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Fraudulent Transfers in Bankruptcy

    Adversary Proceedings due to Fraudulent Transfers in Bankruptcy

    a woman says as a witness in court in a lawsuit. symbol photo foAn adversary proceeding is a lawsuit brought in connection with a bankruptcy case. It is essentially an entire civil lawsuit tried under the bankruptcy court. Like a civil lawsuit, it begins with the filing of a formal complaint and formal service of process (service of the documents) on the parties being sued.  One reason why adversary proceedings might be initiated during a bankruptcy case is for fraudulent transfers.

    Adversaries for fraudulent transfers are initiated when a person filing for bankruptcy transfers money or property to someone else (or a business) two years before filing bankruptcy.   It is the movement of assets to keep them from creditors.  There are two ways to prove fraud.  Actual Fraud or Constructive Fraud.

    Actual Fraud

    Actual fraud is normally more difficult to prove because you have to prove the intent of the person committing the fraudulent transfer.  However, when you can prove it, it is one of those things that are extremely obvious.  To prove actual fraud, the person initiating the adversary proceeding must show that the debtor transferred the property with intent to hinder, delay or defraud creditors.  In this situation, the trustee must prove actual intent.  This means that the debtor actually transferred property to another in an effort to hide the property from the creditors or bankruptcy trustee.  For example, actual fraud is when the Debtor transfers title of their home to their family member without any compensation right before filing for bankruptcy simply to hide the house from the bankruptcy trustee.

    Constructive Fraud

    To prove constructive fraud, the person filing the adversary does not have to look into the mind of the person committing the fraudulent transfer.  In bankruptcy constructive fraud is when a debtor transfers property without receiving fair market value for it or (1) the conveyance was made for less than reasonably equivalent value or fair consideration, and (2) the transferor: (a) was insolvent or rendered insolvent, (b) intended to incur or believed it would incur debts beyond the transferor’s ability to pay as they matured, or (c) was engaged in business or a transaction, or was about to engage in business or a transaction for which any property remaining with the transferor had an unreasonably small value.

    For example, let’s say the debtor owns a car worth $20,000.  Right before filing for bankruptcy the debtor sells the car for $10,000.  This can be seen as constructive fraud.  In this example, the trustee only needs to prove the car is worth $20,000 and that the debtor sold the car for only $10,000.

    What happens if the Court finds that there was a fraudulent transfer?

    If the court finds that there was a fraudulent transfer, the trustee can void the transfer and recover the property.   For more information, it is strongly suggested to contact a bankruptcy attorney.