Fraudulent Transfers / Fraudulent Conveyances in Pennsylvania

It sometimes happens that a creditor, after securing a judgment against a debtor, finds that the debtor has transferred items of value so that there is nothing left for the creditor to use to satisfy the debtor’s obligation. For example, Harry owes $2,000 to John and has neglected to make good on the obligation. John goes to court and secures a judgment against Harry. In trying to collect the judgment, the sheriff is dispatched to levy upon Harry’s property, only to learn that Harry’s 2003 Mercedes has within the last month been transferred from Harry to his son Harry, Jr.. Investigation reveals that the $30,000 vehicle was transferred to Harry, Jr. for no consideration (i.e., Harry, Jr. didn’t pay anything for it). Obviously John thinks that there has been a fraud perpetrated and wants to know what can be done to effect justice so that he can collect the debt.

Both Harry and Harry, Jr. may have more of a problem than they think. A transfer to defeat the rights of creditors may violate criminal statutes relating to fraud, and also violates civil statutes, which provide a procedure to recall the transaction and satisfy the debtor’s obligation.

The general rule is that a transfer made or obligation incurred by a debtor is fraudulent 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:

  1. with actual intent to hinder, delay or defraud any creditor of the debtor; or
  2. without receiving a reasonable equivalent value in exchange for the transfer or obligation, and the debtor:
    1. was engaged or about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
    2. intended to incur, or believed or reasonably believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
  3. The definition of "actual intent" to hinder, delay or defraud presents a problem. To ascertain actual intent, one considers whether:
    1. the transfer was to an insider;
    2. the debtor retained control or possession after the transfer;
    3. the transfer was concealed;
    4. the debtor had been sued or threatened with suit before the transfer was made;
    5. the transfer was substantially all of the debtor’s assets;
    6. the debtor absconded;
    7. the debtor removed or concealed assets;
    8. 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; and
    9. the debtor was insolvent or became insolvent shortly after the transfer.

If the creditors are present creditors, as opposed to "present and future" creditors, the definition of a fraudulent transfer is much less complex. A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if (1) the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or (2) the debtor became insolvent as a result of the transfer or obligation.

Once it has been determined that the transfer was fraudulent, there are remedies that the court may impose to correct the obvious wrong.

  1. The court may void the transfer or obligation to the extent necessary to satisfy the creditor’s claim. The entire transaction might be actually set aside so that the transferred property is actually returned to the ownership of the debtor so that the creditor may proceed against it by legal process.
  2. The court may issue an attachment against the asset transferred or other property of the transferee. This remedy would permit the court to put the transferred asset directly under the control of the court from where the creditor could cause it to be sold and the proceeds used to pay the debt. This remedy is especially strong in that it can be used not only against the particular item that was fraudulently transferred, but may also be used against any other property that might belong to the transferee.
  3. The court may issue an injunction against further transfers by either the debtor or transferee or both. Once there is a finding that the transfer was fraudulent, an injunction may be a very speedy way of arranging that the property to be used to satisfy the debt does not again become lost. The penalties for disobeying an injunction can rise to the level of incarceration.
  4. The court may appoint a receiver to take charge of the asset or other property of the transferee and thereby take physical possession of the asset or other property of the transferee with the obvious advantage that the value may be preserved for the creditor.
  5. Finally, the court may directly issue execution process, that is, authorize the sheriff to go out and seize the asset or its proceeds and pay the claim of the creditor.

John’s route to securing payment on his judgment certainly is not an easy one. It requires filing a petition with the court to request that the transfer be deemed fraudulent and asking that the court order some kind of relief. Obviously the cost of doing this might be prohibitive for a small claim, but the efficiency of proceeding in this manner increases as the amount of the claim increases and the amount of the property wrongfully transferred increases.

If litigation over a fraudulent transfer is necessary, the attorneys of Wolf, Baldwin & Associates, P.C. have the experience to represent you through court or arbitration. Click here now to contact us and to schedule an appointment. We will be happy to advise you about your commercial litigation rights under Pennsylvania law.

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