Legal Definitions - ex fraude creditorum

Ex fraude creditorum is a Latin legal phrase that historically referred to actions taken by a debtor with the intention of defrauding their creditors. It describes situations where a person or entity, facing significant debt or impending financial distress, attempts to hide assets, transfer them away, or unfairly favor certain creditors over others, thereby preventing other creditors from recovering what they are legitimately owed.

While a historical term, the underlying principle remains highly relevant in modern bankruptcy and insolvency law. Such actions are often challenged in court as "fraudulent transfers" or "preferential payments," as they undermine the fair and equitable distribution of a debtor's assets among all creditors.

Here are some examples illustrating the concept of ex fraude creditorum:

• Example 1: Business Asset Transfer

  A struggling restaurant owner, aware that their business is on the verge of bankruptcy, quickly sells the restaurant's valuable commercial kitchen equipment to their cousin for a significantly reduced price. The cousin then immediately leases the equipment back to a new business the owner starts under a different name.

  This action would be considered ex fraude creditorum because the restaurant owner intentionally transferred a significant asset (the kitchen equipment) out of the business's reach at an unfairly low price. The purpose was to prevent the restaurant's legitimate creditors (such as food suppliers, landlords, or banks) from claiming it during the impending bankruptcy proceedings, thereby keeping the asset within the family's control and out of the hands of those owed money.

• Example 2: Individual Gifting of Assets

  An individual facing overwhelming personal debt and contemplating filing for bankruptcy transfers ownership of their expensive antique car collection to their spouse as a "gift" just a few weeks before formally declaring bankruptcy.

  This transfer would fall under the principle of ex fraude creditorum. By gifting the valuable car collection to their spouse shortly before bankruptcy, the individual is attempting to remove these assets from their personal estate. This action makes the assets unavailable to satisfy the claims of their creditors, effectively shielding them from being seized or sold to pay off outstanding debts.

• Example 3: Preferential Corporate Payment

  A small manufacturing company is on the brink of insolvency and about to file for bankruptcy. Days before the filing, the company uses its remaining cash reserves to pay back a personal loan it received from one of its directors, while leaving its other suppliers and lenders unpaid.

  This situation illustrates ex fraude creditorum because the company, through its director, made a preferential payment. By prioritizing the director's personal loan repayment over other legitimate business debts when the company was clearly failing, the company acted to defraud its other creditors. The director benefited at the expense of other parties who were equally or more entitled to be paid from the company's limited remaining assets.