Transfers by the Business

April 13, 2006

	Visited: 102
	Not rated
	Rate:

Creditors may challenge your asset transfers on the basis of constructive fraud. For a business, creditors can challenge payments to the owner for salary, lease payments and loans, as well as liens placed by the owner on the entity's assets. However, each of these transfers involves the owner providing adequate consideration to the entity, so they will not meet the second test for constructive fraud.

Lease and loan payments are made in return for assets provided by the owner to the entity. Liens result only from extensions of credit from the owner to the entity. Payments to the owner for services actually rendered, or for assets actually leased or loaned to the entity, should pass muster, provided that the amounts of the liens or payments are not outrageous in comparison to what the owner provided the entity.

In particular, with respect to salary, the owner has great leeway. Owners can justify salaries amounting to hundreds of thousands of dollars as "reasonable" in many cases. Thus, each type of transfer is beyond reproach in any action based on constructive fraud.

Because creditors must prove both criteria for constructive fraud, the use of adequate consideration makes the issue of your insolvency irrelevant in a constructive fraud case. Note that insolvency can still be important in an actual fraud case.