Trustee Seeks Authority to Recover Money Under California Fraudulent Transfer Laws

The California Uniform Fraudulent Transfer Act is the underlying legal authority the Trustee is using to sue those who received distributions from Slatkin in excess of their deposits to repay those who contributed more than they withdrew. While the venue is Federal Court the Bankruptcy code allows application of state law. A transfer of funds or property may not appear to the transferee as fraudulent, but the courts can construe the transfer as a fraud in the following context. The exact language is found in Cal Civ. Code 3439.04 Act Constituting Fraudulent Transfers-Intentional Acts. "A transfer made or obligation incurred by a debtor is fraudulent as to a creditor...if the debtor incurred the obligation as follows: (a)(actual fraud)With actual intent to hinder, delay or defraud any creditor of the debtor. (b)(constuctive fraud )without receiving a reasonably equivalent value in exchange for the transfer or obligation...AND THE DEBTOR(1) Was engaged or was about to engage in a business or transaction for which the remaining assets were unreasonably small (2) Intended to incur or reasonably should have believed that he or she would incur debts beyond his or her ability to pay as they became due.

Remedies are addressed in CC3439.07 Remedies of Fraudulent Conveyance. (1) Avoidance of the transfer (2) attachment against the asset transferred or its proceeds (3) an injunction against further disposition by the debtor (4) appointment of a receiver

Time limits: A cause of action is extinguished with respect to fraudulent transfer unless brought cc 3439.09 (a) within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant. (b) Under subdivision (b) of 3439.05, within four years after the transfer was made (ac) Notwithstanding any other provision of law, a cause of action with respect to fraudulent transfer is extinguished if no action is brought or levy made within seven years after the transfer made.

Whether the organization was either a. a Ponzi scheme or b. one in which the perpetrator intended to defraud his investors is a key legal issue at stake here. In a typical Ponzi there may be a blanket presumption that all payments above principle can be voided as fraudulent. If a Ponzi is not proven the trustee may face the difficult burden of proving each and every transfer at each point in time was made to hinder or defraud without the blanket presumption afforded by Ponzi. This legal burden would complicate recovery and drive up costs. The current suit for summary judgment alleges intent to commit fraud from the beginning, but does not address the issue of solvency directly.

Insolvency-What Constitutes. Cal. Civ. Code 3439.02 (a) a debtor is insolvent, if, at fair valuations, the sum of the debtor's debts is greater than all of the debtor's assets. (b) partnerships are insolvent when the sum of partnerships debts is greater than aggregate of assets (c) A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent. (d) Assets do not include property that has been transferred, concealed or removed with intent to hinder delay or defraud.

Practical effects of the above include the possibility that if millions are found overseas, but were concealed they do not count toward solvency. What is the definition of solvency-does Reed need to have the money listed on your statement? Because the trustee is suing under a Ponzi type tort, recovery is limited to the money invested. Like a simple theft-you are entitled to no more than your money back. Under this legal tact Reed need only possess enough money to pay everyone their principal to be solvent. This of course will be a hotly contested issue. The statute of limitations argument will be hotly contested as well with arguments that transfers are not avoidable while the debtor meets the test of solvency under tort law. Others will argue that Reed would need to have the funds listed on his statements to qualify as solvent.

 

 

 

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