Fraudulent Transfers

by Wes Cowell, updated 5 June 2016 -- suggest a correction

 

Sometimes a divorcing spouses hide property through "fraudulent tranfers."  Illinois judge shave the power to set aside those transfers and get the property back.  Need advice?  Call, leave your info, or schedulescheduleschedule a consultation.

 

A property owner has an absolute right to dispose of property in any manner.  A married property owner may do so even if the the transfer is for the precise purpose of minimizing or defefating the marital interests in the property of the other spouse.  The transfer cannot successfully be attacked by the spouse unless it is a sham and is "colorable" or "illusory" (those terms are defined in case law) and tantamount to a fraud.  Johnson v. La Grange State Bank, 73 Ill.2d 342, 22 Ill.Dec. 709, 383 N.E.2d 185 (1978).

 

Sometimes one spouse will seek to protect property by transferring it to a friend or relative.  Classic examples include: letting parents foreclose on the marital home while paying down other large bills (In re:  Marriage of Hoffman, 94 Ill.2d 205, 68 Ill.Dec. 593, 446 N.E.2d 99 (1983), selling vehicles and equipment to a friend for a few pennies on the dollar, and even where a spouse places marital property in a revocable trust for the children but names him- or herself as the trustee – thereby keeping control over the assets (In re:  Marriage of Frederick, 218 Ill.App.3d 533, 161 Ill.Dec. 254, 578 N.E.2d 612 (2d Dist., 1991).  These are all recognized as “fraudulent transfers.”  The court has the power to undo such transactions, even if they occurred at a time when the marriage was not undergoing an irretrievable breakdown.

 

The UFTA:  ​Illinois adopted the Uniform Fraudulent Transfers Act.  The law codifies the common law of fraudulent transactions.  The law lays out many definitions; among them:

 

(c) "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

(d) “Creditor” a person who has a claim, including a claim for past-due child support.

. . .

(f) "Debtor" means a person who is liable on a claim.

. . .

(j) "Property" means anything that may be the subject of ownership.

. . .

(l) "Transfer" means every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.

 

All of those definitions fit perfectly into a divorce case where one spouse tries to hide assets.

 

Fraud-in-Law and Fraud-in-Fact:  The law categorizes fraudulent transfers as either “fraud in law” or “fraud in fact.”  The distinguishing characteristic is “whether the transfer was supported by consideration.”  Reagan v. Baird, 140 Ill.App. 3d 58, 487 N.E.2d 1028, 94 Ill.Dec. 151 (4th Dist., 1985).  "Consideration" is the valued item given by each side that induces them to enter into an agreement to exchange mutual performances.  If you offeered to buy my $5,000 car for $5,000, your consideration would be $5,000 and my consideration would be the car.

 

Fraud in Law -- No Intent Necessary:  A transfer falls into the “fraud in law” group where there is insufficient or no consideration given in exchange for the property transferred.   If you bought my $5,000 car for $5, the transaction would be supported by consideration on each side, but your consideration would be insufficient. In such circumstances, fraud is presumed.  Anderson v. Ferris, 128 Ill.App.3d 149, 470 N.E.2d 518, 83 Ill.Dec. 392 (2d Dist., 1984).  The parties’ intent to defraud (or not to defraud) is not even a consideration.  Gary-Wheaton Bank v. Meyer, 473 N.E.2d 548, 130 Ill.App.3d 87, 85 Ill.Dec. 180 (2d Dist., 1984).  In other words, “a donor may make a conveyance with the most upright intentions, and yet, if the transfer hinders, delays, or defrauds his creditors, it may be set aside as fraudulent.”  Apollo Real Estate v. Gelber, 403 Ill.App.3d 179, 935 N.E.2d 963, 343 Ill.Dec. 735 (1st Dist., 2010).

 

Fraud in Fact -- Requires Intent:  “Fraud in fact” cases involve enough consideration to pass muster and, therefore, depends on the plaintiff’s ability to prove the specific intent to defraud.  Anderson, supra.  The statute lists eleven factors the court may consider in determining the intent of the transferor.  The court doesn’t have to consider all eleven factors, and may consider factors other than the eleven listed.  In Northwestern Memorial Hospital v. Sharif, 2014 IL App (1st) 133008, the trial court considered nine of the eleven factors and found that seven of those nine resolved in favor of a presumption of fraud.

 

Consider which theory (fraud-in-law or fraud-in-fact) you’ll employ and, when in doubt, use both.  The plaintiff need not choose one or the other.  Where a plaintiff pleads both theories, the court is not obligated to consider both and may find liability on either.  When the court finds a presumption of fraud surrounding a suspect transfer, the court doesn’t even have to say whether it’s fraud-in-law or fraud-in-fact.

 

If your spouse has tried to defraud you out of your rightful share of marital property – or if your spouse is wrongfully accusing you of fraud to seek an unjust enrichment from assets that you properly transferred – contact my office and work with one of our knowledgeable attorneys to protect your rights and interests.

 

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