Asset Protection?Suppose a high net worth client is in the middle of a lawsuit and the prospectslook grim: it appears the jury will award the plaintiff a large judgment. At thispoint, the client decides to create and implement an asset protection plan, with theobvious intent of preventing the other party from collecting on the judgment.Alternatively, suppose the same individual receives a call from an attorney whowants to discuss a situation with a former client of the high net worth individual(for example, a lawyer representing a former patient calls a doctor who treated thepatient with poor results). The high net worth person has not been sued (he hasnot been formally served with papers) but he has a good indication that someone isthinking about suing him. The high net worth client calls and asks about assetprotection plans.Or suppose a company is starting to lose money and the future does not lookpromising – key clients have gone to other companies, key employees are leavingand the industry is experiencing strong competition from an overseas competitorthat has vastly lower labor costs. The company wants to start siphoning off moneyand assets before creditors either force the company into bankruptcy or simplystart suing for non-payment of debt.
When Can We Engage in Asset Protection?In all the preceding examples, a creditor would bewell within their rights to ask the court to rescind thetransaction.The reason is the debtor knows with a fairly highdegree of certainty that he will have to pay moneysometime in the near future. To allow him to make itdifficult to pay those amounts would be tantamountto encouraging and promoting fraud.
When Can We Engage in Asset Protection?In general, we can’t engage in asset protection whenwe know with a pretty high degree of certainty that ajudgment, debt, payment, bankruptcy or the like isright around the corner.Put another way, we can only engage in assetprotection when things are going well.
Transfers Fraudulent as to Present and Potential Future Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor
“Badges of Fraud”Fraud rarely occurs out in the open. As such, we lookto certain circumstances as evidence of fraud. Whilethe presence or existence of the following “badges offraud” are not conclusive in and of themselves, theydo indicate we need to look in far more detail at thetransaction. This is the way courts will determine if acreditor is attempting to “hinder, defraud or delay” acreditor.
From the ActSubsection (b) is a nonexclusive catalogue of factorsappropriate for consideration by the court in determiningwhether the debtor had an actual intent tohinder, delay, or defraud one or more creditors. Proof ofthe existence of any one or more of the factorsenumerated in subsection (b) may be relevant evidence asto the debtor’s actual intent but does not create apresumption that the debtor has made a fraudulenttransfer or incurred a fraudulent obligation. ….Inconsidering the factors listed in § 4(b) a court shouldevaluate all the relevant circumstances involving achallenged transfer or obligation.
BOF1: Transfer to an “Insider”The transfer or obligation is to an insiderSo – who is an insider?(i) if the debtor is an individual, (A) a relative of the debtor or of a general partner of the debtor; (B) a partnership in which the debtor is a general partner; (C) a general partner in a partnership described in clause (B); or (D) a corporation of which the debtor is a director, officer, or person in control;
BOF1: Transfer to an Insider(ii) if the debtor is a corporation, (A) a director of the debtor; (B) an officer of the debtor; (C) a person in control of the debtor; (D) a partnership in which the debtor is a general partner; (E) a general partner in a partnership described in clause (D); or (F) a relative of a general partner, director, officer, or person in control of the debtor;
BOF1: Transfer to and Insider(iii) if the debtor is a partnership (A) a general partner in the debtor; (B) a relative of a general partner in, or a general partner of, or a person in control of the debtor; (C) another partnership in which the debtor is a general partner; (D) a general partner in a partnership described in clause (C); or (E) a person in control of the debtor;
BOF2:The debtor retained possession or control of theproperty transferred after the transfer; For example, transferring the property to a trust where the debtor is the trustee A limited partnership where the debtor is the general partner A corporation where the transferee is a majority stock- holder of all shares eligible to vote.
BOF: The Transfer was Disclosed Or Concealed From the Act: (3) the transfer or obligation was disclosed or concealed; Obviously, hiding a transaction is a suspicious act; it implies that the parties are doing something that don’t want others to know about.
BOF: Lawsuitsbefore the transfer was made or obligation wasincurred, the debtor had been sued or threatenedwith suit; In this situation, a possible judgment creditor may be around the corner. Therefore, the act prevents a potential debtor from thwarting a creditor before the case even begins.
BOF: Intentional Bankruptcythe transfer was of substantially all the debtor’sassets; In this situation, the debtor is bankrupting himself, making himself “judgment proof.” However, in doing so, he’s thwarting a potential creditors legitimate claims.
BOF: Running Awaythe debtor absconded; Obviously, if the debtor vanishes after the transfer, he’s trying to hide something.
BOF: Removing/Concealing Assets the debtor removed or concealed assets;
BOF: Equivalent Valuethe value of the consideration received by the debtorwas reasonably equivalent to the value of the assettransferred or the amount of the obligation incurred;
BOF: Bankruptcythe debtor was insolvent or became insolvent shortlyafter the transfer was made or the obligation wasincurred; If the debtor was in the middle of a bankruptcy case, or was about the declare bankruptcy, then any transfer is suspect.
BOF: Prior to debtthe transfer occurred shortly before or shortly after asubstantial debt was incurred; Here, the transferor is deliberately making it hard for a future or just recent creditor to collect on a debt.
Transfers As to Present and Future Creditors Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.
Fraudulent Transfers as to Current Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.