What Are Fraudulent Transfers?

Hands of businessperson with smartphone scrolling through online banking account

In the complex world of finance and debt, fraudulent transfers can pose significant challenges.
But what exactly are these transfers, and how can you recognize and combat them? Let’s break
down the essentials in a way that’s easy to understand.
Fraudulent transfers occur when a debtor moves assets or incurs obligations to hinder, delay, or
defraud creditors. Think of it as someone trying to hide their money before a big expense, like a
legal judgment, hits them. These transfers fall into two main categories under the Uniform
Fraudulent Transfer Act (UFTA): actual fraud and constructive fraud.

What is actual fraud?

Actual fraud involves a debtor deliberately transferring assets to avoid paying creditors. Proving
this requires showing that the debtor intended to cheat their creditors. However, proving intent
can be tricky, so courts look for certain “badges of fraud”—indicators that suggest fraudulent
behavior. These include:

  • Transfers to insiders, like family members or business associates.
  • The debtor keeps control of the assets after the transfer.
  • Hiding the transfer or making it secretly.
  • Transferring assets just before or after a lawsuit is filed.
  • Moving substantial assets or nearly all of the debtor’s assets.
  • The debtor fleeing or hiding assets.
  • Getting less than fair value in return for the assets.

If several of these badges are present, it strongly suggests fraud. For example, if someone moves
their property to a sibling for a nominal amount right before losing a court case, it looks
suspicious and may be deemed fraudulent.

What is constructive fraud?

Constructive fraud doesn’t require proving intent. Instead, it focuses on the fairness of the
transaction. A transfer is considered constructively fraudulent if:

  1. The debtor was insolvent at the time of the transfer, meaning their debts exceeded their
  2. The debtor didn’t receive a reasonably equivalent value in return.
    In simpler terms, if someone gives away valuable assets without getting fair compensation while
    being in financial trouble, it may be considered fraudulent.

What is an example of a fraudulent transfer?

Imagine Lauren, a small business owner, is facing a massive lawsuit from a former employee for
wrongful termination. Lauren’s lawyer has warned her that she will likely lose the case and be
required to pay substantial damages. Fearing this outcome, Lauren decides to protect her assets
by transferring them to her brother, Daniel.

Lauren owns a luxury car worth $80,000 and a vacation home valued at $500,000. A month
before the court’s final decision, she sells the car to Daniel for $10,000 and the vacation home
for $50,000. Daniel continues to use the car and stays in the vacation home as if nothing has

Here’s how the law would view this:

  • Actual Fraud: If Lauren transferred these assets to Daniel intending to keep them out of the reach of her creditors, her actions exhibit several badges of fraud. She transferred the assets to an insider (her brother), received significantly less than fair value, continued to use the assets as if she still owned them, and made the transfers near the time of the expected judgment. These factors strongly suggest fraudulent intent. Because of this, a court could find that Lauren’s primary aim was to hide her assets from the impending judgment, making it difficult for the former employee to collect the damages awarded by the court.
  • Constructive Fraud: Even if Lauren claims no ill intent, the transfer can still be fraudulent if she was insolvent at the time and didn’t receive reasonably equivalent value. In this case, Lauren’s business was struggling, and her debts were mounting. By transferring high-value assets for a fraction of their worth, she worsened her financial position. This lack of fair compensation, coupled with her existing debts, may render the transfers constructively fraudulent.

How to defend against fraudulent transfer claims?

If you’re a transferee (the person receiving the assets), you can defend yourself by proving you
acted in good faith and gave fair value for the assets. Even if the value wasn’t exactly fair,
showing good faith may still offer some protection.

What are the remedies for fraudulent transfer claims?

  • Creditors have several options to combat fraudulent transfers:
  • Avoiding the Transfer: They can have the transfer annulled to reclaim the assets.
  • Attachment: Creditors can seize the transferred assets.
  • Injunctions: Courts can issue orders to prevent further transfers.
  • Receivership: Appointing a receiver to manage the transferred assets.
  • Money Judgment: Creditors can seek a money judgment for the value of the transferred
    assets or the amount owed.

Understanding fraudulent transfers and how to challenge them is crucial for protecting your
financial interests. Whether you’re a creditor trying to reclaim assets or a debtor needing to
understand the limits of your actions, knowing these principles helps navigate the legal landscape

EPGD Business Law is located in beautiful Coral Gables. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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Eric Gros-Dubois

Founding partner Eric Gros-Dubois established EPGD Business Law in 2013. With over a decade of experience expanding the firm and leading it to its current success, Eric now primarily manages the corporate division of EPGD. Given Eric’s educational background, holding both a JD and MBA, combined with his own unique experience of starting a business from scratch and growing it to a multi-million dollar firm, he brings a specialized and invaluable perspective to those seeking legal assistance for themselves and their businesses. Having now instilled his same values in our team of skilled corporate associates, Eric leads a firm that is always ready, willing, and equipped to handle any and every legal matter that a business owner may have.


*The following comments are not intended to be treated as legal advice. The answer to your question is limited to the basic facts presented. Additional details may heavily alter our assessment and change the answer provided. For a more thorough review of your question please contact our office for a consultation.



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