In general, a transfer made by a debtor may be avoided under title 11 of the United States Code (the “Bankruptcy Code”) or applicable state law, if the transfer was actually or constructively fraudulent. Actual fraudulent transfer claims require a showing of actual intent to hinder, delay, or defraud creditors. Constructive fraudulent transfer claims do not require proof of actual intent. Instead, a transfer will generally be constructively fraudulent if it is shown that (1) the debtor was insolvent at the time of, or rendered insolvent by, the transfer and (2) so long as the debtor received “less than a reasonably equivalent value” for the transfer. Under Section 548 of the Bankruptcy Code, the alleged fraudulent transfer must have been made within two years of filing for bankruptcy.
In addition, Section 544(b) of the Bankruptcy Code allows the trustee to avoid a transfer under applicable non-bankruptcy law, including the Uniform Fraudulent Transfer Act (“UFTA”). If a trustee pursues a claim under applicable non-bankruptcy law, it will not necessarily be limited to the two-year period set forth in Section 548. Instead, it will be subject to the period set forth in the non-bankruptcy law, which is generally longer than two years.
Property transferred pursuant to a marital separation agreement, or a domestic partnership dissolution agreement, can be subject to avoidance under Sections 544(b) and 548. This is because bankruptcy courts and family courts have different criteria when evaluating the distribution of property under a reasonably equivalent value standard, thus sometimes creating conflicting results under a Section 548 analysis. Bankruptcy courts will look specifically at monetary value to determine whether the debtor received reasonably equivalent value for the property transferred, whereas family courts will look to equitable, non-monetary factors as well. Bankruptcy courts can also focus on the creditor status of the ex-spouse when determining whether to avoid a prepetition transfer of property that was pursuant to the directives of a family court. Bankruptcy courts can avoid transfer by applying relevant non-bankruptcy law that results in viewing the ex-spouse as an unsecured creditor and the trustee as a hypothetical judgment lien creditor. The claim of the trustee would then be prioritized due to having a higher status, even if the disputed property was part of a divorce decree or agreement executed by a family court.
This memorandum examines how bankruptcy courts can avoid property distributions made under the auspices of a family court. Section I explains how bankruptcy law, specifically pursuant to Section 548 of the Bankruptcy Code, permits avoidance of a transfer as constructive fraud. Section II discusses how, under Section 544(b) of the Bankruptcy Code, additional applicable federal, state, and local laws can result in avoidance of family court equitable distribution agreements despite bankruptcy law.