In our previous post, we began looking at the topic of fraudulent transfers in bankruptcy. As we noted last time, trustees are able in some circumstances to avoid transfer of a debtor’s interest in proper or obligations incurred within two years of filing for bankruptcy.
Under the Bankruptcy Code, fraudulent transfer may be found in cases where the debtor voluntarily or involuntarily transferred assets or incurred debts with actual intent to hinder, delay or defraud any entity to which the individual was indebted or in cases where the debtor receives less than reasonably equivalent compensation for such transfers or debts.
In the latter type of case, the debtor must also have: been insolvent; engaged in business or a transaction for which the debtor’s property was unreasonably small; intended to incur debt beyond his or her ability to pay; or made a transfer or incurred a debt for the benefit of an insider under an employment contract and not in the ordinary course of business.
Plaintiffs are required to bring fraudulent transfer actions as adversary proceedings in bankruptcy court and bear the burden of proving fraudulent transfer. The basic idea with avoidance actions is to avoid rewarding those who attempt to take advantage of the bankruptcy process by incurring debts and giving away non-exempt property in advance of a bankruptcy filing.
One of the key ideas in fraudulent transfer law is that of actual fraud. We’ll look at this issue in our next post and a recent court case that helped clarify bankruptcy law on the matter.
11 U.S. Code § 548 – Fraudulent transfers and obligations
Cornell University Law School, “Bankruptcy Fraud: An Overview,” Accessed June 7, 2009.