Jay Adkisson's Overview
of Fraudulent Transfer Law

Introduction

Fraudulent Transfer Law is talked around a lot in asset protection planning, but it is rarely addressed head-on. The purpose of this page is to present the basics of Fraudulent Transfer Law, so that when you hear the phrase you will have a good idea what it is.

Basically, a Fraudulent Transfer (a/k/a "Fraudulent Conveyance") is a transfer which a debtor makes for the purpose of defeating a creditor's collection efforts against the debtor. This typically happens when, say, a debtor attempts to "sell" everything to his wife, cousin or business partner for $5 to keep his stuff out of the hands of his creditors. If the court figures out that the transaction is a sham to defeat the creditor, the court will set aside the transaction and make the person holding the assets give them to the creditor.

The modern law relating to fraudulent transfers derives from a case decided by the late Lord Coke in 1601, see, e.g., Twyne's Case, 3 Coke 80b, 76 Eng.Rep. 809 (Star Chamber 1601), and the law really hasn't changed that much over the course of the last 400 years, except for a slow infusion of bankruptcy principals in determining whether a debtor is insolvent.

In a nutshell, Fraudulent Transfer Law is this: You can't do anything which would impair the rights of your unsecured creditors, if you do then the courts will simply ignore what you have done.

Gifts and Donations

Fraudulent Transfer Law is primarily aimed at people who try to make gifts to other people to avoid their creditors.

The unexpressed rationale is that the gift was only made to keep creditors from getting it, and the gift will either be controlled by the person who made the gift, or they will get it back after the creditors go away. So right off the bat there is a control test: If you have made a gift to keep it away from creditors, but you really still control it, the gift will be a fraudulent transfer.

Another unexpressed rationale is that you shouldn't be making gifts if you are broke (if you are broke you should be receiving gifts!). So there is also an insolvency test: If you have made a gift while you are insolvent, the gift will be a fraudulent transfer.

Finally, you shouldn't be doing anything which would lessen your creditor's rights. So there is an intent test: If you make a gift with the intent of keeping it away from your creditors, the gift will be a fraudulent transfer. This is why you should never call an asset protection plan an asset protection plan, and why you should incorporate other planning into the plan. Call it anything else -- a tax plan, an estate plan, whatever -- just not an asset protection plan.

Well, you say, I'm sure not going to admit that my intention was to keep it away from my creditors. This argument does not protect the gift, it just makes it a little harder to prove, because fraudulent transfers can be proved by circumstantial evidence. And this is why you need to have you plan formed by a licensed attorney who has been in court, and knows what sort of evidence to look out for.

Avoid Trusts

In FTC v. Affordable Media LLC, 9th Cir. Case No. 98-16378 (June 15, 1999), the Ninth Circuit affirmed the decision of the U.S. District Court for the District of Nevada, to hold a San Diego couple in contempt for failing to return assets which were held in a foreign asset protection trust (a/k/a "offshore trust"), which was located in the Cook Islands. The Ninth Circuit characterized the couple's alleged inability to persuade the trustee to return assets as a "charade", and stated that person's attempting to avoid a court's orders by way of an offshore trust will have to meet a heightened burden of proof.

I believe this spells the end for offshore trusts as a common asset protection tool. We will soon offer an extended analysis of the Anderson case, and its effect on the asset protection sector.

Go to Critical Analysis of the Anderson case

Go to Actual Text of the Anderson case

If you have claims against you -- even potential claims -- a transfer to a trust will almost always be deemed a fraudulent conveyance, for the simple reason that the conveyance is a gift which is made without the transferor receiving equivalent value. In fact, much of the old English law from whence fraudulent transfer law derives dealt with people who were attempting to use trusts to shelter assets from creditors -- the 1601 Twyne's Case mentioned above dealt with a trust, for instance. Thus, a domestic trust is worthless for most asset protection purposes. The reason that people use offshore trusts is in anticipation that even if the transfer is deemed to be fraudulent the offshore trustee won't give the assets back, and the offshore jurisdiction won't force the trustee to give the assets back. This is true in some jurisdictions (Nevis protects its trusts) but not in others (the Cook Islands utilize New Zealand judges who set aside Cook Island trusts with terrifying frequency, see Forbes Magazine, June 15, 1998). And, the fact that the offshore trustee will not give the assets back will not keep a judge from holding you in contempt until the money either comes back or you cough it up some other way.

