Constructive fraudulent transfer occurs when a party transfers property in exchange for less than its reasonably equivalent value, such that the value of the party is decreased upon its restructuring or liquidation.  Fraudulent transfer actions seek to avoid or unwind certain pre-bankruptcy transactions so that the value of such transactions can be recovered and redistributed to the debtor's creditors.

A guarantor must receive reasonably equivalent value for its guarantee for purposes of bankruptcy or fraudulent transfer laws in order to avoid a constructive fraudulent transfer.  Reasonably equivalent value is fair consideration paid in exchange for property that is determined by the good faith of the parties involved, the fair market value of the exchange, and whether the transaction took place at arm’s length.

In the event of debtor default, credit default swaps may help bankruptcy courts solve the issue of fraudulent transfer and whether the transfer was made for reasonably equivalent value.

CDS Spreads by Select Bank (1 Year)
Mean Std Min Max
Barclays 69.95 60.97 1.77 272.08
Bear Stearns 143.61 194.49 5.96 1367.72
Deutsche Bank 55.77 43.14 2.26 184.36
JP Morgan 57.84 48.33 3.19 251.12
Lehman Brothers 206.93 245.09 5.89 1422.78
Morgan Stanley 234.21 335.03 6.22 3110.48
Source: Sul, Hong Kee

If deemed fraudulent transfer, a guarantee may be clawed back by the administrator in the event of a restructuring or liquidation.  A claw-back is a motion or petition filed with the appropriate court or authority that seeks the return of assets that were fraudulently transferred.

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