1. What do you mean by a transfer after you incur a 'present liability'?
If you sell an asset for less than its fair value, the creditor must secondly show that the transfer occurred after you had the liability. Once you have a present liability, you cannot safely transfer your assets for less than fair value. No less safe are assets that you transfer when you have a future, foreseeable or probable liability. But you can safely transfer your assets to protect them against a future possible liability. How do we differentiate a probable from a possible liability? The courts consider the facts of each case. When did the act occur that created the liability? When did the debtor first learn of the liability? When was the transfer? Courts conclude differently on whether a liability was probable or possible.
A 'present liability' exists from the moment you have a creditor (incurred a liability). Later asset transfers can be challenged. For example, if you sign a lease today and gift your assets tomorrow, your landlord can recover your gifted assets if you later default on your lease. You didn't have to be in default on your lease for your transfer to be fraudulent. It's also immaterial whether you were yet sued. The critical date is when did the liability arise – not the date of default or when the lawsuit was filed.
2. When is a transfer considered for less than fair value?
One obvious situation is when the debtor merely gifts his assets. However, proving a sale was made for less than fair value can sometimes be difficult. Courts define 'fair' consideration subjectively. 'Fair' consideration is the price for which a reasonably prudent seller would sell his property in a commercially reasonable manner. 'Fair value' depends largely on the type of property. For example, public stocks or bonds have an ascertainable fair value and a debtor who transfers public shares for less than its daily quoted price would create a fraudulent transfer equal to the difference in value. Conversely, real estate sold for 70 percent of appraised value has been held to satisfy the fair value test. Other difficult-to-value items include jewelry and the closely-owned business. Courts must then consider the relevant facts to determine 'reasonable value'.
3. What if I transferred my assets but didn't actually intend to defraud my creditor?
Since actual fraud cases are difficult for creditors to prove, creditors more often claim constructive fraud. Constructive fraud is a gift or sale of property for less than fair value (or fair consideration), made in the face of a known or probable liability and which leaves the debtor insolvent. A transfer can be constructively fraudulent, even if you act innocently and without actual intent to hinder your creditors, but a creditor challenging your transfer must still prove each of these three elements.
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