Legal Question in Real Estate Law in California

First, a sale to a relative or business associate for significantly less than fair market value is not an arm's length transaction. The term "arm's length transaction" usually means one that is negotiated between strangers at a price that at least fairly approximates fair market value and reasonable terms.

Next, transactions below fair market value are not necessarily fraudulent, even when done with a friend or relative. They may be perfectly legitimate gifts of either the entire property or of a part of the value. I can sell a $300,000 house to my son for $250,000, and the taxing and other authorities would treat the deal as including a $50,000 gift. Perfectly legal.

Below-value transactions become fraudulent when certain additional aspects are present, principally where the purpose or even the effect of the transaction is to "hinder, defraud or delay" a creditor or prospective creditor of the transferor, and/or where the below-value transfer leaves the transferor insolvent and unable to pay his, her or its credtors when due.

California's fraudulent transfer law is codified at Civil Code sections 3439 to 3439.12 and is worth looking up and reading to get a better understanding of the subject.

Courts have sometimes held that both the transferor and the transferee in a fraudulent transfer are "in pari delicto" meaning equally at fault. I doubt that a truly innocent transferee would be considered at fault or liable, but maybe there is a presumption that the transferee knows the transaction is fraudulent, which presumption could be overcome by evidence showing no knowledge and no reason to suspect the fraud.

It isn't readily apparent to me how a lender, as a creditor, could become liable to anyone for its role in a short sale; in the first place, a short sale is presumably arm's length and reflective of fair market value, nor is it clear who would be the defrauded party. However, I haven't imagined or thought through all possible scenarios. If you have more specifics as to how and why a particular transaction is fraudulent, send me the facts and I'll take a look at it for you, no charge.