Can Trustees Avoid Transfers Made Pursuant To Divorce Decrees Or Other Agreements Incident To Divorce?

• Published date: 26 August 2022
• Subject Matter: Family and Matrimonial, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, Divorce
• Law Firm: Freeman Law
• Author: Mr Gregory Mitchell

Can Trustees Avoid Transfers Made Pursuant to Divorce Decrees or Other Agreements Incident to Divorce?

This issue arose in a case I am currently working on, and the short answer is yes, and divorce lawyers would be served well by becoming familiar with this possibility. Situations where this might arise can vary substantially. The most obvious scenario involves a sham divorce that is specifically intended to hinder, delay, or defraud a creditor. While not common, and likely difficult to prove, property settlements in divorce that are specifically designed to prevent creditors from getting to the assets of one spouse are clearly avoidable in a subsequent bankruptcy filing. But other, less obvious situations can also lead to avoidance - situations where there was no intent on the part of either spouse to avoid creditors and often where a subsequent bankruptcy is not even contemplated by the parties at the time of entering into the property division agreement.

A quick primer on fraudulent transfer law under the Bankruptcy Code ("Code") is appropriate. 11 U.S.C. ' 548 addresses fraudulent transfers under the Code. Therein, bankruptcy law provides for two types of fraudulent transfers - so-called "actual" fraudulent transfers; and constructive fraudulent transfers. Actual fraudulent transfers are addressed in ' 548(a)(1)(A) of the Code, and they involve the type of conduct referenced above. Intent - often difficult to prove - is a required element of these types of transactions. Constructively fraudulent transfers are addressed in ' 548(a)(1)(B), and in a fact that surprises a lot of divorce attorneys, intent is not an element of constructive fraudulent transfers. Instead, constructively fraudulent transfers are determined simply by an analysis of what one spouse gave up in comparison to what they received. If one spouse received less than a "reasonably equivalent value" in exchange for a transfer, then that transfer is subject to avoidance in a subsequently filed bankruptcy case of the transferor spouse.

In the case I'm involved with, it is apparent that one of the spouses entered into what can only be described as a one-sided agreement incident to divorce out of guilt. That spouse may have been unfaithful in the marriage and felt that the easiest thing to do was simply agree to the settlement - which by all appearances led to the transferee spouse receiving property whose value substantially exceeded that received by the transferor spouse. The divorce court...