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Fraudulent Transfers

A fraudulent transfer is an effort to avoid debt by transferring assets to another person or company. Commonly, such assets are transferred to a family member, other business, or a trust. While under normal circumstances a person is free to transfer his assets, the transaction is considered fraudulent if the transferor either made the transfer intending to defraud creditors, or made the transfer with inadequate consideration and was insolvent prior to the transfer, or became insolvent as a result of the transfer.

The Two Types of Fraudulent Transfer

1. Actual Fraud

A transfer constitutes actual fraud when the transferor knowingly and intentionally transfers assets in order to hinder, delay or defraud a creditor. Intent can be hard to prove.
For that reason, courts look to key indicators, called “badges of fraud,” to determine intent.

Indicators of Intent to Commit Fraud

“In determining actual intent…consideration may be given, among other factors, to whether

  • The transfer or obligation was to an insider,
  • the debtor retained possession or control of the property transferred after the transfer,
  • the transfer or obligation was disclosed or concealed,
  • before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
  • the transfer was of substantially all the debtor’s assets,
  • the debtor absconded,
  • the debtor removed or concealed assets,
  • 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,
  • the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred,
  • the transfer occurred shortly before or shortly after a substantial debt was incurred, and
  • the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debto r.”
  • Connecticut General Statutes Sec. 52-552e.

    If one or more of these factors are proven, the court may presume actual fraudulent intent.

    2. Constructive Fraud

    Constructive fraud is easier to prove and occurs when a debtor received less than a reasonably equivalent value in exchange for the transfer and either was insolvent at the time of the transfer, or was rendered insolvent by the transfer. This is provable by looking at bank and other financial records. In the case of constructive fraud, the transferor’s intent is irrelevant and only the financial facts surrounding the transfer are considered.

    Consequences of a Fraudulent Transfer

    The repercussions for actual and constructive fraud are the same. The transferee can be sued by a creditor or bankruptcy trustee. If fraud is proven, the court can render the transfer void and order a return of the transferred money or property. The court can also enter a money judgment against the transferee equal to the value of the asset transferred.

    What Are The Transferee’s Defenses?

    The law provides the transferee with a defense. If the transferee can prove that it received the transferred assets in good faith, and for value, then the transferee has a reasonable chance of winning. For example, if a transferee received repayment of a debt, without actual or constructive knowledge that the transfer was made with the intent to defraud creditors, or a reason to be suspicious that the transfer is made with fraudulent intent, then the transferee will not be required to return the transferred asset. Or, if the transferee was unaware of the transferor’s insolvency, and gave value in exchange for the transfer, then the transferee will not be held liable.

    However, in some instances, there may be obstacles to establishing a “good faith” defense. One example is when an insolvent parent pays the college tuition of a non-minor child. Some courts have held the school liable to return the payment to the parent’s bankruptcy trustee because, even though the college acted in good faith, it has not given value to the transferor. The value in this example went to the child. Also, when a transferee satisfies the value part of the defense, and establishes that it did not have actual knowledge of fraud, courts may still inquire as to whether the circumstances raised a red flag,  putting the transferee on notice that it should have investigated the facts further before accepting the transfer. If these red flags are evident, however, the transferee can avoid a return of the transferred assets by proving that an investigation would not have yielded evidence of the fraud, and, thus, would have been futile.

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