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Orange County Bankruptcy Attorneys Explain Fraudulent Transfers in New York

The occasional debtor may attempt to preserve a portion of his assets by putting them beyond the reach of his creditors. This activity can manifest itself in many ways, some of which are more subtle than others. A debtor might intentionally sell an asset for less than its fair market value, which may not have been done with any specific intent to defraud but still has the effect of removing the property from the reach of creditors. Another creditor might transfer, or even give away, an asset with the specific intent of shielding it from creditors. There are some intra-family transfers that debtors engage in that also can be problematic, such as (1) when the debtor’s name is taken off the deed to facilitate a refinance; (2) when someone’s name is added to the deed to get a better loan, and thereafter removed as soon as the new loan closes; or (3) if a husband and wife both have bad credit, a child with a good credit rating is added to the deed to obtain a better loan. It does not matter if the debtor’s name was removed from the title, or if someone else’s name was added to the title. In each instance, there was a transfer of an interest in real property without the exchange of money. A case can be made that some, if not all, of the above scenarios are fraudulent transfers.

A debtor can be denied a Discharge under 11 USC § 727(a)(2)(A) if, with intent “to hinder, delay or defraud a creditor or [the Trustee]”, the debtor transfers his property within one year of the bankruptcy filing. These types of inquiries are highly fact specific, and often come into conflict with what a debtor thinks is prudent pre-bankruptcy planning. Courts have constructed various “badges” of fraudulent intent which tend to identify and focus on six considerations: (1) is there a close relationship between the debtor and the transferee?: (2) was the transfer made in anticipation of a pending suit?; (3) was the debtor insolvent or in poor financial condition at the time?; (4) were all or substantially all of debtors assets transferred?; (5) did the transfer so completely deplete the debtor of assets that the creditor has been hindered or delayed in recovering any part of its judgment?; and (6) did the debtor receive adequate consideration (i.e. money) for the transfer? These “badges” are relevant in a proceeding to deny Discharge as well as in a proceeding brought by a Chapter 7 Trustee to set aside a transfer and recover the value of the asset, so as to create a distribution for creditors.

In New York, a Chapter 7 Trustee has a “look back” period of six years prior to the bankruptcy filing to set aside fraudulent transfers. This time frame runs consecutively with the two-year period provided by Bankruptcy law. The substantive law in New York is generally broader than the Bankruptcy Code in this area. The Bankruptcy Code allows a Trustee to avoid and set aside a transfer made within two years of the filing if:

  1. The transfer was made with actual intent to hinder, delay or defraud a creditor; OR
  2. The debtor received less than reasonably equivalent value for the transfer, and the debtor either:
    1. Was insolvent on the date of the transfer, or became insolvent as a result of the transfer; OR
    2. Was engaged in a business, and the debtor’s remaining capital assets were unreasonably small; OR
    3. Intended to incur debts beyond his ability to repay; OR
    4. The payment was made to an insider pursuant to an employment contract and not in the ordinary course of business.

As previously stated, any analysis concerning the propriety of past transfers is very fact specific, and a debtor must be certain to disclose ALL such transfers to his attorney. There is little “bright line” law that sets the boundaries between allowable pre-bankruptcy planning and fraudulent activity, as the most cited case on this issue simply observes that “when a pig becomes a hog it gets slaughtered”. Needless to say, this area can be troublesome.