Fraudulent conveyance: Overview, definition, and example
What is fraudulent conveyance?
Fraudulent conveyance refers to the illegal transfer of assets or property by an individual or entity with the intent to hinder, delay, or defraud creditors. This typically occurs when a debtor transfers property or assets to a third party, often at less than fair market value, in an attempt to prevent creditors from collecting what is owed to them. Fraudulent conveyance is considered a form of fraud and is illegal under many laws, including the U.S. Bankruptcy Code and state fraudulent transfer laws.
The goal of a fraudulent conveyance is usually to conceal assets that would otherwise be used to settle debts or obligations, which can occur in situations like bankruptcy, debt collection, or legal disputes.
Why is fraudulent conveyance important?
Fraudulent conveyance is important because it ensures that debtors cannot evade their legal obligations by hiding or transferring assets to avoid paying debts. Laws against fraudulent conveyance protect creditors and ensure that debts are paid fairly.
If fraudulent conveyance is suspected, courts have the authority to reverse or "void" the transfer of property, thereby allowing creditors to reclaim the assets in question. These laws provide a safeguard against deceitful tactics that could undermine the integrity of the financial system.
Understanding fraudulent conveyance through an example
Imagine a business, XYZ Corp., owes a substantial amount of money to several creditors. In an attempt to avoid paying these debts, the owner of XYZ Corp. transfers valuable company assets, such as machinery and real estate, to a friend or family member for far below the market value. The intention is to keep these assets out of reach of the creditors.
In this case, the transfer of assets may be considered fraudulent conveyance because the business owner intentionally transferred assets to avoid paying debts. The creditors can seek a legal remedy to undo the transfer, forcing the assets to be returned so they can be used to pay the debts.
Example of a fraudulent conveyance clause
Here’s how a fraudulent conveyance clause might appear in a legal contract:
“In the event that any transfer of assets or property by the Debtor is deemed a fraudulent conveyance under applicable law, the transfer shall be void and unenforceable, and the Debtor shall be required to return the transferred property to the estate for the benefit of creditors.”
Conclusion
Fraudulent conveyance is a serious legal issue that involves the dishonest transfer of assets to avoid paying debts. Laws against fraudulent conveyance are designed to protect creditors and maintain fairness in financial transactions. When fraudulent conveyance is suspected, the courts can reverse or nullify asset transfers to ensure that creditors are able to recover the amounts owed to them.
Understanding fraudulent conveyance helps prevent the manipulation of asset transfers to escape financial responsibility, ensuring that individuals and businesses fulfill their legal obligations.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.