A Primer on Fraudulent Transfer Law. F. Hale Stewart, JD, LLM, CAM, CWM, CTEP The Law Office of Hale Stewart Assetprotectionlawyerinhouston.com Author of the book U.S. Captive Insurance Law 832.330.4101 firstname.lastname@example.org Skype name: bonddad. First, What is Asset Protection?.
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F. Hale Stewart, JD, LLM, CAM, CWM, CTEP
The Law Office of Hale Stewart
Author of the book U.S. Captive Insurance Law
Skype name: bonddad
There are several events which can negatively impact an individual’s financial well-being. In general, these are bankruptcy, litigation, divorce, physical/mental incapacitation and death(this actually impacts the decedents family, but it can still harm a family financially if not dealt with properly). Asset protection looks at each of these events, and then asks this fundamental question: "how can we mitigate the financial damage these events have the potential to cause?" Or, put another way, asset protection is the legal discipline of mitigating , or attempting to mitigate, the negative impact of various financially and legally catastrophic events.
Suppose a high net worth client is in the middle of a lawsuit and the prospects look grim: it appears the jury will award the plaintiff a large judgment. At this point, the client decides to create and implement an asset protection plan, with the obvious intent of preventing the other party from collecting on the judgment. Alternatively, suppose the same individual receives a call from an attorney who wants to discuss a situation with a former client of the high net worth individual (for example, a lawyer representing a former patient calls a doctor who treated the patient with poor results). The high net worth person has not been sued (he has not been formally served with papers) but he has a good indication that someone is thinking about suing him. The high net worth client calls and asks about asset protection plans.Or suppose a company is starting to lose money and the future does not look promising – key clients have gone to other companies, key employees are leaving and the industry is experiencing strong competition from an overseas competitor that has vastly lower labor costs. The company wants to start siphoning off money and assets before creditors either force the company into bankruptcy or simply start suing for non-payment of debt.
In all the preceding examples, a creditor would be well within their rights to ask the court to rescind the transaction.
The reason is the debtor knows with a fairly high degree of certainty that he will have to pay money sometime in the near future. To allow him to make it difficult to pay those amounts would be tantamount to encouraging and promoting fraud.
In general, we can’t engage in asset protection when we know with a pretty high degree of certainty that a judgment, debt, payment, bankruptcy or the like is right around the corner.
Put another way, we can only engage in asset protection when things are going well.
A transfer made or obligation incurred by a debtor is 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:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor
Fraud rarely occurs out in the open. As such, we look to certain circumstances as evidence of fraud. While the presence or existence of the following “badges of fraud” are not conclusive in and of themselves, they do indicate we need to look in far more detail at the transaction. This is the way courts will determine if a creditor is attempting to “hinder, defraud or delay” a creditor.
Subsection (b) is a nonexclusive catalogue of factors appropriate for consideration by the court in determining whether the debtor had an actual intent to hinder, delay, or defraud one or more creditors. Proof of the existence of any one or more of the factors enumerated in subsection (b) may be relevant evidence as to the debtor’s actual intent but does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation. ….In considering the factors listed in § 4(b) a court should evaluate all the relevant circumstances involving a challenged transfer or obligation.
the debtor removed or concealed assets;
the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.