A transfer of property in which the owner of the land does not receive a present consideration but merely conveys or mortgages property to a creditor for the payment or as a guaranty for the payment of an antecedent debt is potentially voidable as a preference under section 547(b) of the Bankruptcy Code. 11 U.S.C. § 547(b) reads as follows:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property--
- to or for the benefit of a creditor;
- for or on account of any antecedent debt owned by the debtor before such transfer was made;
- made while the debtor was insolvent;
- on or within 90 days before the date of filing of the petition: or,
- between 90 days and within one year before the date of the filing of the petition, if such creditor, at the time of such transfer was an insider; and,
- the case were a case under chapter 7 of this title;
- the transfer had not been made; and,
- such creditor received payment of such debt to the extent provided by the provisions of this title.
Transactions that restructure, extend, guarantee, recast, or release old debts and create new liens on the property, thus converting previously unsecured debts into secured debts may be deemed viodable preferences under Section 547(b) of the Bankruptcy Code under the following conditions:
- The transfer is on account of an antecedent debt owed to or for the benefit of a creditor of the transferor
- The debtor declares bankruptcy within 90 days of the transaction
- The debtor is insolvent at the time of the transaction and declares bankruptcy
Under Section 547(b), the Bankruptcy Trustee is required to categorize such a debt as unsecured.
Fraudulent conveyances may include mortgages to pay dividends or partnership distributions, leveraged buy-outs, and inter-corporate guarantees. Such transactions will be attacked as fraudulent conveyances if the guarantor or transferor is left insolvent or with insufficient capital to conduct the business. State and federal statutes provide for the avoidance of fraudulent conveyances, defined as the transfer of assets for less than reasonably equivalent value by a grantor that is rendered insolvent by the transfer. The value of the assets is measured by fair market value and insolvency is measured by the balance sheet test of liabilities exceeding assets. Such transfers are deemed fraudulent under 101 U.S. 548(b) (the Bankruptcy Code) and under the Uniform Fraudulent Transactions Act §4, adopted 1984, and may be set aside by judicial decree. Only good faith purchasers who pay value and are without knowledge that the transfer is fraudulent are protected from a court judgment voiding the transfer as fraudulent. Such transfers may also violate state fraudulent conveyance statues.
It is not always possible to determine with certainty whether a transaction involves a preferential transfer or a fraudulent conveyance at time of closing.