What is a fraudulent transfer in a bankruptcy?

Individuals who cannot meet their financial obligations can be relieved of repaying some or all of their debt by filing for bankruptcy. Since the new bankruptcy law was enacted in 2005, however, there are more restrictions and individuals must meet additional requirements to be eligible, including attending credit counseling. Nonetheless, bankruptcy laws have always been complicated and prohibited certain conduct, particularly fraudulent transfers.

This is the overarching issue in a bankruptcy case working its way through the Lenawee County Circuit Court. The case involves creditor claims against a bankrupt Ohio businessman, his son, and nine businesses they own. A complaint by three heating and air-conditioning companies alleges fraudulent transfers of real estate and vehicles by Phillip Cargnino to his son, Zacahari Cargnino, in an effort to avoid payment of debts.

What is a fraudulent transfer?

A fraudulent transfer (or fraudulent conveyance) is an illegal transfer of property by one individual to another party in an effort to defer, hinder or defraud creditors. In bankruptcy law there are two types of fraudulent transfers: actual fraud and constructive fraud.

Actual fraud involves the intent to defraud creditors that occurs when a transfer is made within one year before the date of a bankruptcy filing. Constructive fraud is the transfer or sale of property for an insignificant amount of money to a spouse, relative, business partner or friend. If a trial in bankruptcy court reveals a transfer of property was fraudulent, the judge can order the person holding the assets to surrender the assets to the creditor or make an equivalent monetary payment.

The three companies originally sued Phillip Cargnino before he filed for bankruptcy in 2012. Then, in 2013, a consent judgment allowed him to make monthly payments on debts to these companies that were not discharged in the bankruptcy. The companies began an enforcement action last May after no payments were made, alleging that the son fraudulently received four vehicles, a boat, a Jet Ski and two properties. 

The complaint asks for a judgment against the son for debts owed by the father for about $175,000. The question in this case is if and when the transfers were actually made and whether or not they will be found to be fraudulent conveyances. Lawyers for the Cargninos denied the allegations.

An individual who files for bankruptcy must comply with federal law and regulations. An error can result in the court refusing to discharge the debts. Intent to defraud creditors can have devastating consequences. If you are considering filing for bankruptcy, you should consult with a qualified attorney to make sure you avoid any possible pitfalls.