Recipient of Fraudulent Transferred Property Can Recoup Some Expense...

An Maryland attorney wrote me an email about his representation of a person who received what was determined to be the fraudulent transfer of a piece of real property. His client had spent money maintaining and repairing the property. The attorney wanted to know if his client was entitled to payment for money he spent on property fraudulently transferred to him by a bankruptcy debtor.

The debtor sold the property to the client for $10,000, and he spent another $4,000 improving the property. The client then signed a contract to sell the house for over $30,0000. The person who sold him the house filed Chapter 7 bankruptcy. The Trustee found out about the sales price, and then the trustee tried to reverse the transactions. The trustee wanted to stop the $30,000 sale from closing and order the client to deed back the property on the theory that the initial sale by the debtor to the client was a fraudulent conveyance for inadequate consideration.

I think if the client deeds back the property to the trustee the client is entitled to the return of the $10,000 purchase price and the money he spent on improvements. There are court decisions which hold that enforcement of a trustees fraudulent transfer remedies in bankruptcy is subject to equitable considerations. These equitable considerations refer to fairness for the recipient of the fraudulent transfer. Improvements and maintenance of the property received increases, or at least maintains, the value for the benefit of the bankruptcy estate. Courts will reimburse the recipient for expenses that benefit the estate in this manner.

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