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Understanding “Fraudulent” and “Voidable” Transfers in Minnesota

Posted by Christopher A. Jensen | Feb 14, 2020 | 0 Comments

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If you think a creditor will take your land or personal property, can you “shift” your assets to another person or company to avoid collection? Probably not.

Minnesota and some other states have “fraudulent” or “voidable” transfer laws that allow creditors to undo certain transfers to relatives and corporate partners. After unwinding the transfer, the creditor could seize the asset or get a judgment from the person (and even the person that received the asset!).    

For a creditor, this can be a way to collect from an uncooperative debtor. For a debtor, defendant in a civil lawsuit, and a person that receives the property, it is a risk.

This article looks at the issue of “fraudulent” (now called “voidable”) transfers, which often come up in business litigation, lending disputes, and real estate litigation. The goal of this article is to simplify a complicated law.

What are “Fraudulent” or “Voidable” Transfers?

Basically, a “fraudulent” or “voidable” transfer is when a person shifts an asset to a relative or business partner to avoid collection by a creditor. The creditor may be able to undo (or “void”) the transfer, meaning the asset is put back into the name of the original person (the "debtor") and the creditor can take it.

What is the difference between a "fraudulent" and a "voidable" transfer? Nothing, really. They mean the same thing. The difference is that older versions of statutes refer to "fraudulent" transfers and newer versions of statutes refer to "voidable" transfers.

Laws have very technical and complicated definitions of “voidable” and “fraudulent” transfers. It's important to remember that while these transfers are usually a civil issue for a civil lawsuit, more blatant transfers involving false statements could lead to criminal fraud charges. 

Sometimes, the person knows the transfer is meant to evade creditors. However, in many cases, people make the transfer in the regular course of business or as ordinary gifting to family members. Their intentions were good, but they are surprised to learn that the transfer can be “voided” by a creditor.

The key is to be aware of the voidable transfer laws before making a transfer, especially when you have been sued, owe debts to a creditor, or are insolvent (your debts exceed your assets). If you can properly characterize the transfer, you might be able to legally avoid the creditor's claim.

Examples

Here are some situations that may involve a fraudulent or voidable transfer:

  • Abruptly shifting assets after a person gets notice of a loan default, civil lawsuit, court judgment, or other “triggering” event.
  • Shifting assets between corporate entities, such as parents and subsidiaries, when there are financial problems.
  • Shifting assets to another entity that you control when there are unpaid creditors.
  • Gifting assets to someone when you have financial issues.
  • Giving assets to a relative or business partner without receiving compensation or any performance on a contract.
  • Setting up a phony creditor-debtor arrangement to try and save priority assets before another creditor can take them.

The Minnesota Voidable Transfer Act (MVTA)

Currently, the primary law in Minnesota governing “fraudulent” or “voidable” transfers is the Minnesota Voidable Transfer Act (MVTA) (Minn. Stat. §§ 513.41-.51). Many states have similar laws to protect creditors from these types of transfers. The Bankruptcy Code has similar rules that allow a bankruptcy trustee to set aside transfers made by a debtor before the bankruptcy. See 11 U.S.C. § 548.

In Minnesota, the law used to be called the Uniform Fraudulent Conveyances Act (repealed in 1987) and the Minnesota Uniform Fraudulent Transfer Act (amended in 2015 and renamed MVTA). See here for the 2015 legislative changes.

The MVTA is a complicated law with a simple focus: prevent transfers made without compensation to people close to the debtor.

Prohibited Transfers that Impact Present or Future Creditors

The MVTA prohibits certain transfers that impact a present or future creditor.

Actual Intent to Defraud

Minn. Stat. § 513.44(a)(1) prohibits a transfer (or a debt) made “with actual intent to hinder, delay, or defraud any creditor[.]”

The statute sets forth these factors (a/k/a “badges of fraud”) to figure out if there was “actual intent” to harm a creditor:

(1) the transfer or obligation was to an “insider”;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor that transferred the assets to an “insider” of the debtor.

Basically, this means that the transfer had some “shady” elements that create an assumption that the person intended to “hinder, delay, or defraud” creditors.

Transfer Made without Reasonable Value

Even where there is no actual intent to defraud, the transfer could be prohibited under Minn. Stat. § 513.44(a)(2). The transfer is voidable if it was made “without receiving a reasonably equivalent value in exchange for the transfer or obligation”, and the debtor:

(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

Basically, it means the person gave the asset away and became insolvent. Without the MVTA, the creditor would have no way to collect against the debtor.

