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Recognizing and Setting Aside Preferential Fraudulent Transfers to Insiders

A fraudulent transfer or conveyance occurs when a debtor voluntarily depletes or dissipates their own assets to the point that they cannot fully repay the claims of creditors. A preferential fraudulent transfer involves a payment or transfer of money or property to certain creditors when the debtor was already insolvent. The Uniform Fraudulent Transfer Act (UFTA) bars debtors from preferring one creditor over another if the debtor is insolvent at the time of the transfer and the creditor is an insider.

A creditor may file suit under the UFTA to avoid fraudulent transfers to insiders. An insider preference claim must be filed within a year after the transfer was made. A creditor pursuing such a claim must prove these four elements:

  1. The creditor’s claim arose before the transfer.
  2. The debtor made the transfer to an insider for an antecedent debt.
  3. The debtor would be left insolvent by the transfer.
  4. The insider had reasonable cause to believe the debtor would be insolvent.

The UFTA defines insiders differently depending on whether the debtor is an individual, a partnership or a corporation.

When the debtor is an individual, insiders include:

  • Relatives or general partners of the debtor
  • A partnership in which the debtor is a general partner
  • Anyone who is a general partner in the partnership
  • A corporation of which the debtor is a director, officer or other person in control

When the debtor is a corporation or partnership, insiders include:

  • The company’s officers and directors
  • Anyone in control of the company
  • A partnership in which the company is a general partner
  • Anyone who is a general partner in the partnership
  • Any relative of a general partner, director, officer or person in control of the entity

The debtor may assert several defenses to a fraudulent transfer action based on an insider preference claim. One defense is that the debtor did not have reasonable cause to believe that the debtor was insolvent. Depending on the circumstances, the debtor’s intent may or may not be relevant. Another possible defense is to deny that the transfer rendered the defendant insolvent. However, this requires proving that the property retained after the transfer was sufficient to discharge all the debtor’s liabilities. Another possible defense is that the debtor received fair value in exchange for the transferred property, rather than simply giving it away or selling it for nominal value.

The foregoing shows several hurdles to prevail in an insider preference fraudulent transfer action. The lawyers of Schwartz & Kanyock, LLC in Chicago are Illinois leaders in this field of litigation. To discuss your situation with a skilled attorney, please call 312-436-1442 or contact us online.

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