A transfer of property in which the owner of the land does not receive a present consideration but merely conveys or mortgages property to a creditor for the payment or as a guaranty for the payment of an antecedent debt is potentially voidable as a preference under section 547(b) of the Bankruptcy Code. 11 U.S.C. § 547(b) reads as follows:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property--
Transactions that restructure, extend, guarantee, recast, or release old debts and create new liens on the property, thus converting previously unsecured debts into secured debts may be deemed viodable preferences under Section 547(b) of the Bankruptcy Code under the following conditions:
Under Section 547(b), the Bankruptcy Trustee is required to categorize such a debt as unsecured.
Fraudulent conveyances may include mortgages to pay dividends or partnership distributions, leveraged buy-outs, and inter-corporate guarantees. Such transactions will be attacked as fraudulent conveyances if the guarantor or transferor is left insolvent or with insufficient capital to conduct the business. State and federal statutes provide for the avoidance of fraudulent conveyances, defined as the transfer of assets for less than reasonably equivalent value by a grantor that is rendered insolvent by the transfer. The value of the assets is measured by fair market value and insolvency is measured by the balance sheet test of liabilities exceeding assets. Such transfers are deemed fraudulent under 101 U.S. 548(b) (the Bankruptcy Code) and under the Uniform Fraudulent Transactions Act §4, adopted 1984, and may be set aside by judicial decree. Only good faith purchasers who pay value and are without knowledge that the transfer is fraudulent are protected from a court judgment voiding the transfer as fraudulent. Such transfers may also violate state fraudulent conveyance statues.
It is not always possible to determine with certainty whether a transaction involves a preferential transfer or a fraudulent conveyance at time of closing.