Written by attorney Jeffrey Robert Matsen

Asset Protection Planning: Fraudulent Conveyance Law

A. Overview

The process of planning for estate preservation and risk management involves the marshaling together of one’s assets in order to protect them from loss or dilution from potential risk and claims to which they would otherwise be subject. One of the biggest obstacles or hurdles an individual faces with respect to implementing a legally efficacious risk management plan is the fraudulent conveyance law. Fraudulent conveyances are conveyances made (or presumed to made) with the intent to delay or defraud creditors. Usually, fraudulent conveyances are characterized by a lack of fair and valuable consideration and/or an attempt by debtors to place their property beyond the reach of creditors. In California, the law of fraudulent conveyances found in the Uniform Fraudulent Transferred Act (“UFTA") as set forth in Civil Code Sections 3439.01 to 3439.12.

Basically, a transfer made or obligation incurred by a debtor is actually 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 with actual intent to hinder, delay or defraud any creditor of the debtor. A claim means a right to payment whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, disputed, undisputed, legal, equitable, secured, or unsecured. A transfer means any manner of disposing of or parting with an asset or an interest in an asset whether direct or indirect, absolute or conditional, voluntary or involuntary, and includes the payment of money, a release, a lease and the creation of a lien or other encumbrance. Although most cases involve transfers of assets, California applies the fraudulent conveyance law with equal force to obligations incurred by the debtor.

A creditor need not have a judgment or a matured claim against the debtor to enforce the remedies of the UFTA. The relation of debtor and creditor arises in tort cases the moment that a cause of action accrues.

To determine whether transfers were made with actual intent to hinder, delay or defraud creditors, the focus of the inquiry is on the debtor’s state of mind. The court often infers fraudulent intent from the circumstances surrounding the transfer taking into account the so called “badges of fraud". These badges of fraud include:

  1. A transfer or obligation to an insider;
  2. Concealment of the transfer or obligation;
  3. The debtor’s retention of possession or control of the transferred property;
  4. Transfer of substantially all of the debtor’s assets;
  5. The debtor’s receipt of inadequate consideration for the transaction;
  6. The debtor’s insolvency before or shortly after the transaction;
  7. The incurring of substantial debts shortly before or after the transfer;
  8. Pending litigation or threatened litigation against the debtor;
  9. Transfer of the essential assets of the debtor’s business to a lienor who then transfers them to an insider of the debtor; and
  10. The debtor absconding with his/her property.

Once these badges of fraud are established, then the burden shifts to the transferee to provide a legitimate purpose for the transfers. California, however, seems to say that the presence of badges of fraud does not create a presumption of fraud but constitutes evidence from which an inference of fraudulent intent may be drawn.

B. Transfers

The fraudulent transfer law is primarily aimed at people who try to make gifts to other people or entities to avoid their creditors. In order for fraudulent transfers to be avoided, all transactions should be for “fair value". In addition, the transfer should have economic substance.

Transfers to trusts are extremely suspect because they are not for fair value and often times do not have economic substance. However, transfers to limited partnerships and corporations may be “for value". It is much more difficult to force a limited partnership or corporation to pay up than the debtor himself/herself.

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