Source: https://www.wolfflaw.com/what-are-a-creditor-s-rights-and-remedies-when-a-debtor-fraudule.html
Timestamp: 2019-04-24 00:03:20+00:00

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What Are A Creditor's Rights And Remedies When A Debtor Fraudulently Transfers Property Or Assets To Avoid Payment Of A Debt Or Collection Of A Judgment?
In some instances a desperate or devious defendant or debtor will attempt to fraudulently conceal his, her or its assets by transferring them to a friend, relative, a related company or other cooperating third party, to try to look impecunious or judgement-proof, and avoid paying what is owed.
What should a creditor do in those circumstances?
In California, and in many other States, the Uniform Fraudulent Transfer Act may provide a remedy and protection for both business and personal creditors to set aside those fraudulent transfers and recover the property to pay the debt.
This can be done before, during and after a legal proceeding is started to collect the debt, whenever fraudulent transfers are discovered or reasonably suspected.
Those state statutes are very similar to the Fraudulent Transfer provisions of the U.S. Bankruptcy Code, 11 U.S.C. § 548, but the state remedies can be preferable to the Bankruptcy provisions because, if a creditor can recover assets under the State law, that recovery can be used to pay the debts of that creditor, whereas a recovery by a Bankruptcy trustee under the Federal law is used to pay all unsecured creditors equally.
Thus, there may possibly be a potential benefit in proceeding promptly under the State law to collect the debt, hopefully well before any Bankruptcy proceeding might be filed by the debtor.
The California Uniform Fraudulent Transfer Act allows a “creditor” to cancel a transfer of property by a “debtor”, where the transfer was made (a) to escape monetary “claims” of the “creditor” and (b) the transfer was made for consideration that was less than the “reasonably equivalent value” of that property at the time.
Filip v. Bucurenciu (2005) 129 Cal. App. 4th 825, 827-830.
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due. . . .”(Emphasis added).
Such a fraudulent transfer, if the above elements are proven, can be set aside - or reversed or cancelled - by a “creditor” with a “claim”.
(b) "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.
(c) "Creditor" means a person who has a claim, . . .
(d) "Debt" means liability on a claim.
(e) "Debtor" means a person who is liable on a claim.. . .”(Emphasis added) Civil Code § 3439.01.
(1) Avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim....” (Emphasis added) Civil Code § 3439.07.
The other factors in Civil Code §3934.04(a)(2)(A) have been alleged and proven.
See , 2-4200 CACI 4203; Fisher v. Las Vegas Hilton Corp. (9th Cir. 2002) 47 Fed. Appx. 824, 828.
Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 862.
Filip v. Bucurenciu (2005)129 Cal. App. 4th 825, 834.
Still v. Arakelyan (In re Still) (Bankr. C.D. Cal. 2008) 393 B.R. 896, 917.
What constitutes “reasonably equivalent value” for a transfer depends on the circumstances surrounding the transfer or transaction and the amount of consideration or “value” received in exchange for the transfer of the property.
Decker v. Tramiel (In re JTS Corp.) (9th Cir. Cal. 2010) 617 F.3d 1102, 1109.
Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 862-863.
Mishkin v. Ensminger (In re Adler, Coleman Clearing) (Bankr. S.D.N.Y. 1999) 247 B.R. 51, 111.
Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.) (Bankr. N.D. Cal. 2008) 389 B.R. 842, 864-865.
The determination of what constitutes “reasonably equivalent value” thus depends greatly on the circumstances of the transfer, and equal value is NOT necessarily required.
Kendall v. Carbatt (In re Carbatt) (Bankr. N.D. Cal. 2006) 357 B.R. 553, 560.
“The term "reasonably equivalent value" is not defined in the Bankruptcy Code. That function has been left to the courts. McCanna v. Burke, 197 B.R. 333, 338-39 (D.N.M. 1996). It is clear that "reasonably equivalent value" is not just another term for "fair market value." As the U.S. Supreme Court stated in BFP v. Resolution Trust Corp., 511 U.S. at 531, "fair market value is not necessarily the benchmark against which determination of reasonably equivalent value is to be measured. It may be presumed that Congress acted intentionally when it used the term 'fair market value' elsewhere in the Bankruptcy Code but not in § 548, particularly when the omission entails replacing standard legal terminology with a neologism."
