Property owners may decide to transfer their real property interests for a variety of interests, such as economic factors, family changes, or long-distances moves. In some cases property owners will make a decision to sell their real property based on their outstanding debt obligations in an effort to prevent creditors from accessing the property. Certainly creditors can place liens on property or force the sale of property to collect towards an outstanding debt. However, according to California laws, such bad faith transfers (or fraudulent transfers) may not be permanent.
The Uniform Fraudulent Transfer Act, codified under California Civil Code §§ 3439–3439.12, governs fraudulent conveyances, or transfers in real property. A “fraudulent conveyance” applies to circumstances where the owner of real property transfers an interest in that property in an effort to prevent creditors from using that property to satisfy an outstanding debt. According to the applicable law, a “transfer” involves any method that shifts the interest in property. Indeed, using a divorce settlement agreement to transfer assets to one spouse instead of the other to hinder creditors’ access to the property falls within the type of transfers relating to fraudulent conveyances.
A transfer may be fraudulent regardless of whether an outstanding debt arises before or after the transfer. Rather than consider when the debt arises, courts will generally look to whether the property owner made the transfer with the bad faith intent to prevent creditors from using the property towards outstanding debt. To determine the intent of the transferor, courts weigh several factors, e.g., whether the transfer was to a close relative, whether the property owner maintained physical possession of the property, and whether the property holder transferred the property for a reasonable value. If, based on a review of the circumstances of the transfer, a court determines that a transfer was fraudulent, a creditor can ask the court to set aside the transfer, or return interest in the property to the original property holder. After setting aside the transfer, the creditor can then take steps to use the property towards its outstanding debt.
In the event that a property owner transfers property in good faith, in other words not for the sake of preventing creditors from accessing the property, the property owner may seek legal remedies to protect the transfer. However, the property owner will first need to demonstrate that the transfer was made in good faith and that it was made for a fair market value. Property sellers who are involved in bankruptcy, or who may be involved in bankruptcy proceedings in the near future, are particularly at risk for fraudulent conveyance as creditors and trustees sort through property in an effort to secure funds.
Whether you are a creditor looking to collect towards an outstanding debt, or a property owner defending against allegations of a fraudulent conveyance, the Law Offices of Salar Atrizadeh can help guide you in the legal matters relating to your interests. Please contact us today to set up a confidential consultation with an attorney.