Prohibited Transfers that Impact Present Creditors

The MVTA also prohibits certain transfers or debts that would harm a present creditor. Under Minn. Stat. § 513.45, there are two types of transfers that are prohibited: transfers without reasonable value and transfers to “insiders”.

Transfer made Without Reasonable Value

This involves a transfer or obligation where (1) the person didn't get “reasonably equivalent value” and (2) the person was insolvent then or became involvement from the transfer or obligation.

For example, a person has more debts than assets, owes money to a creditor, and dumps a parcel of land at a 50% of the value. This could be voided by a court. Another example is if the person has slightly more assets than debts, owes money to a creditor, and then becomes insolvent (more debt than assets) after dumping the land at a 50% discount.

Insider Transfer

This involves a transfer made to “an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

An “insider” is another person or company with a close business relationship to the debtor. An “antecedent debt” is just a debt that was in place prior to the transfer. This prevents an insolvent debtor from shifting an asset to a business partner when that partner had reason to believe the debtor was insolvent.

For example, a debtor has more debts than assets, owes money to a creditor, and gives his brother a 50% discount on the land when the brother knows the debtor is insolvent. The court could void this transfer.

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Understanding the Voidable Transfer Definitions

To truly understand the MVTA law, you must be familiar with the definitions from Minn. Stat. § 513.41. These definitions can mean the difference between a winning voidable transfer claim or a losing claim.

Here are some important terms used in the MVTA, along with a common-sense definition:

  • “Affiliate” – business partner, parent company, or subsidiary.
  • “Asset” – real estate, personal property, intangible property.
  • “Insider” – relative, business partner, subsidiary.
  • “Relative” – spouse, child/grandchild, parent/grandparent, aunt/uncle, niece, nephew.
  • “Transfer” – sell or give away.

A more complete discussion of these terms is explained below.

Assets

An “asset” could be any property of a person, such as real estate, personal property, intellectual property, business interests, and other interests.

However, Minn. Stat. § 513.41(2) states that these things are not “assets” under the MVTA:

  • property to the extent it is encumbered by a valid lien;
  • exempt property (or the exempt portion of that property); and
  • a property interest held in “tenancy by the entireties” and which a creditor cannot reach through just one owner.

These exceptions are important to understand. If land is totally covered by a mortgage and has no equity, then it does not meet the definition of an “asset” and can likely be transferred. Likewise, exempt property is not considered an “asset” under the law, since creditors cannot reach exempt assets at all.

Note that the definition of “asset” also excludes portions of property that are covered by a lien or exemption. For example, if there is a $50,000 mortgage on non-exempt land valued at $100,000, then the $50,000 in equity would be considered an asset. Generally, that means the owner cannot transfer or assign the $50,000 in equity to someone else.

Transfer

The term “transfer” under the MVTA is broad and covers any sale, conveyance, gift, assignment, or other way of giving the property to another person.

The legal definition of “transfer” under Minn. Stat. § 513.41(16) is long, but basically includes:

every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, license, and creation of a lien or other encumbrance.

There are exceptions for gifts to charities or religious organizations. Tithing is not prohibited. These gifts would generally not be considered “transfers” unless there are some special circumstances (i.e., the charity had previously been sued for a voidable transfer and the debtor intended to defraud creditors by making the gift).

Relative

“Insider” transfers are often fraudulent or voidable. An “insider” includes a person's “relative.” Not every member of an extended family is a “relative” for purposes of the MVTA.

Under Minn. Stat. § 513.41(14), “relative” means:

an individual related by consanguinity within the third degree as determined by the common law, a spouse, or an individual related to a spouse within the third degree as so determined, and includes an individual in an adoptive relationship within the third degree.

What is “consanguinity within the third degree”? It's not defined in the statute. Basically, it must be a close family member (spouse, child/grandchild, parent/grandparent, aunt/uncle, niece, nephew). If it's a distant family member, then you may not have an "insider" issue (but the person could be an improper “transferee” under other sections of the MVTA).  

So, while it is usually acceptable to gift assets to close relatives, if you have financial issues or are being sued by a creditor then there is a risk of a voidable transfer claim.

Affiliate

Basically, an “affiliate” is a person or company that controls the debtor company.

