The Challenge
August 2002 Vol. 13, No. 1
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
(Notice to librarians: The following issues were published in Volume 12 of this newsletter during the fiscal year ending June 30, 2002: November, No. 1; April, No. 2; May, No. 3.)
Contents
* Fraudulent transfers under the bankruptcy code
* Upcoming events
* More perspectives on war
Fraudulent transfers under the bankruptcy code
By Jill Murch, Foley & Lardner
The old adage "nothing in life is free" is a time-honored principle that is embodied in the Bankruptcy Code's fraudulent transfer provisions. 11 U.S.C. § 101 et seq. It is tempting for a debtor to transfer assets to a relative or friend on the eve of bankruptcy in exchange for little or no consideration in the hope of frustrating creditors' attempts to reach those assets. Recognizing that such temptation would be great, Congress enacted specific provisions barring such transfers. More specifically, § 548 of the Bankruptcy Code allows a trustee to avoid fraudulent transfers that occur within one year before a bankruptcy filing.1 11 U.S.C. § 548. As such, anyone who received property from a debtor for free or even for minimal consideration prior to a bankruptcy filing may find that those assets are subject to a fraudulent transfer action by the bankruptcy trustee.
The purpose of fraudulent transfer law is "to preserve assets of the estate for creditors." In re Image Worldwide, Ltd., 139 F.3d 574, 578 (7th Cir. 1998); In re Roti, 271 B.R. 281, 294 (Bankr. N.D. Ill. 2002) ("Fraudulent conveyance law protects creditors from last-minute diminutions of the pool of assets in which they have interests.") (quoting Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 892 (7th Cir. 1988)). Fraudulent transfers fall under one of two categories: (1) actually fraudulent or (2) constructively fraudulent.
Actual fraud
A transfer is actually fraudulent if it was made "with actual intent to hinder, delay, or defraud any entity to which the debtor was or became...indebted." 11 U.S.C. § 548(a)(1)(A). "The focus in the inquiry into actual intent is on the state of mind of the debtor. Neither malice nor insolvency are [sic] required. Culpability of the part of...the [recipient of a fraudulent transfer] is not essential." In re Roti, 271 B.R. 281, 294 (Bankr. N.D. Ill. 2002) (quoting In re Cohen, 199 B.R. 709, 716-17 (9th Cir. B.A.P. 1996)). Because it is difficult to prove that the debtor acted with intent to defraud its creditors, courts rely upon certain "badges" of fraud to prove intent. Such badges include:
(1) absconding with the proceeds of the transfer immediately after their receipt; (2) absence of consideration when the transferor and transferee know that outstanding creditors will not be paid; (3) huge disparity in value between the property transferred and the consideration received; (4) fact that the transferee was an officer, or agent or creditor of an officer of corporate transferor; (5) insolvency of the debtor; and (6) existence of a special relationship between the debtor and the transferee. Id.
Constructive fraud
Constructive fraud differs from actual fraud in that the debtor's intent is of no import. A transfer is constructively fraudulent if: (1) the debtor received less than reasonably equivalent value in exchange for the transfer and (2) the debtor was (a) insolvent on the date of the transfer or became insolvent as a result of the transfer, (b) the debtor was engaged or was about to engage in a business or transaction for which any property remaining with the debtor was an unreasonably small capital, or (c) the debtor intended to incur or believed that it would incur debts beyond the debtor's ability to pay as such debts matured. 11 U.S.C. § 548(a) § (1)(B).
The cornerstone of a constructively fraudulent transfer is "reasonably equivalent value." "Determination of reasonably equivalent value under § 548(a)(1)(B) is a two-step process" which requires the Court (1) to determine whether the debtor received value and (2) to examine whether the value is reasonably equivalent to what the debtor gave. Roti, 271 B.R. at 294-95. Although the Bankruptcy Code does not define "reasonably equivalent value," courts look to certain factors, including: "(1) whether the value of what was transferred is equal to the value of what was received; (2) the market value of what was transferred and received; (3) whether the transaction took place at an arm's length; and (4) the good faith of the transferee." Id. (citing Barber v. Golden Seed Co., Inc., 129 F.3d 382, 387 (7th Cir. 1997)).
While there is no set formula for determining reasonably equivalent value, the bankruptcy court will review the facts of each case with a view towards the fair market value of the property transferred. Id.
In short, § 548 seeks to deter debtors from attempting to circumvent the orderly distribution process established by the Bankruptcy Code and to maximize assets that are property of the estate. As such, debtors should think twice before transferring assets prior to seeking bankruptcy relief, while recipients of such assets should be aware that they may one day be subject to an action by the trustee.
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1. The Bankruptcy Code also allows the trustee to rely on state fraudulent transfer law as long as there is at least one actual creditor in existence who would be able to attack the transfer under state law. 11 U.S.C. § 544(b). The Illinois Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq., for example, authorizes the avoidance of a fraudulent transfer made as far back as four years prior to the filing of the bankruptcy petition.
Upcoming Events
The Defense Research Institute will be holding its Annual Meeting in San Francisco at the Marriot this year from October 2nd to October 6th. The DRI focuses on defense, insurance and corporate counsel and is a national organization. Their main offices are located in Chicago.
