A new client presented a plan to undo a potentially fraudulent transfer. Client and spouse had used a joint line of credit from a bank to borrow money for several investments. Some investments made in companies owned solely by husband made a profit. These companies distributed some profits to husband who, in turn, conveyed the profits to other companies owned solely by his wife.
A creditor obtained a judgment against husband only. To undo what may be deemed a fraudulent conveyance of profits to his wife, the husband and wife borrowed more money from the same lender on the same line of credit and deposited the borrowed funds in wife’s solely owned company. The wife’s company distributed to the wife/owner funds equal to the amount of profit the company had first received from husband’s company, thereby, reversing the potentially fraudulent conveyance. The client wants to know whether this plan makes moot any fraudulent conveyance action against wife and her company.
I don’t think this reversal eliminates the problem because the transfer of funds and borrowing is too circular. Looking at husband’s and wife’s balance sheets after the conveyance, borrowing, and reversal, the husband’s balance sheet is the same after receiving the newly borrowed funds through wife’s company as it was just after he transferred profits to wife.
The better approach would be for wife to borrow money in her own name on a separate line of credit from the joint line. The wife should use this money to reverse the fraudulent transfer. The fact that husband does not increase his debt in order to pay himself back eliminates the circularity of the reversal and makes the wife’s repayment of profits received easier to explain and defend.