Elements of Fraudulent Transfers (Actual Fraud): Part 1

From a post I originally wrote on March 16, 2012:

This post is the first of two discussing two recent cases illustrating the basic ideas behind fraudulent transfer claims. [FN1]

At some point in their lives most people will engage in basic estate planning, the process of arranging for the disposal of a person’s estate. This process can involve wills, trusts, beneficiary designations, powers of appointment, property ownership and powers of attorney.

When the transfer of property under the rubric of estate planning redirects assets available to satisfy claims of creditors, however, such transfers may be more heavily scrutinized and challenged by creditors. If the transferor subsequently files bankruptcy, the bankruptcy trustee appointed in the case also has powerful tools to bring such claims on behalf of creditors.

In building a case for fraud, a creditor can seek to demonstrate “actual fraud” or “constructive fraud.” One of the ways a creditor can demonstrate actual fraud is by demonstrating that a party transferred property with an intent to keep their property from creditors’ claims, at a time when they were under financial distress.

Since people will rarely admit to such an intent, courts have historically relied on certain factors, known as “badges of fraud,” to determine whether it exists. Most states have enacted a version of what is known as the Uniform Fraudulent Transfer Act (“UFTA”). [FN2] Illinois’ version of the UFTA lists eleven non-exclusive factors that may be considered:

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

A recent bankruptcy case from Illinois illustrates these principles. [FN3] In the Grube case, a bankruptcy trustee asserted that a debtor had committed actual fraud by transferring ownership interests in two corporate entities to his wife. The debtor asserted the transfers were made for estate planning purposes, and not with the intent to hinder, delay or defraud any creditor. To support his case, he included a declaration from their estate planning lawyer. The trustee contended that the debtor’s story was too incredible to past muster, as there existed eight of the eleven statutory badges of fraud when the transfers were made. These badges included the fact that the debtor’s business interests were all doing poorly and had equity totaling the amount of $1,150,000 when transferred.

While the trustee had moved for summary judgment on the actual fraud claims in his case, the court ultimately concluded that a further trial was needed to determine the debtor’s actual intent at the time of the transfer. The case illustrates the complications that can arise due to creditors’ claims in certain estate planning situations.

[FN1] As with all legal content I will post on this website, nothing contained herein is intended as legal advice or creating an attorney-client relationship and is provided for informational purposes only. Persons with further questions are encouraged to consult with a licensed attorney in their jurisdiction.

[FN2] 740 ILCS 160/5(b).

[FN3] Barber v. Grube (In re Grube), 462 B.R. 663, Bankr. No. 09-81713, Adv. No. 10-8011 (Bankr. C.D. Ill. 2012).

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