Fraudulent Transfer

A legal doctrine permitting a creditor or judgment holder to void or recover assets that a debtor transferred to a third party with the intent to hinder, delay, or defraud creditors, or for less than reasonably equivalent value when the debtor was insolvent. Fraudulent transfer claims are governed by state law (typically the Uniform Fraudulent Transfer Act or its successor, UVTA) and by the federal Bankruptcy Code, and are a key tool in post-judgment collection and bankruptcy avoidance proceedings. For litigation funders, fraudulent transfer exposure on the defendant side is a risk factor that can render a recovery illusory even after a favorable judgment. Conversely, funders may finance fraudulent transfer claims directly when a creditor holds a judgment against an insolvent debtor that stripped assets before or during litigation.

On the defendant side, fraudulent transfer exposure is a collectability killer that funders test for before ever pricing the merits of the underlying claim — a facially strong case against a defendant that has already stripped its assets is a worthless judgment waiting to happen. On the claimant side, a viable fraudulent transfer theory can be the entire investment thesis, letting a funder back a creditor's action to claw back specific assets a debtor moved in anticipation of judgment.