A Short Series on the Disappearing Debtor – Fraudulent Transfers

PART 3: Fraudulent Transfers

Contributed by:
Robert S. Bernstein, Esquire
Bernstein-Burkley, P.C.

What happens when a business debtor closes up shop one day only to appear the next day under a slightly different name without going through bankruptcy? How does that happen and what do creditors do?

To answer that question, we need to review what ownership is, how debt is created and whether creditors have rights to attack property in a name other than the original customer. We attempt to do so in this four-part series. Should you have specific questions, please contact Bob Bernstein at bob@bernsteinlaw.com.

When we talk about a fraudulent transfer, we generally do not mean a “criminal fraud.” Usually, a fraudulent transfer occurs when a debtor intends to hinder, delay, or defraud a creditor, or transfers property under certain conditions to another person without receiving reasonably equivalent value in return. The classic case is the fellow who transfers his car to his cousin for $1.00 (or no consideration at all), thinking he will be able to avoid his creditors. Most of us know that such a transfer can be avoided (reversed) if attacked within the appropriate Statute of Limitations.

Other examples of fraudulent transfer include transfers of business inventory or assets to a third person (even if that is a corporation “owned” by the original debtor) or even that “sale” of assets for less than their fair value. If the business doesn’t have any creditors, then there are probably no fraudulent transfers. In other words, this generally only works if the customer is in debt when the transfer is made. Although they are not our topic here, even seemingly innocent transfers can be fraudulent (and be avoided by creditors). If a couple transfers property into a trust for the benefit of their children while they are indebted, there are circumstances where creditors may be able to get to the money in the trust, since it was transferred without receiving equivalent value in return.

The concept of fraudulent transfers also is found in many bankruptcy situations, where the Trustee (or the Official Creditors’ Committee in the Chapter 11) can invoke the law of fraudulent transfers to recover assets for the benefit of the Estate.

Next – Conclusion: What Creditors Can Do

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