7 Fraudulent Transfer Traps in OldCo/NewCo Restructurings

The Move Everybody Suggests and Almost Nobody Documents

Somebody has already told you the plan. Open a new LLC, move the trucks or the equipment or the book of business into it, keep the customers and the crew, let the old entity go quiet with four advances and a line of credit still sitting in it. It sounds clean because businesses are bought and sold out of distress all the time, and courts approve those sales constantly through Article 9 dispositions, assignments for the benefit of creditors, and §363 sales in bankruptcy. What separates those from this one has almost nothing to do with intentions and almost everything to do with what OldCo actually received and who was told.

Understand who is on the other side. A funder holding a judgment hands the file to collection counsel, who runs a UCC search, pulls Secretary of State filings and DBA registrations, subpoenas the bank records, and files a voidable transaction action naming OldCo, NewCo, and you personally. Or three creditors holding $21,050 in undisputed noncontingent unsecured claims put OldCo into an involuntary bankruptcy under 11 U.S.C. §303(b) and a trustee with federal avoidance powers inherits the question. What follows is the risk map, not a playbook, and every one of these decisions belongs in front of counsel before anything moves.

1. Transferring Assets for Nominal Consideration

The rule that catches most of these transactions does not require anyone to prove you meant to cheat a creditor. Constructive fraud under 11 U.S.C. §548(a)(1)(B) needs two findings: OldCo received less than a reasonably equivalent value in exchange, and OldCo was either insolvent at the time or rendered insolvent, left with unreasonably small capital for the business it was still in, or intending to incur debts beyond its ability to pay. The state law mirrors say the same thing outside bankruptcy, at N.Y. Debtor and Creditor Law §§273(a)(2) and 274(a) under the Uniform Voidable Transactions Act, and at Tex. Bus. & Com. Code §24.005(a)(2) in states still running the older Uniform Fraudulent Transfer Act.

Reasonably equivalent value gets measured from OldCo’s side of the ledger, which is the part owners consistently get backwards. The question is not what NewCo paid out in total or what the assets were worth to you; it is what OldCo received that its creditors could have reached. In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the Supreme Court held that the price fetched at a noncollusive real estate foreclosure sale conducted in compliance with state law conclusively is reasonably equivalent value, and the reasoning rested on the market testing that a regulated forced sale supplies. A private transfer between two entities you own gets none of that deference, because nothing tested the price.

So the two phrases that make the other side’s case easy are “ten dollars and other good and valuable consideration” and “assumption of the equipment lease.” Neither is a value OldCo’s creditors can collect from. And the remedy is not a fine you negotiate down: the transfer gets avoided, and under 11 U.S.C. §550(a) the trustee recovers the property or its value from the initial transferee or from “the entity for whose benefit such transfer was made,” which is language written to reach the person who ended up better off. NewCo hands back the trucks or writes a check for what they were worth.

2. Same Owners, Same Customers, Same Number

Successor liability is a separate theory that does not require avoiding the transfer. The general rule is that a buyer of assets does not inherit the seller’s debts, with four familiar exceptions: express or implied assumption, a transaction amounting to a consolidation or merger, a purchaser that is a mere continuation of the seller, and a transaction entered into fraudulently. The de facto merger exception swallows OldCo/NewCo deals, because it exists for exactly the case where a merger has been dressed up as something else.

New York’s formulation is the one most funder-side lawyers use, and the Second Circuit set it out in Cargo Partner AG v. Albatrans, Inc., 352 F.3d 41 (2d Cir. 2003): continuity of ownership, cessation of ordinary business and dissolution of the predecessor as soon as practicable, assumption by the successor of the liabilities ordinarily necessary for uninterrupted continuation of the business, and continuity of management, personnel, physical location, assets, and general business operation. In that case the claim failed for want of continuity of ownership, and that is the point worth absorbing: the factor that defeats a de facto merger claim in New York is the factor an OldCo/NewCo plan almost always flunks, because the whole idea is that you still own it.

The evidence is not hard to gather, which is why these motions get filed. The same phone number on the invoices, the same website with a new footer, the same DOT number, the same insurance broker, payroll records showing the identical crew moving over on a Monday, and a customer list that did not change. None of that requires discovery into your intentions; it requires a paralegal and a subpoena to your bank, and it produces a claim that NewCo owes OldCo’s judgment in full rather than the value of what it received.

