Fraudulent Transfer Law’s Forgotten Foundations

Introduction

Fraudulent transfer law has served as one of the principal bulwarks of private law for centuries. It allows creditors to recapture assets that a debtor placed in the hands of confederates to the detriment of the debtor’s creditors. It might seem that what it means for a debtor to put assets in the hands of a confederate is straightforward, but this has never been the case. Consider the following eighteenth-century transaction.

A real estate developer (“Developer”) overextended himself and became hopelessly insolvent. At this point, Developer hatched a plan to secure a comfortable financial future free of the claims of his creditors. Developer took advantage of a paperwork problem associated with a large, completely legitimate real estate deal he had done some years before.1 Through no one’s fault, the paperwork turned out not to be in order. The buyers could go to court and cure the defect without any help from Developer, but it was far cheaper and faster if Developer simply signed a piece of paper the buyers gave him. Given the expense of going to court, the buyers were willing to pay Developer a substantial amount for his signature.

Then as now, if Developer took cash directly from the buyers in return for his signature, Developer’s creditors could levy on the cash. Moreover, again then as now, fraudulent transfer law prevented Developer from giving any cash he received from the buyers to his wife or using this cash to buy an annuity for his wife. To thwart his creditors, Developer asked the buyers to give an annuity directly to his wife in return for his signature. The buyers readily agreed. For them, resolving the paperwork problem quickly was easily worth the price of an annuity. They promised to buy an annuity that would allow Developer and his wife to live comfortably for the rest of their lives.2

The creditors would, of course, like to call upon fraudulent transfer law to retrieve the annuity. They face a difficulty, however. Developer never transferred a traditional interest in property to his wife. The transaction, of course, was explicitly designed to secure Developer’s financial future by putting assets beyond the creditor’s reach. Whether this is enough to bring it within the reach of fraudulent transfer law, however, is not clear.

As it happened, judges never confronted this issue. Developer obfuscated his business dealings enough during the bankruptcy procedure to keep this transaction out of sight.3 The case did ultimately reach the Supreme Court, but on a different issue.4 The Supreme Court would not have been well-equipped to resolve this dispute in any event. The lawyer who had represented Developer’s creditors had fled the country after shooting and killing one of the lawyers for the buyers. Moreover, the two justices best positioned to understand this transaction did not sit for the case. One of them had been a partner of the lawyer who had been shot and killed. The other justice who did not sit was the brother of Developer’s son-in-law, and the son-in-law had helped Developer concoct the scheme for securing the annuity in the first place.5

Many with a traditional understanding of fraudulent transfer law, however, are likely to think the case is easy. Fraudulent transfer law requires a “transfer” of an “interest in property of the debtor.”6 Without a transfer, there can be no fraudulent transfer. It might be unseemly for Developer to help someone out in order to enrich his wife, but helping someone out is not a traditional asset of the debtor, and without such an asset, fraudulent transfer law simply does not operate.7 But this is merely an assertion about fraudulent transfer law and its reach. As this Article explains, this assertion is hard to anchor in either statutory text or common law precedent.

This sort of problem was of little moment for a long time. Complex real estate transactions like that involving Developer were comparatively rare. Fraudulent transfers almost always involved flesh-and-blood individuals putting tangible assets into the hands of their relatives and other confederates. What constituted a transfer was straightforward. But we now live in a different world. Today, most assets are intangible. Transactions happen in the blink of an eye, and they take place entirely on corporate books. Whether it is a corporation exposed to mass tort liability using a Texas two-step or an equity sponsor engaging in a liability management exercise, the problem of identifying what constitutes a fraudulent transfer of the debtor’s property permeates modern commercial law. The core question in the hypothetical involving Developer—what constitutes a transfer of the debtor’s assets—has become salient in many failed businesses, especially when there is a whiff (or more than a whiff) of fraud.

This Article sorts through the problem of defining what it means for a debtor to transfer its property in a world of intangible assets. It takes advantage of a feature common to recent cryptobankruptcies.8 The only evidence of ownership of cryptocurrencies held on an exchange exists on a private ledger. This ledger provides only a series of snapshots. There is no way to know what happened to the cryptocurrencies between each iteration of the ledger. How exactly the cryptocurrencies passed from one account to another during any discrete interval is inherently unknowable. An infinite number of transactions might have happened between the two intervals. There are no objective markers or other traditional indicia of ownership. One must call upon first principles to impute how assets travelled from one place to another.

Part I introduces the peculiar world of cryptoexchanges. Parts II and III use this world to confront what it means to transfer an asset for purposes of fraudulent transfer law. Fraudulent transfer law serves in the first instance to ensure that the debtor does not engage in transactions that diminish the pool of assets available to creditors. If limited to this idea, the fraudulent transfer net is narrow. But fraudulent transfer law has also long made confederates liable when a debtor enriched them as a result of its debtor’s efforts to thwart creditors quite apart from whether creditors were deprived of assets they could otherwise reach. When this principle is recognized explicitly, what should count as a transfer of the debtor’s property takes on a different complexion. A court can extend the fraudulent transfer net much more broadly.

I. Cryptocurrency and Private Ledgers

The world of cryptocurrency might appear to be a domain in which ownership rights are unambiguous. Cryptocurrencies do not have any tangible attributes. They are merely entries on an immutable public ledger. These entries have value because individuals are willing to part with money if they can change the immutable public ledger to reduce the quantity of a cryptocurrency shown in a third party’s account (or “wallet”) and make a corresponding increase in a wallet they control. In principle, every transaction is permanently recorded and verifiable.9 But even though the biggest players record their transactions directly on a public ledger, many individuals use a cryptocurrency exchange to hold cryptocurrency on their behalf,10 and cryptoexchanges use a private rather than a public ledger. Entrusting cryptocurrency to an exchange makes sense for a variety of reasons. First, mistakes are easy to make when individuals try to enter changes on the blockchain on their own. Cryptocurrency on the blockchain resides in a virtual wallet controlled by the person with its password. Each wallet has a unique address. For Bitcoin, the address consists of between twenty-six and thirty-five alphanumeric characters. Making a transfer requires entering the addresses of both the sender and the receiver correctly. An error in even a single digit in the receiver’s address results in the cryptocurrency being lost forever. In addition, the cost of using the blockchain is high for low dollar value transactions, and it varies from one day to the next.11 By contrast, cryptocurrency exchanges charge predictable fees that are adjusted by transaction size. They are generally significantly lower for small transactions than the cost of comparable trades on the blockchain. Finally, changes in individual accounts are acknowledged quickly when using a cryptoexchange. By contrast, several hours might pass before a transaction is acknowledged when done directly on the blockchain.12

There is nothing particularly novel about an entity like a cryptocurrency exchange controlling assets in which someone else has an ownership interest. Cryptocurrencies are a form of property, and people have entrusted their property to others for centuries.13 Creditors cannot reach assets that their debtor holds merely as a custodian for someone else.14

Cryptocurrency is intangible and cannot be physically possessed. This feature of cryptocurrency, however, is hardly unique. It has long been possible to give control over intangible assets to a third party without exposing those assets to the claims of creditors of the third party. Individuals appoint agents and authorize them to convey their intangible property, such as money in their bank accounts. Creditors of these agents have no ability to reach assets entrusted to the agents. To be sure, agents can abuse their power and steal from their principals, but the power of agents to convey their principal’s property is not enough to give the agents’ own creditors the ability to reach that property. Creditors can reach only those assets that their debtor owns. Only these are at risk when the creditors reduce their claims to judgment and attempt to levy on their debtor’s property.

What matters for purposes of this Article is that cryptoassets held on an exchange consist of nothing more than entries on a private ledger. Cryptocurrency exchanges do not hold the cryptocurrency in a wallet assigned exclusively to each customer. Instead, they pool the cryptocurrency of all their customers together. The total amount of cryptocurrency is supposed to equal the amount held by the customers as a group. Each customer has a pro rata share of this pool. Their interest is reflected in the internal records of the exchange.15 This Article uses the term “private ledger” to capture the idea that each cryptocurrency exchange has an internal mechanism to account for who holds what.16

Determining who owns what is necessarily metaphysical when everything is merely an entry on a private ledger. Much of the trading on a cryptoexchange takes place among those who maintain accounts on the cryptoexchange. The cryptoexchange may have little need to acquire or sell cryptocurrency on the blockchain. The private ledger shows how the cryptocurrency the exchange controls is distributed among the customers at discrete moments in time.17 This private ledger is updated periodically. Coinbase, for example, reconciles its ledgers every two hours. Nothing turns on the length of the interval. It could be once every day or once every second or a tiny fraction of a second. The nature of the problem remains the same. We can tell only how much more or less cryptocurrency was in an account each time the ledger is updated.18 Any intervening transactions that net out are not observable. Each iteration of the ledger captures only the net effect of all the transactions. Any path that begins with the entries in one ledger and ends with the entries in the next ledger is equally consistent with what is knowable.

In this environment, it is not meaningful to talk about the actual path that cryptocurrency takes to go from one account to another, or even who owned the crypto during these intervals. Tracing the path assets travelled and determining whether the debtor transferred an interest in property in this context requires using first principles. There is always some finite interval about which nothing is known. There is nothing analogous to the movement of a physical object from one person to another. With physical objects, there is only one path an object takes that is consistent with all observable facts. By contrast, the ledger entries reflect only where parties stand after all the transactions that took place during the previous discrete interval are netted out. There is no way to observe more.

