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What You Need to Know About Fraudulent Transfers in Business Bankruptcy

fraudIn most business bankruptcy proceedings, a trustee will be appointed by the court to review and manage assets of the debtor company. The goal is to assess value and potentially sell off any real estate or property, so the funds can be used to pay all or some of the organization’s creditors. However, in the months leading up to filing bankruptcy, some business owners might attempt to sell assets on their own – often to avoid having them liquidated as part of bankruptcy proceedings. This type of conduct may constitute fraud under the US Bankruptcy Code, and there can be serious consequences for doing so.

To avoid mistakes and ensure you remain in compliance with the law, you get should a North Carolina business bankruptcy lawyer involved as early as possible in your case. In addition, it’s important to review some general information about fraudulent transfers in bankruptcy.

Fraudulent Conveyance as Defined by Bankruptcy Laws: When you file for bankruptcy, you must provide information on any transfers of real estate or other assets that you accomplished within a certain time period beforehand. North Carolina’s Voidable Transactions Act allows for a four-year lookback period, superseding the bankruptcy rule of two-years.

The trustee will review all of these transactions for signs that they violate the laws regarding fraudulent conveyances. If you did transfer an asset or interest under circumstances indicating fraud, the trustee has the power to unwind the transaction. By recovering the property or its fair market value, these amounts can be applied to satisfy creditor claims.

Conduct That May Constitute a Fraudulent Transfer: Specifically, the bankruptcy trustee is looking for:

  1. Actual Fraud: These are transfers that encompass an intent to defraud and prevent your creditors from touching the assets. Though proving actual fraud can be challenging, there are some actions that will raise questions, such as;
    1. Transfers to a company insider, employee, family member, or friend;
    2. Selling the asset, but maintaining control over it for your own use – such as a sale and lease-back; and,
    3. “Straw man” transactions or other unusual circumstances.
  2. Low Value: You may violate bankruptcy fraud laws if you transfer business property to a third party for far less than its worth. For purposes of this form of misconduct, there may be allegations of a fraudulent transfer if two factors are present:
    1. You sold or gave away the asset for less than the reasonably equivalent value; and,
    2. You were insolvent at the time or became insolvent after the transaction.

The surrounding circumstances are critical for this analysis. A trustee may look at whether the transfer was part of your ordinary business dealings or whether you solicited other offers for selling the property.

Set Up a Consultation with a North Carolina Business Bankruptcy Attorney

For more information regarding fraudulent conveyances, please contact Howard, Stallings, From, Atkins, Angell & Davis, P.A. to schedule a meeting with a member of our team. We represent business bankruptcy clients throughout Central and Eastern North Carolina from our offices in Raleigh, New Bern, or Morehead City, NC.

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