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Constructive Fraud as a Cause of Action in New York

In New York, constructive fraud refers to certain types of transactions that the law treats as fraudulent even if the person making the transfer didn’t intend to deceive anyone. The law is primarily concerned with whether someone moved money or property in a way that harmed creditors, especially when they couldn’t afford to do so. This is commonly raised in civil lawsuits when someone is trying to collect on a debt or judgment. For a claim of constructive fraud to succeed, the person bringing the case must prove that a transfer was made without fair value in return and that at least one of the following conditions existed.

The Transferor Was Insolvent or Became Insolvent

If someone gives away or sells their property for far less than it’s worth, and they were already unable to pay their bills, or they became unable to pay their bills because of the transfer, this is the first ground for constructive fraud. This rule helps protect creditors by stopping individuals or businesses from giving away assets when they can’t pay what they owe.

The Transferor Was Being Sued or Unable to Pay a Future Judgment

A person or company cannot sidestep paying a judgment by moving assets out of reach while being sued. If a defendant in a lawsuit transfers property for little or no value and ends up unable to pay when the plaintiff eventually wins the case, that transfer can be challenged as constructive fraud. The law wants to make sure that people can’t avoid financial responsibility just by emptying their bank accounts or moving assets during litigation.

The Transferor Had Too Little Capital to Run the Business

Another red flag is when a business transfers property or money without receiving something of equal value in return and is left with too little to continue operating. This is not just a bad business decision—it’s something the law can step in to correct. If the transfer makes it impossible for the business to keep going, it can be challenged.

The Transferor Expected to Take on Debts They Couldn’t Repay

Even if the person or business wasn’t yet out of money, a transfer may still count as constructive fraud if it was made at a time when they believed they were going to take on more debt than they could realistically repay. This includes situations where someone moves assets knowing they’re headed toward financial trouble and wants to protect what they have before creditors come calling.

Conclusion

Constructive fraud in New York doesn’t require proof that someone meant to commit fraud. Instead, it focuses on the financial condition of the person making the transfer and whether the deal made economic sense. If the transfer left the person broke, unable to pay judgments, underfunded, or drowning in future debt, and there wasn’t fair value exchanged, the law allows that transaction to be undone. This ensures fairness to creditors and helps maintain trust in the financial system.

Find the Law

“In order to state a cause of action for constructive fraud, there must be a transfer made without fair consideration at a time when the transferor (1) is insolvent or was thereby rendered insolvent (DCL § 273); (2) is a defendant in an action for money damages or is unable to satisfy a judgment that a plaintiff finally obtains (DCL § 273-a); (3) has unreasonably small capital to operate its business (DCL § 274); or (5) intends or believes that he or she would incur debt beyond the ability to pay as the debt matured (DCL § 375).” CDR Creances v. First Hotels Resorts Inv., 2009 N.Y. Slip Op. 31837, 8 (N.Y. Sup. Ct. 2009)