II. Private Ledgers and Diversions of Value

A debtor who spends money to perpetrate a fraud engages in a fraudulent transfer. It does not matter that the recipient gives value in return for whatever services were used to perpetrate the fraud. The fraudulent transfer action lies as long as the recipient lacks good faith.19 Courts have dealt with such cases for centuries.

Consider the following hypothetical. Entrepreneur runs a cryptocurrency exchange. Its ledgers are updated at the beginning and end of every day. Entrepreneur acts as a custodian for some customers, including Celebrity. These customers are not mere creditors of the exchange. They retain the right to retrieve the cryptocurrency that Entrepreneur holds as a custodian. Most customers, however, enter an entirely different arrangement. They turn over their cryptocurrency to Entrepreneur. Entrepreneur promises to return the same type of cryptocurrency at the end of the year with interest. These customers cannot withdraw their deposits during the year, but they are free to trade the different types of cryptocurrency they hold with each other. The customers’ agreement with Entrepreneur makes it clear that the customers do not retain special rights to the cryptocurrencies recorded in their accounts. As far as the law is concerned, they are ordinary creditors of Entrepreneur.

Entrepreneur enjoys a lavish lifestyle by looting the corporation. Entrepreneur maintains the illusion of success through extensive advertising. Entrepreneur persuades Celebrity to do ads in return for cryptocurrency. Celebrity has seen plenty of red flags but does not ask questions, being more than happy to enjoy a great payday in return for little work.20 On the day that Celebrity does the ad, Entrepreneur’s account shows less cryptocurrency, and Celebrity’s account shows correspondingly more at the end of the day than at the start.

Eventually, Entrepreneur’s defalcations come to light. The noncustodial customers should be able to use fraudulent transfer law to recover from Celebrity the amount by which Celebrity’s account increased and Entrepreneur’s decreased on the relevant day. At the start of the day, the noncustodial customers could levy on the cryptocurrency in Entrepreneur’s account. Entrepreneur undertook to hinder, delay, or defraud them by getting Celebrity to do ads that made them think all was well. In the process, cryptocurrency upon which the customers could levy disappeared from Entrepreneur’s account. Under any account of fraudulent transfer law, a transfer has taken place. Entrepreneur has deliberately hindered, delayed, or defrauded creditors, and the pool of assets upon which the creditors relied to satisfy their claims has been diminished.

The only other question is whether the creditors can hold Celebrity responsible to the extent that the amount of crypto in Celebrity’s account has increased. This is not a hard question either. To be sure, the changes in the ledger are also consistent with a transfer from Entrepreneur to some other customer and then for that customer to give cryptocurrency to Celebrity the same day, but this changes nothing. As long as Celebrity failed to act in good faith, it makes no difference whether Celebrity is a direct or indirect transferee. Celebrity should be liable for helping to keep other customers in the dark. A direct transfer from Entrepreneur to Celebrity is the path that is easiest to reconcile with Entrepreneur’s desire to use Celebrity’s ads to prolong the fraud and for Celebrity’s willing participation. But any path that connects the reduction in Entrepreneur’s account with the increase in Celebrity’s leads to the same outcome.

Imputing a direct path that the cryptocurrency took in this example is merely a convenient way to characterize what happened. Given that there is no ambiguity about whether Entrepreneur parted with crypto and Celebrity gained crypto as part of a single scheme to hinder, delay, or defraud Entrepreneur’s creditors, nothing turns on characterizing it as a transfer directly from Entrepreneur to Celebrity. It is merely a convenient way to describe what happened. It parallels the simple case in which the debtor gives cash to someone in order to keep a fraud hidden.

But when Entrepreneur creates several different legal entities in which to house the cryptocurrency exchange, complications easily arise. The path one chooses matters. Consider now a variation on the previous hypothetical. Assume that Entrepreneur runs two cryptoexchanges. Entrepreneur runs the first exchange personally.21 The second is a corporate entity, CryptoExchange. Entrepreneur owns all its equity. Entrepreneur’s own cryptoexchange has mostly noncustodial customers. Entrepreneur invests the cryptocurrency of most of its customers and promises them a return.

The noncustodial customers of Entrepreneur know that their right to withdraw their cryptocurrency is subject to the risk that Entrepreneur’s investments will fail. They know that they lose rights in the cryptocurrency they turned over to Entrepreneur. Entrepreneur acts as a custodian only for a few customers. By contrast, CryptoExchange has only custodial customers. CryptoExchange also trades on its own account. CryptoExchange never borrows, and it has no creditors.

Entrepreneur is also a liquidity provider to CryptoExchange. When one of CryptoExchange’s custodial customers wants to sell a cryptocurrency, there is usually another customer of CryptoExchange that wants to buy it. But when no such customer exists, Entrepreneur stands ready to be on the other side of the transaction from Entrepreneur’s own account on the exchange Entrepreneur directly owns. Entrepreneur maintains a single private ledger for all Entrepreneur’s cryptoholdings, all of CryptoExchange’s, and all the crypto of all their customers. The amount of cryptocurrency on the private ledger Entrepreneur oversees for the exchange owned directly and all its customers as well as for CryptoExchange and its customers remains relatively constant.

Entrepreneur maintains a lavish lifestyle by looting the business. To give the appearance that all is well and thereby hinder, delay, or defraud the customers, Entrepreneur persuades Celebrity, again one of Entrepreneur’s few custodial customers, to do an ad for Entrepreneur’s exchange in return for cryptocurrency. Celebrity has seen red flags but chooses not to ask questions. Celebrity does the ad, and at the end of that same day, the cryptocurrency in Celebrity’s account has increased by the amount Entrepreneur promised for the ad. The amount of cryptocurrency in CryptoExchange’s own custodial account with Entrepreneur has correspondingly less. Entrepreneur’s account is unchanged.

The creditors of Entrepreneur continue to believe everything is fine, and Entrepreneur continues to spend lavishly. Celebrity soon cashes out, and eventually so do all other customers that used Entrepreneur or CryptoExchange as custodians. Eventually Entrepreneur disappears. For its part, CryptoExchange has no assets and no creditors. Entrepreneur leaves behind many defrauded customers.

All that changed on the day Celebrity did the ad was changes on a private ledger. There were no transactions recorded on the blockchain. Entrepreneur held the same amount of cryptocurrency at the end of the day as at the start.22 The only difference between the ledgers at the start and the end of the day is the allocation of the cryptocurrency in CryptoExchange’s and Celebrity’s accounts as recorded on the private ledger. CryptoExchange’s account on the ledger shows less crypto in it, and Celebrity’s correspondingly more.

It is possible to imagine an infinite number of transfers that took place during the day that leaves Celebrity with more cryptocurrency and CryptoExchange with less. The simplest way to characterize the events of the day is to posit that Entrepreneur, acting as the agent of CryptoExchange, transferred some of CryptoExchange’s cryptocurrency to Celebrity. Seen from this perspective, Entrepreneur made no transfer. CryptoExchange did. CryptoExchange might have engaged in an act that hindered, delayed, or defrauded Entrepreneur’s creditors, but fraudulent transfer law only gives creditors power to void transfers that their debtor made, and their debtor is Entrepreneur, not CryptoExchange. CryptoExchange is not subject to any fraudulent transfer action. By assumption, it has no creditors. There is no one for it to hinder, delay, or defraud.23

It is by no means obvious, however, that this characterization of the change in the ledger best captures what happened on the day. Entrepreneur is a liquidity provider. On any day, there are thousands of transactions between CryptoExchange and Entrepreneur. An alternative characterization, and one that is as consistent with the ledger, is that among the many thousands of transactions between CryptoExchange and Entrepreneur was one in which CryptoExchange issued a cryptocurrency dividend to Entrepreneur, and before the end of that same day, Entrepreneur then transferred an equal amount of cryptocurrency to Celebrity. If we adopt this characterization of the transaction, the second transfer of cryptocurrency from Entrepreneur to Celebrity is a fraudulent transfer. Entrepreneur made the relevant transfer and did it with the requisite intent to hinder, delay, or defraud Entrepreneur’s creditors, and Celebrity’s awareness of the red flags prevents Celebrity from asserting a defense of good faith.

One can as easily assert that there was a transfer from CryptoExchange to Entrepreneur and then from Entrepreneur to Celebrity as assert that there was a direct transfer from CryptoExchange to Celebrity. A court must impose some characterization on the transaction. Imputing a path that the cryptocurrency took is, in this environment, the way one decides whether the debtor made a transfer of an interest in property for fraudulent transfer purposes. In this world, there is no underlying reality to ground the definition of a transfer of an interest in property.

Because everything takes place on a private ledger, judges need some way to answer the necessarily metaphysical question of whether the debtor transferred an interest in property for purposes of fraudulent transfer law. Such recourse to the principles animating fraudulent transfer law is necessary. A useful way for a court to conduct this inquiry is to ask what path makes the most sense given its understanding of the purposes of fraudulent transfer law. The court can ask whether it makes more sense to posit a path from CryptoExchange to Entrepreneur and another from Entrepreneur to Celebrity rather than a straight path from CryptoExchange to Celebrity. Or, to ask the same thing, whether Entrepreneur’s decision to take value from CryptoExchange, value over which Entrepreneur had dominion and control, and give it to Celebrity constituted a “transfer” of an interest of Entrepreneur in property for fraudulent transfer purposes. The need to choose among the different characterizations of the transactions is inescapable. It is a mistake to couch this as a factual question. It is instead a question about the proper reach of fraudulent transfer law.

