Rabbi Yehonoson Dovid Hool
This article was written by a dayan at Beis Din Nesevos Chaim-the Beis Din of the Institute For Dayanim and was published in Kuntris Magazine
Often when someone owes a lot of money he will write over all his possessions to another person, in order that his creditors will have no recourse in claiming their debts. We would like to discuss how Beis Din would react to such a disposal of assets, especially, when there is reason to suspect that the transfer was not genuine.
Let us first have a brief look at how the secular legal system deals with this.
Legally the transfer of assets in order to avoid paying one’s debts is referred to as Fraudulent Transfer (or Fraudulent Conveyance, with regard specifically to real estate).
A very early example of this idea took place four hundred years go in Elizabethan England. A certain farmer, Pierce, owed two hundred pounds to his creditor, ”C.” Pierce also owed another debt of four hundred pounds to Twyne of Hampshire. Anticipating a judgment against him in favor of “C”, and the subsequent arrival of the Sheriff, Pierce made ‘a general deed of gift’ of everything that he owned to Twyne.
The case was referred for litigation to the Star Chamber, which held that Pierce’s “gift” to Twyne had “the signs and marks of fraud.” The supposed gift from Pierce to Twyne was set aside, and “C” was able to recover his debt from the assets that had been transferred to Twyne.
The Star Chamber found that there were several indicia of fraud in Twyne’s case, which indicated that the gift was not genuine and was in effect fictitious, enacted only to defraud Pierce’s creditor.
First, the gift purported to transfer everything Pierce owned, including his clothes, and other necessities. Such a “general” transfer is highly irregular.
Second, Pierce retained possession of the goods. Even though Pierce had purportedly conveyed the assets to Twyne, Pierce apparently treated them as his own. He himself sold some of the goods, and, as for the livestock, he shore the sheep, and marked them with his own mark.
Third, the deed of gift from Pierce to Twyne was made in secret.
Fourth, the timing of the transfer, with ” C”’s writ pending, was suspicious.
Finally, the deed of gift itself was suspicious. It recited, for no apparent reason, that this was an honest, true, and bona fide gift. This unnecessary clause, however, aroused suspicion, and thus ironically, the clause proved the exact opposite of its terms.
The end result was that the deed of gift was voided, and Twyne was convicted of fraud.
Twyne’s Case is still a valid common law precedent in the United States today.
The federal law of bankruptcy in the United States provides that a trustee of a bankrupt person or corporation may “avoid” – reverse – fraudulent transfers. Accordingly, the United States Bankruptcy Courts have relatively frequent occasion to rely on the ‘badges of fraud’ test, and Twyne’s Case. In general each case is judged on its own merits, and although one or other of the above indices may raise suspicion but may not necessarily be enough to lead to a conclusion of fraud, several of them together may well point out a fraudulent conveyance.
Let us look at how the Halachah regards this type of transaction.
In general, a Beis Din that adjudicates financial disputes will base its rulings on hard evidence, such as the testimony of two valid witnesses or legitimate documentation. Circumstantial evidence, although admissible in Beis Din, cannot be the sole basis for a Beis Din to financially obligate a party. Occasionally, though, the circumstantial evidence can be so compelling as to create an umdenah – an unequivocal presumption based on an assessment of the situation. According to the halachah, a Beis Din can rule in line with such an umdenah.
However, there a various different types of umdenah. Sometimes the presumption is so absolute that any independent observer would come to the same conclusion, and this is recognized by halachah. So for example, if a man on his deathbed disburses his entire possessions to various beneficiaries, and then subsequently recovers from his illness, he receives back all the gifts that he made (Bava Basra, 146b; Shulchan Aruch, Choshen Mishpat 250:2), because although he may not have stated it explicitly, it is absolutely clear that the gifts were made on the understanding that he was dying. Thus he never intended for the gifts to be valid in the event that he recovers.
