Voidable / Fraudulent Transfers in Bankruptcy Cases

Bankruptcy Law Documents and Gavel

In bankruptcy cases, a bankruptcy trustee has the ability to void certain fraudulent transfers of property made by the debtor prior to filing bankruptcy. This ability is often referred to as the bankruptcy clawback provision. When fraudulent transfers in bankruptcy cases are voided, the bankruptcy trustee can recover the property that was transferred or its value from the transferee and use the assets to pay creditors in the bankruptcy action.

Federal and State Law on Fraudulent Transfers

Under the United States Bankruptcy Code, the trustee has the authority to void fraudulent transfers made within two years preceding the bankruptcy filing. The federal law gives the trustee the option of proceeding under state law as well.

Minnesota state law substantive provisions relating to fraudulent transfers are similar to those of federal bankruptcy law. The most significant difference under Minnesota state law is that a trustee can go back as far as six years in cases of fraudulent transfers, compared to the two years allowed under federal law. For that reason, a bankruptcy trustee in Minnesota may decide to proceed on fraudulent transfers under state law instead of under the federal bankruptcy law, to take advantage of the longer clawback period. The six-year clawback period does not apply to charitable or religious organizations — those transfers are subject to the two-year period.

Uniform Voidable Transfers Act and Uniform Fraudulent Conveyances Act in Minnesota

For many years, Minnesota and the vast majority of other states covered fraudulent transfers in a statute called the Uniform Fraudulent Conveyances Act (UFCA). In 2015, Minnesota adopted the Uniform Voidable Transfers Act (UVTA), which replaces the UFCA. A number of other states also have adopted the UVTA.

The UVTA is similar to the UFCA in many respects. The most significant difference is the absence of the word fraudulent in the UVTA. The UFCA used both fraudulent and voidable with some inconsistency. Confusion existed among creditors, courts, and lawyers about "fraudulent transfers," because under the UFCA (and now the UVTA), proof of fraud or fraudulent intent is not — and never has been — necessary to give rise to a fraudulent or voidable transaction. The UVTA no longer uses the term "fraudulent," to minimize the confusion. The change in terminology does not have any effect on application of the law, nor does it substantially change the nature of the law on fraudulent or voidable transactions.

When specific requirements are met, the UVTA empowers the bankruptcy trustee to reach assets and property that a debtor transferred to another person prior to filing bankruptcy The bankruptcy trustee has the authority to recover the assets or their value from the transferee. The trustee sometimes can even recover property from a subsequent transferee, unless the subsequent transferee purchased the property in good faith without knowledge of the debtor’s rights. If a subsequent good faith transferee made improvements in the property, the subsequent transferee may be able to retain a lien or the improvements in some cases.

Types of Voidable / Fraudulent Transfers

Under the UVTA and federal bankruptcy law, there are two different types of voidable transfers. The first type is intentional and traditionally has been referred to as a transfer involving actual fraud. The second type is commonly referred to as constructive fraud. The UVTA does not use either of these terms but instead describes the two situations where voidable transfers occur.

Transfers Involving Intent to Defraud

The first type of voidable action requires intent on the part of the debtor — but not necessarily fraudulent intent. The Minnesota UVTA provides that transactions are voidable when the transfer was made “with actual intent to hinder, delay, or defraud any creditor of the debtor.” The determination of intent is made on a case-by-case basis, weighing the facts in the specific situation. The law sets forth a number of factors that will be considered in making the decision about the debtor’s intent.

Transfers Involving Receipt of Nonequivalent Value and Insolvency

The second type of voidable transfer — traditionally referred to as constructive fraud — does not require intent on the part of the debtor. It arises when a debtor makes a transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation.”

Federal bankruptcy law and the UVTA impose the additional requirement of insolvency on these transfers: the transfer for nonequivalent value is voidable only if the debtor was insolvent at the time of the transfer or became insolvent because of the transfer. Insolvency is not defined in the statute, but it generally means having more debts than assets. In a bankruptcy case, assets that are exempt and the value of the transferred property are not counted in determining insolvency.

Examples of Fraudulent / Voidable Transfers

The goal of the fraudulent and voidable transfer provisions is to prevent individuals from getting rid of or hiding valuable assets that can be sold to pay creditors. There are many things an individual can do that give rise to an allegation of a voidable transfer, even when the intention is not to hide assets or defraud creditors. Examples of situations that can give rise to voidable transfer claims include but are not limited to:

  • Transfer of property (like a car or real estate) to a relative or friend for a fraction of the value
  • Depositing a check into another person’s bank account to avoid having the funds in the debtor’s account
  • Transfer of title to property but retention of possession by the debtor
  • Gifts to family members or friends
  • Placing assets in an irrevocable trust

Proving and Defending Against Fraudulent Transfer Allegations — Talk With an Experienced Twin Cities Bankruptcy Litigation Attorney

Allegations of voidable or fraudulent transfers are not uncommon in bankruptcy proceedings. Proving them and defending against them requires detailed knowledge and experience with federal bankruptcy law and applicable Minnesota laws, as well as the skill to investigate the complicated factual circumstances often involved.

In my practice at the Dave Burns Law Office, I represent both debtors and creditors in adversary proceedings in the United States Bankruptcy Courts in Minneapolis and St. Paul. If you are a creditor and suspect a fraudulent transfer by your debtor or if you are a debtor facing an allegation that you made a fraudulent transfer, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.

Categories: Bankruptcy, Litigation

The Dave Burns Law Office hopes you find this article helpful. But please do not rely on it as legal advice. The law changes regularly and the outcome of any legal matter depends on its unique circumstances. View full disclaimer