Understanding Fraudulent Activity

When one thinks of fraud, they think of con-artists making deliberate efforts to cheat innocent people. They think of criminals or at the very least a used car salesmen. Fraud is not always so intentional, though, and can even happen by accident in certain circumstances. Bankruptcy, or other dealings between a creditor and a debtor, often trigger accidental fraud that can implicate an otherwise good person.

If a person or business is facing large amounts of debt that exceed the reasonable value of their assets, he/she is considered insolvent. When a person becomes insolvent, it is natural to try to protect the assets that are currently in their possession–especially ones that are held debt-free or were paid for and owned prior to any downturn that lead to the financial struggles. One must be very careful when dealing with assets in order to avoid fraudulent transfers.

Of the following three ways to handle assets when one becomes insolvent, the first two are considered fraudulent:

  1. Transfer the assets with fraudulent intent.
  2. A sale for less than what is considered to be the asset’s fair market value.
  3. A sale for fair consideration in an arm’s length transaction.

The first, and most obvious, way to commit fraud when handling assets is to transfer assets to a new business or to a third party with the intent to hinder, delay, or defraud present or future creditors. This is actual fraud and requires a look at the intention of the debtor. If the transfer is made while the debtor is insolvent or it directly causes the debtor to become insolvent, then the debtor has committed a fraudulent transfer. Likewise, if the debtor is left with unreasonably small capital or intended to incur debts beyond the debtor’s ability to pay them, the intent to defraud creditors is found.

The next type of fraud is not as obvious as actual fraud and is known as constructive fraud. Constructive fraud does not require any intent on behalf of the debtor and automatically results when an insolvent debtor sells or transfers property for an amount less than fair consideration. Fair consideration is an exchange of property or money given for the debtor’s assets that is done in good faith and for property with a fair equivalent value.  When a transfer or sale is made that is inappropriately less than fair market value the Court will consider the transfer fraudulent.

Selling and transferring assets is the most common way to try to shield assets from debtors, but the principles of actual and constructive fraud apply in the following circumstances as well:

  1. Backdating mortgages
  2. Rescinding a profitable contracts
  3. Releasing interest in an estate
  4. Canceling valuable long-term leases
  5. Favoring one creditor over another
  6. Redeeming worthless stock
  7. Making excessive charitable contributions

Call a New York Fraud Defense Attorney Today for a Free Consultation.

If you are wrongfully accused of fraud or would like legal advice to avoid fraud, please do not hesitate to call the Law Office of Stephan Jacob Siegel. We have helped many individuals accused of fraud and other offenses, so please call 718-575-3900 for more information today.