One issue that has come before the Supreme Court is what is actual fraud, and does actual fraud included fraudulent transfers. Stated in another way, is it fraud to accept a fraudulent transfer. For a long time the answer depended on the judicial circuit. Now the Supreme Court has provided a firm answer.
So before we can determine the importance of the Supreme Court’s decision it is important to understand what actual fraud is in the context of bankruptcy law. The bankruptcy code bars the discharge of “any debt… for money, property, [or] services… to the extent obtained by… false pretenses, a false representation, or actual fraud.”
So how does the reception of fraudulent transfers fit within this definition of actual fraud?
The first step in answering this question is to determine how fraud is defined. The modern law concerning fraudulent transfers comes from the Uniform Fraudulent Transfers Act (UFTA), which was adopted in most states including Florida. The UFTA defines fraudulent transfers against present and future creditors as “a transfer made under obligation incurred by a debtor if made with actual intent to hinder, delay or defraud any creditor of the debtor.”
The law divides fraudulent transfers into two different types: actual fraud or constructive fraud. Actual fraud is when a person makes a transfer with the intent to defraud, while constructive fraud is usually when a transfer is made without adequate consideration. The bankruptcy code defines a discharge of a person’s debt when a person transfers property with the intent to hinder, delay, or defraud creditors within one year of filing for bankruptcy.
So the issue becomes if a fraudulent transfer is fraud is it actual fraud or constructive fraud? The Supreme Court recently answered this question. Before this ruling, a majority of circuit courts interpret fraud as a material misrepresentation intended to deceive.
Other courts, such as the Seventh Circuit in McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000), held that the law forbids the discharge of debts obtained by fraudulent transfers. The court reasoned that fraud is more a generic term that cannot be defined by any definite or invariable rule, but instead must include all surprise, trick, cunning, dissembling, and any unfair way in which another is cheated.
As the reader can see, the circuit courts were split on how to define fraud and actual fraud. Some courts followed a more narrow definition of actual fraud, where the perpetrator must actually intend the fraud, while a minority of courts followed a much broader definition.
The split of opinion finally reached the Supreme Court this past year. The Court held that “actual fraud” includes fraudulent transfers made with wrongful intent. The Court further held that fraudulent transfers are included in the common law definition of actual fraud.
Until the Supreme Court supplied its answer, the issue of whether a fraudulent transfer was actual fraud was an unsettled question here in Florida. Now the bankruptcy courts have the difficult task of determining the transferee’s intent when receiving property. This means attorneys should advise their clients to not accept fraudulently transferred assets under circumstances that could be deemed “intentional” through transferred intent. For more information on what might be considered the intentional acceptance of a fraudulent transfer contact the Jacksonville bankruptcy attorneys at The Office of David M. Goldman PLLC today.