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Creditor scrutiny can help identify fraudulent transfers

Laws require businesses to provide almost complete transparency regarding financial and business decisions leading up to filing bankruptcy. Unfortunately, some will try to hide money or assets through fraudulent transfers before filing. While rare, owners, officers or decision-makers may also take actions that devalue the company and line their pockets even as creditors are paid pennies on the dollar. They think they are being clever or even resourceful by gaming the system, but motivated creditors and their legal team can search for signs of illegally transferred assets.

Transfers can be criminal fraud

Prosecutors are usually notified about potential bankruptcy fraud through the U.S. Trustee Program (USTP), which must report any suspected criminal activity to the U.S. Attorney’s Office. Fraudulent transfers that fall into the criminal category are:

  • A person knowingly transferring the money has the intent to defraud, likely by misrepresenting the facts.
  • They conceal assets from creditors.
  • They falsify documents to hide the facts.
  • They fraudulently transfer property to shield it from creditors.
  • Devising a scheme that intends to hide or shield assets

Whatever the situation, the intention is key to criminal charges.

Transfers can be civil fraud

A long list of creditors may be vying to collect money owed when a company files bankruptcy. The reorganization under Chapter 11 proceedings will involve a 341 meeting and a committee of the largest unsecured creditors, who have the fiduciary duty to represent the interests of all unsecured creditors. They can investigate the filer’s conduct, acts, financial condition and other details before filing. Typical red flags they look for include:

  • They did not receive reasonable equivalent compensation in exchange for the assets.
  • They are engaged or are about to engage in business transactions in exchange for the promise of future business or payment.
  • The transaction was atypical compared to the usual course of a business.
  • The offers received or proposed were atypical of the usual prices or market.

Handling the suspicious transfer or transaction

In liquidating non-exempt property or restructuring the debt, trustees and possibly examiners (if involved) have the power and responsibility to uncover fraudulent transfers and recover the property or asset. Legal or not, the trustee can order the third party to return (known as disgorgement) the property, which they can use to pay appropriate creditors. This action can even involve adversary proceedings against the other entity involved in the transaction or transfer. It is common to review transactions going back at least 90 days before a bankruptcy filing, but a bankruptcy trustee can go back two years after the transfer looking for a fraudulent transfer in Texas.

The Details of each case are different

Creditors may require protection and enforcement to receive payment for what the debtor owes them. Those with questions about suspicious transfers or suspect other acts of fraud can contact an attorney who handles collections and fraudulent transfers.