Fraudulent Transfer in California
Fraudulent transfer in California Chapter 7 bankruptcy can get your friends & family sued and forced to give up valuable things, even for something innocent. It’s also called a Fraudulent Conveyance. A trustee can avoid the transfers, causing real trouble for you and the person you gave it to.
What is a Fraudulent Transfer or Voidable Transfer?
Quite simply, a fraudulent transfer is something you give or a conveyance before filing Chapter 7 bankruptcy which the bankruptcy trustee can take.
What is the logic behind the fraudulent transfer laws?
First, let’s go back and look at the big picture. Chapter 7 bankruptcy can take some of your stuff and pay back some of your debts with it. Liquidation bankruptcy is Chapter 7, and it does take things. Yes, there are exemptions that can protect some stuff, but often, not all. But that’s not the point here. A Chapter 7 trustee can take your things and sell them and then use that money to pay some or all of your debt. That’s the big picture.
READ MORE: Chapter 7 bankruptcy basics
Next, now let’s pick a ridiculous example. What if the day before you filed bankruptcy, you owned a paid-off Lamborghini car worth $500,000. Further, let’s pretend you knew you’d lose that car in the bankruptcy. Consequently, you gave it to your best friend. Now, when you file bankruptcy, you don’t have a car to list as an asset, because “it’s all gone.” Problem solved, right? Wrong. The Chapter 7 bankruptcy trustee can go and get that car. Why? For exactly the reason you gave it to your friend. You transferred it to hinder giving it to your debts. So, the trustee can get it back.
While the thing is no longer your asset, there’s a place in the bankruptcy papers you must disclose all recent transfers you made. Remember, you’re signing these papers under penalty of perjury. Then, at the 341a Meeting of Creditors while being recorded, under oath, you’ll be asked if you gave away, sold or transferred anything worth more than $2,000 in the last four years. You need to tell the truth and disclose the thing you transferred. The FBI investigates bankruptcy crimes like hiding assets, and people really do go to jail for lying under oath in bankruptcy.
The logic behind these fraudulent transfer laws is to have the long arm of the law be able to reach something you gave away beforehand, and to right a wrong.
What do the laws say?
The fraudulent transfer laws
First, there are multiple laws in play that impact bankruptcy. There’s federal law and state law. It’s confusing how they work. The trustee’s rights in these actions are by state law. In re Hilde, 120 F3d 950 (9th Cir, 1997). Next, since I’m a California bankruptcy lawyer who only files bankruptcy cases in California, this discussion will focus on California state law. As a result, if you’re in a different state, you’ll need to research that state’s statutes.
To start, what is the definition of transfer in bankruptcy?
In bankruptcy, the definition of “transfer” is defined extremely broadly. Skipping some obvious parts of the definition, let’s go to the part that comes up most often: “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or an interest in property.” 11 USC 101(54)(D). It “literally encompasses ‘every’ mode of parting with an interest in property.” Matter of Besing, 981 F2d 1488 (5th Cir, 1993). In law, things rarely get more comprehensive or all-inclusive than that. If you had it or could have had it (interest in property), and now you don’t, that’s a transfer. In bankruptcy, the definition of “transfer” is extremely broad.
The federal Fraudulent Transfer Statute
The federal fraudulent transfer bankruptcy law is codified in 11 USC 548, which is conveniently titled “fraudulent transfers and obligations.” The trustee has the power of the federal strongarm clause of 11 USC 544(a). This federal fraudulent transfer bankruptcy law goes back two years. There are two main parts of Section 548 of the Bankruptcy Code that apply.
Actual Intent, Or…
There’s a section that says the trustee can avoid any transfer if there was actual intent to hinder, delay or defraud. We already know for a fraudulent conveyance that “avoid any transfer” is very broad, from the definition above. But actual intent of something bad? That sounds fairly specific and narrow. Note that for this part insolvency isn’t needed. However, a court can infer intent, particularly when there are badges of fraud such as when an insolvent debtor makes a transfer and gets nothing or very little in return. Kupetz v Wolf, 845 F2d 842 (9th Cir, 1988).
