Fraudulent transfer in bankruptcy
11 USC 548(a)(1)(B).
It is 90 days for voidable preference transfers (11 USC 547), but 2
years from petition date for voiding fraudulent transfers under Sec. 548.
It would be fraudulent if the transfer was for less than reasonably
equivalent value *and* aunt was insolvent at time of transfer or
became insolvent because of the transfer. For most people, we can
assume insolvency at transfer.
So you would be fighting with the bankruptcy Trustee over the FMV at transfer.
Assessment will hurt you, the $189k non-sale will help a bit. Trustee
will probably want the difference, $29k, you would argue it didn't
sell and the related party sale for the 160k debt assumption saved
transactional costs (that you calculate - 6% + local closing fees), to
whittle down the 29k to something agreeable to your client.
At the end of the day, client will probably have to pay something to
keep the house, or give back the house and get an creditor
interest/lien in the house based on the additional proved up
investment (sweat equity and otherwise) in the property.
If the mortgage is only 160k, and the house is worth at minimum 189k (and possibly even more given the assessment), then the house was not sold for fair market value and can be considered a fraudulent transfer. That is probably what the attorney is talking about. It's not a preference, but it might be a fraudulent conveyance. Still, I'd
argue that the transfer was made for "reasonably equivalent value." It
doesn't have to be perfectly equivalent, only reasonably so. In this case,
the Aunt was relieved of the obligation to pay $160k, and the Nephew
incurred a debt of $160k in order to get the house. He has essentially paid
$160k for a house that couldn't even sell for $189k. IMO, there's a maximum
of $29k on the table there, and I agree with Lewis on this that there
wouldn't be much left when all was said and done anyway.
If the transfer was fraudulent, there are a couple possible ways around this
depending on whether Aunt is still living in the home, as then you might be
able to have him reconvey to Aunt (provided there was no novation in the
mortgage), have her file bankruptcy, and then claim the homestead exemption,
which is rather generous in MA, at least from what I'm reading (though
probably capped at $125k). The trustee will then likely abandon the
property and she can reconvey to nephew. Check the case law to see if this
is forbidden in your circuit. If she doesn't live there anymore, then it
gets more complicated and there may have to be some money paid to the
Trustee to make him/her go away, or you could fight the trustee on value and
see if the court buys your argument that it isn't worth what the Trustee is
claiming. Realistically, if the trustee sells it, it's likely going to have
to be at an auction or at least some kind of fairly quick sale, so that's
going to work against him/her on value as well.
