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Fraudulent Transfers

Orange County Bankruptcy Attorneys Explain Fraudulent Transfers in New York


Fraudulent transfer lawsuits (called “Adversary Proceedings”) are designed to recover assets transferred prior to a bankruptcy filing, either due to a debtor selling or giving away an asset or a creditor seizing an asset as part of their debt collection efforts. Such lawsuits can be brought in both Chapter 7 and Chapter 13 bankruptcy cases, under the provisions of either federal Bankruptcy law or New York state fraudulent transfer (now referred to as “voidable transactions”) law. They can be brought by Trustees and by debtors (in certain circumstances), although they are generally brought by either Chapter 7 Trustees or Chapter 13 debtors. Such actions can also be brought in Chapter 11 cases, which is not discussed here.

  • In a Chapter 7 case:

In certain circumstances a fraudulent transfer (also called “voidable transactions” in New York State) can result in: (1) the debtor being denied a Chapter 7 Discharge; and/or (2) the Chapter 7 Trustee recovering the fraudulently transferred asset and liquidating it for the benefit of creditors in the case.

  • In a Chapter 13 case:

The debtor is provided a platform whereby, in appropriate circumstances, an asset sized by a creditor prior to the bankruptcy filing can be recovered by the debtor, undoing the pre-filing seizure.

The Makings of a Fraudulent Transfer


The occasional debtor may attempt to preserve a portion of their assets by putting them beyond the reach of their 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 their creditors.

Denial of Chapter 7 Discharge

A Chapter 7 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?; (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?

Setting Aside a Fraudulent Transfer Using Federal Law

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, generally referred to as “actual fraud” or “intentional fraud”; OR
  2. What is generally referred to as “constructive fraud” occurred, where 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.

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.

Setting Aside a Fraudulent Transfer or Voidable Transaction Using New York State Law

The New York law in this area is much more nuanced than is the federal law. In fact, there is one set of laws pertaining to transfers occurring on or before April 3, 2020 (hereafter referred to as the “Old Law”) and another set of laws concerning transfers occurring on or after April 4, 2020 (hereafter referred to as the “New Law”).

Under the “Old Law” the “constructive fraud” statutes proscribe the following conveyances:

  1. One that rendered a debtor insolvent that was made without fair consideration is fraudulent as to all creditors regardless of intent;
  2. One made without fair consideration by a defendant in a lawsuit seeking money damages is fraudulent as to the party suing the defendant regardless of intent;
  3. One made without fair consideration in a business transaction for which the capital remaining after the conveyance is unreasonable small is fraudulent as to all creditors regardless of intent;
  4. One incurred without fair consideration when the debtor believes they will incur dents beyond their ability to pay is fraudulent as to both present and future creditors.

The “actual fraud” statute under the “Old Law” provides that conveyances made with actual intent to “hinder, delay or defraud either present or future creditors is fraudulent as to both present and future creditors”. Not surprisingly, actual intent to defraud is very hard to prove, as such intentions are rarely announced by those engaging in the activity.

Under the “New Law” the “actual fraud” statute provides that a transfer is voidable as to both present and future creditors if made “with actual intent to hinder, delay or defraud any creditor of the debtor”.

Under the “New Law” the “constructive fraud” statutes proscribe the following conveyances:

  1. One made without receiving reasonably equivalent at a time when the debtor was insolvent, or was rendered insolvent by the transfer, is voidable as to all present creditors;
  2. One made to an insider (i.e., relative, business associate, etc.) to pay off an existing debt at time when the debtor was insolvent and the insider-recipient “had reasonable cause to believe debtor was insolvent” is voidable as to all present creditors;
  3. One made without receiving equivalent value is voidable as to both present and future creditors if made at a time when the debtor:
    • 3(a.) was about to engage in a business or transaction for which their remaining assets were unreasonably small; OR
    • 3(b.) intended to incur debts beyond their ability to pay.

Not all aspects of both laws are discussed herein—you should speak to your bankruptcy attorney for a detailed analysis of the minutia in this area. The following will highlight some of the differences between the Old Law and the New Law:

  • The New York Lookback Period:

The Old Law had a very creditor-friendly lookback period of six (6) years. Under the New Law the look back period is four (4) years for constructively fraudulent transfers, and for transfers involving actual fraud the lookback period is whichever is the later of—four (4) years from the transfer date or one (1) year from the date of discovery of the transfer.

  • The Standard of Proof Required:

The Old Law applies a preponderance of the evidence (more likely than not) standard for a constructive fraud case and the heightened standard of clear and convincing evidence for an actual, intentional fraud case. The New Law applies the preponderance of the evidence standard for both constructive fraud cases and for those involving intentional fraud.

  • Factors evidencing actual intent to defraud:

The Old Law did not specifically identify the relevant “badges of fraud”, instead relying upon a hodgepodge of case law to do so. The New Law expressly codifies the badges of actual fraud, centered upon whether:

  1. The transfer was to an insider;
  2. The debtor retained possession of control of the asset post-transfer;
  3. The transfer was disclosed or concealed;
  4. The debtor had been sued, or threatened with suit, prior to the transfer;
  5. The transfer was of substantially all of debtor’s assets;
  6. The debtor absconded;
  7. The debtor removed or concealed assets;
  8. The debtor received reasonably equivalent value for the asset transferred;
  9. The debtor was insolvent or became insolvent shortly after the transfer was made;
  10. The transfer occurred shortly before or shortly after a substantial debt was incurred;
  11. The debtor transferred the essential assets of the business to a lienor who then transferred the assets to an insider of the debtor

Intra-Family Transfers

There are some intra-family transfers that debtors engage in that 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.

Contact our legal team in Middletown, NY today

For reliable help with fraudulent transfer matters in New York, contact the knowledgeable attorneys at Hayward, Parker & O’Leary today. Their office is conveniently located in Middletown.

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