But wait, there’s more.
No Proof of Intent Needed
The other main part of bankruptcy section 548 say the Chapter 7 trustee can avoid “any transfer” (two broad words again). But there’s an if coming. And it’s if the giver received less than its “reasonably equivalent value” where the debtor was: insolvent at the time; was engaging in business where property remaining was unreasonably small capital; intended to incur or believed the debtor would incur debts the debtor couldn’t afford to repay; or made the transfer for the benefit of an insider (typically family member).
Note that this second part of the federal fraudulent conveyance law has four options. While three of the four are fairly specific, “insolvent,” the first one, is pretty broad. And you don’t need all four; note the ‘or’ that is in there. Consequently, the bankruptcy trustee only needs to be able to show there was any transfer for less than the fair market value while the debtor was insolvent. This is where most of the action seems to be in the federal statute.
You Can Sell a Vehicle for its Value
Let’s sum up so far. It’s a fraudulent transfer if, in the past two years, you sold, gave away or transferred anything for less than its value while insolvent. Can you sell your car to raise rent money before you filed bankruptcy? Usually yes, especially if it was a transaction to a stranger where you got what the thing was worth. However, if you “sold” it to your Aunt Erma for $50 that sure looks like a fraudulent conveyance or gift. It got less than the reasonably equivalent value. Plus, that would be for the benefit of an insider (relative).
Definition of Insolvent in Bankruptcy
One requirement for the federal fraudulent transfer law is to show the debtor got less than fair market value while he or she was insolvent. Therefore, it’s kind of important to know the definition of insolvent in bankruptcy. With regard to an individual, the Bankruptcy Code defines “insolvent.” It’s a financial condition where the sum of the debts is greater than the sum of the debtor’s property at FMV. This excludes counting the possible fraudulent transfer asset and exemptions. Section 101(32)(A) of the Bankruptcy Code. So, you’re insolvent if you have $30,000 of credit card debt and your assets (as defined above) are worth $10,000.
Summary of how federal fraudulent transfers typically come up in bankruptcy
Summing up so far, a Section 548 fraudulent transfer is but is not limited to where the bankruptcy trustee can avoid or undo any transfer in the last two years where the debtor got less than its fair market value while the debtor was insolvent.
“But wait”, you say. “My transfer was 3 years ago!” Check and mate, bankruptcy trustee. Not so fast.
Fraudulent Transfer in California (or Fraudulent Conveyance)
A fraudulent transfer in California falls under California Civil Code Section 3439.04. Section 3439.04 is the Uniform Voidable Transactions Act, or UVTA, for short. Some call it the “California Fraudulent Transfer Act” or the “California Uniform Voidable Transfers Act” (which would also be UVTA). However, it’s really voidable transactions.
The California Uniform Fraudulent Transfer Act (UFTA) is now Outdated
Some people still refer to the “California Fraudulent Transfer Act.” The UVTA of Section 3439.04 supersedes and replaces the old and now outdated “California’s Uniform Fraudulent Transfer Act” (also known as the UFTA). The new UVTA applies to transfers or transactions after 1/1/2016. One of the main differences is the lower standard of proof: preponderances compared to the older clear and convincing. The UVTA also gives more powerful remedies. Unlike the obsolete UFTA, the voidable transfers are just that, voidable. There’s no need to show actual fraud. The creditor has an easier road to prove the voidable transfer, and it’s easier to collect.
California Fraudulent Conveyance Statute of Limitations
Further, compared to 11 USC 548, Calif Civil Code Section 3439.09 UVTA is a longer fraudulent transfer statute of limitations. This means the California Uniform Voidable Transactions Act gives the trustee a much longer time than the federal statute to pursue fraudulent conveyances. Section 3439.09 says that the cause of action must be brought not later than four years after the transfer was made or the obligation was incurred or, if later, not later than one year after the transfer or obligation was or could reasonably have been discovered by the claimant. Moreover, there’s a 10-year reachback for transfers to self-settled trusts. Therefore, the two years of 11 USC 548 aren’t the real statute of limitations here.
