In Illinois, the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 (the “UFTA”), permits creditors to reach fraudulent transfers and conveyances made by a debtor with intent to defraud, hinder, or delay a creditor, or place property out of a creditors reach. A violation of the UFTA requires either ‘fraud in fact’ or ‘fraud in law.’
Fraud in Fact: Fraud in Fact occurs when “the debtor made the transfer or incurred the obligation…with (1) actual intent to hinder, delay, or defraud any creditor of the debtor.” It’s unlikely a debtor would ever admit actual intent, so circumstantial evidence is necessary to demonstrate actual intent (or fraud in fact). The UFTA provides (11) factors which may be given consideration in determining whether actual intent is established. These factors include:
- Whether the transfer or obligation was to an insider:An insider can be broadly defined as someone with a close relationship (personal or professional) or control over the debtor. A full list of “insiders” is set forth in 740 ILCS 160/2(g).
- Whether the debtor retained possession or control of the property transferred after the transfer: For example, a debtor might have transferred title to his automobile to a friend, but he is still driving it, parking it in his garage, and treating it as his own vehicle.
- Whether the transfer or obligation was disclosed or concealed: If the transfer was concealed from the creditor, this factor weighs in favor of fraud in fact. If the transfer was disclosed to the creditor, however, this factor weighs in favor of no fraud in fact.
- Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit: If the debtor makes the transfer after a lawsuit was filed against the debtor, this suggests that the transfer was made with actual intent to commit fraud.
- Whether the transfer was of substantially all the debtor’s assets: A debtor knowing it has substantial liabilities to a creditor or creditors may try to transfer everything of value, knowing that it would likely be obtained or liquidated to satisfy debts if it remained in the debtor’s possession.
- Whether the debtor absconded: The debtor leaves hurriedly and secretively.
- Whether the debtor removed or concealed assets.
- 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: If the value received for the assets was reasonable, this would weigh in favor of no actual intent to commit fraud.
- Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred: A debtor is considered insolvent when the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.
- Whether the transfer occurred shortly before or shortly after a substantial debt was incurred: This factor considers both the timing of the transfer, how close it was to incurring the debt, and the substance of the transfer.
- Whether the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
Fraud in Law: If Fraud in Fact cannot be established, the UFTA provides a creditor with an avenue for recovery if it can establish “Fraud in Law.” 740 ILCS 160/5(a)(2). Fraud in Law occurs when an asset is transferred, or an obligation is incurred, and the debtor does not receive a reasonably equivalent value in exchange, and:
- The debtor 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; or
- The debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
Determining the “Reasonably Equivalent Value” is a fact specific inquiry, and courts will compare the value of what was transferred to what was received in exchange, whether the asset was transferred or the obligation was incurred for fair market value, and whether the transaction was at arm’s length between a willing buyer and a willing seller. See Barber v. Golden Seed Company, Inc.)
In People ex rel. Hartigan v. Anderson,the defendant transferred a beneficial interest in his marital residence to his wife less than one month prior to being indicted by a grand jury but many months after receiving a subpoena to appear before a grand jury and produce tax documents. Eventually, the criminal charges were dropped and the state brought a civil suit against the defendant. A civil judgment was entered, and the state filed an action to set aside the real estate transfer, alleging that is was a fraudulent conveyance. The Court applied a three pronged tests to determine if the conveyance was fraudulent in law: (1) there must be a transfer made for no or inadequate consideration; (2) there must be existing or contemplated indebtedness against the transferor; and (3) it must appear that the transferor did not retain sufficient property to pay his indebtedness.
The defendant and his wife argued: (1) the wife’s decision not to divorce the defendant, after discovering he had an affair which produced children, was adequate consideration for the transfer, and (2) the defendant did not contemplate a civil judgment at the time of the transfer. The court conducted a hearing on the matter and found the transfer to be fraudulent.
Bankruptcy Code and Fraudulent Transfers: Debtors who fraudulently transfer assets to avoid turning them over to creditors may be tempted to use bankruptcy as a shield by discharging the debt owed to those creditors. The Bankruptcy Code, however, provides creditors with protection against dishonest debtors. Bankruptcy trustees have the power to avoid fraudulent transfers made within two years before the bankruptcy filing. The standard for proving a fraudulent transfer under that section is the same in many respects as the standard for proving fraud under the UFTA. If a transfer is avoided, then trustees have the power to recover the property or its value and then distribute the recovery to creditors. The trustee’s “look back period” may often exceed two years depending on several factors, including the method and recipient of the transfer and the applicable state law.
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