Legal Question in Bankruptcy in Illinois

Fraudulent Conveyance by sole shareholder to himself?

In a judgment for creditor against a debtor corporation, can the creditor go after personal assets of the sole shareholder of the corporation, which were transfered by the sole shareholder to himself, from corporate assets, in his official capacity as the CEO, BEFORE he ever knew, and before the suit was filed? Or is this a fraudulent transfer?

Here is what happened: Corporation A, with one man behind it, a sole shareholder and the CEO, did business with Corporation B. B owed money to A, and paid the money within 90 days for filing for bankruptcy, and is now trying to recover that money as a preference. If B gets the judgment for him, A will become insolvent as a corporation, because it's assets are about 1/4 of what the judgment would be. However, the sole shareholder and CEO of A, transfered large sums of money to himself, as the shareholder, BEFORE he ever knew of the claim being filed, and actually BEFORE the claim was filed. They were 3 transfers: one 2 years before, one 1 year before, and one small one several months before claim was filed.

If there's a judgment against Corporation A, can B go after A's personal assets as the shareholder? Thank you in advance.


Asked on 6/27/02, 5:35 pm

2 Answers from Attorneys
Bruce Buckrop Bruce Buckrop

Re: Fraudulent Conveyance by sole shareholder to himself?

It is not fraudulent unless the corporation was left insolvent as to it's known outstanding obligations, piercing the corporate vail as it is known is diffilcult and should involve an attorney in preparing or evauluating the evidence

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Answered on 6/27/02, 6:25 pm
Kenneth J. Ashman Ashman Law Offices, LLC

Re: Fraudulent Conveyance by sole shareholder to himself?

The fact that the sole shareholder/CEO of Corporaiton A made the transfer w/out knowing of the claim by Corporation B hurts in establishing whether a fraudulent transfer occurred.

Corporation B is not dead in the water, however. There is a concept known as "piercing the corporate veil," in which the corporate shield is discarded in certain circumstances. Courts generally look to about 10 factors to determine whether it should pierce the corporate veil and go after a shareholder personally, all of which are discussed in the case law.

In short sum, however, the Court makes an assessment of whether the corporation was following true corporate formalities and whether it was undercapitalized. Thus, if the corporation was truly acting as a corporation, with regular board meetings, minutes, resolutions, and was not undercapitalized, etc., then the Court will respect the corporate form. If, however, the corporation was a mere "alter ego" of the individual shareholder, a court will discard the corporate form and permit individual liability. The assessment is highly fact-sensitive.

-- Kenneth J. Ashman; [email protected]; www.lawyers.com/alo

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Answered on 6/30/02, 10:53 pm


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