Accounting
Fraudulent Conveyance
A fraudulent Conveyance would be more accurately called avoidable transfer, as it is a transfer by a party (the debtor) of interest in property in order to prevent a creditor from claiming the transferred interest in order to pay a debt.
Governing Fraudulent or Voidable Conveyances
The Uniform Voidable Transactions Act (UVTA) determines how fraudulent conveyances are governed. This act, which replaced the Uniform Fraudulent Transfer Act (UFTA) in California as of January 1, 2016, applies to any transfers made after that date. Meanwhile, the UFTA applies to any transfers or obligations that occurred before. The word “fraudulent” has been removed from the title and body of the UVTA, which is one of the most apparent modifications. This revision highlights that a transfer can be voidable even if there is no wrong intent on the part of the debtor or the transferees.
Voidable Transfers
There are two types of transfers that qualify as fraudulent or voidable. The first is one is “actual fraud” and requires intent by the debtor to defraud the creditor. The other type is called “constructive fraud” and occurs when a transfer is made by the debtor for inadequate consideration. Although both instances are referred to as fraud, a “fraudulent” or “voidable” transfer may occur in either case even if typical fraud is not present.
Actual Fraud
If the debtor made the transfer (or incurred the obligation) “with actual intent to hinder, delay, or defraud any creditor of the debtor,” it is voidable and considered to be “actual fraud.” A debtor will rarely admit to acting with the intent of defrauding a creditor. Due to this, direct evidence is hard to obtain and so courts have developed a list of non-exclusive factors known as “badges of fraud” that is referred to when determining whether “actual intent” existed.
The UVTA lists eleven of these “badges of fraud,” which includes whether the transfer or obligation was made to an insider, whether the transfer or obligation was disclosed or concealed, whether the debtor was sued or threatened with a lawsuit before the transfer or obligation was made, and whether the debtor retained possession or control of the property.
The list is not exhaustive, and it does not limit the criteria that the court can or must examine when determining the debtor’s intent. Furthermore, no one variable is definitive, and no set quantity of factors determines a certain outcome. And so it is the court’s responsibility to take into account all of the facts surrounding the transfer.
Constructive Fraud
Regardless of the debtor’s intent, a transfer is voidable if the debtor made the transfer without “reasonably equivalent value” and the debtor: (i) was engaged or about to engage in a transaction “for which the debtor’s remaining assets were unreasonably small in relation” to the transaction; (ii) intended to incur, or reasonably should have believed, that the debtor would incur “debts beyond the debtor’s control or (iii) the debtor “was insolvent” at the time of the transfer or obligation, or “became insolvent” as a result of it. A debtor is presumed insolvent if they do not pay their debts when they become due, unless there is a genuine reason.
