Legal Definitions - in fraudem creditorum

In fraudem creditorum is a Latin phrase that translates to "in fraud of creditors." It describes an action taken by a debtor with the deliberate intention of deceiving or disadvantaging their creditors. This typically involves hiding, transferring, or disposing of assets to prevent those assets from being used to satisfy legitimate debts.

Such actions are often considered legally voidable or fraudulent transfers because they are designed to place assets beyond the reach of those who have a legal claim to them.

Here are some examples to illustrate this concept:

• Example 1: Transferring Property Before Bankruptcy

  Imagine a small business owner who knows their company is on the verge of bankruptcy. A week before filing for bankruptcy, they transfer ownership of their valuable personal vacation home to their adult child for a symbolic payment of one dollar. This action would likely be considered in fraudem creditorum because the owner's clear intent was to remove a significant asset from their personal estate, making it unavailable to their business creditors when the bankruptcy proceedings began. The transfer was not a genuine sale but an attempt to shield the asset from legitimate claims.

• Example 2: Selling Assets at an Undervalued Price

  Consider an individual who owes a substantial amount of money to several lenders and is aware that their assets might soon be seized to cover these debts. To prevent this, they sell their rare and expensive art collection to a close friend for a fraction of its true market value. This situation exemplifies an act in fraudem creditorum. The debtor intentionally undervalued and sold valuable assets to a friendly party, knowing that the true market value would have been sufficient to cover a portion of their debts. The purpose was to prevent creditors from accessing the true value of the assets to satisfy their claims.

• Example 3: Creating a Fictitious Debt

  A construction company is facing severe financial difficulties and anticipates defaulting on several loans from its bank. To ensure that a favored subcontractor receives payment, the company creates a backdated, fictitious invoice for a large sum from that subcontractor, making it appear as a priority debt that must be paid before others. This constitutes an act in fraudem creditorum because the company fabricated a debt to give preferential treatment to one party, thereby diminishing the assets available to other legitimate creditors, such as the bank. The intent was to manipulate the distribution of limited funds to the detriment of other creditors.