Fraudulent Transfer in California: Top Keys

Fraudulent transfers. Voidable or fraudulent conveyances. They go with these 17 words: “Have you sold, transferred, or given away anything worth more than $3,000 in the last four years?” It’s a 341(a) question bankruptcy attorneys can recite in their sleep, and one that can cause our debtor clients to have nightmares. The reason is the trap known as fraudulent transfers, voidable transfers, fraudulent conveyances, and the like.

Fraudulent transfer in California comes up typically here in Chapter 7 bankruptcy. Also known as a fraudulent conveyance, it can get your friends and family in hot water. It’s one of the top tips recommended to do or avoid before filing bankruptcy. Fraudulent transfer grief can even include the recipient being taken to court in a lawsuit, and forced to give up something they own. It’s terrifying and a nightmare. Worst of all, it can all happen with the purest of intentions.

That’s right: fraudulent conveyance doesn’t even require fraud.  More on that in a bit.

What is a Fraudulent Transfer?

With all this talk about voidable transfers or fraudulent conveyances, we should probably define the terms.  What’s a transfer? The Bankruptcy Code defines a transfer, for our purposes, as “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property, or an interest in property.” 11 USC 101(54D).

You can’t get more all-inclusive of a definition than that. Direct or indirect. Definitely or maybe. Voluntary or not. Parting with property, or even just an potential stake in property. It “literally encompasses every mode of parting with an interest in property.” Matter of Besing, 981 F2d 1488 (5th Cir, 1993). Basically, if there’s something you had or could have had (or even had the possibility of maybe one day having), and… now you don’t, that’s a transfer.

So that’s a transfer. Now, what’s a fraudulent transfer?

Fraudulent conveyance or transfer isn’t defined in the Bankruptcy Code. However, case law defines fraudulent transfer in California (and the Ninth Circuit) as a transfer of “some property interest with the object or effect of preventing creditors from reaching that interest to satisfy their claims” or “an act which has the effect of improperly placing assets beyond the reach of creditors.” In re First Alliance Mortgage Company, 471 F3d 977, 1008 (9th Cir, 2006).

A fraudulent transfer as defined by the Ninth Circuit Court of Appeals is some act that stops your debts from getting something that would satisfy their claims. Note that the action can have either the “object or effect.” That means what you did has was to stop the creditors from getting it as the intended goal (object), or even just the unintended impact (effect).  But the appellate court went on. In the alternative, an act of putting something where the creditors can’t get it, and here the 9th Circuit adds the term “improperly.” Again, there’s talk of effect, which means you didn’t even have to do the act on purpose.

Summing that up, a transfer is pretty much anything you had but now don’t. A fraudulent transfer in the 9th Circuit is a transfer which had the goal or even just the unintended effect of making it so your creditors couldn’t get to the thing.  When you step back, this seems super broad and a trap that pretty much anyone can fall into without even meaning to, just because they sold their paid-off pickup truck a few years ago. And it can be, but for some limitations in the state and federal law.

The Law on California Fraudulent Transfer

Fraudulent transfers in California are governed by the Uniform Voidable Transactions Act (UVTA). The UVTA is Calif Civil Code 3439.04.  Notice the name: voidable transactions. This should get your attention, because it implies that someone can void, that is, undo or erase the transaction or conveyance. And that is exactly what can happen.  Let’s look at what the law says.

What California UVTA says about Fraudulent Transfers

The text of the fraudulent conveyance law in California:

(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows:
(1) With actual intent to hinder, delay, or defraud any creditor of the debtor.
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either:
(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.

There are a couple of things to point out about this.

First, with California voidable transfers, the transfer is voidable.  That is, it can be made as though it never happened, if some conditions are met. Second, actual intent has to be shown the giver tried to hinder or defraud a creditor.  This sounds like a high bar, which can be a good thing for debtors.  Third, the debtor didn’t get equivalent value in return, and either was in a business or transaction and got in return something small in exchange, or intended to get debt or reasonably should have believed he’d have to get debts he’d be unable to repay.

That last sentence, number three, is a mouthful. It combines (2) and (A) or (B) from the UVTA statute. The gist of it is this: no intent needs to be shown, only that the debtor gave away or sold something for less than its value, and couldn’t pay his debts he was about to get.

So, using the California fraudulent transfer law, actual intent to hinder doesn’t have to be shown. The trustee or creditor needs to demonstrate that the debtor believed, or should have believed debtor would be unable to pay the debts.

(Note that the statute used to be called the UFTA or California Uniform Fraudulent Transfer Act. The old UFTA applies to transfers before 12/31/2015. With the new UVTA, the standard of proof became lower, and there’s no need to prove actual intent, as we’re about to see. But look to the date of the transfer; if you’re in California, and it’s before 1/1/2016, debtor may have an easier road utilizing the  old UFTA.)

Let’s now turn to how they prove actual intent. It helps to have a smoking gun letter that states, “I  declare that I actually intend to defraud this creditor.” But that doesn’t come up very much.