3. Keeping the Goodwill, Leaving the Debt

Owners think of assets as things with serial numbers, and that instinct is what creates this trap. Goodwill, the trade name, the customer list, the vendor relationships, the contractor or operating license, the online reviews, and the book of recurring work are all assets with real value, and moving them to NewCo for nothing is the same constructive fraud problem as moving the trucks for a dollar. In a service business they are often the most valuable thing OldCo owned, because the equipment is encumbered and the receivables are pledged while the name and the relationships are not.

The transfer of those assets is also documented in public records that carry dates. Trademark assignments, DBA and assumed name filings, a new entity registering the old brand, a license transferred at the state board, domain registration changes, and the Google listing that quietly changed hands. Two of the eleven statutory badges of fraud that courts weigh under N.Y. Debtor and Creditor Law §273(b) and Cal. Civ. Code §3439.04(b) hit here directly: whether the transfer was of substantially all the debtor’s assets, and whether the consideration received was reasonably equivalent to the value of the asset transferred.

This is also where the case gets expensive rather than simple, because valuing goodwill is a fight between two experts and nobody can predict it. That cuts in both directions. It means a creditor cannot easily prove a number, and it means you cannot either, so the file becomes a multi-year valuation dispute at a cost that dwarfs whatever the advances would have settled for. Owners who have been through it tend to name the legal spend rather than the judgment as the thing that finished them.

4. Paying Insiders on the Way Out

The payments made in the weeks before the transfer are often more damaging than the transfer itself, because they are simple to prove and they are their own cause of action. Under N.Y. Debtor and Creditor Law §274(b), a transfer is voidable as to an earlier creditor if it was made to an insider for an antecedent debt while the debtor was insolvent and the insider had reasonable cause to believe the debtor was insolvent. Repaying yourself the shareholder loan, catching up the rent owed to the LLC that holds the building you own, or clearing the balance on the credit card in your spouse’s name all fit that sentence exactly.

The insolvency element is easier for the other side than owners expect. Under N.Y. Debtor and Creditor Law §271(a) a debtor is insolvent when, at a fair valuation, its debts exceed its assets, and §271(b) presumes insolvency for a debtor that is generally not paying its debts as they come due, with the burden on the party resisting the presumption. If you have been in default on two advances for four months, missing vendor terms, and stretching payroll, you have handed the plaintiff the presumption before anyone opens a balance sheet.

In bankruptcy the same payments come back as preferences with a longer reach. Section 547(b)(4)(A) covers transfers within 90 days of the petition, but §547(b)(4)(B) extends to transfers made between 90 days and one year before filing where the creditor was an insider at the time. The state law timing is tighter and worth knowing: under N.Y. Debtor and Creditor Law §278, a claim under §274(b) must be brought within one year after the transfer, while ordinary constructive fraud claims run four years. Insider payments have a short fuse and a hard landing.

5. The Look-Back Windows Are Longer

The federal window is the short one. Section 548(a)(1) lets a trustee avoid transfers made on or within two years before the petition date, for actual intent under subparagraph (A) or constructive fraud under subparagraph (B). If that were the whole picture, waiting out 24 months would be a strategy. It is not the whole picture.

Section 544(b)(1) is the provision that matters, because it lets the trustee step into the shoes of an actual unsecured creditor holding an allowable claim and use whatever state law that creditor could have used. Under the Uniform Voidable Transactions Act and the older Uniform Fraudulent Transfer Act alike, that is four years after the transfer, and for actual-intent claims, if later, one year after the transfer was or reasonably could have been discovered. See N.Y. Debtor and Creditor Law §278 and Tex. Bus. & Com. Code §24.010, which read nearly identically. A transfer you made three years ago is squarely reachable, and a concealed one can be reachable longer, since the discovery clock does not start until a creditor could reasonably have found it.

The other clocks belong to the trustee, not to you. Section 546(a) gives a trustee two years after the order for relief, or one year after appointment if that is later, to commence the avoidance action, and §550(f) allows a further year after avoidance to recover. Transfers into a self-settled trust carry a ten-year window under §548(e). And you do not control whether a bankruptcy happens at all: under §303(b), three creditors holding $21,050 in noncontingent, undisputed, unsecured claims, or a single creditor if OldCo has fewer than twelve, can file an involuntary petition. That threshold holds from April 1, 2025 through March 31, 2028.

6. The UCC-1 Follows the Collateral

Every advance you took came with a UCC-1 financing statement, and most of them describe the collateral as all assets, all accounts, and all proceeds. That lien does not stay behind with OldCo. U.C.C. §9-315(a)(1) says a security interest continues in collateral notwithstanding sale, lease, license, exchange, or other disposition, unless the secured party authorized the disposition free of the security interest, and §9-315(a)(2) attaches it to any identifiable proceeds. The exception is the operative language: without a written authorization or a release, the lien travels with the equipment and the receivables into NewCo.

