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Debtors beware: Intent must be proven for fraudulent conveyance

On Behalf of | May 1, 2024 | Business Disputes

Fraudulent conveyance, also known as fraudulent transfer, is a serious legal issue that can arise during bankruptcy proceedings or debt collection. It occurs when a debtor transfers assets to another party with the intention of avoiding creditors. This hinders a creditor’s ability to collect outstanding debts.

While it may seem like a debtor simply needs to avoid transferring assets altogether, the law is more nuanced. For a business owner to be found guilty of fraudulent conveyance, the key element that creditors must prove is intent to defraud. It can help to explore common red flags that can raise suspicion of fraudulent conveyance, but it’s crucial to remember that these actions alone don’t guarantee guilt.

Setting up shell corporations

While intent is key, certain actions can raise eyebrows in court. The most prevalent is setting up shell corporations. Shell corporations are businesses created with minimal assets and activity. These can be a red flag if a business owner establishes one shortly before facing financial difficulties and then transfers assets to it. This creates a layer of separation between the debtor and the valuable assets, making it difficult for creditors to seize them. However, it’s important to consider legitimate reasons for shell corporations, such as isolating liability for specific ventures.

Scheming to retain control of transferred property

Scheming to retain control of transferred property can also be interpreted as intent to defraud. Even if a transfer of ownership occurs, if the debtor maintains control over the property in some way, it can suggest fraudulent intent. This might involve the debtor continuing to use the asset, leasing it back from the new owner or having a family member act as the recipient of the transfer while still benefiting from the asset themselves.

Transferring assets to an insider

Transactions with individuals close to the debtor, such as family members or business associates, are scrutinized more heavily. Suppose assets are transferred to an “insider” at a price significantly below market value, especially when the debtor is facing financial hardship. In that case, it can be seen as an attempt to shield assets from creditors.

Business owners facing financial difficulty can benefit from seeking personalized legal counsel before transferring any assets. A legal team can explore the potential legal implications of any actions and help them navigate the complexities of debt collection and bankruptcy. They can also help ensure that asset transfers are legitimate and won’t be misconstrued as a fraudulent conveyance.


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