A Primer on Fraudulent Transfer Law

1. A Primer on Fraudulent Transfer Law F. Hale Stewart, JD, LLM, CAM, CWM, CTEP The Law Office of Hale Stewart Assetprotectionlawyerinhouston.com Author of the book U.S. Captive Insurance Law 832.330.4101 bonddad@prodigy.net Skype name: bonddad

2. First, What is Asset Protection? There are several events which can negatively impact an individual’s financial well-being.  In general, these are bankruptcy, litigation, divorce, physical/mental incapacitation and death(this actually impacts the decedents family, but it can still harm a family financially if not dealt with properly).  Asset protection looks at each of these events, and then asks this fundamental question: "how can we mitigate the financial damage these events have the potential to cause?"  Or, put another way, asset protection is the legal discipline of mitigating , or attempting to mitigate, the negative impact of various financially and legally catastrophic events.

3. When Can We Engage in Asset Protection? Suppose a high net worth client is in the middle of a lawsuit and the prospects look grim: it appears the jury will award the plaintiff a large judgment.  At this point, the client decides to create and implement an asset protection plan, with the obvious intent of preventing the other party from collecting on the judgment.  Alternatively, suppose the same individual receives a call from an attorney who wants to discuss a situation with a former client of the high net worth individual (for example, a lawyer representing a former patient calls a doctor who treated the patient with poor results).  The high net worth person has not been sued (he has not been formally served with papers) but he has a good indication that someone is thinking about suing him.  The high net worth client calls and asks about asset protection plans.Or suppose a company is starting to lose money and the future does not look promising – key clients have gone to other companies, key employees are leaving and the industry is experiencing strong competition from an overseas competitor that has vastly lower labor costs.  The company wants to start siphoning off money and assets before creditors either force the company into bankruptcy or simply start suing for non-payment of debt.

4. When Can We Engage in Asset Protection? In all the preceding examples, a creditor would be well within their rights to ask the court to rescind the transaction. The reason is the debtor knows with a fairly high degree of certainty that he will have to pay money sometime in the near future. To allow him to make it difficult to pay those amounts would be tantamount to encouraging and promoting fraud.

5. When Can We Engage in Asset Protection? In general, we can’t engage in asset protection when we know with a pretty high degree of certainty that a judgment, debt, payment, bankruptcy or the like is right around the corner. Put another way, we can only engage in asset protection when things are going well.

6. Transfers Fraudulent as to Present and Potential Future Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor

7. “Badges of Fraud” Fraud rarely occurs out in the open. As such, we look to certain circumstances as evidence of fraud. While the presence or existence of the following “badges of fraud” are not conclusive in and of themselves, they do indicate we need to look in far more detail at the transaction. This is the way courts will determine if a creditor is attempting to “hinder, defraud or delay” a creditor.

8. From the Act Subsection (b) is a nonexclusive catalogue of factors appropriate for consideration by the court in determining whether the debtor had an actual intent to hinder, delay, or defraud one or more creditors. Proof of the existence of any one or more of the factors enumerated in subsection (b) may be relevant evidence as to the debtor’s actual intent but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation. ….In considering the factors listed in § 4(b) a court should evaluate all the relevant circumstances involving a challenged transfer or obligation.

9. BOF1: Transfer to an “Insider” • The transfer or obligation is to an insider • So – who is an insider? • (i) if the debtor is an individual, • (A) a relative of the debtor or of a general partner of the debtor; • (B) a partnership in which the debtor is a general partner; • (C) a general partner in a partnership described in clause (B); or • (D) a corporation of which the debtor is a director, officer, or person in control;

10. BOF1: Transfer to an Insider • (ii) if the debtor is a corporation, • (A) a director of the debtor; • (B) an officer of the debtor; • (C) a person in control of the debtor; • (D) a partnership in which the debtor is a general partner; • (E) a general partner in a partnership described in clause (D); or • (F) a relative of a general partner, director, officer, or person in control of the debtor;

11. BOF1: Transfer to and Insider • (iii) if the debtor is a partnership • (A) a general partner in the debtor; • (B) a relative of a general partner in, or a general partner of, or a person in control of the debtor; • (C) another partnership in which the debtor is a general partner; • (D) a general partner in a partnership described in clause (C); or • (E) a person in control of the debtor;

12. BOF2: • The debtor retained possession or control of the property transferred after the transfer; • For example, transferring the property to • a trust where the debtor is the trustee • A limited partnership where the debtor is the general partner • A corporation where the transferee is a majority stock-holder of all shares eligible to vote.

13. BOF: The Transfer was Disclosed Or Concealed • From the Act: • (3) the transfer or obligation was disclosed or concealed; • Obviously, hiding a transaction is a suspicious act; it implies that the parties are doing something that don’t want others to know about.

14. BOF: Lawsuits • before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; • In this situation, a possible judgment creditor may be around the corner. Therefore, the act prevents a potential debtor from thwarting a creditor before the case even begins.

15. BOF: Intentional Bankruptcy • the transfer was of substantially all the debtor’s assets; • In this situation, the debtor is bankrupting himself, making himself “judgment proof.” However, in doing so, he’s thwarting a potential creditors legitimate claims.

16. BOF: Running Away • the debtor absconded; • Obviously, if the debtor vanishes after the transfer, he’s trying to hide something.

17. BOF: Removing/Concealing Assets the debtor removed or concealed assets;

18. BOF: Equivalent Value the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

19. BOF: Bankruptcy • the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; • If the debtor was in the middle of a bankruptcy case, or was about the declare bankruptcy, then any transfer is suspect.

20. BOF: Prior to debt • the transfer occurred shortly before or shortly after a substantial debt was incurred; • Here, the transferor is deliberately making it hard for a future or just recent creditor to collect on a debt.

21. Transfers As to Present and Future Creditors Creditors • A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: • without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: • was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or • intended to incur, or believed or reasonably should have believed that he [or she] would incur, debts beyond his [or her] ability to pay as they became due.

22. Fraudulent Transfers as to Current Creditors A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.