Fraudulent Transfer Litigation

Illinois has enacted the Uniform Fraudulent Transfer Act, 740 ILCS 140/1. A fraudulent transfer is a transfer by a debtor to avoid paying a claim of a creditor. Our Chicago Commercial Litigation Lawyers have experience in filing lawsuits against creditors who fraudulently transfer property to avoid paying a judgment. We will aggressively pursue your claim against the debtor.

Example: A sues B for causing personal injury. B, who owns a farm, conveys title to the farm to his nephew. The nephew does not pay any money for the farm. A has an action against B and possibly Nephew to avoid or cancel the fraudulent transfer.

Section 5 of the statute provides two basic pathways to proving a fraudulent transfer:

Sec. 5. (a) 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 reasonably equivalent value in exchange for the transfer or obligation, and the debtor

(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; or
(B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

First, if the debtor made the transfer with intent to hinder or defraud the creditor, the transaction is a fraudulent transfer. There are additional factors listed in the statute that can demonstrate fraudulent intent:

1. the transfer or obligation was to an insider;
2. the debtor retained possession or control of the property transferred after the transfer;
3. the transfer or obligation was disclosed or concealed;
4. before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
5. the transfer was of substantially all 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;
9. the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
10. the transfer occurred shortly before or shortly after a substantial debt was incurred; and
11. the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

Second, if the debtor made a transaction but did not receive fair value for what he gave up, that too is a fraudulent transfer.

Third, the statute also makes illegal a subset of transactions, commonly referred to as “fraud in law.”

Section 6 provides: Sec. 6. (a) 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 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 the debtor became insolvent as a result of the transfer or obligation. (740 ILCS 160/6)

If the transfer was to an insider, it may also constitute “fraud in law.” Section 6 (b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

If the creditor can prove a fraudulent transfer, the Act gives the creditor powerful tools to block or void the fraudulent transfer.

Sec. 8. (a) In an action for relief against a transfer or obligation under this Act, a creditor, subject to the limitations in Section 9, may obtain:
(1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim;
(2) an attachment or other provisional remedy against the asset transferred or other property of the transferee in accordance with the procedure prescribed by the Code of Civil Procedure;
(3) subject to applicable principles of equity and in accordance with applicable rules of civil procedure,

(A) an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property;
(B) appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or
(C) any other relief the circumstances may require. (740 ILCS 160/8) (from Ch. 59, par. 108).

The fraudulent transfer act has a four-year statute of limitations. The creditor must bring the lawsuit within four years of the date of the transfer. Kenneth W. LEVY, Plaintiff-Appellee, v. MARKAL SALES CORPORATION, et al., Defendants-Appellants

In Regan v. Ivanelli, 617 N.E.2d 808 (Ill. App. 2d Dist 1993), the Appellate Court reinstated a fraudulent transfer claim against a defendant, Carl, Sr., who was aware of the claim of the creditor and transferred his property to other family members. “The complaint alleged that Carl, Sr., gratuitously transferred the beneficial interest in the land trust to his children on May 23, 1988, after the commencement of plaintiffs' action for tortious interference with contract was filed on March 10, 1988. Such transfer left Carl, Sr., without sufficient assets or income to satisfy the subsequent judgment entered against him.” Id.

Please review our blog for further articles discussing fraudulent transfers.

In this case the Harris Bank proved that a debtor’s transfer of property to his wife was a fraudulent transfer.

In the Munson case the debtor transferred assets to another person when he was insolvent.

If you are a creditor and you believe that a debtor engaged in a fraudulent transfer to avoid paying a claim, please contact our Commercial Litigation Lawyers. We will fight for you and make sure that you are treated fairly by the courts and the debtor.