Fraudulent Transfer Law: Transfer to an Insider

Under the Uniform Fraudulent Transfer Act, a transfers made with the "intent to hinder, delay or defraud" any creditor of the debtor can be voided by the court.  In some situations, these transfers are considered to be fraudulent as to both present and future foreseeable creditors.  Under the Act, there are certain "badges of fraud" -- that is, facts which in and of themselves imply that the creditor's intent was to defraud.  The presence of one or more of these fact patterns "may be relevant evidence as to the debtor's actual intent, buy does not create a presumption that the debtor has made a fraudulent transfer or incurred a fraudulent obligation."  In looking at the case, the court "should evaluate all the relevant circumstances involving a challenged transfer or obligation."  

Remember that fraud is seldom a public event; it reality, most of the time it's done covertly.  As such, most fraud cases rely on circumstantial evidence -- a fact recognized by the UFTA.

Last time, we looked at below market transfers.  Today, I'll look at transfers to an insider.  It's important to understand who an insider is, which depends on who (or what) is making the transfer.  Let's start with an individual making a transfer.  In that situation, the following would be considered insiders: 

(A) a relative of the debtor or of a general partner of the debtor;  
(B) a partnership in which the debtor is a general partner; 
(C) a general partner in a partnership described in clause (B); or 
(D) a corporation of which the debtor is a director, officer, or person in control. 

A relative of the debtor (or a relative of the general partner if the GP is an individual) would obviously be sympathetic to the debtor and would still allow him to use the item.  Under general partnership principles, a general partner controls the affairs and the property of a partnership; therefor a transfer to a partnership where the debtor is a GP is a suspect transaction.  A general partner who is in charge of a partnership is the legal equivalent of a transfer to yourself, and a corporation where the debtor is a director/officer or in control is the legal equivalent of transfer to yourself as well.  In short, in all the above situations there has not been a meaningful relinquishment of control of the item transferred; hence the transfer is inherently suspect.

If the person making the transfer is a partnership, the following are considered insiders:

(A) a general partner in the debtor;
(B) a relative of a general partner in, or a general partner of, or a
person in control of the debtor;
(C) another partnership in which the debtor is a general partner;
(D) a general partner in a partnership described in clause (C); or
(E) a person in control of the debtor 

As with situation for an individual transfer, in all the above situations, the debtor really isn't relinquishing control of the item. A general partner in the debtor is presumed to be sympathetic to the debtor's situation, as is a relative of the general partner.  A partnership where the debtor is a general partner was previously explained.  A general partner who is in business with the debtor is obviously a friendly individual.  A person in control of the debtor may actually be getting paid for services; at minimum, he's sympathetic.

Finally, if a person making the transfer is a corporation, the following transactions are suspect


A transfer to
(A) a director of the debtor;
(B) an officer of the debtor;
(C) a person in control of the debtor;
(D) a partnership in which the debtor is a general partner;
(E) a general partner in a partnership described in clause (D); or
(F) a relative of a general partner, director, officer, or person in
control of the debtor;

The first three individuals control the corporation in some manner and as such are going to treat the debtor kindly.  Situations (D) and (E) and (F) were explained above.

Remember that a transfer to any of the above people in the above situations is a "badge of fraud" -- meaning the court will look at the transaction with a great deal of suspicion.  They will examine the facts very closely to determine if a transfer should be voided.




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