Fraudulent Asset Transfers

Beneficial Ownership Post
Spouses can hide assets through layering & fraudulent transfers, this 35th Post in the “Divorce & Hidden Money” series says.

According to The Financial Action Task Force anti-money laundering group:

Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement. Glossary of the FATF Recommendations, Web. July 10, 2017.

A divorcing spouse may conceal his/her beneficial ownership of community property by titling: bank accounts; real estateart; etc. in the name of an intermediary (i.e. a nominee). The divorcing spouse secretly controls these assets while the nominee appears to own them. The nominee acts as a protective layer which hides the divorcing spouse’s beneficial ownership of assets.

Protective layers can be comprised of: nominees; offshore bank accounts; multiple jurisdictions; shell companies; trusts; & gatekeepers. The layering is the first clue a divorcing spouse could be concealing beneficially owned assets. The second clue a divorcing spouse is concealing assets would be the divorcing spouse’s fraudulent transfers. To detect fraudulent transfers look for the badges of fraud, as more fully set forth at “An Asset Search When Money Is Hidden Offshore.”

Image: kentoh/

Copyright 2017 Fred L. Abrams

Puzzle Money PhotoTo cheat you out of your fair share, your divorcing spouse, a business partner, an executor handling a decedent’s estate or someone else may hide assets from you.  As a result of an asset search or other investigation you might uncover a money trail for these hidden assets.

If you follow the money trail & locate the assets, how do you then recover them?  One way could be through a settlement with those hiding the assets from you.  You might also be able to recover the assets by pursuing available legal remedies.

These remedies sometimes include proving to the Court that assets were hidden from you through nominees (i.e. intermediaries); fraudulent transfers; &/or trusts.  To recover assets hidden these ways, you may have to demonstrate the following to the Court:

I.  NOMINEE OWNERSHIP —‘A nominee is one who holds bare legal title to property for the benefit of another.’ In re Callahan, 442 B.R. 1, 5 (D. Mass. 2010) (quoting Black’s Law Dictionary 1076 (8th ed. 2004)).  A true beneficial owner can easily hide assets by employing a nominee to make purchases &/or hold assets.  To recover these assets you may have to prove nominee ownership by showing that the owner transferred assets in anticipation of a lawsuit; that the assets were transferred to the nominee although the nominee did not pay for them; etc.  See e.g., Fourth Inv. LP v. United States, 720 F.3d 1058, 1070 (9th Cir. 2013) (six-part test for nominee ownership applied to tax lien case).

II.  FRAUDULENT TRANSFERS—If there were badges of fraud when an asset was transferred, you might be able to recover the asset on the ground it was fraudulently transferred.  The badges are used to prove fraudulent intent or an intent to hinder creditors.  A fraudulent transfer is marked by the badges when assets are transferred in anticipation of a lawsuit or liability; when assets are transferred even though there is inadequate or no payment for them; etc.  The badges are listed at Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574 (2d Cir. 1983) and additional cases discussing them are at “Badges Of Fraud In Debt Collection, Divorce & Bankruptcy.

III.  TRUSTS—IRS Talking Points say that trusts can be misused “[t]o depreciate personal assets (such as a home)”; “[t]o deduct personal expenses”; “[t]o split income over multiple entities…”; “[t]o underreport income”; “[t]o avoid filing returns”; “to wire income overseas and fail to report it”; & “[t]o attempt to protect transactions through bank secrecy laws in tax haven countries.”  If a trust is abused in these kinds of ways to hide assets, assets could conceivably be recovered from the trust.

Depending on the circumstances, you may recover trust assets by claiming the trust is only a nominee owner; or by claiming that assets were fraudulently transferred to the trust.  It may also be possible to recover assets by piercing the trust veil on an alter ego theory.  The gravamen of this claim would be that the individual hiding assets at the trust & the trust were inseparable.  See United States v. Evseroff, No. 00-CV-06029 KAM, 2012 WL 1514860, (E.D.N.Y. Apr. 30, 2012) aff’d, 528 F. App’x 75 (2d Cir. 2013) (trust assets subject to collection/can be reached under nominee ownership, fraudulent conveyance and alter ego theories).

Image courtesy of Flickr (Licensed by) Images Money/Images_of_Money

Trust Photo

My post “Four Asset Concealment Tools” says that assets can be hidden by fraudulently transferring them to a trust.  This 15th post in the “Divorce & Hidden Money” series concentrates on the evidence a divorcing spouse might try to collect if marital assets are concealed by a trust.