“There is no hard and fast rule in the Ninth Circuit as to what constitutes "reasonably equivalent value." The concept of "reasonable equivalence" is not wholly synonymous with "market value" even though market value is an extremely important factor to be considered in the court's analysis. In re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990).
“Whether the transfer is for "reasonably equivalent value" in every case is largely a question of fact, to which considerable latitude must be given to the trier of fact. In re Ozark Restaurant Equip. Co., 850 F.2d 342, 344 (8th Cir. 1988). In order to determine whether a fair economic exchange has occurred, the court must analyze all the circumstances surrounding the transfer in question. 5 Collier on Bankruptcy, (15th Ed. Revised, 2007), P 548.05[b] at 548-36. The transferee's "good faith" is a relevant factor. In re Smith, 24 B.R. 19, 23 (Bankr. W.D.N.C. 1982).
Salven v. Miller (In re Noon) (Bankr. E.D. Cal. Jan. 22, 2009) 2009 Bankr. LEXIS 390, 8-10, 2009 WL 197919; Barber v. Golden Seed Co. (7th Cir. Ill. 1997) 129 F.3d 382, 387, 1997 U.S. App. LEXIS 30232, 10-11 Congrove v. McDonald's Corp. (In re Congrove) (6th Cir. 2007) 222 Fed. Appx. 450, 454.
In re Richardson (Bankr. D. Utah 1982) 23 B.R. 434, 448.
The concept of "reasonable equivalence" is not wholly synonymous with "market value" even though market value is an extremely important factor to be used in the court's analysis. In re Morris Communications NC, Inc., 914 F.2d 458, 466 (4th Cir. 1990). The transferee's "good faith" is also a relevant factor. In re Smith, 24 B.R. 19, 23 (Bankr. W.D.N.C. 1982).
Salven v. Munday (In re Kemmer) (Bankr. E.D. Cal. 2001) 265 B.R. 224, 232.
Bfp v. Resolution Trust Corp. (1994) 511 U.S. 531, 537-538, 114 S. Ct. 1757, 1760, 128 L. Ed. 2d 556, 564-565.
Payment of a prior or pre-existing debt is legal “value” given for the property transferred.
In re Prejean (9th Cir. Cal. 1993) 994 F.2d 706, 708-709.
Lewis v. Superior Court (1994) 30 Cal. App. 4th 1850, 1874.
Thus, in considering what constitutes “reasonably equivalent value” the Court can also consider whether the property was exchanged in whole or in part as payment of an antecedent or pre-existing debt, as well as the particular circumstances leading to the transfer.
Whether or not a “fraudulent transfer” has actually occurred thus may require some investigation and the use of appraisers etc.
Some of that investigation can be done using court “discovery” processes and procedures, after the action is filed, but some of the initial pre-filing investigation should include a review of public property and other public records, and the use some additional basic investigative skills and footwork from the parties and their attorneys or consultants.
As noted above, because a fraudulent transfer proceeding in a Bankruptcy case may offer little benefit for a particular debtor, and because a Bankruptcy may foreclose or stay a state fraudulent transfer action, in many cases it may be advisable to proceed with the state action to recover the assets much sooner rather than later, before any Bankruptcy is even contemplated or filed by the debtor.
The contents of this Article do not constitute legal advice or create an attorney-client relationship, and you may not rely on it without seeking legal advice regarding your particular situation and contract from a competent business litigation attorney.
Please also note that statutes and case law are frequently changing and these materials may become outdated.
For further information on this topic and how the current law may apply to your particular situation and issues, Contact Us via email, phone (415)788-1881 or visit our website at www.wolfflaw.com for other contract information.
© George W. Wolff (2015), all rights reserved.

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