Here is the formal definition of “affiliate” under Minn. Stat. § 513.41(1):

 (i) a person that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor, other than a person that holds the securities,
     (A) as a fiduciary or agent without sole discretionary power to vote the securities; or
     (B) solely to secure a debt, if the person has not in fact exercised the power to vote;
(ii) a corporation 20 percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote, by the debtor or a person that directly or indirectly owns, controls, or holds with power to vote, 20 percent or more of the outstanding voting securities of the debtor, other than a person that holds the securities,
     (A) as a fiduciary or agent without sole discretionary power to vote the securities; or
     (B) solely to secure a debt, if the person has not in fact exercised the power to vote;
(iii) a person whose business is operated by the debtor under a lease or other agreement, or a person substantially all of whose assets are controlled by the debtor; or
(iv) a person that operates the debtor's business under a lease or other agreement or controls substantially all of the debtor's assets.

The definition gets complicated, but the focus is on control of the debtor's company. If a person or company controls 20% or more of the voting stock of the debtor company, the person or company is an “affiliate”. That means a gift or transfer to that company will be scrutinized under the MVTA law.

Often, an “affiliate” involves a parent-subsidiary arrangement between companies.

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Insider

An “insider” is basically connected to a debtor as a relative, manager of the debtor's entity, or an “affiliate”.

Here is the full definition of “insider” under Minn. Stat. § 513.41(8):

(i) if the debtor is an individual,
     (A) a relative of the debtor or of a general partner of the debtor;
     (B) a partnership in which the debtor is a general partner;
     (C) a general partner in a partnership described in subitem (B); or
     (D) a corporation of which the debtor is a director, officer, or a person in control;
(ii) if the debtor is a corporation,
     (A) a director of the debtor;
     (B) an officer of the debtor;
     (C) a person in control of the debtor;
     (D) a partnership in which the debtor is a general partner;
     (E) a general partner in a partnership described in subitem (D); or
     (F) a relative of a general partner, director, officer, or person in control of the debtor;
(iii) if the debtor is a partnership,
     (A) a general partner in the debtor;
     (B) a relative of a general partner in, or a general partner of, or a person in control of the debtor;
     (C) another partnership in which the debtor is a general partner;
     (D) a general partner in a partnership described in subitem (C); or
     (E) a person in control of the debtor;
(iv) an affiliate, or an insider of an affiliate as if the affiliate were the debtor; and
(v) a managing agent of the debtor.

Basically, this definition involves people with control or an interest in the debtor through an entity. In some ways, the definition is quite broad, especially with the inclusion of “an insider of an affiliate” (perhaps a parent company of a subsidiary that has a director related to the debtor). The possibilities are expansive.

But note that the definition does not list a “friend” or an informal “contact”. The definition focuses on family relationships and legal relationships. If you are transferring property to someone that has no family, legal, or corporate relationship to you, there may be no “insider” relationship that would create a MVTA claim (but there still might be a “transferee” issue under other sections of the MVTA).

Insolvency

A primary concern of the MVTA law is to prevent transfers when debtors are “insolvent” or become “insolvent”. People often think of bankruptcy when they hear the word “insolvency”. The MVTA definition of “insolvent” is actually consistent with the bankruptcy definition of “insolvent” under 1 U.S.C. § 101(32)(A).

Here is how Minn. Stat. § 513.42 describes “insolvency”:

(a) A debtor is insolvent if, at a fair valuation, the sum of the debtor's debts is greater than the sum of the debtor's assets.
(b) A debtor that is generally not paying the debtor's debts as they become due other than as a result of a bona fide dispute is presumed to be insolvent. The presumption imposes on the party against which the presumption is directed the burden of proving that the nonexistence of insolvency is more probable than its existence.
(c) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under sections 513.41 to 513.51.
(d) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.

As you can see, the MVTA includes the standard definition of insolvency (“debts greater than assets”). But it also presumes a debtor is insolvent when it's not paying debts as they become due. It is important to note that property that is concealed or transferred is not an “asset” (meaning the debtor is more likely to be considered “insolvent”).

As with other definitions, valid liens are generally not considered debts for purposes of the insolvency analysis.

These situations can get complicated, and it may be necessary to have an attorney help understand the legal definition of “insolvency” as applied to your circumstance.

Reasonably Equivalent Value

Another key issue in the MVTA law is whether the debtor got “reasonably equivalent value” for the item transferred. If the debtor sold the item for fair value, then the debtor should have received cash or property (which the creditor should then be going after). Remember, the MVTA does not prohibit all transfers, just a narrow set of transfers where little or no money was received.

