Fraudulent Transfers

• Published date: 14 December 2022
• Subject Matter: Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Freeman Law
• Author: Mr Gregory Mitchell

Basic Statutory Framework and the Difference Between Actual and Constructive Fraudulent Transfers

Over the last 45 days, I have litigated four separate fraudulent transfer adversary proceedings in Bankruptcy Court. Through that experience, I have not only reinforced certain principles, but also clarified others and learned a few things along the way. This is the first in a series of blogs I'm going to write that will not only document these principles for my own benefit and future reference, but also share what I've learned (and re-learned) with others dealing with similar matters.

This first of what is expected to be five blogs on fraudulent transfers will focus on the basic statutory framework surrounding fraudulent transfers - both under the Bankruptcy Code as well as Texas law. Herein, I will additionally cover the basic differences between what is known as "actual" versus "constructive" fraudulent transfers.

Fraudulent Transfer Basics

The term "fraudulent transfer" conjures up a wide variety of visions depending on your perspective and experience. In its broadest sense, a fraudulent transfer is the transfer of an asset for what is deemed an unlawful purpose. Usually, it involves the current owner of an asset transferring that asset in an attempt to put it out of reach of someone else - often a creditor; sometimes a business partner or other entity that might claim some right to acquire that asset.

In this series, I am going to focus on fraudulent transfer laws under both the Bankruptcy Code, as well as under Texas law. Mind you, fraudulent transfer laws around the country are very similar. And therefore, while the Bankruptcy Code is uniform, state laws are also fairly consistent. The best way of explaining the concept of a fraudulent transfer in the bankruptcy context is with a relatively simple example. Most debtors are aware that, when they file for bankruptcy protection, any non-exempt assets that they have are likely at risk of being taken and used to satisfy creditors. The issue of exempt versus non-exempt assets is beyond the scope of this series, but as a general concept, debtors in most states are allowed to keep a limited number of assets as part of the "fresh start" that bankruptcy is supposed to provide. In most cases, this includes, at a minimum, a house, a car, and personal belongings, including clothes, jewelry and basic necessities. These assets are considered exempt assets because they are exempted from the rights of a bankruptcy...