definition of insolvency in a fraudulent conveyance

Once a transfer has been deemed fraudulent, the trustee may recover the property, or the value of the property, and make it part of the bankruptcy estate. In the case of real estate, for example, the transfer is not complete until a deed is officially recorded. The transfer of certain types of property requires more than one step to complete the transaction. Only those transfers completed or “perfected” within a year of the filing of the petition for bankruptcy may be reversed. The timing of the transfer is important in determining whether the transfer will stand or not. Value as determined by foreclosure sales is generally not questioned unless the foreclosure was collusive or otherwise in violation of state procedural law.

However, transfers made solely for the benefit of third parties are not reasonably equivalent value. Generally, for an exchange to be considered legitimate, value does not have to be received directly by the debtor, but may exist in the form of additional business opportunities made available through new lines of credit or new affiliations created by the transfer. Some of the factors courts have considered in making a determination are whether the sale was for fair market value, whether the transaction was made in good faith in the ordinary course of business by parties of independent interests, the competitiveness of bids for the property, and the net effect on the debtor’s estate with respect to funds available to unsecured creditors. Courts will look at all the circumstances surrounding a transaction to determine whether the exchange looks even. When is a bargain just a bargain and not a fraudulent transfer? Although the trustee of the estate must prove that reasonably equivalent value has not been given, there is no formula for determining reasonably equivalent value. Not infrequently, however, something of value is given and the question becomes whether the value was really adequate compensation for the property. When there is nothing of value exchanged for the transfer of the debtor’s property, the answer is an easy one. Of course, reasonably equivalent value can be in the eye of the beholder. In this case, intent need not be proven rather the focus of the inquiry rests on whether the debtor received reasonably equivalent value. These are only factors to be considered in determining whether a person intended to defraud a creditor, and whether they do in fact prove the debtor’s fraudulent intent is to be determined on a case by case basis.Ĭonstructive fraud also requires two conditions: 1) in exchange for the transfer, the debtor received less than “reasonably equivalent value”, and 2) the debtor is unable to pay debts either at the time the transfer was made or as a result of the transfer itself. Some examples of these circumstances are actual or threatened litigation against the debtor, a retention of possession or control of the property, transfer of substantially all the debtor’s assets, transfer to a newly created corporation, and a special relationship with the person to whom the property is transferred. Therefore, courts have set forth circumstances, the existence of which indicate the intent to defraud. Of course, a debtor intending to defraud his creditors will not be overt about his intentions to do so. Actual fraud requires proof of intent from the person challenging the transfer. The first, actual fraud, involves the intent to defraud creditors, the other, sometimes called constructive fraud, involves a transfer, which is made in exchange for grossly inadequate consideration.Īctual fraud is committed when 1) a transfer is made within one year before the date of the filing of a bankruptcy petition and 2) is made with the intent to hinder or defraud a creditor. There are two types of fraudulent transfers in bankruptcy law. Such a transfer of the debtor’s assets to a third party, with the intent to prevent creditors from reaching the assets to satisfy their claims, is called a “fraudulent conveyance”. The trustee is given the power to set aside or “avoid” certain transfers of the debtor’s assets out of the estate that unfairly place assets beyond the creditor’s reach. Generally speaking, for bankruptcy purposes, the estate is comprised of those assets of the debtors in which the debtor’s creditors have an interest. In bankruptcy proceedings, a trustee is chosen to administer the debtor’s estate in a fair and orderly manner. Bankruptcy Law: Understanding Fraudulent Conveyances

Definition of insolvency in a fraudulent conveyance