Reversing Fraudulent Conveyances

The Bankruptcy Court in Massachusetts In re Mark J. Paulding, — B.R. —-, 2007 WL 1783867 (Bkrtcy.D.Mass. 2007) recently reviewed the law on reversing fraudulently conveyed property. An example of a fraudulent conveyance is the “I’ll transfer my house to my wife for a dollar” scenario.

People who do this usually do so because of bad advice or their misunderstanding of what will serve their best interests. After getting better advice, a debtor will realize that these transfers, if they occured within a year of a planned bankruptycy filing, may lead to denial of their discharge under Section 727 of the Bankruptcy Code.

In some places (such as the Ninth Circuit) arranging for a pre-petition transfer of the property back to the debtor will solve that problem (though other may remain). This issue is unresolved in the First Circuit where our case law says only that a post-petition re-transfer will not cure the effect of the original transfer.

In the recent case cited, Judge Feeney refused to decide that a pre-petition re-transfer fraudulently conveyed property saved the debtor from the trustee’s action to deny his discharge. The case is proceeding to trial.