When Are Charitable Gifts Prior To Civil Judgment A Fraudulent Conveyance?

When is a debtor’s conveyance of non-exempt money to a charitable organization a fraudulent transfer? Does the debtor’s charitable intent immunize the debtor from allegations of an intent to defraud his creditors?

Some of my clients asked me if they could dispose of non-exempt assets by contributing the assets to their favorite charity. The clients felt they would rather their charity got the money than their creditors. Some creditors may challenge large charitable gifts shortly prior to a judgment as fraudulent transfer. I read a bankruptcy case which discussed this issue.

In this case, the director of a well- publicized ponzi scheme had filed Chapter 7 bankruptcy in southern Florida. Prior to bankruptcy he had made several payments to a charitable organization including $25,000 to honor a non-binding pledge and $3,000 for seats at a charity dinner. The bankruptcy said these payments, and other similar gifts, were fraudulent conveyances.

The bankruptcy court found that the charitable gifts were not fraudulent transfers. Even though the $25,000 pledge was non-binding and was not a contractual obligation the court said the payments were “for value” because they satisfied an antecedent debt. The court said that consideration for a transfer to pay an antecedent debt requires the transferee charity to have a “claim” or “right to payment” even if it does not amount to a contractual obligation.

The court also found that paying $3,000 for dinner seats were not intended to defraud creditors because the debtor purchased these tickets at arms’ length, and in return he raised his profile in the community.

Evaluating pre-judgment charitable gifts as fraudulent transfers is based on the facts of each situation. At least, the charitable organization has to be a bona-fide charity wholly independent from the debtor or his family. See Case No. 12-01317-RBR in the Southern District of Florida.