On what grounds might one conclude that the path that makes sense is the one in which the cryptocurrency never passes through Entrepreneur’s hands on its way to Celebrity? One needs some conception of the work that “transfer” is supposed to do. This is not a question that can be answered without recourse to first principles.

What it means for a person to have an interest in property is not a yes/no question. Someone can own an asset for some purposes, but not others. Take a simple example. Wealthy individuals often put all their assets in a trust. From the perspective of trust and estate law, such individuals do not own any of the assets in the trust. They merely have a beneficial interest in the trust itself.24 Because they own no assets other than this beneficial interest, and because this beneficial interest disappears the moment they die, these individuals own nothing at death as far as trust and estates law is concerned. Individuals do this to spare those who survive them from probate, a process that can be quite burdensome, especially if there is real property in multiple jurisdictions.

The law, however, sometimes treats the assets in such trusts as if they still belonged to the individual. For example, putting assets into such a trust does not remove the assets from the reach of an individual’s creditors. The creditors remain free to levy upon these assets even though they are held in trust. Even though, from the perspective of trust and estate law, the person who set up the trust does not own the assets, from the perspective of debtor-creditor law, the person does own them.25

But it takes an extra step to find that individuals transfer their own property for purposes of fraudulent transfer law when they remove assets from a self-settled trust in order to evade their creditors. To reach this conclusion, one is deciding that the debtor is transferring an interest in its property for fraudulent transfer purposes, even though these assets are not the debtor’s property at least as a matter of trusts and estates law.

Of course, one can argue that these assets should be treated as the debtor’s property for fraudulent transfer purposes because these assets are property upon which creditors could otherwise levy. But this argument imputes a particular conception of “transfer” for fraudulent transfer purposes that is not grounded in the statutory text. One can assert that fraudulent transfer law is limited to preserving a pool of assets that are subject to levy, but this is a claim about the first principles of fraudulent transfer law. Justifying this conception of transfer by connecting the meaning of “transfer” to the question of whether property was at one time subject to creditor levy requires work. It is not self-evident. And it is not obvious why the reach of fraudulent transfer law should stop with those assets upon which creditors could levy. Nothing in the statute prevents a court from having it reach further.26 The assertion that the reach of fraudulent transfer law is connected to assets subject to creditor levy is itself not explicitly embedded in the definition of “transfer.” Again, some recourse to the policies underlying fraudulent transfer law is required to reach even this conclusion.

Consider a somewhat harder hypothetical. An insolvent individual owns 100 percent of the equity of a corporation. The books of the corporation are meticulously kept, and the corporation has no debt. This individual is the sole director of the corporation and serves as the corporation’s chief executive officer. To thwart the many creditors to whom this individual is personally indebted, this individual instructs the corporation’s board to direct the chief executive officer to take all the cash from the business’s cash register, put it in a briefcase, take the briefcase to the individual’s spouse, and then physically hand over the cash to the spouse bill by bill. Can the creditors of this individual levy on the cash in the spouse’s hands? Or, to ask the same question, has this individual “transferred” the cash to the spouse within the meaning of fraudulent transfer law?

The debtor had only an interest in the equity of the corporation, not a direct interest in the corporation’s assets.27 For this reason, the creditors of this individual would not be able to levy directly on the cash in the cash register. The cash belongs to the corporation, not to the individual. To be sure, the person who physically took the cash out of the cash register and gave it to the spouse to thwart creditors was also the debtor of these creditors, but, as far as corporate law goes, this individual did not own the cash taken out of the register. The corporation did, and the corporation cannot make a fraudulent transfer. The corporation has, by assumption, no creditors it can hinder, delay, or defraud. And when the individual removed the cash, the individual was merely acting in the capacity as agent of the corporation. This cash still belonged to the corporation.

The debtor, at least by conventional accounts of corporate law, does not own any of the corporation’s assets. Nevertheless, the debtor’s creditors could levy on the debtor’s equity interest in the corporation, and given enough time, creditors could reach the value of assets held in corporate solution, including the cash in the register.28 The question is whether this ability to access this value is enough to give the debtor an interest in them for fraudulent transfer purposes. Again, the text of the statute gives no explicit answer to this question, one way or the other.

It is possible to distinguish between assets held in a self-settled trust and assets parked in a wholly owned limited liability corporation. One can create some explanation, again one not founded on statutory text, that distinguishes levying on property directly as opposed to accessing the same value indirectly by first levying on equity and then exercising the rights of an equityholder to reach the property itself. Under a narrow conception of fraudulent transfer law, the critical question should be whether the pool of assets upon which creditors could levy has changed. One could point to history for support. Fraudulent transfer law started by preventing farmers from secretly transferring their sheep to third parties so that fewer sheep were available for creditors when the sheriff came to levy on them.29

But when transactions all take place on a private ledger, asking whether assets were ever subject to creditor levy is not dispositive. One can treat the transaction involving Celebrity as if the assets never went through Entrepreneur’s hands and were never subject to creditor levy, but one can also treat the transaction as if it did go through Entrepreneur’s hands and thus was subject to creditor levy at least for a moment.

One needs to choose between two characterizations of the transaction, neither one of which is more grounded in fact than the other. The question is not whether the cryptocurrency that started in CryptoExchange’s account was in fact ever subject to creditor levy. It is instead about the reach of fraudulent transfer law and whether fraudulent transfer law should operate when a debtor diverts value for the purpose of hindering, delaying, or defrauding its creditors. Assuming that one concludes that creditors should be able to reach the value that Entrepreneur diverted from them in an environment where the path assets take must be entirely imputed, one then must ask whether there should be a different answer in other contexts when the path leaves objective markers.

Transactions that divert value from subsidiaries to the detriment of creditors of their parent corporation arise with some frequency.30 The following hypothetical captures the dynamics. Private Equity holds all the equity of ManufacturingCo. ManufacturingCo in turn holds the equity of OperatingCo, a business that operates at a different location. ManufacturingCo borrows extensively. OperatingCo has many assets, but no debt.

Private Equity orchestrates a transaction in which OperatingCo transfers a valuable machine it no longer needs to Private Equity and delivers the machine to Private Equity’s headquarters. Sometime later, ManufacturingCo fails. Its creditors foreclose on the equity ManufacturingCo holds in OperatingCo. They then force OperatingCo’s liquidation. The proceeds from the sale of OperatingCo’s assets, however, prove insufficient to pay the creditors in full. ManufacturingCo’s creditors then seek to recover the machine that was delivered to Private Equity and still sits in its headquarters.

If a court respects the form of the transaction, there is no fraudulent transfer. OperatingCo did make a gratuitous transfer of the machine to Private Equity, but OperatingCo had no creditors that it could hinder, delay, or defraud. Someone without creditors is free to make gifts.

Courts sometimes refuse to impute temporary ownership of an asset in the face of a transaction in which there was a physical transfer of a hard asset. They are unwilling to treat the transaction as if there were a transfer of the machine to ManufacturingCo and then, a second later, a transfer of the machine from ManufacturingCo to Private Equity. The transaction raises the same questions as the transaction involving Entrepreneur, CryptoExchange, and Celebrity, but courts sometimes see the absence of an actual transfer by the debtor (in this case, ManufacturingCo) as a showstopper.31

But treating these markers as showstoppers is hardly compelled. Just as judges can impute a path that cryptocurrency took on its way between CryptoExchange and Celebrity when there are no markers, they can recharacterize the transaction that took place between OperatingCo and Private Equity as one in which ManufacturingCo had an interest in it for fraudulent transfer purposes for a fleeting moment.

Judges can look past form and focus on substance. ManufacturingCo exercised dominion and control over the assets of OperatingCo. The creditors of ManufacturingCo could not levy on the machine, but if the machine had not been transferred to Private Equity, they could have accessed its value. If this would be enough to impute ownership in the crypto-environment, it could be sufficient here as well.

The transaction involving Private Equity, ManufacturingCo, and OperatingCo was structured by someone intent upon hindering, delaying, or defrauding its creditors. Courts have long recognized that they enjoy a broad power in fraudulent transfer actions to look through form to substance.32 They regularly ignore the exact path that an asset takes once it leaves the debtor’s hands.33

Courts have the power to recharacterize these transactions, but to do so, they must first decide how far the fraudulent transfer net extends. They should not engage in the current practice, which is either to defer to objective markers or muddle through without confronting first principles. They should not refuse to find that transfers have the same structure as Entrepreneur, Celebrity, and Cryptoexchange are fraudulent transfers merely because of the absence of traditional markers of ownership on the part of the debtor.34

In private ledger cases, a characterization of some sort is necessary. Hence, a court inclined to a broad view of fraudulent transfer would experience none of the queasiness that comes with a forthright assertion of the power to impute ownership. But if a court chooses to allow Entrepreneur’s creditors to recover from Celebrity, it is not obvious why the same court should not be willing to allow ManufacturingCo’s creditors to recover from Private Equity. The case for imputing momentary ownership by ManufacturingCo seems no more or less compelling. Imputing ownership does not appear to unsettle any other values embedded in commercial law. Only the rights of Celebrity and Private Equity are implicated, and given their role in the transaction, they have no good faith defense.