Nonetheless, certain umdenahs, although compelling, may not be acted upon by a Beis Din. For example, the Shulchan Aruch rules that in a situation in which an uninjured ox that was grazing in a field was subsequently found to have been gored, and there is only one other ox present, leading to the assumption that it was responsible for the damage, a Beis Din can nonetheless not award damages from the owner of the second ox without conclusive proof that it was responsible for the damage. The Maharik (129) explains that when the facts are proven and the only question is as to the intent of someone, we can rely on an umdenah to presume the intent of the individual. When the facts themselves are unproven though, we cannot use an umdenah to establish what actually happened. (There is however an exception to this in the Shulchan Aruch Choshen Mishpat 90:16. Reuven enters a room in which only Shimon is present, and subsequently emerges with a bite-mark between his shoulder blades – a wound that cannot possibly be self-inflicted. In this case, Shimon can be held liable. His responsibility for the wound is not merely beyond reasonable doubt, it is beyond any doubt.)
Although there is Talmudic (Kesubos, 85a) justification for a Dayan to rule according to that which, although unproven is absolutely certain to him, the Rambam hilchos Sanhedrin, 24:1 writes that this does not apply nowadays, when Dayanim are not of the caliber of ancient times. Nonetheless, there will be circumstance in which it is clear to all what has transpired, and what the real intentions of parties were, and in that case Beis Din will act on this presumption even in the absence of absolute evidence.
A classic example of this is when a debtor engages in fraudulent conveyance, writing all of his assets under someone else’s name in order to avoid paying off his debts. As mentioned earlier, legally, the Bankruptcy Code authorizes a bankruptcy trustee to recover the property transferred fraudulently,http://en.wikipedia.org/wiki/Fraudulent_conveyance – cite_note-11 for the benefit of all of the creditors of the debtor if the transfer took place within the relevant time frame. Halachically, lehavdil, the Rosh In several responsa, quoted in Tur, Choshen Mishpat, 99, and Shulchan Aruch, Choshen Mishpat 99:7 ruled in such cases that one would need to examine closely the subsequent actions of the debtor. In one of the Rosh’s cases, the debtor had written a bill of debt to his son, for a huge sum of money, several years before he borrowed money, and when the creditors came to claim their debts, he showed them that the son’s debt precedes theirs, and thus he gets first rights to the assets. The Rosh pointed out that no-one gives away everything that they own leaving nothing for themselves, and thus even if the son was then a baby, eventually when he grows up he could conceivably claim the debt from his father and relieve him of all his assets. Furthermore, the sum mentioned was far more than he actually owned, and it made no sense that one would give his son way above and beyond that which he actually owns. It was clear that the man had simply created a legal fiction in advance of his loans, by creating a huge “debt” to his son, in order to protect his own assets from being seized to pay off his genuine debts. As such, the Rosh ruled that the Beis Din should not recognize the bill of debt at all, treating it as entirely fictitious.
In another case, the debtor gave away all his assets to a relative, leaving absolutely nothing to himself. Nonetheless, he and his family continued to live off these assets, and his wife actually managed the assets, all the while claiming that she was doing this on behalf of the relative who had received everything as a gift from her husband. The Rosh ruled again that the gift was fictitious, and thus the assets in reality still belong to the debtor, and his creditors may collect from them regardless of the fact that technically they appear to belong to someone else.
Thus the Shulchan Aruch rules that if it is clear to Beis Din that any act, though technically valid, is largely fictitious in order to defraud a creditor, such as a fraudulent transfer of assets, the halachah ignores this act of transfer of property and will allow the creditors to collect their debts from the property as if it were still in the possession of the debtor.
If however there is no indication of fraud, the transfer may indeed put the assets beyond the reach of the creditors.
Rabbi Hool serves as a dayan on the Institute for Dayanim’s Beis Din, “Nesivos Chaim” in Yerusholayim. “Nesivos Chaim” also adjudicates international Dinei Torah, via Skype linkup. In addition, the Institute operates the popular website www.dinonline.org, where one can submit sheilos. Rabbi Hool can be reached via the website.