Bankruptcy Defense: Fraudulent Transfers and Preferential Payments

What are fraudulent transfers and preferential payments?

In Florida, fraudulent transfers and preferential payments can significantly impact businesses facing bankruptcy or restructuring. A fraudulent transfer involves the debtor transferring property or assets intending to hinder, delay, or defraud creditors. Florida Statutes § 726.101; 11 U.S.C. § 548. On the other hand, preferential payments occur when a debtor favors one creditor over others by making payments within 90 days before filing for bankruptcy. 11 U.S.C. § 547.

These transactions can have severe implications for Florida-based businesses. If a court identifies such transactions, it may unwind them, leading to potential financial and reputational damage. Additionally, business owners may face litigation and potential personal liability for the company’s debts.

For instance, a fraudulent transfer could occur if a debtor sells an asset at significantly below market value to a friend or family member to avoid its seizure by creditors. A preferential payment example could be a debtor paying off a personal loan from a family member while neglecting other creditors, thereby preferring that specific creditor.

Need help with fraudulent transfers or preferential payments? Schedule your consultation today with a top bankruptcy and restructuring attorney.

What are relevant laws related to fraudulent transfers and preferential payments in Florida?

Both Florida and federal laws govern fraudulent transfers and preferential payments. In Florida, the Florida Uniform Fraudulent Transfer Act (FUFTA), codified in Florida Statutes sections 726.101-726.112, outlines the rules for identifying and remedying fraudulent transfers. In addition, it establishes civil remedies for creditors to recover assets or their value and provides for the avoidance of fraudulent transfers.

On the federal level, the Bankruptcy Code contains provisions addressing these issues. Specifically, Section 548 governs fraudulent transfers by allowing the bankruptcy trustee to avoid such transfers made within two years before filing for bankruptcy. Similarly, Section 547 covers preferential payments by empowering the trustee to recover payments made within 90 days before bankruptcy (or one year if the creditor is an insider).

Businesses in Florida should be aware of state and federal regulations when navigating bankruptcy and restructuring processes to ensure compliance and avoid potential liabilities.

What legal issues typically arise related to fraudulent transfers and preferential payments?

The following disputes are among the most common to fraudulent transfers and preferential payments:

Insider dealings: Transactions with insiders, such as family members, close friends, or business partners, may raise suspicion and lead to litigation if they resemble fraudulent transfers or preferential payments.
Undervalued transactions: Sales or transfers of assets for significantly less than their fair market value can trigger litigation, as they may be considered fraudulent transfers aimed at hindering creditors. Florida Statutes § 726.105.
Inconsistent payments to creditors: Paying select creditors while neglecting others, especially within the 90 days before filing for bankruptcy, can lead to preferential payment claims. 11 U.S.C. § 547.
Transfers without reasonably equivalent value: If a debtor transfers an asset without receiving reasonably equivalent value in exchange, it may be a constructively fraudulent transfer, opening the door to litigation. Florida Statutes § 726.106.

What is required to prove a case of fraudulent transfers and preferential payments in Florida?

To file a proceeding for fraudulent transfers and preferential payments in bankruptcy and restructuring matters, plaintiffs must satisfy specific procedural and evidentiary requirements established by the Bankruptcy Code and Florida’s Uniform Fraudulent Transfer Act.

Common claims that businesses face related to fraudulent transfers and preferential payments include:

Actual fraudulent transfers: When a debtor transfers assets intending to hinder, delay, or defraud creditors.
Constructive fraudulent transfers: When a debtor transfers assets without receiving reasonably equivalent value in exchange, leaving the debtor insolvent or with unreasonably small capital.
Preferential payments: When a debtor pays select creditors within 90 days before filing for bankruptcy, which may be recoverable by the bankruptcy trustee to distribute assets more equitably.