As soon as one recognizes that the challenge is connecting the principles of fraudulent transfer law with the definition of a transfer, some questions become easy ones. Consider the Texas two-step.35 Texas, like several other jurisdictions, allows divisional mergers. The board of an existing corporation facing mass-tort liability can create two new corporations and put the assets of the existing corporation into one (“GoodCo”) and the tort liabilities into another (“BadCo”).

If the form of the Texas two-step is respected, tort victims wake up with BadCo as their debtor.36 The tort victims can force BadCo into bankruptcy, but BadCo has no assets.37 BadCo’s bankruptcy trustee can reach the assets in GoodCo only if BadCo “transferred” an “interest in property” to GoodCo. To reach the assets now in the hands of GoodCo, BadCo’s bankruptcy trustee must explain how BadCo once had an interest in them.

The transaction did not involve any physical movement of assets or any other objective markers of ownership. There is only a record of the various transfers. A court does not need to find that assets went directly from OldCo to GoodCo merely because those in control of OldCo recorded the transaction in this fashion.38 The Texas two-step involves transferring assets to GoodCo and liabilities to BadCo, but it is substantively the same as if those in charge of OldCo had given all of OldCo’s assets and liabilities to BadCo and then had BadCo transfer the assets to GoodCo while retaining the liabilities. The transaction took place in an instant, and the two possible records would begin and end in the same place. Nothing beyond internal bookkeeping distinguishes the two. A court could impute a momentary transfer of all the assets to BadCo before they ended up in GoodCo.

But one still needs to explain why imputing ownership makes sense in the case of the Texas two-step.39 When examined in light of first principles, however, it is no harder than the question involving the self-settled trust. As long as one grounds fraudulent transfer law on at least the idea that it preserves the right of creditors to reach assets subject to levy, then characterizing it as a transfer by BadCo is easy.

Just as a court can impute a path that cryptocurrency takes based on fraudulent transfer principles, a court can compare the state of the world before the divisional merger and the state of the world afterwards. When a court recharacterizes the transaction, tort victims should be able to reach the assets now held by GoodCo. A Texas two-step that does not leave BadCo fully funded is a transaction that deprives the tort victims of assets upon which they could have otherwise levied if the transaction was done with intent to hinder, delay, or defraud them. This triggers fraudulent transfer law even under its most narrow conception.

The defenses of Texas two-steps worth taking seriously are those that rely not on the absence of a transfer, but on the absence of an intent to hinder, delay, or defraud. There are those who argue that if the Texas two-step merely moves tort litigation to a more efficient forum, it works to everyone’s advantage and is not a transaction done with intent to hinder, delay, or defraud.40 Determining whether a transaction is done with intent to hinder, delay, or defraud, however, is distinct from the form that the transaction took.

The hard question is whether the difficulty of determining whether an action hinders, delays, or defrauds should affect the deference that is given to form. A court might sensibly resist imputing ownership not because of the objective markers themselves, but rather because the presence of these markers makes it more likely that the transaction served a legitimate business purpose and was not intended to hinder, delay, or defraud. This possibility looms even larger when one asks, as the next section does, whether fraudulent transfer law should extend even beyond ensuring that debtors cannot deliberately reduce the value available to their creditors.

III. Fraudulent Transfers and Remote Assets

It is possible to expand the fraudulent transfer net beyond even transactions that deprive creditors of value that they could have otherwise reached. This part of the Article explores this question, again anchoring the analysis in the cryptoworld. It begins with another variation on the hypothetical involving Entrepreneur and Celebrity. There is also Friend, someone who is willing to do favors now and again for Entrepreneur.

Entrepreneur invests cryptocurrencies on behalf of others. Two of Entrepreneur’s customers are Celebrity and Friend. Entrepreneur maintains a lavish lifestyle. When some customers start to ask questions, Entrepreneur turns to Celebrity to help put the customers at ease. Even though there are many red flags, Celebrity once again agrees to do ads.

To pay Celebrity, Entrepreneur calls on a favor from Friend. An examination of the private ledger on the relevant day shows that the day ended with Celebrity having more cryptocurrency and Friend correspondingly less. Entrepreneur’s own position is unchanged. Because of Celebrity’s ads, the creditors do nothing while Entrepreneur continues to loot the business. Eventually, Entrepreneur disappears and leaves no assets behind.

There are again many ways to characterize the change that took place on the private ledger on the relevant day. When assets reside entirely on a private ledger, there is no difference between Friend giving cryptocurrency to Celebrity directly and Friend giving it to Entrepreneur and Entrepreneur in turn giving it to Celebrity. Both transactions would be recorded on the private ledger in the same fashion. A court that faces this transaction must opt for one of these two characterizations.41

One understanding of fraudulent transfer law begins with the observation that it is, in the first instance, remedial. It gives creditors the ability to reach assets that would have been available to them had the debtor not given them to someone else. If creditors never had a way to reach the assets before they were transferred to the third party, the assets would never fall within the fraudulent transfer net. The control the debtor had over the thing of value (in this case the ability to call on a favor from a friend) would not be enough.

The creditors of Entrepreneur had no way to force Entrepreneur to call upon the favor from Friend. Before the transaction, Entrepreneur had a potential source of value in the favor that Friend owed, but Entrepreneur’s creditors never had a way to reach it. Unless and until Friend’s cryptocurrency lands in Entrepreneur’s hands, it is not something to which Entrepreneur’s creditors can lay any claim.

Someone inclined to this view of fraudulent transfer law would be likely to conclude that Entrepreneur neither received the cryptocurrency from Friend nor gave it to Celebrity. Entrepreneur’s ability to call in a favor is not an asset that Entrepreneur’s creditors could ever reach. To be sure, if Entrepreneur called the favor and received something of value directly from Friend into Entrepreneur’s own hands, creditors could then levy upon it. But as this never happened, there is no justification for positing that the cryptocurrency passed through Entrepreneur on its way to Celebrity.

But there is another way to characterize the change in the ledger. One can impute ownership based on a different, more expansive, but equally well-grounded conception of fraudulent transfer law. Fraudulent transfer law first took statutory form in 1571. This statute rendered void any transfers made with the intent to hinder, delay, or defraud creditors. The statute served two distinct purposes. First, it stepped into the breach when debtors tried to evade ordinary creditor remedies by hiding assets with a confederate. Fraudulent transfer law allowed creditors to recover the property notwithstanding the purported transfer. Second, the statute preserved order and prevented the debtor from engaging in actions that undermined the sheriff’s ability to implement the Crown’s orders.

Under the Statute of 13 Elizabeth, half of everything recovered went to the Crown.42 That half of the recovery went to the Crown itself shows that from the start fraudulent transfer law was not simply a way to enhance creditor recoveries. It was also a legal tool that ensured that debtors did not impede their creditors. Quite apart from whether creditors recovered property, fraudulent transfer law was aimed at deterring the misbehavior itself. One of the first, and still the best known of all fraudulent transfer cases, was brought in the Star Chamber to punish a confederate of a debtor after the debtor’s efforts to shield assets had led to a violent clash between a deputy sheriff and friends of the debtor.43

One purpose of fraudulent transfer law—that of supplementing ordinary remedies when the debtor attempts to thwart creditors—is firmly established, but whether this purpose should eclipse the second— that of a general tool to check debtor’s efforts to thwart those to whom it is indebted—lay forgotten. The difference between the two conceptions did not matter much for a long time. In a world that consists entirely of tangible property, the overlap between the two is nearly complete. Virtually every transaction in which a debtor orchestrated a transfer of property to impede debt collection was also a transaction in which the debtor owned property that was subject to levy. But it matters now in a world in which ownership of assets looks nothing like a flesh-and-blood individual in possession of tangible goods and where only want of imagination limits a debtor’s ability to shift assets across corporate entities without appearing to have an interest in them.

By turning to this second and equally venerable principle of fraudulent transfer law, it should make no difference whether Entrepreneur called in the favor and transformed it into an asset or whether Entrepreneur merely used the same source of value in a scheme to hinder, delay, or defraud creditors. The fraudulent transfer net should allow creditors to access any asset the transfer of which was orchestrated by the debtor in a way that benefits the debtor and simultaneously harms creditors.

That Entrepreneur derived some benefit and creditors suffered some harm justifies characterizing the transaction as one in which Entrepreneur “transferred” the asset within the meaning of fraudulent transfer law. Entrepreneur tapped a source of value to induce Celebrity to do the ad and lull creditors into inaction. It should not matter whether this thing of value used to hinder, delay, or defraud creditors happens to be something creditors would have been able to access if Entrepreneur had not connived to hinder, delay, or defraud them. What matters is that Entrepreneur did access this thing of value and put it in the hands of a third party who lacks a defense of good faith.

Fraudulent transfer law need not be merely a supplement to remedies otherwise available to creditors. There is no social value in hindering, delaying, or defrauding creditors, and there is no reason to protect a third party who receives assets in bad faith in a transaction that served no legitimate economic purpose. By this account, fraudulent transfer law, far from being a supplemental remedy, is a general power creditors enjoy to prevent debtors from orchestrating transfers of assets that hinder, delay, or defraud them. Debtor’s control over the asset coupled with an intent to hinder, delay, or defraud should suffice. That Debtor never enjoyed any of the typical objective markers of ownership of the asset should not be relevant in determining whether Debtor had an interest in the asset for fraudulent transfer purposes.