California Badges of Fraud under UVTA (Civil Code 3439.04)

Badges of Fraud for California Voidable Transfers

To prove actual intent, the California fraudulent conveyance law says the following

In determining actual intent under paragraph (1) of subdivision (a), consideration may be given, among other factors, to any or all of the following:

(1) Whether the transfer or obligation was to an insider
(2) Whether the debtor retained possession or control of the property transferred after the transfer
(3) Whether the transfer or obligation was disclosed or concealed
(4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit
(5) Whether the transfer was of substantially all the debtor’s assets.
(6) Whether the debtor absconded
(7) Whether the debtor removed or concealed assets
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred
(9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred
(11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor

A few thoughts about all those badges of fraud. Some badges of fraud clearly show someone had bad intentions: absconding sounds pretty guilty, as does concealing, or even keeping control after you supposedly give something away.

However, other California badges of fraud some a bit more innocent: being insolvent at the time or even after the transfer, or was sued or even threatened with a lawsuit, and whether the value received was reasonably equivalent.

How many Badges of Fraud are Needed

In 2021, Bankruptcy Judge William Lafferty wrote in In re Fox Ortega Enterprises, 631 B.R. 425 (NDCA, 2021) that “only one or two badges of fraud may suffice to find a transfer was made with actual fraudulent intent.  In re Ezra, 537 B.R. 924, 931 (9th Cir BAP, 2015); Filip v. Bucurenciu, 129 Cal. App. 4th 825, 834 (2005).” The Ninth Circuit BAP earlier found that the “UFTA list of ‘badges of fraud’ provides neither a counting rule, nor a mathematical formula. No minimum number of factors tips the scales toward actual intent. A trier of fact is entitled to find actual intent based on the evidence in the case, even if no ‘badges of fraud’ are present.” In re Beverly, 374 BR 221 (9th Cir BAP, 2007). Depending how these fraud badges are weighed, insolvency pretty much covers everyone in Chapter 7 bankruptcy, and doesn’t really require actual intent.

Proving insolvency under UVTA

Insolvency is proved under the UVTA using the “balance sheet test.”  The balance sheet test is traditionally “whether debts are greater than assets, at a fair evaluation, exclusive of exempted property.”  In re Koubourlis, 869 F. 2d 1319 (9th Cir 1989), citing 11 USC 101 (now subsection 32A). Therefore, a homeowner with equity and maybe $20,000 of credit card debt may pass the balance sheet test.

However, while we’re here discussing the UVTA state law, there’s also a rebuttable presumption against the debtor. See California Civil Code 3439.02: “A debtor that is generally not paying the debtor’s debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent.”  Because of this statutory “cash flow test” on the books, it’s on the debtor to show that he or she was paying their debts at the time of the transfer to get it back to the potentially more favorable balance sheet test.

So all of that is fraudulent transfers in California. Let’s turn to the federal standard.

Federal Fraudulent Transfer Law

The Bankruptcy Code’s fraudulent transfer provisions are in Section 548, which is its own version of the UFTA.  Section 548 is titled “Fraudulent Transfers and Obligations.” The Bankruptcy Code, at Section 544, gives a bankruptcy trustee the power to avoid transfers made with actual intent to defraud and transfers made without reasonably equivalent value.

The key provision is in subsection (a), which is presented here:

The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily [either]

• made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; OR
• received less than a reasonably equivalent value in exchange for such transfer or obligation; AND [one of the following]
  • • was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
    • was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
    • intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
    • made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

In short, the trustee has to show either actual intent to hinder, or less than value along with  either insolvency, giving away most of debtor’s stuff, about to incur debts, or helped an insider (family member).

Actual Intent of Section 548 Fraudulent Transfers

We see, then, from the first part of Section 548, that there has to be actual intent to hinder, delay, or defraud.  This is hard to prove, as the 9th Circuit pointed out in Kupetz v Wolf, 845 F2d 842 (9th Cir, 1988).  In that case, the circuit court analyze the leveraged buyout (LBO) of a mannequin company.  It went back on a history trip to the Statute of 13 Elizabeth passed by Parliament in 1571. Then, the appellate court explained how, for four centuries, courts relied on badges of fraud to try to infer intent. It then concluded that absent proof of actual intent, one can “assume fraudulent intent when an insolvent debtor makes a transfer and gets nothing or very little in return.” Kupetz at 846.

Constructive fraud alternative: No proof of actual intent

The other part of Section 548 provides a path for a trustee if actual intent can’t be shown, relying on “constructively fraudulent transfers.” The trustee would have to show debtor got less than value, along with one of four factors. Note that not all four are needed. The typical way to get here in a bankruptcy is where less than full value is received by a debtor who is insolvent. (see discussion on insolvency standards elsewhere on this page).

Some fraudulent conveyance examples

1. Selling a vehicle for value

Let’s say debtor a year ago prepetition was struggling to pay their debts as they came due. To make ends meet, debtor sold a vehicle by placing an ad while insolvent. They haggled and finally sold the vehicle to a stranger.  Voidable transfer? Probably not, because while debtor was insolvent, didn’t receive less than the reasonably equivalent value.

