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Fraudulent Conveyance

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Legal Definition and Penalties

You’ve heard the phrase about debtor’s prisons. The shady places where people used to be sent when they were unable to pay their debts. In the United States, imprisonment for debt was officially outlawed since the 1830s. But that doesn’t mean people are never sent to jail for trying to avoid paying their debts.

Under California’s laws, it is a crime to sell or give away your property in order to avoid having that property used to pay a debt. Debtors who violate these laws or persons who help break the laws can face jail time. Sometimes the same concept is known as “assets hidden from creditors.”

These days, people must be especially careful about violating the fraudulent conveyance laws. Thanks in part to unethical behavior by mortgage lenders, payday lenders, etc.

If someone owes more money than they can pay, creditors may come after their possessions: houses, cars, most cherished wedding rings, family heirlooms. It may be very tempting for people in such situations to try to hide their possessions, give them to relatives, or otherwise keep them out of the hands of greedy lenders. But by doing so, they risk adding a criminal record to their problems.

What is a “fraudulent conveyance”?

Fraudulent conveyance is what is known as a “white-collar crime.” This means that generally it is committed through a business or property transaction rather than through a physical act. But unlike many white-collar crimes, which are often committed by professionals or executives in a workplace setting, fraudulent conveyance is a crime anyone can commit in their personal life, whether they have a white-collar job or not.

A “fraudulent conveyance” is simpler than it might seem. Basically, in California a fraudulent conveyance is what happens when someone sells, gives away, or transfers any kind of property, with the aim of preventing their creditors (i.e. people to whom they owe money) from collecting on that property—goods, jewelry, money; property that could be used to pay the debt.

Fraudulent Conveyance by a Debtor | Penal Code 154 PC

For a debtor who transfers property to another person so as not to have to use it to pay a debt, the most relevant California law is Penal Code 154 PC.

Elements of Penal Code 154 PC fraudulent conveyance

You may violate Penal Code 154 PC if all of the following (the elements of the crime) are true:

Debtor

This means you are responsible for paying money to another person (the “creditor”), usually because you borrowed money from them.

You do some of the following:

You do it because you intend to prevent your creditors from getting repayment or to make it harder for them to collect payment, or to delay them from getting paid.

Penal Code 155 PC — fraudulent conveyance by a debtor of a judgment is not only for people who owe money; people who lose in a court case may also be convicted under this law.

This law provides that it is illegal to hide or transfer property, or to move property to another county, in order to prevent damages owed as a result of a lawsuit.

You can violate Penal Code 155 PC by transferring property after you have already been ordered to pay money in a court case. But you can also violate it by transferring property while the lawsuit is still pending, even before you have been ordered to pay anything.

Penal Code 531 PC — other ways to be involved in fraudulent conveyance

Acts that violate Penal Code 531 PC: You may be penalized for fraudulent conveyance even if you are not the person who owes money. Specifically, you can be guilty of participation in a fraudulent conveyance if you do one of the following:

Are part of a fraudulent conveyance (most often, this means the person to whom property is transferred).
Give away or sell any goods that have already been transferred fraudulently.

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Example

Melissa is a retired lady living on Social Security. She has had to use credit cards for everyday expenses and now is having trouble paying her credit card bills. Melissa is considering declaring bankruptcy. Melissa has an old car that she rarely uses. Her daughter Clarisa damages the car and does not have enough money to buy a new one. Melissa knows Clarisa needs a car to go to work. So Melissa gives her car to Clarisa for free. Melissa did not give her car to Clarisa to keep it away from credit card companies; she did it because she wanted to help Clarisa. So she probably did not commit California’s fraudulent conveyance crime.

José has a dog and it escapes from the house’s yard and attacks Michael. Michael sues José, to make him pay medical bills and emotional distress she suffered. During the lawsuit, José takes most of his money and places it in trusts abroad for the benefit of his children, so that he and his creditors cannot touch them. José transferred his personal property in order to avoid having to pay Michael if he wins the lawsuit; by having done so, he may be guilty of fraudulent conveyance under Penal Code 155 PC.