To mitigate the risk of litigation over fraudulent transfers and preferential payments, businesses can implement the following strategies:

Maintain detailed records: Keeping accurate and comprehensive records of all transactions can help businesses demonstrate their legitimacy and avoid accusations of fraudulent transfers or preferential payments.
Consult with legal counsel: Engaging experienced bankruptcy attorneys can help businesses navigate complex legal issues and ensure compliance with applicable laws and regulations, minimizing the risk of litigation.
Develop a comprehensive restructuring plan: A well-thought-out restructuring plan that fairly addresses all creditors can help prevent claims of preferential payments or fraudulent transfers.
Conduct arm-’s length transactions: Businesses should ensure that transactions are conducted at arm’s length, especially when dealing with insiders, to avoid the appearance of impropriety or favoritism.
Obtain independent appraisals: Acquiring independent appraisals of assets before transferring or selling them can help businesses demonstrate that they conducted their transactions at fair market value and avoid fraudulent transfer claims.

By implementing these strategies, businesses can proactively address potential issues related to fraudulent transfers and preferential payments, reducing the likelihood of litigation and ensuring a smoother bankruptcy or restructuring process.

When a set of facts is appropriate to meet the requirements of fraudulent transfers and preferential payments, there are many paths a claimant may take. We are value-based attorneys at Jimerson Birr, which means we look at each action with our clients from the point of view of costs and benefits while reducing liability. Then, based on our client’s objectives, we chart a path forward to seek appropriate remedies.

To see what actions may be available for your unique situation, please contact our office to set up your initial consultation.

What are common defenses to fraudulent transfers and preferential payments in Florida?

The primary defenses to fraudulent transfers and preferential payments in Florida include the following:

Good faith defense: Asserting that the debtor and the transferee entered the transaction in good faith and for reasonably equivalent value.
Ordinary course of business defense: Arguing that the transfer was made in the ordinary course of business, making it a legitimate transaction and not a preferential payment.
Subsequent new value defense: Claiming that the creditor provided new value to the debtor after the alleged preferential transfer, which can offset the amount of the preference claim.

To see what defenses may be available for your unique situation, please contact our office to set up your initial consultation.

Frequently Asked Questions

How does the Bankruptcy Code differentiate between fraudulent transfers and preferential payments?

Fraudulent transfers involve a debtor’s intentional or constructive effort to hinder, delay, or defraud creditors. At the same time, preferential payments focus on ensuring equitable distribution of assets by recovering payments made to select creditors within 90 days before filing for bankruptcy.

Can a business still be liable for fraudulent transfers if it had no intent to defraud?

Yes, a business can be liable for constructive fraudulent transfers even without an intent to defraud. For example, suppose a debtor transfers assets without receiving reasonably equivalent value in exchange and becomes insolvent or has unreasonably small capital. In that case, the transaction may be considered a constructive fraudulent transfer.

What happens if a preferential payment or fraudulent transfer claim is successful?

If a preferential payment or fraudulent transfer claim is successful, the court may order the recovery of the transferred assets or the value of the assets. These recovered assets are included in the debtor’s bankruptcy estate and distributed equitably among the creditors.

Have more questions about fraudulent transfers and preferential payments?

Crucially, this overview of fraudulent transfers and preferential payments does not begin to cover all the laws implicated by this issue or the factors that may compel the application of such laws. Every case is unique, and the laws can produce different outcomes depending on the individual circumstances.

Jimerson Birr attorneys guide our clients to help make informed decisions while ensuring their rights are respected and protected. Our lawyers are highly trained and experienced in the nuances of the law, so they can accurately interpret statutes and case law and holistically prepare individuals or companies for their legal endeavors. Through this intense personal investment and advocacy, our lawyers will help resolve the issue’s complicated legal problems efficiently and effectively.

Having a Jimerson Birr attorney on your side means securing a team of seasoned, multi-dimensional, cross-functional legal professionals. Whether it is a transaction, an operational issue, a regulatory challenge, or a contested legal predicament that may require court intervention, we remain a tireless advocate every step of the way. Being a value-added law firm means putting the client at the forefront of everything we do. We use our experience to help our clients navigate even the most complex problems and come out the other side triumphant.

If you want to understand your case, the merits of your claim or defense, potential monetary awards, or the amount of exposure you face, you should speak with a qualified Jimerson Birr lawyer. Our experienced team of attorneys is here to help. Call Jimerson Birr at (904) 389-0050 or use the contact form to set up a consultation.