The transaction involving Friend, Entrepreneur, and Celebrity bears a family resemblance to one that commonly arises in tax. Assume that Entrepreneur has an employee. The employee and the employee’s mother both store their cryptocurrencies on Entrepreneur’s exchange. Entrepreneur, however, has never met the mother, nor has Entrepreneur ever had any dealings with her. The employee has done good work, and Entrepreneur realizes that a generous bonus is needed to ensure the employee’s loyalty.

At the start of one day, Entrepreneur, the employee, and the employee’s mother all have cryptocurrency allocated to them on the private ledger that Entrepreneur maintains. At the end of that same day, the ledger shows Entrepreneur with less cryptocurrency, the employee’s mother with correspondingly more, and the employee with the same amount.

There are two explanations for the changes in the ledger. One might conclude that Entrepreneur made a gift of cryptocurrency to the mother. Alternatively, one might conclude that Entrepreneur transferred cryptocurrency to the employee who then made a gift to the mother. If a court adopts the first characterization, Entrepreneur simply made a gift to the employee’s mother. The employee received nothing from Entrepreneur and therefore has no income tax liability. Under the second characterization, the cryptocurrency passed first to the employee and only then to the mother. Under this characterization, the employee must pay tax on the value of the cryptocurrency. The employee received something of value for services performed for Entrepreneur. This is income.44

A court is certain to adopt this second characterization. Businesspeople like Entrepreneur do not make random gifts to strangers. Benefits that someone close to an employee receives from an employer are best understood as imputed income to the employee. A sensible interpretation of the tax laws must ensure that the tax cannot “be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the [income] when paid from vesting even for a second in the man who earned it.”45 Income tax will be too easy to avoid if any other characterization were permitted.

For tax law purposes, nothing turns on this transaction taking place on a private ledger. The outcome would be the same even if Entrepreneur gave the mother cash in person. The form that the transaction takes is irrelevant. The ability of the court to impute income to Employee is uncontroversial. A view of fraudulent transfer law that conceived it as a legal regime that prevents a debtor from thwarting creditors is vindicating a policy different from ensuring an effective system of income taxation, but it may make equal sense to interpret fraudulent transfer law in such a way that in this domain, as in tax, parties cannot evade the law by being too clever by half.

Assume one takes the view that a court should allow Entrepreneur’s creditors to reach the cryptocurrency in Celebrity’s hand even though creditors could never have reached the value that Entrepreneur could access by calling on the favor Friend owed. The question then arises whether, as in tax law, one should reach the same outcome outside a private ledger.

Return to the case of the developer who extracted a benefit for his wife from those who had bought property from him in return for his help with a paperwork problem. Outside the private ledger, the transaction has objective markers. There is a traceable path between someone in the position of Friend (the buyers of land willing to part with value to cure a paperwork problem) and someone in the position of Celebrity (the wife who would ultimately share the annuity with Developer once the dust settled). In contrast to a transaction on a private ledger, it is meaningful to say that the buyers gave the annuity directly to the wife. Nothing ever went through Developer’s hands. It is just as if the buyers had put dollar bills directly in the wife’s hands themselves.

Nevertheless, there is no special magic to the path that the annuity took. As in the tax case, there is no doubt that the transaction was intended solely to hinder, delay, or defraud. There are no other plausible explanations for the behavior. Just as Entrepreneur has no reason to make a gift to Employee’s mother other than to reward Employee for services rendered, Friend had no reason to give cryptocurrency to Celebrity other than because of the favor owed to Entrepreneur. Similarly, the buyers of the land had no reason to give an annuity to Developer’s wife other than their need to have Developer help them clean up the paperwork problem.

Even when everything takes place on a private ledger, expanding the fraudulent transfer net comes with its own perils, however. The wider one casts the net even in the cryptoworld, the more confident one needs to be that courts can understand this world and distinguish those transactions in which the Entrepreneur is trying to hinder, delay, or defraud creditors from those in which Entrepreneur is doing something that has social value. This is not necessarily easy even when everything takes place on a private ledger.

There are currently over ten thousand different cryptocurrencies, each with different attributes.46 Many of these coins have different derivative products layered on top of them.47 Some of these financial products have analogues in traditional finance, but others are—at least arguably—novel to this market.48 Additionally, these new cryptocurrencies and cryptoderivatives can be created in a matter of minutes.49 We might be concerned that judges lack the ability to keep up with the quickly evolving market and properly identify the nature of any given transfer.50 The next round of failed cryptoexchanges may involve transactions where it is less obvious whether there were transfers with intent to hinder, delay, or defraud creditors.

Courts often struggle to distinguish even ordinary transactions that hinder, delay, or defraud from those that do not. Return to the case involving Entrepreneur and Celebrity. In many instances, those in the position of Entrepreneur start by running legitimate businesses, and they employ people like Celebrity to do ads for them. Even when those in the position of Entrepreneur are engaged in outright fraud, not every transaction a fraudster makes is intended to thwart creditors.51

Entrepreneur, like anyone else, can engage in ordinary expenses that are completely unrelated to keeping creditors in the dark. Moreover, those in the position of Celebrity may be unaware of what Entrepreneur is doing or at least sufficiently unaware that they lack inquiry notice and can still assert a good faith defense.

A court that is unwilling to impute ownership unless assets are removed from the creditors’ immediate reach is relieved of the burden of engaging in such inquiries. It is an easy way to shirk responsibility for making hard decisions. But such shirking should be resisted, particularly when the transaction, like the Texas two-step, falls squarely within even the narrowest conception of fraudulent transfer law. Of course, distinguishing a divisional merger that is aimed at defeating the rights of tort victims from a divisional merger that is pursued for legitimate business purposes may not be easy, but this properly has nothing to do with the structure of the transaction or that it lacks objective markers of ownership. Making such distinctions between the legitimate and illegitimate is part of the business of judging.

At the same time, however, judges need to be attuned to the possibility of error. The less fraudulent transfer law is focused upon protecting assets otherwise available to creditors and the more it is focused on transactions that merely keep creditors in the dark, the more likely it becomes that the transaction was not in fact an effort to hinder, delay, or defraud and that the third party did not act in bad faith. These errors come with their own costs and provide a reason to keep the fraudulent transfer net small, even if it comes at the expense of allowing some debtors and their confederates to thwart creditors.

A hypothetical inspired by a recent case illustrates another form of distasteful conduct that again may or may not run afoul of fraudulent transfer principles.52 Entrepreneur runs a business and has many ordinary unsecured creditors. In addition, Entrepreneur has borrowed from Lender. This loan is fully secured and due in five year’s time. Entrepreneur begins looting assets from the business and spending lavishly.

A short while later, Lender becomes suspicious. Lender begins to make noises about declaring a default, something that the loan documents entitle it to do. This would be a disaster for Entrepreneur as the default would wake up all the general creditors. It would be unpleasant for Lender as well. Lender would much rather have its cash quickly and walk away from the transaction quietly.

Fortunately for both Entrepreneur and Lender, Bank appears on the scene at this moment. Bank, unaware of Entrepreneur’s defalcations, likes Entrepreneur’s business and makes it clear that it would be happy to refinance Entrepreneur’s loan with Lender. Entrepreneur decides to take advantage of Bank’s interest in refinancing the loan and considers borrowing from Bank and using the proceeds of the loan to pay off Lender. Structuring the transaction in this fashion, however, comes with a fraudulent transfer risk for Lender.

To eliminate the fraudulent transfer risk, Entrepreneur proposes a structure of the transaction in which money never actually passes from Entrepreneur to Lender. Instead of Entrepreneur borrowing from Bank and repaying Lender, Entrepreneur introduces Bank to Lender and suggests to Lender that Lender transfer its loan to Bank. Bank agrees. It buys the loan from Lender and steps into Lender’s shoes. Going forward, Bank enjoys the same rights as Lender, just as would have been the case if Bank had given cash to Entrepreneur and Entrepreneur had used it to pay off Lender.

Entrepreneur succeeds in keeping the general creditors in the dark. Entrepreneur continues to loot the business. When Entrepreneur ultimately fails, the remaining assets are still sufficient to repay Bank’s secured loan in full. Bank will undoubtedly feel hard done by and will incur considerable costs in vindicating its rights, but it likely has no claim against Lender. From the perspective of the law, as long as Bank is paid in full, it has not suffered any cognizable harm.

Those who were harmed were Entrepreneur’s general creditors. In the absence of the substitution of Bank for Lender, they would have discovered Entrepreneur’s fraud sooner and recovered more of what they were owed. From the perspective of Entrepreneur’s general creditors, the transaction in which Bank lent to Entrepreneur and Entrepreneur paid off Lender is the same as the transaction in which Bank dealt with Lender directly after Entrepreneur connected them.

Bank’s transaction with Lender began and ended in the same place as it would have if Bank had lent to Entrepreneur and Entrepreneur used the proceeds to pay off Lender. If the money had passed through Entrepreneur, the creditors could use fraudulent transfer law to recover the money from Lender.53 Again, the question for the court is whether to recharacterize the transaction and treat the transaction the same as it would if the cash had passed through Entrepreneur’s hands.

