Fraudulent Conveyance In Simple Terms

By: M. Wayne Patton

A fraudulent conveyance can totally defeat an asset protection plan, no matter how good the plan itself may be. Laws regarding fraudulent conveyances (a.k.a. fraudulent transfers) make certain types of transfers wrongful. This shouldn’t be confused with the concept of fraud or anything else illegal. I know, I know . . . the use of the word “fraud” in and of itself is scary, but a fraudulent conveyance isn’t illegal and has nothing to do with actual fraud. If a court finds that a fraudulent transfer or conveyance has occurred, then the court merely sets aside (a.k.a. claws back) those transfers. Pretty simple.

What Is A Fraudulent Conveyance

In basic terms, a fraudulent conveyance is any transfer or sale of assets that is intended to “hinder, delay, or defraud” a legitimate creditor.

Prohibited transfers include conveyance made within a certain period of time before a claim is made or while a claim is pending. What is a claim? Claims take many forms. Claims can be lawsuits, but they are also more broadly defined and can include things like demand letters or even accidents where an injured person has yet to contact the person at fault. The crazy thing is that under the Bankruptcy Code section 548 and the Uniform Fraudulent Transfer Act (which has been adopted by all but a handful of states), a transfer can be deemed fraudulent even if no claim exists when the property is transfered. The Bankruptcy Code has a two year “look back” window, for example.

Example of a Fraudulent Conveyance

Consider an oral surgeon or dentist (“doctor”) who is not properly insured. If this doctor accidentally causes injury to a patient during a surgical procedure, the patient clearly has a “claim” on the day the injury occurs. If the patient sues the doctor, then the doctor’s personal assets are at risk, in addition to whatever insurance limits are in place. The doctor’s personal assets include cash, stocks, bonds, investment properties, and in some cases even items like cars, boats and airplanes.

What we’ve established so far is that a doctor with assets has caused an injury. Assume that no lawsuit has been filed. Even though there is not a lawsuit pending, there is a “claim” against the doctor. The doctor knows that she or he could end up owing money to the patient, and that is enough. What can the doctor do to protected his wealth from a lawsuit?

The answer is complex.  While the doctor stills owns and controls his or her assets and can continue to move them around, if the doctor moves assets to a place where they cannot be reached by the injured patient (or if they are sold for less than fair value), then a court can “set aside” those transfers of assets. The bottom line is that a court can require transferred assets to be given to the injured patient, even if the doctor is no longer legally and technically the owner of the assets.

In other words, once a claim exists, it is too late to protect most assets, and you need at least a two year window before transfers can be respected in the context of bankruptcy. While one can continue transferring and investing assets while a claim is pending, it is almost impossible for an asset protection attorney to develop a plan that would make assets immune from being deemed a fraudulent conveyance at that point. The moral of the story is that people with assets who are engaged in professional practices (e.g. doctors, dentists, lawyers, real estate developers, etc.) need to engage an asset protection attorney before claims surface. That is the only way to develop and tailored an effective asset protection strategy to meet individual needs.

It is true that some assets, in some states, are exempt assets and automatically protected by statute. But if you are a person with assets that go beyond exempt assets (e.g. if you have a stock portfolio outside of your retirement account), then you should consider proactively pursuing an asset protection strategy.