![]() ![]() If assets have effectively disappeared since the loan inception, that issue should be brought to the bankruptcy trustee’s attention and/or the creditor should inquire about the same at the creditor’s meeting. To preserve its claim, a creditor should carefully compare the financial statements received throughout the loan relationship with the debtor’s bankruptcy schedules. This includes when a distressed debtor fraudulently transfers assets and then files a Chapter 7 petition claiming no assets for distribution to creditors. Following the recent decision the creditor’s leverage increased significantly, as the transferee was exposed to a potentially significant money judgment for her role in the fraud.Ī bankruptcy filing does not protect a debtor from a fraudulent conveyance claim. Punitive damages, or monetary penalties against a party engaging in fraud, can be used to reimburse a creditor for attorneys’ fees incurred during the lawsuit. In a recent case, Chuhak & Tecson attorneys successfully argued that “other relief” included an award of punitive damages for the creditor which was previously unclear under Illinois law. The court may also grant “other relief” as the circumstances require. ![]() The court can also enter a money judgment against the transferee of the asset, which is useful if the transferee has further transferred, concealed or dissipated the asset. At the end of a case, the court can “void” the transfer, which returns the asset to the debtor subject to the creditor’s claim. Such an injunction often leads to settlement because the debtor is barred from transferring the asset and/or depleting it. In the past, Chuhak & Tecson attorneys have successfully obtained injunctive orders at the beginning of a lawsuit, which effectively froze the asset until a final judgment was entered. What remedies does a creditor have against a fraudulent conveyance?Ĭourts have significant flexibility protecting parties harmed by fraudulent conveyances. In order for the creditor to prevail, the evidence must be clear and convincing. Other factors include whether: (5) the transfer was concealed (6) the transferor had been threatened with legal action before the transfer and (7) the transferred asset constituted virtually all of the transferor’s assets.įraud can be proven when only a single badge is present, but the case is stronger when multiple badges are established. The most critical factors are whether: (1) the transferor was insolvent when the transfer occurred (2) the transferor received sufficient consideration for the asset (3) the transfer was made to an insider such as a family member or affiliated entity and (4) the transferor maintained control over the asset after the transfer. How do courts determine whether a conveyance is fraudulent?Ĭourts generally consider a number of factors, known as “badges of fraud,” when determining whether a conveyance is fraudulent. However, if the asset is fully encumbered, a fraudulent conveyance claim cannot be asserted. If a borrower successfully conveys an asset fraudulently, the creditor is often left with an uncollectable judgment and a significant loss. Another example is when a defaulting borrower converts a non-exempt asset (such as cash) to an exempt asset (such as an Individual Retirement Account) so his creditor cannot garnish the cash to satisfy a claim. ![]() One common example is when an insolvent borrower transfers property to an entity controlled by a family member and receives nothing of value in return. This article discusses the actions that constitute a fraudulent conveyance and the legal remedies creditors have against such conduct.Ī fraudulent conveyance is when a party transfers something of value to a third party in order to keep the asset beyond the reach of the transferor’s creditors. One of the most common schemes against a creditor is a fraudulent conveyance. With unemployment claims increasing at unprecedented levels and businesses struggling to survive, financial institutions should expect an increase in fraud. The Great Recession taught us that fraudulent activity increases during economic downturns.
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