This entry contains information applicable to United States law only. A transfer of property that is made to swindle, hinder, or delay a creditor, or to put such property beyond his or her reach.
For example, a man transfers his bank account to a relative by putting the account in the relative's name. He informs the relative that he has not relinquished ownership of the funds, but merely wants to isolate the money from the reach of his creditors. This is a fraudulent conveyance that can be set aside by the court at the request of the defrauded creditor.
Every kind of property that can be used for the payment of debts can be the subject of a fraudulent conveyance and reclaimed by the creditors in a proper case. By statute many states exempt personal items — such as clothing, kitchen appliances, and household furniture— from being reached by creditors to satisfy debts.
Any creditor who can establish that he or she has been harmed by the fraudulent conveyance can attack it. The debtor must have owed the creditor a valid and enforceable debt at the time the conveyance was made. A creditor who seeks to set aside a fraudulent conveyance must comply with the requirements in his or her jurisdiction. Generally, the individual must acquire a lien — a right or claim — or a judgment — a court decision — against the property. A judgment is usually required to show with certainty the existence of a valid and enforceable debt, but it can be dispensed with, depending upon the particular circumstances of the case. In many jurisdictions, a court will not set aside the conveyance if the debtor owns property, other than that which has been fraudulently conveyed, that is sufficient to pay the debt.
Fraudulent Intent
Whether a transaction constitutes a fraudulent conveyance depends upon the existence of the intent to defraud that must exist at the time that the challenged transfer was made. The mere fact that a person is in debt does not make a conveyance of his or her property for a valuable consideration fraudulent unless it is made with an intent to cheat the person's creditors. Suspicious circumstances surrounding the transfer of property by a debtor can justify an inference of fraud. If a debtor transfers his or her property to another for a grossly inadequate consideration in anticipation of, or during, the course of a lawsuit by creditors to enforce the payment of debts, the transfer can be set aside by the court. If the conduct of a sale or transfer of a debtor's property is done in the usual manner of doing business, the court can scrutinize the transaction to determine whether it was made with an intent to defraud. The failure to record a conveyance, such as a deed to land, indicates the existence of fraud, which when coupled with other suspicious circumstances can justify a determination that the conveyance was fraudulent. If a debtor retains possession of personal property after it has been sold to another, this is evidence of fraud, which can lead to the sale being set aside as a fraudulent conveyance.
Consideration
A valuable consideration is necessary to support a conveyance made by a debtor against the challenge of his or her creditors. The payment of money or the surrender of a legal right, such as relinquishing a right to institute a lawsuit to enforce a court order, is usually regarded as valuable consideration. Where a person pays a valuable consideration for a transfer of a debtor's property without knowledge of the debtor's fraudulent intent, the creditors cannot have that transfer set aside.
Where a debtor is insolvent — his or her debts exceed assets — at the time he or she makes a voluntary conveyance to someone without receiving anything in return, this is usually treated as a fraudulent conveyance. If a voluntary conveyance renders a debtor insolvent or leaves the debtor without the means of paying the debts existing at the time of the conveyance, it is fraudulent and without any legal effect, regardless of the intent of the parties.
Family Relationships
A conveyance by one spouse to the other based upon a fictitious or nominal consideration is generally treated as fraudulent if it is made to defeat the spouse's creditor's claims. However, if the one spouse pays the other the market value of the property, the transfer is valid and will not be set aside as a fraudulent conveyance. Where a conveyance between spouses is made in consideration of love and affection, it is voluntary and fraudulent if it renders the debtor spouse unable to pay existing personal debts.
Property purchased in the name of one spouse, for example the wife, but paid for with the funds of the other, the husband, can be challenged by the husband's existing creditors. A bona fide debt due by one spouse to the other, which can be established by showing that the spouses dealt with each other as debtor and creditor, is sufficient consideration to support a conveyance of property in payment of a debt as long as the debt bears a reasonable proportion to the value of the property conveyed.
Creditors will lose their attack upon a conveyance by a parent to his or her child, or between any family members, for valuable consideration unless the transfer is for a grossly inadequate consideration and is surrounded by other circumstances that establish fraud.
Preferences
A debtor, although insolvent or in failing financial circumstances, can prefer one or more of his or her creditors in the payment of debts by paying these persons first, provided no fraudulent intent exists to cheat the other creditors. The debtor's motives for a preference among the creditors are immaterial unless they establish the fraudulent intent of the debtor. The property transferred must not unreasonably exceed the amount of the claim, and the transaction must not provide for special benefits to the creditor. A debtor can give a preference to his or her creditors because as absolute owner of his or her personal property, the debtor can do with it as he or she pleases, so long as the law is not violated. (By law certain debts — such as those owed to the United States, which are given preference by statute, or debts created by secured transactions — must be satisfied before any preferred creditors.) The existence of a family relationship, such as husband and wife, between the debtor and preferred creditor does not in itself affect the validity of a preference. The relationship between the parties is just one factor to be considered, along with other circumstances, and is given commensurate weight in determining the good faith of the transaction. A transaction involving a family relationship, however, will be more closely examined than if it had taken place between strangers.
Remedies
Once a conveyance is declared void in fraud of creditors, the court can do full justice by ordering a sale of the property under its own direction. The proceeds are used to pay off the costs of the lawsuit and the complaining creditors who brought their claims before the court. A debtor who has fraudulently transferred property to cheat his or her creditors might also be subject to statutory penalties and criminal prosecution, depending upon the law in the debtor's home state.
Bankruptcy
In the context of bankruptcy law, a fraudulent conveyance can be the basis for an objection to discharge. Federal law denies a discharge to a debtor who transfers property with intent to hinder, delay, or defraud within the twelve months immediately prior to the filing of the bankruptcy petition or after the filing of bankruptcy petition.