2.  Selling the asset to a family member

Now assume the debtor sold the item prepetition to a family member, and was even insolvent while doing so. Ah, we’re missing information: was there a sweetheart deal or was there reasonably equivalent value?  Let’s go with less than value, because heck, it’s family. Voidable conveyance, because less than value and transferred to an insider. The fact that debtor was insolvent, while not necessary in the 548 UFTA constructive fraud variables, actually hurts his argument. If he was struggling to pay his bills and insolvent, it makes one wonder why he’d settle for less than value and sure looks like a sweetheart deal and fraudulent transfer.

3. Divorce agreement transfers can be troublesome

Husband is debtor and has judgments against him. He structures his divorce’s marriage settlement agreement (MSA) to transfer basically all the assets to his soon-to-be ex-wife.  He can’t later say there was a “good faith for reasonably equivalent value.” Further, moving assets beyond the reach of creditors was explicitly part of the MSA negotiations as an actually fraudulent transfer.  In re Beverly, 374 BR 221 (9th Cir BAP, 2007)

4.  Quitclaiming half of debtor’s home to their adult child for estate planning

Debtor is advanced in age, has a home with some equity, and wants to put her adult child on title as a joint owner. The purpose is innocent: for estate planning, when debtor passes away, the child gets the other half of the real estate without having to create a will or trust. Debtor then quitclaims half of her home to the child, and files bankruptcy a year later. Fraudulent transfer, as it was for the benefit of a family member (insider), without receiving reasonably equivalent value in return.

That last example is interesting. What if the equity could have been exempted before the transfer?  The California homestead exemption is now very generous. Let’s say the entire equity or even the transfer amount was smaller than the broad exemption coverage for the homestead.  In California, the fraudulent transfer can still be avoided even if exempt. Read on for why.

Exemption status irrelevant

But wait, you might say. If debtor still had the asset, it could have been exempted!  That sounds persuasive, and in some states it would be. However, with fraudulent transfers in California in the Ninth Circuit, that’s not the case. In fact, the transfer of property waives the right to exempt it. Further, the recipient can’t claim it exempt for debtor, either. Gladstone v US Bancorp, 811 F3d 1133, 1142 (9th Cir, 2016). And, “the transferee cannot avail herself of the exemption in a subsequent avoidance action.” In re Noblit, 72 F. 3d 757, 758 (9th Cir 1995).

Reachback period for fraudulent transfers and voidable conveyances

What’s the reachback period for fraudulent transfers or voidable conveyances in California? Like most things, it depends. For California fraudulent transfers, it helps to understand how far back in time the trustee can go, since when it happened can make all the difference between avoiding the transfer and getting the asset or it being safe.

The fraudulent transfer reachback time period varies, depending on which statute (the Calif UVTA or 548) is being used, when the transfer happened, and the type of asset it was.

• 1 year: for cases commenced before 4/21/2006 per Section 548
• 2 years: Section 548, for current cases and California’s UFTA for transfers before 2016
• 4 years : using California fraudulent transfer UVTA statute 3439.09(b) for transfers after 12/31/2015
• 7 years: using Section 544(b) and California 3439.09(c), but note 546(a) in bankruptcy, so maybe longer than 7 years, as equitable tolling applies In re EPD Inv Co, 523 BR 680, 691 (9th Cir BAP, 2015). Los Angeles Bankruptcy Judge Robert Kwan has an interesting discussion of this in In re Art & Architecture Books, 2:13-bk-14135-RK, Adv 2:15-ap-01679-RK, opinion dated May 5, 2021.
• 10 years for Self-settled trusts (SST) using Section 548(e)

The 341(a) question asking have you sold, transferred or given away anything of value in the past four years isn’t really the end of the story. Even if it’s been five or six years, there may still be ways for the trustee to avoid the California fraudulent transfer and sell the asset. Is the voidable transfer reachback period clear as mud? You bet.

Burden of Proof for Fraudulent Transfers

After reviewing the reachback periods for fraudulent conveyances, you get a sense that it makes a difference whether the trustee is relying on the federal section 548 or California state 3439.04. Not only do they have different time frames, the burden of proof is different.

A creditor making a claim for relief under 548 subdivision (a) has the burden of proving the elements of the claim for relief by a preponderance of the evidence.  Under California’s UFTA (or UVTA), the burden of proof can be on the debtor if they weren’t paying debts as they became due. Calf CC 3439.02.

In short

A transfer is something you had before and don’t have anymore. If you file Chapter 7 bankruptcy, you will almost certainly be asked about it. This also applies to cash apps Zelle and Venmo with transfers of cash in and out of your bank account.  The Chapter 7 trustee, using one of the above tools, can go after the person or people who received the transfer and force them to give up the thing or money, even subjecting them to a lawsuit to force it to happen.  With fraudulent transfers in California, consider all your options, including Chapter 13 bankruptcy, as Chapter 7 can be a risky bet where assets have gone away.