The filing keeps working too. Under U.C.C. §9-507(a), a filed financing statement remains effective with respect to collateral that is sold, exchanged, leased, licensed, or otherwise disposed of, whether or not the secured party knew about it. And §9-508 goes further, making a financing statement naming the original debtor effective to perfect a security interest in collateral in which a new debtor bound by the security agreement has or acquires rights, covering collateral acquired before and within four months after the new debtor becomes bound. Nobody has to file anything for that to be true.

The practical consequence lands in NewCo’s bank account, not in a courtroom. A funder can send notification to the account debtors and collect NewCo’s receivables directly, and NewCo’s prospective lender or factor will find the lien on a routine search and decline the deal, which is usually how owners discover the problem. The only clean fix is the one you negotiate: a payoff or settlement with a written release and a UCC-3 termination filed against the collateral, which is the subject of our page on terminating a UCC lien after an MCA is paid off.

7. The Officers Who Signed Are Exposed

The corporate form does not do the work owners expect it to do here, because the claims are aimed at the transfer rather than at the business. Section 550(a) lets a trustee recover from the initial transferee or from the entity for whose benefit the transfer was made, and the good faith defense in §550(b) protects later transferees, not the first one and not the insider who benefited. State law adds aiding and abetting theories against the individuals who signed, plus fiduciary duty claims where the company was insolvent when the board acted.

The Supreme Court closed the last exit in Husky International Electronics, Inc. v. Ritz, 578 U.S. 356 (2016). Ritz was a director and 30 percent shareholder who moved money out of Chrysalis Manufacturing into other entities he owned, draining the assets a trade creditor would have collected from. He was held personally liable under Texas law, then filed personal bankruptcy. The Court held 7 to 1 that “actual fraud” in the discharge exception at 11 U.S.C. §523(a)(2)(A) covers fraudulent conveyance schemes even with no false representation, so the debt survived his discharge. A judgment built on this conduct is one you cannot file your way out of.

Two more exposures ride along and neither is theoretical. Payroll taxes left at OldCo follow the people, not the entity: 26 U.S.C. §6672(a) imposes a penalty equal to the entire unpaid trust fund tax on any responsible person who willfully failed to collect and pay it over. And 18 U.S.C. §152(7) makes it a federal offense, punishable by up to five years, to knowingly and fraudulently transfer or conceal property in contemplation of a bankruptcy case or with intent to defeat title 11. If you are also the personal guarantor on the advances, that liability never moved either, which is a separate fight covered on our page about an MCA lawsuit against you personally.

What a Real Sale Actually Looks Like

None of the above means a distressed business cannot be sold. It means the sale has to give OldCo something its creditors can reach, and it has to be documented before the fact rather than reconstructed after. That starts with a dated, independent valuation from someone with no stake in the outcome, covering the goodwill and the trade name and not just the titled equipment. Then a price that reflects it, paid in cash or in a note with real terms that OldCo can enforce and that shows up on its books as an asset a creditor can levy on. A note nobody ever intends to pay is not value.

Then the secured creditors get dealt with rather than stepped around. Either the funder is paid at closing, or it releases with a UCC-3 termination, or it consents in writing to the disposition free of its lien, which is the precise exception written into U.C.C. §9-315(a)(1). Board or member resolutions authorizing the sale, a bill of sale that itemizes what is being assumed and what is not, and no insider distributions in the window before closing. If you cannot show a creditor the file and have it look boring, the file is not finished.

There are also structures built for this that come with their own protection. A secured party sale under U.C.C. §9-610 requires notice and a commercially reasonable disposition, and it leaves a record. An assignment for the benefit of creditors puts a fiduciary assignee in charge of liquidating under state law. A §363 sale in a bankruptcy case gives the buyer a court order and an overbid process. All three cost more up front than moving the trucks on a Saturday, and all three produce a buyer who is not defending an avoidance action in three years. Which one fits, and whether a Subchapter V filing beats selling at all, is a question for counsel who has read your actual agreements.

Who Should You Call? Our Top-Rated Business Debt Firms

One firm on this list works the entire lifecycle of a business debt file, from stopping the daily debits through attorney-led negotiation, UCC lien removal, and a signed release. The other two cover broader debt categories that often sit alongside the advances. Choose accordingly.