The Latent Efficiency of Fraudulent Transfer Law

01 Jan 1997

A creditor holding a claim against a debtor typically holds the right, subject to the debtor's default, to obtain a judgment against the debtor, liquidate the debtor's assets, and apply the proceeds against his claim. If the debtor's assets are insufficient to satisfy the creditor's claim, the creditor is usually, but not always, out of luck. Under limited circumstances, a creditor can reach property the debtor transferred to a third party and apply the value of such property to satisfy his claim. The creditor can undo the transfer and obtain the property or its value from the transferee as though the debtor had never transferred it. The circumstances under which the creditors can undo or "avoid" a transfer of the debtor's property, deprive the transferee of the value of the property, and apply such value to satisfy their claims are the subject of fraudulent transfer law.

Part II of this article sets out the fraudulent transfer rules and explains in basic terms how they work. It then examines and criticizes the prevailing normative explanations for fraudulent transfer law. Part III explains the respective abilities of creditors and transferees to avoid loss and the economic purpose of the rule that permits to creditors to undo some transfers of the debtor's property at the expense of transferees. Part IV of this article reveals how the definitions of actually and constructively fraudulent transfers can be understood as identifying those transfers in which the transferee is likely to be able to avoid the loss more cheaply. Part V considers some implications of this economic perspective on fraudulent transfer law.