HOW TO AVOID INSIDER
"SWEATHEART DEALS" BY AN
C O N S T R U C T I V E F R A U D U L E N T T R A N S F E R S
T O R E L A T I V E S O R F R I E N D S O F O W N E R S
O F S M A L L B U S I N E S S E S W H O F A C E
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Constructive Fraudulent Transfers Are Used By Unscrupulous Insolvent
Companies To Favor Insiders At The Expense Legitimate Creditors
Constructive fraudulent transfers often are used by small family businesses as a
means to give "sweetheart deals" to other family members or friends in anticipation of the
company going bankrupt. Simply put, a constructive fraudulent transfer is a transfer of a
debtor‟s property where the debtor did not receive reasonably equivalent value for the
property transferred, and at the time of transfer, he was either insolvent, became insolvent
as a result of the transfer, was undercapitalized, or he/she/it intended or believed that the
company would be unable to pay its debts as they became due.
To protect creditors from this type of abuse, the bankruptcy code provides that
certain transactions that occurred prior to the filing of the petition can be avoided as
“constructive fraudulent transfers.” 11 U.S.C. § 548. California also has enacted a
fraudulent transfer statute based on the Uniform Fraudulent Transfer Act (“UFTA”). Cal.
Civ. Code § 3439.01 et seq. The two statutes “are similar in form and substance” and the
Ninth Circuit has held that they may be interpreted “contemporaneously.” Gill v.
Maddalena (In re Maddalena), 176 B. R. 551 (Bankr. C.D. Cal. 1995) (citing Wyle v.
C.H. Rider & Family, et al. (In re United Energy Corp.), 944 F.2d 589, 594 (9th Cir.