Debtors commonly engage in fraudulent transfers to avoid paying debts or other obligations by using two related tactics. The first is to dissipate assets; the debtor transfers property to a friendly third party in an effort to keep the assets out of the creditor’s reach. The second tactic is to take on higher priority debt to reduce the pool of assets available to pay lower priority debts.
Fraudulent transfers occur in many settings, including business, divorce and bankruptcy. The debtor typically tries to avoid paying one or more creditors while retaining control over assets otherwise available to pay valid debts or claims. The Illinois Uniform Fraudulent Transfer Act is designed to prevent and remedy fraudulent transfers of property. The law recognizes three general types of unlawful transfers: fraud in fact, fraud in law and preferential transfers to insiders.
A transfer involving fraud in fact occurs when the debtor dissipates assets or increases priority debt with the intent to hinder, delay or defraud a creditor from receiving amounts due. To prove a fraud-in-fact conveyance, the creditor must prove the debtor’s intent by clear and convincing evidence. That can be a difficult task, but the statute provides a list of factors to consider in determining whether the conduct was intentional.
A fraud-in-law case is easier to prove because it does not require proof of fraudulent intent. The creditor must show that the debtor transferred assets or incurred debts for less than fair market value or for less than reasonable compensation. The creditor must also show either that the assets transferred were disproportionately large or that the debtor knew or should have known that any additional debts incurred were beyond the debtor’s ability to pay. When the court makes a finding of fraudulent transfer, the transaction or series of transactions can be set aside or legally undone.
A fraudulent insider transfer occurs when there is a pre-existing obligation to a creditor and the debtor transfers assets to a person or organization over which the debtor has control or great influence. This control or influence effectively permits the debtor to keep assets rather than tendering the value of those assets to one or more creditors. Examples of insiders include close relatives, company executives or directors and principals of other businesses in which the debtor has a significant ownership interest.
Schwartz & Kanyock, LLC in Chicago is a full service commercial litigation and debtor/creditor law firm serving the entire metropolitan area. If you or your company have a debt collection or credit dispute issue, please feel free to contact us online or call 312-436-1442 for an initial consultation.