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Fraudulent Intent Not Always Necessary to Unwind an Improper Transaction

Creditors may use Illinois’ Uniform Fraudulent Transfer Act (IUFTA) to recover funds improperly shifted by a debtor to a third party. Although “fraud-in-fact” claims require proof that the debtor intended to defraud creditors, creditors may also pursue “fraud-in-law” or “constructive fraud” claims, which do not require evidence of intent.

Gecker v. Estate of Flynn provides a recent example of a large ($219 million) “fraud-in-law” claim. Gecker involved a suit by the bankruptcy trustee for Emerald Casino Inc. against the estate of its former CEO, Kevin Flynn, who had died unexpectedly in a bicycle accident. The bankruptcy trustee sought to claw back assets transferred upon Kevin’s death to his widow, Susan Flynn. These assets included stock units and options naming Susan as beneficiary, where ownership shifted to her outside of probate.

A federal court judge held that the bankruptcy trustee could recover the assets from Susan, making several points that affect many fraudulent transfer cases, including:

  • Intent not required — A transaction can be constructively fraudulent even if the transferring party had no intent to hide money from creditors. Here, the fact that Kevin did not know of the transaction, being dead at the time, did not constitute an adequate defense.
  • Lack of reasonably equivalent value — A key question when evaluating allegedly fraudulent transfers is whether the debtor received reasonably equivalent value for the transferred asset. Although Kevin did not consciously give funds away or sell an asset a nominal cost, he did not receive anything in exchange for the stock units and options, which satisfied the statute.
  • Solvency when the transfer occurred — Susan argued that Kevin was not insolvent at the time of the transfer because the $219 million judgment had not yet been entered. However, the fact that the claim had been filed against Kevin at the time of his death sufficed to support recovery under the statute.

Though the incredibly high judgment makes this case newsworthy, all creditors and debtors should understand the parameters of the IUFTA.

Schwartz & Kanyock, LLC works on behalf of financial institutions, commercial leasing companies, law firms and others seeking to recover funds that were transferred unlawfully by debtors. We also assist transferees, such as real estate developers who are accused of receiving a fraudulent conveyance. To make an appointment for a consultation at our Chicago office, please call 312-436-1442 or contact us online.