Reasonably equivalent value” is not formally defined in the MVTA, but Minn. Stat. § 513.42 describes “value” as follows:

(a) Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the promisor's business to furnish support to the debtor or another person.
(b) For the purposes of section 513.44, paragraph (a), clause (2), and section 513.45, a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, security agreement, or agricultural lien.
(c) A transfer is made for present value if the exchange between the debtor and the transferee is intended by them to be contemporaneous and is in fact substantially contemporaneous.

The statute is technical, and it can be hard to understand and apply. A simple example is paying $500 for a $500 item. Not a problem. But when a person pays the debtor $50 for a $500 item, there could be a problem. Paying $5 for a $500 item would certainly not be equivalent value.

Securing a prior debt would be considered “value”, as would be a typical foreclosure or execution sale of the debtor's property. Also, a promise to perform made in the “ordinary course” of business is considered “value” (i.e., debtor continues ordering supplies from a typical supplier). On the other hand, there is no “value” for an “unperformed promise” that is not in the “ordinary course” of the other party's business (i.e., a phony contract where the person receiving the property did nothing for the debtor).

The takeaway is that “value” depends a lot on the circumstances. Usually, money transferred in exchange for a good or service is “value.” For more sophisticated exchanges of property interests, business interests, or financing, the parties will have a more difficult time sorting out the promises and consideration for the transaction.

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Timing of the Transfer

Timing is important for assessing whether a transfer is voidable. Timing is key for figuring out (1) when a person became insolvent and (2) when a transfer was made.

Often, the timing will be straight-forward (i.e., contract was dated January 1, or the loan agreement was dated July 30). Other times, the timing is less clear.

For unclear situations, Minn. Stat. § 513.46 has rules that help define when a transfer was made or a debt incurred. That statute says in relevant part:

(1) a transfer is made:
     (i) with respect to an asset that is real property other than a fixture, but including the interest of a seller or purchaser under a contract for the sale of the asset, when the transfer is so far perfected that a good faith purchaser of the asset from the debtor against which applicable law permits the transfer to be perfected cannot acquire an interest in the asset that is superior to the interest of the transferee; and
     (ii) with respect to an asset that is not real property or that is a fixture, when the transfer is so far perfected that a creditor on a simple contract cannot acquire a judicial lien otherwise than under sections 513.41 to 513.51 that is superior to the interest of the transferee;

Basically, land is transferred when the deed is filed with the recorder's office (which would give notice to the world that the property was conveyed).

For personal property, it might be considered transferred when the “transferee” (person receiving the item) perfects an interest in it (such as though a UCC filing). If the transferee could perfect an interest but does not do so, the law assumes the timing was immediately before the MVTA claim.

The MVTA talks about a perfected interest against a “good faith purchaser”. The law references this issue to show that the creditor could not get at the item without a MVTA claim. In other words, if the transferee has no secured interest in the item then the creditor would not need the MVTA (the creditor could just try to seize it from the debtor). When the creditor cannot easily seize the item because of a transferee's interest, the MVTA steps in to provide relief for the creditor.

Creditor Remedies In A Voidable Transfer Claim

The MVTA allows courts to award various remedies to a creditor that wins a voidable transfer claim.

The MVTA at Minn. Stat. § 513.47 states that a creditor could get:

(1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor's claim;
(2) an attachment or other provisional remedy against the asset transferred or other property of the transferee if available under applicable law; and
(3) subject to applicable principles of equity and in accordance with applicable Rules of Civil Procedure:
     (i) an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property;
     (ii) appointment of a receiver to take charge of the asset transferred or of other property of the transferee; or
     (iii) any other relief the circumstances may require.

Here is a summary of remedies for the creditor:

  • Avoid the transfer, which puts the asset back in the debtor's name, and then seize it.
  • Get a money judgment against the debtor (and the transferee).
  • “Attach” the asset with a court order giving the creditor temporary possession of the item while posting a bond.
  • Start a receivership so that an appointed receiver can liquidate assets to pay off the creditor.
  • Get an injunction that restricts what a debtor can do with assets (i.e., no transferring or destroying the assets).
  • Obtain a lien on the property, which could potentially allow the creditor to repossess and sell the item.
  • Use any collection methods once a judgment is entered against the debtor in the case.
  • Seek punitive damages for the debtor's wrongful conduct.

The takeaway is that the voidable transfer law gives the court more tools than it would have in an ordinary civil action. That is a benefit to the creditor, but a risk to the debtor (or the person that improperly received the asset).