Entrepreneur kept general creditors asleep by putting naïve and unsuspecting Bank in the place of suspicious Lender. Substituting Bank for Lender enabled Entrepreneur to continue to pilfer assets, but the transaction itself did not reduce assets available to satisfy their claims. The absence of any immediate diminution in the value of the assets that the creditors could reach makes the case for declaring the transaction to be a fraudulent transfer less compelling. At the same time, the absence of any objective markers that show Entrepreneur orchestrated the transaction makes it more likely Bank might have approached Lender independently. A court can never be certain after the fact how much Entrepreneur did to connect Bank with Lender. In some cases, it is possible that someone like Bank would have acquired Lender’s position without any intervention on the part of Entrepreneur.

If Bank had acquired Lender’s loan without any intervention by Entrepreneur, Lender’s decision to trade its loan rather than call a default would still leave Entrepreneur’s other creditors worse off. Lender’s quiet departure ensured that these creditors never asked the questions they would have asked if Lender had declared a default. And if these creditors had known to ask these questions, they would soon have put a stop to Entrepreneur’s looting and recovered something. But Entrepreneur would never have done anything to hinder, delay, or defraud them.

If Lender’s decision to extricate itself from its loan to Entrepreneur quietly was done without any involvement by Entrepreneur, Lender was the only person who took any actions that harmed Entrepreneur’s general creditors, and Lender owed no duties to them. Lender might lack good faith because of what it knew of Entrepreneur’s bad behavior, and Lender might have had a duty to tell Bank about its suspicions, but Bank was paid in full. The general creditors are in no sense third-party beneficiaries of Lender’s undertaking with Bank.

The transaction involving Entrepreneur, Lender, and Bank differs critically from the one involving Developer diverting an annuity to his wife. Buyers of real property do not give large annuities to complete strangers, such as Developer’s wife. Imputing a path that took the annuity from the buyers to Developer to the wife makes sense of a transaction that otherwise does not make sense. By contrast, it is a most ordinary event for one lender to assign debt to another. Bank and Lender might have done this even in the absence of any fraud on the part of Entrepreneur.

There is a risk of error when a court imputes a transitory interest in property for fraudulent transfer purposes. The mere possibility that a court will impute an interest in property even when the debtor was not involved or the third party did not act in bad faith puts a cloud over legitimate transactions. For example, as soon as any transfer of a loan comes with a fraudulent transfer risk, those in the position of Lender will be less able to transfer their loans. The risk that a court might strike down a perfectly innocent transfer of debt from one commercial actor to another would undercut a longstanding policy in commercial law in favor of promoting negotiability of such loans. Honest commercial lenders may foreclose prematurely (and inefficiently) rather than accepting the fraudulent transfer risk that comes with finding another lender to take its place. Courts might sensibly risk tolerating bad behavior in order to ensure that obligations are freely transferable.54

An arbitrary line that limits the creditors to recovering assets whose value they could otherwise access prevents false positives. Such a rule might ensure that desirable transactions went forward that might not happen if the matter were left entirely to case-by-case judicial discretion. A narrow conception of fraudulent transfer law might be justified along these lines.

Nevertheless, there is reason to resist this argument. Conceptually, there are three categories of cases. There are cases like those involving Developer. These are cases in which imputing ownership on the part of the debtor provides not simply the best, but the only plausible account of a transaction. Buyers of real estate simply do not give annuities to the wife of a developer out of the kindness of their hearts. At the other extreme are those cases in which a lender, without any participation on the part of someone like Entrepreneur, transfers a loan to another sophisticated lender who ends up being paid in full. Striking down such a transaction after the fact makes loans less freely transferable and brings no off-setting benefit.

The third case falls between the two. This is the case involving Lender, Entrepreneur, and Bank in which there is some involvement on the part of Entrepreneur, but Entrepreneur never acts in a way that leaves any objective markers of ownership. In such cases, there is doubt about whether Entrepreneur in fact acted with intent to hinder, delay, or defraud, as well as uncertainty about whether Lender saw enough red flags to deny Lender a good faith defense. A hard prohibition that prevented a court from imputing ownership in this environment might be a sensible prophylactic rule. We need to know whether these intermediate cases arise very often and, when they do, whether determining whether a debtor acted with intent to hinder, delay, or defraud and whether the third party acted in good faith are sufficiently uncertain that the risk of error is high.

This is ultimately an empirical question, but there is reason to be skeptical that the risks here are high enough to justify such a prophylactic rule. In practice, courts are generally reluctant to find that a transaction hinders, delays, or defrauds unless a debtor is both insolvent and receives less than reasonably equivalent value.55 Given the high threshold generally in place, courts are unlikely to find many ordinary commercial transactions done without manifest connivance on the part of the debtor were done with intent to hinder, delay, or defraud. Moreover, courts could insist that creditors seeking to impute ownership surmount a high bar for transactions that have at least the patina of an ordinary commercial transaction done at arms’ length.

Indeed, if courts merely insisted that, in the absence of a diminution of assets available to the creditors, those bringing a fraudulent transfer action have a high bar to overcome, it is likely that courts would strike down vanishingly few transactions other than those like the one involving Developer that cannot be explained as being other than transactions done with intent to hinder, delay, or defraud. There are likely to be a few false positives.

IV. Conclusion

Fraudulent transfer law needs to be applied sensibly to a world in which assets are intangible and controlled rather than possessed. Traditional accounts of property transfers and related ideas must be updated. This will be best accomplished not by piecemeal confrontations with specific problems, but with a return to first principles and a careful application of them to a new reality.

It is a defensible interpretation of existing law to find that fraudulent transfer law should focus narrowly on ensuring that debtors lack the ability to reduce the pool of assets available to their creditors. Such an interpretation minimizes the risk of false positives and prevents fraudulent transfer law from deterring valuable commercial transactions. A narrow conception of fraudulent transfer law, however, neglects one of the foundational principles embedded in fraudulent transfer law from the start. Relying upon it to the exclusion of the broader definition invites mischief. And these sorts of problems are destined to arise with increasing frequency.

The cryptoworld is a metaphor for what the future holds, a world that increasingly consists of intangible assets held in corporate solutions that move in cyberspace at the speed of light. Courts should not think that a “transfer” of property is self-defining. From its inception, fraudulent transfer law was as much aimed at deterring transfers done with bad motives as at ensuring that creditors maintained their ability to reach discrete assets. A narrow focus on traditional conceptions of ownership slights this longstanding facet of fraudulent transfer law.

• For an account of this transaction, see Paul Demund Evans, The Holland Land Company 177–85 (Buffalo Historical Soc’y 1924). The real estate parcel in question was large. It lay in upper New York state and included all of what is now the city of Buffalo. Orsamus Turner, Pioneer History of the Holland Purchase of Western New York 569 (Buffalo, Jewett, Thomas & Co. 1850) (“He surveyed the city of Buffalo . . .”).
• For an account of this transaction, see Paul Demund Evans, The Holland Land Company 177–85 (Buffalo Historical Soc’y 1924). The real estate parcel in question was large. It lay in upper New York state and included all of what is now the city of Buffalo. Orsamus Turner, Pioneer History of the Holland Purchase of Western New York 569 (Buffalo, Jewett, Thomas & Co. 1850) (“He surveyed the city of Buffalo . . .”).
• See Robert Morris, Account of Robert Morris’s Property 5–6 (King & Baird n.d.) (originally published [c. 1801]) (dating inferred from latest dated event in the text).
• See Fitzsimmons v. Ogden, 11 U.S. (7 Cranch) 2 (1812).
• For a discussion of Morris’s machinations and the various players involved, see Douglas G. Baird, The Unwritten Law of Corporate Reorganizations 6–10 (Cambridge University Press 2022).
• See, e.g., Adelphia Recovery Trust v. Bank of America, 390 Bankr. 80, 92 (S.D.N.Y. 2008) (recognizing avoidance powers apply to transfers of the debtor’s property and discussing limits tied to benefit-to-creditors); In re Tribune Co., 464 Bankr. 126, 172 (Bankr. D. Del. 2011) (noting fraudulent-transfer provisions presuppose a transfer of an interest of the debtor in property).

  The Bankruptcy Code explicitly requires that the debtor “transfer” “an interest of the debtor in property.” 11 U.S.C. §§ 544(b)(1), 548(a)(1). The Uniform Voidable Transactions Act requires that there be a “transfer.” U.V.T.A. § 4(a). The definition of “transfer” requires that the transfer be of an “asset,” U.V.T.A. § 1(16), and “asset” is defined as property of a debtor.” U.V.T.A. § 1(2).

  There are a handful of cases in which courts are willing to find that fraudulent transfer law operates in the absence of a traditional transfer, but these cases are usually undertheorized. See, e.g., DZ Bank AG Deutsche Zentral-Genossenschaft Bank v. Meyer, 869 F.3d 839 (9th Cir. 2017).

