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Fraudulent Transfers in Divorce

fraudulent-transfers

A fraudulent transfer is a transaction one person makes to frustrate another person’s legitimate claim to an asset. In divorce, fraudulent transfers occur when one spouse deals away property he controls to prevent the court from counting it and distributing it to the other spouse.  Fraudulent transfers are illegal, of course, but they can be tricky to discover and difficult to “unwind.” However, a spouse with a legitimate claim to a transferred asset can compel even a good-faith recipient to return the property.

For example, a husband anticipates that his wife is going to file for divorce. They’ve discussed selling a vacation cabin that he bought with marital assets, so he figures a quick sale won’t raise any red flags. He makes the sale for roughly what he paid for it back in the day, but significantly less than current market value.  The buyer is a prospective client, who is so happy with the deal that he signs a big contract with the husband’s company.  The husband’s also happy, because the profit he made from the sale — his deal with the client — won’t come through until after the divorce, so he won’t have to share any of the proceeds with his wife. That is, unless she finds out.

Because the husband originally bought the cabin with marital assets, the cabin itself is part of the marital estate, so all proceeds from the sale go into the marital estate for equitable distribution. But the proceeds of the sale don’t tell the whole story.

If the wife discovers that the sale of the cabin was for below market value and was motivated by the husband’s desire to cheat her out of marital property, she can allege fraudulent transfer. If the court agrees, there are three possible remedies:

  • The court will impute the market value of the house to the transaction and hold the husband responsible to the wife for the shortfall.
  • The court will consider the new business contract as part of the marital estate and order those profits to be split with the wife.
  • The court will void the sale to the client and return the cabin to the marital estate for equitable distribution.

The court will rarely unwind a transaction to a good-faith buyer if there is another way to compensate the defrauded party. But transactions to close friends or family members who are co-conspirators can be voided depending on the totality of the circumstances.

Bryan L. Salamone & Associates, P.C. represents property interests aggressively in divorce actions on Long Island.

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