I was in a deposition today representing a lady who was the recipient, transferee, of an alleged fraudulent transfer. The allegations are unique; here’s what happened. My client, a professional mortgage broker, loaned money to a businessman evidenced by a promissory note. The note stated that the loan was secured by two parcels of real estate and a mortgage note receivable from a third party. At the time of the loan, the collateral’s value was close to the original note amount. The note was not recorded, and there was no separate mortgage.
My client did not know the borrower at the time of the loan, but subsequent to the loan they became good friends. The businessman found it impossible to make payments on the note. My client and the businessman agreed that to satisfy the note the businessman would assign to my client all the collateral. The collateral by then had appreciated, and my client received assets close to double the amount of money she originally loaned. Just over one year after the assignment of collateral the business man filed Chapter 7 bankruptcy. The trustee is suing my client to recover the assigned assets.
This fact situation raises some interesting questions which I have yet to research. For instance, did the businessman receive reasonable value for his conveyance of property? Should my client be penalized because the collateral increased in value or that she made an over secured loan and a profitable business deal? Does it make any difference that the parties were on friendly terms after the loan was made? Assuming no collusion between the businessman and my client I do not think this transaction “smells” of a fraudulent conveyance designed to avoid creditors.
Prior to one year before bankruptcy the debtor/business man is free to prefer any creditor. However, I also understand that the trustee and other creditors are angry because my client was enriched while everyone else may be wiped out. It will be interesting to see how this case unfolds