Fraudulent Transfer Claims in Business Bankruptcy: 5 Elements and the Lookback Period

A trustee can win a fraudulent transfer claim without proving that anyone meant to defraud anyone. The name is older than the doctrine it now covers, and section 548 of the Bankruptcy Code offers two routes to the same remedy: one that asks about intent, and one that asks only about price and solvency.

In 1571 the Fraudulent Conveyances Act (13 Elizabeth, chapter 5) condemned conveyances made with "[i]ntent to delay hynder or defraude [c]reditors," a phrase the Supreme Court traced in 2016 when it decided Husky International Electronics v. Ritz. The words survived four and a half centuries almost intact. What follows sets out the five elements a trustee assembles under section 548 and then the lookback, which turns out to be several clocks rather than one.

1. The Company Must Have Parted With Its Own Property

Section 548(a)(1) reaches "any transfer ... of an interest of the debtor in property" and any obligation the debtor incurred. The definition of transfer in section 101(54) is broad: it includes "the creation of a lien," the foreclosure of an equity of redemption, and "each mode, direct or indirect, absolute or conditional, voluntary or involuntary," of parting with property. A transfer can happen to the company without the company choosing it.

The phrase "of the debtor" limits the claim in the other direction. Property the owner held personally is outside the company's case, and so is property the company never owned. That second point returns in merchant cash advance cases, where whether a funder's daily remittances were the company's property or receivables the funder had already purchased is contested and depends on the agreement. No general answer exists.

2. The Transfer Must Fall Within Two Years

Section 548 applies to transfers "made or incurred on or within 2 years before the date of the filing of the petition." Section 548(d)(1) fixes when a transfer is made: when it is perfected against a bona fide purchaser, and, if it was never perfected before the case, "immediately before the date of the filing of the petition." A lien signed three years ago and recorded last month is, for this purpose, recent.

3. Either Actual Intent to Hinder, Delay, or Defraud

The first alternative is the old one. Under section 548(a)(1)(A) the trustee must show the debtor made the transfer "with actual intent to hinder, delay, or defraud any entity to which the debtor was or became ... indebted." The verbs are disjunctive. A transfer meant only to slow a creditor down satisfies the text as fully as one meant to cheat it, and the creditor protected need not have existed yet on the date of the transfer.

Intent is proved the way it is always proved, from circumstances, and state statutes list the circumstances that courts consider. New York's version in Debtor and Creditor Law section 273(b) includes a transfer to an insider, a debtor who kept control of what it transferred, concealment, a lawsuit pending or threatened beforehand, a transfer of substantially all assets, and insolvency. The statute presents them as factors to weigh, not a checklist that decides the case, though a trustee with four of them has the beginning of a narrative that an owner will need documents to answer.

A company that moves its equipment to a newly formed sister company the week after a funder's demand letter arrives is behaving like a tenant who carries the furniture out the back while the landlord knocks at the front: nothing in the act itself proves what was intended, and nobody watching needs it proved.

The consequence can follow the owner out of the case.

Husky held that "actual fraud" in section 523(a)(2)(A) reaches fraudulent conveyance schemes "even when those schemes do not involve a false representation," so a director who drains a company to defeat a creditor may face both an avoidance action in the company's case and a nondischargeability claim in his own, if state law makes him personally liable for the debt in the first place.

4. Or Less Than Reasonably Equivalent Value

The second route begins with price. Section 548(a)(1)(B)(i) asks whether the debtor "received less than a reasonably equivalent value in exchange." Section 548(d)(2)(A) defines value as "property, or satisfaction or securing of a present or antecedent debt of the debtor," which means that paying a real debt is value; a payment to a genuine creditor is a matter for preference law, not this one.

Reasonable equivalence is not fair market value. In BFP v. Resolution Trust Corp. (1994) the Supreme Court held that for real property sold at a foreclosure that complied with state law, the price received is reasonably equivalent value, and it rejected fair market value as the automatic benchmark. The holding is confined to regularly conducted foreclosures. Private sales between related parties receive no such shelter, and the owner who sold the van to a cousin at half its book value will be asked where the other half went.

5. And a Company Already in Trouble

Value alone does not complete the constructive route. Section 548(a)(1)(B)(ii) adds one of four conditions: the company was insolvent or became insolvent because of the transfer; it was left with "unreasonably small capital"; it intended or believed it would incur debts "beyond the debtor's ability to pay as such debts matured"; or the transfer went to an insider under an employment contract outside the ordinary course. Insolvency under section 101(32) is a balance sheet test at "a fair valuation," and it excludes property the debtor itself transferred with intent to hinder creditors.

A transferee that took for value and in good faith may keep what it received to the extent it gave value to the company, under section 548(c).

The Lookback Is Several Clocks, and Only One Is Two Years

The two years of section 548 are the federal default. Section 544(b) lets the trustee use any state law that an actual unsecured creditor of the company could have used, and state periods run longer. New York's Debtor and Creditor Law section 278 extinguishes an actual intent claim unless brought "not later than four years after the transfer was made" or, "if later, not later than one year after the transfer ... was or could reasonably have been discovered"; constructive claims get four years; an insider preference under section 274(b) gets one.

The reach-back asks how old the transfer is. The filing deadline asks how old the case is. They are different questions.

Section 546(a) sets the trustee's own deadline to sue: generally two years after the order for relief, or one year after the first trustee's appointment if that comes within the two years, and never after the case is closed or dismissed. Recovery from the transferee, under section 550(f), must begin within one year after avoidance. Section 548(e) runs ten years for transfers to a self-settled trust made with actual intent, which concerns individuals more than operating companies. And an owner who later files personally faces section 727(a)(2), which denies a discharge for property transferred or concealed with intent to hinder creditors "within one year before the date of the filing of the petition."

Which of those clocks governs a given transfer depends on the state, the creditor, and the chapter, and whether a trustee in a small case will spend the estate's money chasing a four-year-old transfer is a question the statute leaves to the trustee. Delancey Street is not a law firm and does not evaluate transfer claims; it negotiates merchant cash advance and other business debt outside court and offers a free, confidential review for owners deciding whether settlement or bankruptcy counsel should come first, and a short description of that work is at delanceystreet.com. Where assets have already moved, counsel comes first.