So the trustee gets to look back four years for a fraudulent transfer using the UVTA California law. Or put differently, the statute of limitations for a fraudulent transfer in California is twice as long (possibly longer) under the Calif UVTA than under Section 548 of the bankruptcy code.
Definition of Fraudulent Transfer in California
However, the definition of a fraudulent transfer in California is somewhat different than under federal law.
(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
So, we’re back to “actual intent” again, which sounds pretty hard to prove.
California UVTA Badges of Fraud under Civil Code 3439.04
But the California state legislature went on to define “actual intent” using eleven factors. These 11 factors, or “badges of fraud” aren’t all required for a voidable transfer. In fact, the UVTA statute says it can be “any or all” of them. As we all know, “any” can mean even just one. And the creditor or bankruptcy trustee has the burden of proving it by the preponderance of the evidence (more likely than not).
The California UVTA badges of fraud are:
(1) Whether the transfer or obligation was to an insider
(2) Whether the debtor retained possession or control of the property transferred after the transfer
(3) Whether the transfer or obligation was disclosed or concealed
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded
(7) Whether the debtor removed or concealed assets
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor
Badges of Fraud: All or Any
Again, the Chapter 7 trustee has to show “any or all” of these badges of fraud. This typically will result in a very fact-specific analysis based on the specifics of your circumstances. The trustee gets to go back four years (or possibly longer) and prove “any” of these badges of fraud. It’s usually easy to prove whether you got the full amount of the value of the thing transferred as a badge of fraud. Admittedly, badge of fraud number eight is phrased oddly, but the “whether” implies that less than value was received for it to be fraud.
The Exemption Doesn’t Count
Here’s one last point that confuses even bankruptcy attorneys. You can’t exempt or protect the thing you transferred. Why? It’s no longer your asset. This leads to some ironic situations. Imagine a case where a debtor transferred half his house to a relative and got nothing in return. Why? Because if the relative is on title and he died, she’d inherit his share of the house. There is no intent to do anything bad. Just an innocent estate planning transaction. In bankruptcy, this is a fraudulent transfer, and the house can be sold. However, if the debtor kept the house, he could have exempted it all and kept it. And he can’t exempt it now that it’s transferred. A debtor waives the right to exempt something which he transfers. Gladstone v US Bancorp, 811 F3d 1133 (9th Cir, 2016). He was better off just keeping it! Talk to a bankruptcy attorney before moving things around. Really.
Fraudulent Transfer Case Law
Does the trustee have to use Section 548? No. In Law v Seigel, 571 U.S. 415 (2014), the Supreme Court held that bankruptcy trustees don’t have to rely on federal law to deny an exemption. In the 9th Circuit, a major case on fraudulent transfers is In re Stern, 345 F3d 1036 (2003). There, the Ninth Circuit Court of Appeals held that merely conversion of an asset from non-exempt to exempt on the eve of bankruptcy wasn’t enough to be a fraudulent transfer. Just this year in 2021, an appellate court in California held that the UVTA doesn’t require a third-party transfer, strengthening the UVTA. Nagel v Westen, 59 Cal.App.5th 740 (2021). Think about that for a second: the Uniform Voidable Transactions Act doesn’t even require a transfer to someone else. There are many cases with examples where creditors avoided the transfer, discharge or both. In short, transfers before bankruptcy for less than FMV are bad.
If you had something before but don’t have it now because it got sold, transferred, or given away in the last four years, your bankruptcy may have problems. It doesn’t have to be gifts of $20,000. Even if your bank statements show Zelle cash app transfers in and out, this is a red flag for trouble. You may have made a fraudulent conveyance, or voidable transfer. You must disclose each one, or face penalties, up to and including prison time. And once you do disclose it, if you got less than the fair market value of the thing, there’s a really good chance the Chapter 7 trustee will sue the recipients of the fraudulent conveyance and avoid the transfer.
Don’t chance it. Talk to a qualified bankruptcy attorney before you file and it’s too late.