Planned highlights include an opening session featuring Erin Brockovich and a session with Jerry Sears, author of Making Rain. Also of interest to our readers would be the panel presentation entitled, "Inclusion in the Workforce: Looking Inward, Looking Outward," which will deal with diversity programs and features a panel made up of Randall Heldt (Shell Oil), Gloria Johnson (Cingular Wireless), Reginald Jones (former EEOC Commissioner 1996-2000) and Sally Narey (CNA). A new Job Fair feature will also be included at the meeting for the first time.
For more information or to register for the Meeting/ Conference, please go to www.dri.org or send e-mail inquiries to dri@dri.org.
The Illinois Defense Counsel (IDC) has set the date for its annual "Rookie Seminar" and will be hosting this popular event at the John Marshall Law School on November 16, 2002. For information on the specific programming available, or to register, please go to www.iadtc.org or send e-mail inquiries to IL-Defense-Trial Counsel-Office@iadtc.org.
More perspectives on war
Editor's note: This is a response to a letter printed in Vol. 12 No. 3 of the Challenge by the author of the original article that sparked the debate.
Dear Ms. Hanson:
It must have been quite an experience for your son, Rick, to have participated in the Bataan Memorial Death March this past April. You must certainly be proud of him and his group winning their division.
Your commentary on war history and the Japanese made interesting points; however, I feel that you misread and misinterpreted the intent behind my article. By no means did I intend to present a historical retrospective on war etiquette. What I wrote about was, very simply, a story reflecting my visit to Hiroshima Memorial Peace Park and the Peace Museum. It was not my intent to glorify Japan's military participation in WWII. I would not refute that the Japanese military has been historically recognized as a cunning and brutal enemy. They were a military that was born from an ancient warrior civilization. Neither did I intend to diminish the bravery of any of the U.S. military men serving during WWII.
On December 12, 2001, Congressman Faleomavega addressed the House of Representatives in support of a resolution for National Pearl Harbor Remembrance Day and addressed the bravery of a particular division of the military in his speech. He directed a portion of his speech to thanking the 100th Battalion, 442nd infantry, an all volunteer unit, for their dedication and bravery during WW II, "during the height of tremendous bigotry and racism we had another fantastic legacy to be shared with every American in our country" through this battalion. That particular division remains the most highly decorated combat unit of its size in the history of the U.S. military. That unit suffered an unprecedented casualty rate for a division of its size and length of service and was awarded over 18,000 individual decorations for bravery. Of those decorations there were 52 Distinguished Service Crosses, 560 Silver Stars, 4,000 Bronze Stars, 9,480 Purple Hearts and 12 French Croix de Guerre. This battalion was the Japanese-American combat unit, which included the respected Senator Daniel Inouye. These were more than 25,000 Japanese-American citizens who chose to fight for their country against their ancestral homeland, while their families were interred in "relocation" camps for being of Japanese heritage. A large portion of the volunteers to the unit came from the relocation camps to offer their services to fight for America. President Truman was so moved by the devotion and bravery of this infantry unit as well as that demonstrated by the African-American infantry unit that he desegregated all the armed forces. In 1996 this same battalion was awarded an additional 20 Medals of Honor by President Clinton. At the awards ceremony, Secretary of the Army Louis Caldera commented, "I am pleased and proud to be a part of honoring these soldiers and setting the record straight about the magnitude of their courage ... with their selfless service, bravery and sacrifice they helped America realize that being American is not where you come from, but where your heart is."
War, by definition, is brutal. It brings out the best and the worst in every country involved. It would be inconceivable to think that any war could be fought minus death or brutality. The aggressor attacks and must be defended against. We cannot present ourselves as a completely blameless example. Unfortunately, we have had American soldiers in foreign prisons who have been tried in military courts and found guilty of rape. We placed all Japanese-Americans into relocation camps with substandard housing and medical care on the basis they were an assumed security risk. We did not imprison German or Italian Americans in the same manner. Our participation in Vietnam has been highly scrutinized and criticized over the years. Even today our treatment of the al Qaeda soldiers and the motive behind our war against terrorism are being questioned by European nations.
Although my article did not discuss the war itself, you have suggested that I have "taken one episode to define the realities of war." In considering that comment, it became quite evident that this event does clearly define the realties of an atomic war. Hiroshima and Nagasaki are the only examples to date of atomic bombs used in warfare. The atomic bomb not only demolished most of the city and killed tens of thousands of people in an alarming matter of mere minutes, but it also caused genetic mutations and illnesses from radiation poisoning in generations in that city. You are absolutely correct that when a war is prolonged, a nation will do what they find necessary to bring about its end. If the United States did not realize the destructive capabilities of this weapon, I doubt they would be as concerned about protecting the knowledge to build another bomb as they are. We revisit the Holocaust constantly to remind us of the horrors and to prevent any such future inhumanities. We revisit Pearl Harbor and honor the bravery of the servicemen stationed there. It is hardly inconceivable that we should revisit Hiroshima to prevent the future use of atomic weapons.
I offer my sincerest apologies that a simple article about a museum obviously disturbed you.
Very truly yours;
Denise Lynn Kato
Paralegal, Laner Muchin, Dombrow, Becker, Levin & Tominberg, Ltd.
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