Actual Fraud and Asset Transfers

April 13, 2006

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In seeking to avoid challenges to asset transfers--whether in an overall asset exemption plan or in your strategic funding plan for the business--you must be careful of the provisions of the Uniform Fraudulent Transfers Act (UFTA).

Besides constructive fraud, the UFTA also outlaws actual fraud--that is, transfers made with the intent, or motive, of avoiding a debt. You should be most concerned with this type of claim.

Both the UFTA itself and the courts have identified factors that tend to establish fraud. With the exception of the first factor (motive or intent), which must be proved in every case based on actual fraud, no one factor is necessarily more important than the others. Factors are weighed by the particular court, and the relative importance of a given factor varies on a case-by-case basis.

Notwithstanding that, the most important factors, in most cases, are as follows:

the motive or intent of the debtor
whether the debtor was insolvent at the time of the transfer, or could reasonably anticipate becoming insolvent thereafter
whether the transfer was concealed from the creditor
whether, at the time the transfer was made, the debtor had been sued, was threatened with a lawsuit or was otherwise in the midst of a financial crisis
whether the debtor received adequate consideration in return for the transfer
whether, at the time the transfer occurred, the debtor had incurred a substantial debt

Other factors that are given some weight include:

whether the transfer was of all or substantially all of the debtor's assets
whether the transfer was to an insider (i.e., family member or controlled entity)
whether the debtor fled the vicinity or tried to hide assets
whether the debtor transferred assets to a lien holder, who then transferred the assets to an insider of the debtor