What are Fraudulent Transfer Statute of Limitations

what are fraudulent transfer statute of limitations

The assessment of the transferee or fiduciary’s liability under IRC section 6901(c) is limited to 1 year after the period of assessment against the transferor ends. But if it is for the assessment against a transferee or a transferee, there will be 1 year limitations period after the assessment period against the preceding transferee ends. However, the limitation period will not be more than 3 years after the assessment period against the transferor ends.

The Fraudulent Conveyance Lookback Period

The Federal Bankruptcy Code Section 548 allows the DIP (debtor-in-possession) or the trustee to avoid any transfers that the debtor makes out of the bankruptcy estate that make the creditors unable to reach those assets. So if these transfers were successfully made from a debtor to a third party with the intention of preventing a particular creditor from getting the said transferred assets to satisfy the creditor’s claim, this particular activity is called a fraudulent transfer or a fraudulent conveyance.

Besides that, the IRC section 6901(a)(1)(A)(i) allows the Internal Revenue Service to collect the unsettled taxes of the transferee of the property of the debtor. However, it further states that the transferee’s liability will be determined “in equity or at law.” It means that the IRS should make use of the state fraudulent transfer law when it pursues a transferee. 

So while the Internal Revenue Service should follow the state law, the agency isn’t bound by the Statute of Limitations of the state law. Instead, the IRS applies the ten years of the IRC. Hence, to pursue the collection against an actual fraudulent transfer, the IRS gets the ten year Statute of Limitations under state law while the ordinary creditors will usually have 4 years only.

Moreover, to see whether the transfers may be avoided under the applicable fraudulent conveyance law, DIPs and trustees will usually rely on the capability to “look back” at any pre-petition transfers that a debtor has made. The state statute of limitations also codifies the look-back periods, and these are absent an exception, ranging from 3 to 6 years from the actual transfer date. 

A DIP or a trustee may be allowed to take advantage of the expanded look back period with the following guidelines. The debtor was indebted to the IRS at the time when transferring such assets was made and the date of the petition remained the same. It also includes when the debtor was a defendant in litigation that resulted in getting a money judgment against it, which consequently remained unsatisfied as of the date of the petition. Also, the expanded look back period can be granted to a DIP or a trustee if the debtor made actual fraudulent transfers and at least one of their current creditors was not able to find the transfer within a specific time frame before the date of the petition.

Types of Fraudulent Conveyances

Now, there are two types of fraudulent conveyance claims that you should know. Learn more about these two below. 

Actual Fraud

The actual fraud involves the intention to defraud the creditors. It requires proof of intent from the person initiating the transfer. Courts have set various circumstances that indicate the actual intent to defraud and here are some of them below. 

  • transfer of substantially all of the debtor’s assets
  • threatened or actual litigation against the debtor
  • transfer was made to a recently created or established corporation
  • retention of control or possession of the property
  • a special relationship with the person to whom the asset or property is transferred to

So these are some of the important factors that courts will look into in determining intent. But in accordance with the applicable rules of civil procedure, doing so can be determined on a case to case basis, depending on the circumstances or proof presented. Also, it may not be a strong defense against actual fraud, but proving the fraudulent transfer claims that the debtor has received the same value of the property or asset transferred may tend to rebut inferences of the defraud intent.

Constructive Fraud

Proving someone committing a constructive fraudulent transfer requires two particular conditions. One is when the debtor has received a value that is less than the equivalent value of the transferred property or asset. The second is when there are incurred debts, which would be beyond the debtor’s ability to pay when the constructively fraudulent transfers were made or as the result of the said transfer.  In fraudulent transfer cases like these, the debtor’s intent becomes irrelevant. The very important issue here that needs to be looked into is the actual value of the asset that a debtor successfully received. 

However, using the term “reasonable equivalent value” of the asset can be a subjective measure. If there’s a particular value given, people may ask if that value is adequate compensation for the said transferred asset or property. To find the resolution, courts will now look for the circumstantial pieces of evidence that involve the said transaction to see if the exchange is fair. These are some of the important factors that courts will consider. 

  • The said transaction was made in the ordinary course of business and in good faith by different parties of independent interests
  • The net effect on the debtor’s estate with respect to the creditor’s unsecured claim 
  • The competitiveness of bids for the asset or property

To consider an exchange or transferring assets to be fair, the debtor doesn’t have to directly receive the value but it may exist in the form of new opportunities in business that have been made available through new affiliations or new lines of credit made by the said transfer. But, if there are transfers that are merely created for the third party’s benefit, there’s no reasonably equivalent value. 

Moreover, you can consider something a fraudulent conveyance if such a transfer is made within 2 years before bankruptcy filing. That’s why it is crucial to exactly determine the date when the actual transfer was made. When a debtor transfers, it can only be successful once it is perfected under applicable existing law and this perfection happens when an individual who buys the asset or property from the debtor couldn’t have the acquisition of the interest higher than that of the trustee or transferee.

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