Section 548 of the Bankruptcy Code provides for the avoidance of fraudulent transfers based on actual or constructive fraud. 11 U.S.C. § 548. The purpose of the fraudulent conveyance section of the Bankruptcy Code is the preservation of the bankruptcy estate. In short it prevents bad actors from profiting from fraud by recovering property that was transferred to defraud creditors. Under Section 548, the bankruptcy estate may recover two types of transfers made within two years of a bankruptcy petition: 1) a transfer made by the debtor with actual intent to defraud creditors in making the transfer (actual fraud); or 2) a transfer from which the debtor received less than reasonably equivalent value in exchange , and was or became insolvent when the transfer was made (constructive fraud).
Actual fraudulent transfers are those made with actual intent to hinder, delay, or defraud present or future creditors. 11 U.S.C. § 548(a)(1)(A). Because evidence of actual fraud is difficult to prove, courts look to what are known badges of fraud when determining intent. These include the following:
- The lack of or inadequacy of consideration;
- Any close relationship between the parties including family or friends
- The retention of possession, benefit or use of the conveyed property
- The financial condition of the party the property was conveyed
- The chronology of events and transactions in question.
See McCord v. Ally Fin., Inc. (In re USA United Fleet, Inc.), 559 B.R. 41, 57-58 (Bankr. E.D.N.Y. 2016).
On the other hand, the debtor’s intent to harm or defraud its creditors is irrelevant. Rather, the inquiry focuses solely on whether the debtor received reasonably equivalent value in exchange for the transfer. Harrison v. N.J. Cmty. Bank (In re Jesup & Lamont, Inc.), 507 B.R. 452, 470 (Bankr. S.D.N.Y. 2014). The term value means “property, or satisfaction or securing of a present or antecedent debt” of the debtor. 11 U.S.C. § 548(d)(2).
Defenses to a Fraudulent Conveyance Action
Section 548(c) of the Bankruptcy Code provides a defense to avoidance of fraudulent conveyances. A transfer is voidable if the transferee takes 1) for value; and 2) in good faith has a lien on or may retain any interest transferred, to the extent that such transferee gave value to the debtor in exchange for the transfer. 11 U.S.C. § 548. These defenses are applicable to both actual and constructive fraud.