Forgiving a Debt Can Be Fraudulent Under the New Jersey Fraudulent Transfer Law

HNWBusiness Law, Fraudulent Transfer Litigation

By Fredrick P. Niemann, Esq., of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Fraudulent Transfer  Law Attorney

  • Debtors often seek to evade creditors
  • Creditors want to be paid what is owed to them
  • The New Jersey Fraudulent Transfer Law addresses conflicts between debtors and creditors

The New Jersey Fraudulent Transfer Law

The Uniform Fraudulent Transfer Act (UFTA), N.J.S.A. 25:2-20 -34, provides that a transfer made by a debtor can be fraudulent as to a creditor whose claim exists before the transfer it made. What’s important is whether the debtor made the transfer without “reasonably equal value” and the debtor was insolvent or became insolvent as a result of the transfer.   The law defines “reasonably equal value” as being the monetary “value” received by the debtor.

An Insolvent Debtor Can’t Forgive Debts

In a recent Appellate Law case, a bankruptcy trustee challenged the corporation’s release of a debt, on the ground that the release constituted a fraudulent transfer under UFTA. The debt that was released had previously been owed to the corporation by a landscaping business that was a creditor of two other corporations in exchange for the release.

The trial court concluded that the transfer was constructively fraudulent under N.J.S.A. 25:2-27(a) because the corporation gave up its sole asset without receiving “reasonably equivalent value” in return.

The Appellate Court reversed that decision. The panel held that the transfer benefited the debtor corporation’s sole shareholder because it extinguished the debts of two other corporations that she owned. The Appellate Division determined that the transfer was therefore made for “reasonably equivalent value” and that it was not constructively fraudulent under N.J.S.A. 25:2-27(a).

On further Appeal, the New Jersey Supreme Court reversed the Appellate Division because it believed the Appellate Division improperly ignored the distinction between the corporation that was the “debtor” for purposes of N.J.S.A. 25:2-27(a) and its shareholder, as well as the distinction between the debtor corporation and the other corporate entities that the shareholder owned. The court concluded that the evidence fully supported the trial court’s determination that the corporation did not receive “reasonably equivalent value” in exchange for the disputed transfer. The statute requires a party challenging a transfer to prove several elements. First, the party must establish the existence of a “transfer” or “obligation” N.J.S.A. 25:2-27(a).  For purposes of the UFTA, “transfer” is expansively defined as “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance.”

Second, the party challenging the transfer must demonstrate that the claim of the creditor arose before the transfer was made or the obligation was incurred.

Third, the party must prove that the debtor “was insolvent at the time” of the transfer or obligation, or that “the debtor became insolvent as a result of the transfer. A debtor is deemed “insolent” if “the sum of the debtor’s debts is greater that all of the debtor’s assets, at a fair valuation.”  “A debtor is conclusively insolvent if its debts exceed the fair value of his assets.”

The fourth element that a party challenging a transfer must prove is at the heart of the dispute in many appeals. The UFTA requires that in order for a transfer to be constructively fraudulent, the debtor must not receive a “reasonably equivalent value” in exchange for the transfer. In applying that standard, a court considered the UFTA”s fundamental objective: to protect creditors from transactions that are either intended to defraud them or otherwise deprive them of assets to which they are entitled. As the third circuit has observed,

Because the fraudulent conveyance laws are intended to protect the debtor’s creditors, a lender cannot hide behind the position, although sympathetic, that it has parted with reasonable value. The purpose of the laws is estate preservation; thus, the question whether the debtor received reasonable value must be determined from the standpoint of the creditors.

Accordingly, the judgement was reversed and remanded to the lower court for its consideration of issues that it did not reach.

To discuss your NJ Fraudulent Transfer matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.

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