Basic Information on Fraudulent Transfers

WHAT IS A FRAUDULENT TRANSFER?

Fraudulent transfer claims are intended to prevent debtors from defrauding creditors by placing assets beyond their reach. Texas has a statutory cause of action through which a creditor may seek recourse for a fraudulent transfer of assets or property. The Texas Uniform Fraudulent Transfer Act (“TUFTA”) is located in Chapter 24 of the Texas Business and Commerce Code. Although there are differences, 11 U.S.C.A. § 548 (governing fraudulent transfer claims under the Bankruptcy Code) has many similarities with TUFTA, and Bankruptcy cases from Texas generally cite to both TUFTA and 11 U.S.C.A. § 548.

In essence there are two types of fraudulent transfer theories under TUFTA–actual fraud and constructive fraud. An actual fraudulent transfer occurs in relation to a particular creditor when (1) the creditor’s claim arose before or within a reasonable time after the transfer was made; and (2) the debtor acted with actual intent to hinder, delay, or defraud any creditor of the debtor. Because it can be difficult to prove “actual” fraud, there are also three constructive fraudulent transfer theories under TUFTA.

Under the first constructive fraudulent transfer theory under TUFTA, constructive fraudulent transfer occurs when (1) the creditor’s claim arose before or within a reasonable time after the transfer was made; (2) the debtor did not receive reasonably equivalent value in exchange for the transfer; and (3) the debtor was engaged in a business or transaction for which its remaining assets were unreasonably small or the debtor intended to incur, or believed or reasonably should have believed that the debtor would incur debts beyond its ability to pay as they became due.

The other two TUFTA constructive fraudulent transfer theories are found in a second provision regarding constructive fraudulent transfers, which provides two additional causes of action. In the first constructive fraudulent transfer occurs when (1) the creditor’s claim arose before the transfer was made, (2) the debtor made the transfer without receiving reasonably equivalent value in exchange, and (3) the debtor was insolvent at that time or became insolvent as a result of the transfer. The final constructive fraudulent transfer theory relates to insider transfers and provides a claim for (1) a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, (2) the transfer occurred at a time the debtor was insolvent, and (3) the insider had reasonable cause to believe that the debtor was insolvent.

Similarly, the Bankruptcy Code allows for fraudulent transfer claims for both types of theories (actual intent or no reasonably equivalent value). The first fraudulent transfer theory requires proof that (1) a transfer was made of the debtor’s property; (2) the transfer was made within two years of the bankruptcy filing; and (3) the transfer was made with actual intent to hinder, delay, or defraud the debtor’s creditors. The second theory requires proof that (1) a transfer was made of the debtor’s property; (2) the transfer was made within two years of the bankruptcy filing; (3) the debtor received less than reasonably equivalent value in exchange for such transfer; and (4) the debtor was insolvent at the time of such transfer. Please note, in the bankruptcy arena, this claim will generally have to be brought by the bankruptcy trustee or Chapter 11 debtor-in-possession.

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