• One could, of course, argue that doing such a favor does constitute an “asset” within the meaning of fraudulent transfer law, but this just restates the challenge of defining what it means for a debtor to have an asset for fraudulent transfer purposes.
• See, e.g., Yesha Yadav & Robert J. Stark, The Bankruptcy Court as Crypto Market Regulator, 96 S. Cal. L. Rev. 1479 (2024) and Alan Rosenberg & Ross Hartog, Creditor Considerations in Crypto Cases, 40 Emory Bankr. Dev. J. 435 (2024) (discussing the various challenges that cryptocurrencies present to the bankruptcy system).
• There may be limits to the ability to trace even transactions on the public ledger, however. There are decentralized cryptocurrency tumblers like Tornado Cash that allow users to mix their cryptocurrencies with others and render them untraceable. Tornado Cash: A Crypto-Mixing Service Now Blacklisted by the US Treasury, Sanction Scanner, https://perma.cc/FD63-69X6 (last visited Jan. 30, 2024).
• The value of cryptocurrency held on private ledgers is large in absolute terms. Coinbase alone acts as a custodian for 874,000 bitcoins, each trading for over $90,000. See Don Mitchell, Who Owns the Most Bitcoin?, Capital.com, https://perma.cc/8NWH-34SF (last visited Jan. 11, 2026).
• See Bitcoin Average Transaction Fee (I:BATF), YCharts, https://perma.cc/7ASV-7WFE (last visited Oct. 27, 2025) (showing January 2024 daily average transaction fees ranging from $3.73 to $17.53).
• Of course, none of this would matter much if cryptocurrency exchanges had no social value, but it is too soon to draw this conclusion. To be sure, relatively little legitimate commerce today goes through these exchanges. There is, however, some. Foreign nationals, for example, can transfer a portion of their earnings on their smart phones to relatives back home. The cost is far less than they would pay for a money order. Moreover, cryptocurrency visionaries believe that cryptoexchanges in time will provide an infrastructure that allows cryptocurrencies, in addition to being a repository of value, to become the payment system of choice as commerce migrates to cyberspace. This Article largely brackets the question of how much social value cryptocurrency exchanges create.
• See, e.g., William Jones, An Essay on the Law of Bailments (Boston, Press of Samuel Etheridge 1796).
• Consider a debtor that is a parking garage. The creditors of the garage cannot seize the cars that others have parked there. The creditors can reach only their debtor’s assets, and the garage is merely a bailee of the cars. See In re Mississippi Valley Livestock, Inc., 745 F.3d 299, 305 (7th Cir. 2014) (using the parking garage example in a discussion of constructive trusts).
• Coinbase describes its business model in the following way:

  “For centuries, banks, asset managers, commodity brokers, and others in traditional finance have relied on something called an omnibus account to store funds. By combining many customer funds—and even house funds—in the same place, institutions can more easily move funds as withdrawals, deposits, and trades take place. And they keep track of which funds belong to which customer by using an internal ledger.

  Coinbase works the same way. When a transaction is executed, it’s immediately recorded on our ledger and it settles there . . . .”

  SeeCoinbase’s Blockchain-Enabled Approach to Funds Management and Storage, Coinbase Blog (Jan. 26, 2023), https://perma.cc/Q47K-6HD7 (“Coinbase’s Approach”).

• These mechanisms vary dramatically in quality and may be spread across many different software programs. The ledger can be anything from an ordinary spreadsheet to a complicated computer program to an amalgam of different kinds of records. FTX’s private ledger was particularly messy. It consisted, in the debtor’s own words, of “a hodgepodge of Google documents, Slack communications, shared drives, Excel spreadsheets and other non-enterprise solutions.” See Disclosure Statement for Debtors’ Joint Chapter 11 Plan of Reorganization of FTX Trading Ltd. and its Affiliated Debtors and Debtors-in-Possession at 50–51, In re FTX Trading Ltd., No. 22-11068 (Bankr. D. Del. Dec. 16, 2023) (hereafter “FTX Disclosure Statement”).
• As noted previously this trope of a single ledger is, of course, a radical simplification. For the typical cryptoexchange, the relevant data are spread across multiple computers and backed up in the cloud. Information is recalled and displayed or printed out from time to time as necessary.
• The examples here also assume the ledger contains no other information. This is not always the case. For example, each of Coinbase’s ledger entries contains a unique identifier that allows an audit trail. SeeCoinbase’s Approach, supra note 15. But this again makes no difference. To be sure, with such identifiers, it may be possible to reconstruct the state of each account at extremely short intervals. They may show deductions of one account and additions to another taking place at a particular minute or second or tenth or hundredth of a second. But there is always some amount of time between these intervals in which multiple events might have taken place, such as a transfer to one entity and a transfer from that entity to another, that cancel each other out and are never recorded.
• See U.V.T.A. § 8(a); 11 U.S.C. § 548(c).
• Celebrity’s failure to question is likely to lead to a loss of a good faith defense. “Good faith” is more than honesty in fact. It also requires adherence to reasonable standards of fair dealing in the trade, U.C.C. § 1201(b)(20). The test is “inquiry notice.” One loses the good faith defense when one fails to ask questions a reasonable person would ask under the circumstances. See In re Bernard L. Madoff Investment Securities LLC, 12 F.4th 171, 178 (2d Cir. 2021). Those who receive property from a debtor fail to meet this bar when a reasonable person in their position would ask questions. See, e.g., Harrell v. Beall, 84 U.S. 590 (1873) (finding absence of good faith where defendant “intentionally shut his eyes to the truth”); Bentley v. Young, 210 F. 202 (S.D.N.Y. 1914) (Hand, J.) (absence of good faith found where the defendant was “a facile purchaser” who “ask[ed] no questions”). An absence of good faith makes it irrelevant that Celebrity gave value by doing the ads.
• In this hypothetical, Entrepreneur is operating as a sole proprietorship. Of course, this is unrealistic, but it reduces the number of players. The analysis works equally well, though less simply, if Entrepreneur owned a legal entity that operated an exchange and this legal entity in turn owned a subsidiary that also operated an exchange. Celsius had such a structure, for example. See Declaration of Alex Mashinsky in Support of Chapter 11 Petitioners and First Day Motions at 26, In re Celsius Network LLC., No. 22-10964 (Bankr. S.D.N.Y. Jul. 14, 2022).
• Again, the assumption of no change in the total holdings of Entrepreneur over the course of a day is artificial. Even when most of the trading takes place between those with accounts on the exchange, some trades with the outside world are likely. But nothing turns on such a simplification. What matters is only that the path cryptocurrency takes between the morning and evening ledgers cannot be observed.
• That CryptoExchange helped Entrepreneur hinder, delay, or defraud does not itself generate liability. In most states, there is no aiding and abetting liability for fraudulent transfers. See GATX Corp. v. Addington, 879 F. Supp.2d 633, 641–50 (E.D. Ky. 2012). Even if there were aiding and abetting liability for a fraudulent transfer, there can be no aiding and abetting liability in the absence of an underlying cause of action, and there is no underlying fraudulent transfer if the debtor (in this case Entrepreneur) makes no transfer. Again, under this characterization, the only entity that made a transfer was CryptoExchange, and it had no debt and hence no creditors it can hinder, delay, or defraud.
• What matters to these individuals is the power they enjoy as trustees to distribute assets to beneficiaries of the trust. Every time they buy a cup of coffee, they are not spending their own money but rather they are acting in their capacity as trustee and making a distribution on behalf of the beneficiary of the trust (themselves).
• New York law, for example, provides that “[a] disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator.” N.Y. Est. Powers & Trusts Law § 7-3.1 (McKinney). California works the same way: “If the settlor retains the power to revoke the trust in whole or in part, the trust property is subject to the claims of creditors of the settlor to the extent of the power of revocation during the lifetime of the settlor.” Cal. Prob. Code § 18200 (West).
• The definition of “transfer” in the Bankruptcy Code is broad. See 11 U.S.C. § 101(53D) (providing that a transfer means, among other things, “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with . . . property . . . or . . . an interest in property”).
• This partitioning between the assets of an investor in a corporation and the assets of the corporation is one of the fundamental attributes of corporate law. See Henry Hansmann, Reinier Kraakman & Richard Squire, Law and the Risk of the Firm, 119 Harv. L. Rev. 1335 (2006).
• Once the creditors levy on the equity stake, they enjoy the rights of any shareholder. As such, they can exercise rights of corporate governance. These include forcing a liquidation of the firm. For a case in which creditors of a parent seize the equity of a subsidiary and then exercise control over it, see In re Marvel Entertainment Group, Inc., 209 B.R. 832 (D. Del. 1997).
• This is, of course, Twyne’s Case 76 Eng Rep 809 (Star Chamber 1602). For a modern court that adopts this narrow conception of fraudulent transfer law, see In re Chase & Sanborn Corp., 813 F.2d 1177, 1181 (11th Cir. 1987) (observing that fraudulent transfer law “prevent[s] a debtor from diminishing, to the detriment of some or all creditors, funds that are generally available for distribution to creditors”).
• See, e.g., Adelphia Recovery Trust v. Bank of America, 390 Bankr.

  80 (S.D.N.Y. 2008); In re Tribune Co., 464 B.R. 126, 172 (Bankr. D. Del. 2011).

