NYS Equitable Distribution Law and Fraudulent Conveyances

NYS Equitable Distribution Law and Fraudulent Conveyances

Freeman Law wrote a very interesting and informative article  titled Can Trustees Avoid Transfers Made Pursuant to Divorce Decrees or Other Agreements Incident to Divorce?  The article was published in JD Supra at https://www.jdsupra.com/legalnews/can-trustees-avoid-transfers-made-3271604/?origin=CEG&utm_source=CEG&utm_medium=email&utm_campaign=CustomEmailDigest&utm_term=jds-article&utm_content=article-link

In the article, the author discusses whether Bankruptcy Trustee’s in Ohio can avoid transfers made pursuant to divorce decrees (yes according to the author)  and discusses fraudulent conveyance law.

In NYS the division of marital property is governed by equitable distribution. Which is defined as a  division of marital property between spouses that is equitable or fair. The division does not have to be equal to be considered fair.

As a result, if a couple is divorcing in NYS and one spouse owes money to creditors, the divorce presents an opportunity for the spouse who owes money to creditors (a debtor) to make themselves judgment proof or otherwise engage in  asset protection planning.

Let’s look at an example. A couple is married and they own a house that has appreciated in value. The house has a fair market value of $1,000,000 and is subject to a $250,000 mortgage. The couple has 2 minor children and custody of the children will be given to the mother, who does not work.

The husband had started a business which subsequently failed and he owes or has guaranteed debt exceeding $2,000,000.  The husband cannot repay that debt in the near term and he expects to get sued in the future.

During the divorce process, each spouse hires a divorce attorney, and the husband consults a bankruptcy attorney who advises him to transfer the house to his wife.

When the divorce is finalized, the husband has few assets that can be liened or levied by creditors and the wife has a house for herself and her children.

Does NYS or bankruptcy law consider the conveyance of the house a fraudulent conveyance? Depending on the facts probably not and if a creditor were to challenge the conveyance it would result in lengthy and costly litigation. 

Clients with questions about fraudulent conveyance law and bankruptcy should contact Jim Shenwick, Esq   jshenwick@gmail.com   212 541 6224