Fraudulent Conveyance

Fraudulent Conveyance
See also

Fraudulent Conveyance, i.e. a transfer of property to frustrate a creditor's claim by putting the property beyond the creditor's reach, may trigger veil piercing under the fraud exception to limited liability. A fraudulent conveyance can be actual or constructive. An actual fraudulent conveyance is intentional and reckless, and can be defined as a transfer made, or obligation incurred with the actual intent to hinder, delay or defraud any creditor of the debtor.

A constructive fraudulent conveyance may be found when the transfer leaves the debtor with unreasonably small assets or renders the debtor insolvent, where any reasonable man would have foreseen that insolvency was likely to follow. If such transfer has been effected by a shareholder, a court may undo or disregard that transaction or impose personal liability on the shareholder for the amount of the transaction's value. The shareholder is to return the fraudulently transferred assets so that they become available to creditors of the corporation, or pay an equivalent amount to the corporation as compensation[1].

Analysis of fraudulent conveyance

When examining fraudulent conveyance risk, the planner should consider the following analysis:

  1. Determine the applicable source of law
  2. Analyze fraudulent conveyance claim risk arising out of an actual intent fraudulent conveyance claim
  3. Analyze fraudulent conveyance claim risk arising out of a constructive fraudulent conveyance claim
  4. If, based on the preceding steps, the planner determines that there is a risk of a valid fraudulent conveyance claim, determine whether any affirmative defences apply
  5. If the planner determines that there is a risk that successful fraudulent conveyance claim may be brought, determine the possible remedies a court may apply

To avoid fraudulent conveyance claims:

  1. The planner should obtain from the client a personal financial statement audited by a competent accounting firm, as well as audited financial statements of business entities the client controls
  2. The planner should limit the transfer of assets out of the client's estate to a maximum predetermined amount of the client's assets, which the planner must determine by analyzing the applicable law
  3. The planner should obtain from the client a certificate of all liability insurance maintained
  4. The planner should obtain from the client affidavits:
  • there are no current legal proceedings being prosecuted or contemplated against the client
  • the client is not liable for liabilities or contingent liabilities that the client has not disclosed in its financial statements
  • the client does not know of any currently existing facts that would lead

The planner should use the above items to conduct an insolvency analysis under applicable law[2].

Example of fraudulent conveyance

Example of fraudulent conveyance law arose during the merger mania of the 1980s, when it became a key issue in claims against executives who that the leveraged buyouts of corporations. The point made was that the leveraged company often received nothing of value in return for yielding its assets as collateral to lending institution. The question occurs not just in bankruptcy cases or shareholder suits against large corporations, but in family law. What about a spouse who hides earned assets in an off-shore bank account, beyond the reach of the US legal process, and then seeks a divorce? Some lawyers are calling this practice a form of fraudulent conveyancing, because it effectively defrauds the abandoned partner. The practice is during, not only because it is morally unfair- usually to women- but because, legally, it works[3].

Footnotes

  1. L. Bergkamp 2001, p.316
  2. L.D. Solomon, L.J. Saret 2010, p.35-36
  3. Ch. Ross 2017, p.52

References

Author: Marlena Dopnik