A spouse can use the pretrial discovery phase of a divorce to gather evidence about any marital assets concealed by a trust.  Based on this evidence, the divorcing spouse may be able to credibly argue that assets at the trust are marital property subject to distribution by the Court.  A divorcing spouse might also claim the trust was void if the trust was “self-settled” (i.e. the grantor and beneficiary were found to be one and the same).  Under certain circumstances a divorcing spouse can additionally assert the trust veil should be pierced because the trust wrongly concealed assets &/or facilitated fraudulent transfers.  See Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85, 91 (2d Cir. 2003) (discussing New York cases where right to pierce trust veil was preserved).

Below is a demand for documents, (i.e. a production request) and demand for answers to interrogatories employed by the Chapter 7 trustee in the Seattle, Washington Michael Mastro bankruptcy case.  The Chapter 7 trustee made these demands suspecting Mr. Mastro hid assets at trusts.  Mr. Mastro had formed LCY Trust under Belizean law and it had a Belizean trustee, called “Compass Trust Corporation.”  The Chapter 7 trustee’s demands sought information regarding the location of assets, transfer of assets, banking records, etc.  They give a glimpse of the kind of evidence a divorcing spouse should collect if a trust is thought to conceal marital assets.

(To Access The Discovery Demands Click On Each Image)

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First image courtesy of Flickr (Licensed) by Syed Ikhwan

Copyright 2015 Fred L. Abrams

When fraudulent transfers are used to hide assets the subject of a debt collection, divorce, or bankruptcy case, the Court looks for badges of fraud.  As explained in Wall Street Associates v. Brodsky, 257 A.D.2d 526, 529 (1st Dept 1999), the badges of  fraud for fraudulent asset transfers or conveyances are:

  • A Close Relationship Between The Parties
  • A Transfer Outside The Ordinary Scope Of Business
  • Inadequate Consideration
  • Knowledge Of A Creditor’s Claim
  • Retention Of Control Of The Property

For example, in AMP Servs. Ltd. v. Walanpatrias Found. a.k.a. Doraw, 2006 slip op. 7985 ; 34 A.D.3d 231; 824 N.Y.S.2d 37 (1st Dept,  2006), the Appellate Division upheld an injunction against a debtor dodging a debt collection proceeding.  In applying New York Debtor and Creditor Law, the Appellate Division ruled that the debtor could not transfer a stock portfolio offshore to Europe because there were badges of fraud as mentioned by Wall Street Associates, 257 A.D.2d 526.

In another Appellate Division case, Dempster v. Overview Equities, Inc., 2004 slip op. 01149 ; 4 A.D.3d 495; 773 N.Y.S.2d 71 (2d Dept 2004), a divorcing husband transferred his residence to a Delaware corporation just before his valuation/equitable distribution hearing.  Since the Delaware corporation had filed for bankruptcy, the residence was eventually sold by the bankruptcy court as a corporate asset.  The husband in Dempster had also diminished his net worth by alleging he had a $1,473,362.74 debt because of two confessions of judgments from construction loans.

Since the the above transfer happened just two weeks before the valuation hearing, the Appellate Division found it “replete with badges of fraud“.  The Appellate Division further stated that the Delaware corporation had been created only two days before the residence was transferred to it and that the corporation had operated from the very same address as the husband’s other businesses.  According to the Appellate Division, the husband’s residential transfer and construction loans also violated New York Debtor and Creditor Law because they had occurred without any monies ever being paid, (i.e. without “fair consideration”).

In Allan J. Bentkofsky, Trustee v. Ralph J. Malandra, et. al., United States Bankruptcy Court, N.D.N.Y.,  Adv. Pro. No. 00-80221, the Court also found there were badges of fraud when a husband and wife transferred their residence to their children.  Despite the transfer, the husband and wife continued to live at the residence because they had retained a life estate interest.  Since the couple had filed a Chapter 7 bankruptcy petition, the Bankruptcy Court analyzed the residential transfer only to discover that it had occurred without any payment of money/was without “fair consideration”.  The couple had also made the transfer at a time they had been insolvent.  Given these facts, the Court found there were badges of fraud and set aside the transfer as it violated New York Debtor and Creditor Law.

Finally, badges of fraud can sometimes be used in debt collection, divorce, or bankruptcy cases to demonstrate that an opposing party has hidden assets or removed property with “actual intent” to defraud.  Robert M. Morgenthau v. A.J. Travis Ltd., 708 N.Y.S.2d 827, 842 (N.Y. Sup. Ct. 2000); Wall Street Associates, 257 A.D.2d at 529.  The badges can also become important in court because a concurrence of several badges always makes a strong case for fraud. Gafco Inc. v. H.D.S. Mercantile, 47 Misc. 2d 661, 665 (N.Y. Civ. Ct. 1965).

(Last edited October 12, 2011)

Copyright 2007-2017 Fred L. Abrams