In a previous post, we mentioned that fraudulent transfer may be found in cases where a debtor voluntarily or involuntarily transferred assets or incurred debts with actual intent to hinder, delay or defraud any entity to which the individual was indebted. We also noted that fraudulent transfer may be found in cases where the debtor received less than reasonably equivalent compensation for the transfers or debts. Here we wanted to say a bit more on this topic.           

It is important to be clear about the difference between the above two grounds for a finding of fraudulent transfer since the requirements for making an initial case for fraudulent transfer are different. Usually, it is very difficult to provide solid proof of intent to defraud. Typically, non-circumstantial evidence is required. 

In looking for evidence of fraudulent intent in a bankruptcy case, a variety of red flags exist. These include things like:

  • Transferring assets to or incurring debts with an insider;
  • Retaining possession or control of property after the alleged transfer;
  • Concealing the asset transfer or incurred debt;
  • Prior threat of litigation against the debtor; or
  • Substantial debt was taken on shortly before or after the transfer.

These and other “badges of fraud” need to be dealt with carefully by debtors, since they do not serve as proof of intent to defraud, but only possible signs of fraudulent intent. Legitimate defenses and explanations may exist for certain transactions and debts aside from fraud.

Whether the basis for taking action against a debtor, the plaintiff must prove intent to defraud by clear and convincing evidence, a higher standard than the ordinary preponderance standard. Debtors can and should benefit from working with an experienced attorney to defend themselves against unfounded accusations of fraudulent transfer and to know when a bankruptcy filing may put them at risk for such accusations.