So don't believe for a second that a domestic trust will give you ANY asset protection, and beware offshore trusts formed in unreliable jurisdictions -- and for that matter NEVER stand behind a trust as your only protection. An offshore trust can sometimes be effective when used in conjunction with a offshore limited partnership or offshore corporation formed in a different jurisdiction, but judges are increasingly "on" to offshore trusts and have figured out that the best way to deal with them is to simply hold the grantor in contempt (jail).

How Are Fraudulent Transfers Avoided?

The safest way to avoid fraudulent transfers is make sure that all transactions are at least close to being "for value." While "for value" transactions can still be set aside as a fraudulent conveyance, it is very, very hard for a creditor to prove.

Another factor is that the transaction must have economic substance. A transaction which does not have economic substance is likely to be deemed a fraudulent transfer, but a transaction which makes good economic sense under the circumstances is going to be very, very difficult for a creditor to defeat.

While a conveyance for value will not guarantee that the transfer will stand up, see, e.g., Cioli v. Kenourgios, 59 Cal.App. 690, 211 P. 838 (1922) (debtor's sale of all assets and shipment of proceeds out of the country held to be fraudulent conveyance notwithstanding adequacy of consideration), if a transfer is for equal or near-equal consideration then you have a much, much higher chance that the transfer will not be deemed to be a fraudulent transfer, see, e.g., Bank of Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D.Ark. 1963); Lumpkin v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955); Weigel v. Wood, 355 Mo. 11, 194 S.W.2d 40 (1946); Wareheim v. Bayliss, 149 Md. 103, 131 A. 27 (1925). The Upshot: Use limited partnerships and corporations whenever possible because transfers made to a limited partnership or corporation are "for value" and let the creditor worry about having to force the limited partnership or corporation to pay up -- something which may be very difficult for the creditor to do.

When Transfers Made

Timing -- when the transfer was made -- is often critical to the analysis as to whether a particular transfer amounts to a fraudulent conveyance.

The following chart illustrates this. It will be very difficult to prove that any transfer which was made before any claims were known or reasonably suspected was a fraudulent transfer. By like token, it can be assumed that any gifts made after bankruptcy is filed are fraudulent transfers, and even for-value transfers will typically have to be approved in advance by the bankruptcy court.

Between these two extremes, it is possible to take reasonable but adverse positions as to whether or not a transfer was fraudulent in nature. As shown, these positions can be taken with increasing or decreasing comfort, depending upon the progress of the litigation.

The Sliding Scale

Transfer Table

Different types of transactions face different types of tests. The following table illustrates generally what transactions will stand up and when:

STATUS OF LITIGATION	Gifts	For-Value Transactions
No Claim Known Or Threatened	O.K.	O.K.
Claim Known But Unliquidated	Fraudulent Transfer	O.K.
Claim Liquidated	Fraudulent Transfer	O.K. if makes economic sense
Bankruptcy	Bankruptcy Fraud	Requires Prior Court Approval

Additional Authorities

Barry S. Engel, When Is A Subsequent Creditor Not A Subsequent Creditor?, 3 Journal of International Trust and Corporate Planning 105 (August 1994).

Post-Judgment Asset Protection

Most fraudulent transfer issues arise where planning is undertaken only after the Client has incurred debts or suffered an unfavorable judgment. This is more dangerous for the planner than it is for the Client, because not only can a transaction be set aside, but a court in some states can award additional damages against both the Client and the planner. Nonetheless, we have developed certain strategies and tactics for these situations. Thus, we will occasionally in a proper case assist a Client with post-judgment planning, however, we charge a minimum of $50,000 (with 1/2 "up front" and 1/2 on delivery of the documents) because of the additional risk that we incur. But, after all, this is the "pound of cure" and not the "ounce of prevention." If you don't want to pay this price, too bad! -- You should have undertaken planning beforehand when it was much less expensive for you and risky to us.