• See, e.g., Crystallex Int’l Corp. v. Petróleos De Venezuela, S.A., 879 F.3d 79, 81 (3d Cir. 2018).
• See National Bank of Newport v. National Herkimer County Bank, 225 U.S. 178, 184 (1912) (famously observing that “circuity of arrangement” will not save an otherwise voidable transaction). See, e.g., Nordberg v. Sanchez (In re Chase & Sanborn Corp.), 813 F.2d 1177, 1181–82 (11th Cir. 1987) (“The court must look beyond the particular transfers in question to the entire circumstance of the transactions.”).
• See, e.g., In re DSI Renal Holdings, LLC, 574 Bankr. 446, 466 (Bankr. D. Del. 2017).
• A court, for example, can equate the debtor’s control over an asset with having legal title to it. See In re IFS Fin. Corp., 669 F.3d 255, 263 (5th Cir. 2012) (allowing an avoidance action, observing that where debtor “obscured its power to transfer in an intentionally complicated corporate structure,” “legal title is irrelevant”). In other cases, courts allow recovery of the asset from an entity like Private Equity by finding that OperatingCo and ManufacturingCo were not distinct legal entities. See, e.g., ASARCO LLC v. Americas Mining Corp., 396 Bankr. 278, 317 (S.D. Tex. 2008).

  Courts tend to be even less fastidious than usual about respecting corporate separateness when confronting such cases. Quite often, such cases are settled. Noises about substantive consolidation and veil-piercing lurk in the air, but a deal has been reached and no one objects. A negotiated outcome of this sort followed in Dynegy in the wake of an examiner’s report that elided a discussion of fraudulent transfer law and substantive consolidation. See Examiner’s Report at 118, In re Dynegy Holdings, LLC, No. 11-38111 (Bankr. S.D.N.Y. 2012).

• Johnson & Johnson is attempting to use the Texas Two-Step to resolve its talc liabilities—liabilities that run in the many billions. See Sujeet Indap, J&J’s Latest Texas Two-Step Strategy on Brink of Victory, Fin. Times (Nov. 10, 2024), https://perma.cc/TG72-5KJU. For a general discussion of Texas Two-Steps, see Laura S. Rossi, The Texas Two-Step: How Corporate Debtors Manipulate Chapter 11 Reorganizations to Dance Around Mass Tort Liability, 39 Emory Bankr. Dev. J. 585 (2023).
• Many have called for federal legislation to bar firms that use the Texas two-step from using bankruptcy. Such laws, however, may not be effective. Indeed, making bankruptcy unavailable for BadCo makes it impossible for creditors to act jointly, and on their own, each of the creditors has no easy way to reach assets now held by GoodCo.
• This example oversimplifies things. The typical Texas two-step does not leave the tort victims with nothing. The healthy subsidiary and the parent corporation leave BadCo what they claim are assets are sufficient to meet the tort liability. When the transaction leaves BadCo fully funded, it is not clear that BadCo can even file for bankruptcy. See In re LTL Mgmt., LLC, 64 F.4th 84 (3d Cir. 2023). The fraudulent transfer problem arises only when BadCo is underfunded.
• See National Bank of Newport v. National Herkimer County Bank, 225 U.S. 178, 184 (1912) (famously observing that “circuity of arrangement” will not save an otherwise voidable transaction); Nordberg v. Sanchez (In re Chase & Sanborn Corp.), 813 F.2d 1177, 1181–82 (11th Cir. 1987) (“The court must look beyond the particular transfers in question to the entire circumstance of the transactions.”); In re DSI Renal Holdings, LLC, 574 Bankr. 446, 466 (Bankr. D. Del. 2017).
• Many believe under-funded divisional mergers should be treated as fraudulent transfers See, e.g., Samir D. Parikh, Mass Exploitation, 170 U. Pa. L. Rev. Online 53, 68–69 (2022). But it is generally understood that this is hard. See Adam Levitin, The Texas Two-Step: The New Fad in Fraudulent Transfers, Credit Slips (July 19, 2021), available at https://perma.cc/JA75-TH8X.
• See, e.g., Anthony J. Casey & Joshua Macey, In Defense of Chapter 11 for Mass Torts, 90 U. Chi. L. Rev. 973 (2023).
• One might decide the case simply by looking at burdens of proof. Entrepreneur’s creditors are the ones bringing the action against Celebrity. As the parties bringing the action, they are the ones who need to show that their characterization of the transaction as a transfer from Friend to Entrepreneur and then from Entrepreneur to Celebrity is more compelling. Because the two characterizations are equally consistent with the ledger, the creditors lose, as they are the ones bearing the burden of proof. Saul Levmore suggests that resorting to formal principles is most appropriate for a broad number of problems in corporate tax. In this world, there is often no substantive policy that points to any particular characterization of the transaction. See Saul Levmore, Recharacterization and the Nature of Theory in Corporate Tax Law, 136 U. Pa. L. Rev. 1019 (1988).

  Alternatively, it might be possible to resort to formal rules to resolve such questions. Such an approach is not appropriate, however, when bad actors can manipulate transactions to navigate around the formal rules and when substantive principles are available that ensure that imputations of ownership are not simply invitations to unchained judicial discretion.

• See Stat. 13 Eliz. ch. 5, § 2.
• Twyne’s Case (1602), 3 Coke 80b, 76 Eng. Rep. 809. It should be noted, however, that even though most associate the case with the debtor’s secret transfer of sheep and even though the debtor did transfer sheep to a confederate, the riot that triggered the litigation arose when the sheriff’s deputy attempted to levy on the farmer’s cattle, not the sheep. See Emily Kadens, New Light on Twyne’s Case, 94 Am. Bankr. L.J. 1 (2020).
• 26 U.S.C. § 1; 26 U.S.C. § 61(a).
• Lucas v. Earl, 281 U.S. 111, 115 (1930) (Holmes, J.); see also Treas. Reg. § 1.61–21(a)(4).
• Number of Cryptocurrencies Worldwide from 2013 to September 2025, Statista (Oct. 1, 2025), https://perma.cc/8ZT8-5PU3.
• For up-to-date information about the newest cryptocurrency derivative products and their prevalence in different markets, see Bitcoin BTC, Crypto Quant (last visited Dec. 4, 2025), https://perma.cc/WSD6-8G3X.
• Wrapped cryptocurrency is one example of a new product. A wrapped cryptocurrency is a derivative product that allows users to transact between different types of coins by locking up one underlying asset. For an explication of wrapped cryptocurrencies, see Guneet Kaur, A Beginner’s Guide to Understanding Wrapped Tokens and Wrapped Bitcoin, Cointelegraph (Mar. 19, 2023), https://perma.cc/HP4F-9VMG.
• See Allie Garnett, Step-by-Step Guide to Creating Your Own Cryptocurrency, Investopedia (Oct. 15, 2025), https://perma.cc/W8L4-B8XT.
• For a discussion of regulatory attempts to understand and regulate part of the cryptocurrency market, see Saule Omarova, Dealing with Disruption: Emerging Approaches to Fintech Regulation, 61 Wash. U. J.L. & Pol’y 25 (2020).
• See Boston Trading Group, Inc. v. Burnazos, 835 F.2d 1504 (1st Cir. 1987) (Judge Breyer).
• This hypothetical is loosely based on Mann v. LSQ Funding Group, 71 F.4th 640 (7th Cir. 2023). Some facts (such as the addition of a large group of somnolent general creditors) have been added to make the fraudulent transfer attack more compelling.
• Courts are often reluctant to find payments made on account of antecedent debts to be fraudulent transfers. See, e.g., In re Sharp Intern. Corp., 403 F.3d 43 (2d Cir. 2005). Creditors are entitled to insist upon being paid, and when creditors are, like Lender, fully secured, it does not even seem as if the repayment is leaving general creditors worse off. For an excellent discussion of when a payment of an existing debt can be a fraudulent transfer, see Emil A. Kleinhaus & Alexander B. Lees, Debt Repayments as Fraudulent Transfers, 88 Am. Bankr. L.J. 307, 338–39 (2014). Some mischief must be afoot before courts will insist that creditors return money that they were owed. In our example, however, Entrepreneur is an outright fraudster, and Lender is on inquiry notice. Courts are willing to treat repayment of debts as fraudulent transfers in cases involving Ponzi schemes. See, e.g., Picard v. Katz, 462 Bankr. 447 (S.D.N.Y. 2011).
• For an example of an able judge willing to tolerate preposterously suspicious behavior in the cause of negotiability, see Joseph Story’s opinion in Swift v. Tyson, 41 U.S. 1 (1842). For Llewellyn’s well-known critique, see Karl N. Llewellyn, The Common Law Tradition: Deciding Appeals 410–21 (1960). Story’s view of good faith, one that tolerated any conduct that was not affirmatively dishonest, prevailed for a long time with respect to negotiable instruments. Indeed, it remained good law until the start of this century. Swift also raised a procedural question not relevant here. See Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938). But quite apart from the costs of tolerating bad behavior, not everyone thinks that promoting negotiability is an unalloyed good. For a notable attack, see Grant Gilmore, The Good Faith Purchaser Idea and the Uniform Commercial Code: Confessions of a Repentant Draftsman, 15 Georgia L. Rev. 605 (1981).
• There is a conclusive presumption that when these two badges of fraud are present that the transaction in fact hinders, delays, or defrauds. See U.F.T.A. § 4(a)(2); U.V.T.A. § 4(a)(2); 11 U.S.C. § 548(a)(1)(B). For a general discussion of these “constructive” fraudulent transfers, see Douglas Baird, Elements of Bankruptcy, 148–54 (7th ed. 2022).