Pedro got divorced and his ex-wife sued him so that he could pay child support payments based on his actual financial ability. Pedro, to avoid paying the actually appropriate amount, arranged that his business earnings go to his current girlfriend Camila. Thus the State could not take the money directly from his account for the child support payments that according to Pedro are extremely high to his ex-wife, María.

Camila (Pedro’s girlfriend) knew what Pedro was doing and signed the papers that would allow diverting his earnings to her account. In this case Camila is a part of the fraudulent conveyance and he (she) may face criminal penalties too.

Penalties

In most cases, a debtor who fraudulently transfers his or her property is guilty of a misdemeanor in California.

The maximum possible penalties are up to one year in county jail, a fine of no more than one thousand dollars, or both.

But the crime of fraudulent transfer under Penal Code 154 PC becomes a felony if the following statements are true:

The property that is fraudulently transferred is what is known as “stock in trade,” that is, merchandise that the debtor could sell in his or her business.
The stock in trade that is fraudulently transferred has a value of more than $250.

In these cases, the possible penalties are much more severe. A defendant may be sentenced to 16 months, 2 years, or 3 years in a California state prison.

However, at the judge’s discretion, he or she may also be sentenced to up to one year in county jail, a fine, or both.

Why is fraudulent transfer punished more harshly if the property is stock in trade?

The reason is that small retail businesses normally obtain most of their inventory on credit. They then pay their suppliers only after they sell the merchandise.

The California legislature was concerned about the problem of people opening stores, stocking them with merchandise purchased on credit, selling the merchandise at very low prices, pocketing the money from the sales, and then leaving town without paying their suppliers. So it enacted severe felony penalties for this type of fraudulent transfer.

Participating in a fraudulent transfer is a misdemeanor under Penal Code 531 PC. The maximum penalties are up to 6 months in county jail, a fine of up to $1,000 dollars, or both.

State charges in California are not the only thing you have to worry about if you become involved in a fraudulent transfer. Being involved in a fraudulent transfer can also result in federal criminal charges. However, this will only occur if the transfer takes place after, or shortly before, a debtor’s bankruptcy.

The bankruptcy process allows someone who owes more debts than they can pay to get a fresh start. What happens in bankruptcy is the following: a court takes stock of what the debtor owns and can pay, decides the amount to be allocated to each creditor, and then wipes out the debt. But the problem with this process is that it requires the debtor to use all of his or her assets to pay as much of the debt as possible.

If a debtor decides to transfer part of his or her property to another person before the bankruptcy filing, specifically with the intention of preventing that property from being included in the assets to pay his or her debts, or if he or she does so after the bankruptcy process has begun, he or she may face federal criminal penalties. Not only that, but the person to whom he or she transfers the property can also be charged, assuming that person also intended to keep the property out of the bankruptcy process.

The penalties for federal fraudulent transfer in bankruptcy are quite steep. If convicted, the defendant may be sentenced to a maximum of five (5) years in a federal prison, a fine, or both.

Legal Defense

Fortunately, there are legal defenses that can help you if you are accused under California’s Civil or Criminal or Federal laws of fraudulent conveyance. The most important is probably “lack of intent.”

As mentioned above, you cannot be found guilty of violating California or federal fraudulent conveyance laws unless you intended to make it harder for a creditor to collect payment. So a prosecutor must be able to prove what your intent was before you can be found guilty.

Proving this can be quite complicated, especially as a white-collar crime like fraudulent conveyance. It’s complicated enough that California law actually provides a list of factors that help show that the intent to defraud a creditor was present. These include:

If the person to whom the transfer was made was a “close insider,” that is, someone with close business or personal ties to the debtor.
If the debtor continued to own or control the property after its transfer (for example, by renting it back or borrowing it back from the person to whom it was transferred).
If the transfer was done openly or in secret, or if the transfer took place just before or after the debtor became unable to pay his debts.

Progresso Legal Group P.C. has professional attorneys who can provide you the best advice or representation of your case. Call us; the consultation is FREE!

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