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“Constructive fraud” occurs when a debtor inadvertently sells an asset for substantially less than what is at worth. This can constitute a type of bankruptcy fraud if the result of the transaction deprives creditors of what they are owed. If an asset involved in a constructive fraudulent transfer had instead been liquidated in bankruptcy at the appropriate market value, creditors likely would have recovered more.
Our New York constructive fraudulent transfer lawyers at The Law Office of Magdalena Zalewski are committed to helping you recover funds in bankruptcy proceedings. We understand how to recognize constructive fraud and can serve as your advocate throughout the recovery process. Our team offers big firm knowledge with boutique firm efficiency, and we are prepared to handle your case with the integrity and diligence it deserves.
A transaction may involve “constructive fraud” if a debtor sells an asset below fair market value without the intention of defrauding creditors. This distinction is important: If a debtor deliberately attempts to transfer or conceal property in an effort to shield it from creditors, they have likely committed an actual fraudulent transfer. Both types of fraud are unlawful, and in bankruptcy, assets can potentially be recovered through clawback.
When filing for bankruptcy, the debtor agrees to go through a liquidation process. This involves the bankruptcy trustee inventorying and selling – or liquidating – all nonexempt assets. The proceeds of the liquidation are then used to impartially compensate creditors. When a lucrative asset is sold below fair market value before a bankruptcy, the trustee has one less item to sell, and fewer funds are ultimately available to creditors.
Even though a debtor is not deliberately attempting to cheat creditors when committing constructive fraud, the end result is the same as an actual fraudulent transfer. Creditors receive less than what they are owed.
A constructive fraudulent transfer occurs when these two conditions are met:
- An asset is sold for considerably less than the property’s “reasonably equivalent value”
- The debtor is insolvent at the time of the sale or became insolvent after the sale
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Debtors are subject to a “lookback window” when they file for bankruptcy. This means that all transactions made within a certain timeframe before the bankruptcy filing can be audited to check for fraudulent activity. If it is determined that constructive fraud occurred, the assets involved can potentially be recovered – or “clawed back” – by the bankruptcy trustee. This recovery process can sometimes involve adversary proceedings litigation.
The state of New York has a lookback window of 6 years. Thus, any assets sold below the fair market window in the 6-year window before a debtor files for bankruptcy may constitute constructive fraud.
Debtors will often attempt to argue they did not commit a constructive fraudulent transfer, especially if a transaction occurred multiple years ago and well before the debtor ever considered filing for bankruptcy. The bankruptcy court will consider several factors when determining if an asset was sold for “reasonably equivalent value.”
The bankruptcy court will typically consider the following elements when adjudicating an alleged constructive fraudulent transfer:
- The fair market value of the asset at the time of the transaction
- Other offers received for the asset
- The circumstances under which the asset was sold
- Whether future business was promised as part of the transaction
"I started this practice to bring genuine care to my clients, to make the complexity of law, simple."- Maggie Zalewski, Founding Attorney
Our New York constructive fraudulent transfer attorneys can aggressively advocate for creditors in these cases. Our experienced team at The Law Office of Magdalena Zalewski can pursue progressive clawback solutions that work to recover what you are owed when a debtor enters bankruptcy or business reorganization proceedings. We are responsive to your needs and will be accessible 24/7 throughout our handling of your case.