Defenses to a Voidable Transfer Claim

A debtor or transferee that has been sued under the voidable transfer law may have several potential defenses. The MVTA at Minn. Stat. § 513.48 discusses defenses and how they apply to various types of voidable transfer claims. That statute also discusses protections for transferees and good-faith purchasers of the debtor's assets.

Here are some common defenses used by defendants in a voidable transfer case:

  • The transfer at issue involves homestead property or other exempt property. See Holding Co. v. Evanson,122 N.W.2d 596, 600 (Minn. 1963) (“Even a conveyance fraudulent as to creditors does not deprive the property of its homestead exemption.”).
  • The property was not an “asset” because it was loaded with debt and did not require any compensation in return for a transfer.
  • The debtor was solvent (had more assets than debts) at the time of the transfer or the time the debt was obtained.
  • The debtor did not have a close family, legal, or business relationship with the person receiving the assets (i.e., not an “insider”, “affiliate”, “relative”).
  • There was no intent to defraud a creditor.
  • The transfer was made within the regular course of business between the debtor and transferee.
  • The transfer was made “in good faith and for a reasonably equivalent value.”
  • The transfer was the result of ordinary collection action by a creditor (i.e., a “regularly conducted, noncollusive foreclosure sale”).
  • The transfer was the result of action by a secured creditor acting under the Uniform Commercial Code to reclaim an asset.
  • “Transferee” defenses that may be available under the Bankruptcy Code.
  • Other definitional defenses or other exceptions set forth in the MVTA.
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Tips for Creditors Dealing with Voidable Transfers

  • Be watchful for assets that have been transferred by your borrower.
  • Ask your borrowers or debtors for updates on their Personal Financial Statement, and have them explain any changes from previous statements.
  • If you see signs of potential default, check the status of the person's biggest non-exempt assets.
  • Before entering into a contract with a borrower, get a list of other creditors and secured claims on the person's assets.
  • As part of loan due diligence, make sure to get accurate information on any business entities that the debtor owns or is affiliated with.
  • Consider the need for temporary relief when you start a voidable transfer action in order to secure the asset you are targeting.
  • Take the debtor-defendant's deposition in the case and get statements under oath about the true reasons for the transfers.
  • Consider all possible creditor claims or liens that might prevent the land or item from being considered an “asset” for voidable transfer purposes (i.e., figure out if there was any equity in the land).
  • Get appraisals of assets from qualified experts to see if there was “reasonably equivalent value” given.
  • Have a plan early in the case for remedies and how you will collect against the debtor or transferees.

Tips for Debtors That Want to Transfer Assets

  • Assess whether your debts exceed your assets. If you are insolvent, you need to be careful if there are active creditors out there.
  • Figure out the value of land or personal property through an assessment in order to set a proper sale price.
  • Be more careful for transfers to relatives, business partners, or corporate entities that are affiliated with your entity.
  • Make a record of the reasons for the transfer, any due diligence conducted, and other relevant information favorable to your position.
  • Plan ahead before making a transfer. Try to avoid making a transfer immediately after a significant event (loan default, being sued, becoming insolvent, etc.).
  • If you have concerns about a transfer to a relative or friend, make sure they understand the risk of potentially being sued by a creditor to set aside the transaction.
  • Speak to an attorney if you have any doubts about the transfer. If an attorney puts his or her blessing on it, you are probably free to make the transfer.

Conclusion

For borrowers and debtors, hiding or shifting assets from creditors is risky. Voidable transfer laws give creditors a way to unwind transactions that insolvent debtors make with relatives or business affiliates. Creditors sometimes give up on low-value transfers that are hard to collect. But for larger assets, creditors can make life difficult for borrowers and their transferees using the voidable transfer laws.

Creditors must carefully watch their borrowers or defendants they are suing in a civil lawsuit. If they see suspicious behavior, they must conduct their due diligence and report it to their attorney for a potential voidable transfer claim. If they are not aggressive, the creditor could lose its opportunity to collect.

If you need legal advice or representation on a voidable transfer issue, Contact Us for a free consultationWith offices in Shakopee (Scott County) and Litchfield (Meeker County), we serve clients throughout the Twin Cities and Greater Minnesota.

About the Author

Christopher A. Jensen

About Chris Jensen  Chris Jensen is an experienced litigation attorney that has successfully handled civil lawsuits in state, federal, administrative, and appellate courts.  He has been honored as a Rising Star attorney, which is a distinction awarded to less than 2.5% of attorneys.  He is not a...

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