As one might imagine since lending practices are so highly regulated, defaulting on such a loan is also highly regulated. From the creditor’s perspective, Michigan’s Uniform Fraudulent Transfer Act protects creditors from deceitful debtors (MUFTA). The MUFTA defines fraudulent transfers as any transfer that is made with actual intent to defraud, hinder, or delay either a present or future creditor; including transfers without actual intent if the debtor should have believed that he or she would become insolvent by failing to make the exchange for a reasonably equivalent value (see MCL 566.33 and MCL 566.34).
Fraudulent conveyances more broadly is defined as any transaction by which any property (real or personal) is moved beyond the reach of creditors, including a transaction that prejudices the legal or equitable rights of present or future creditors. Exchanges whereby a debtor accepts a value below a reasonable equivalent for property a creditor has a higher right to, happens every day. Consequences for purchasing or selling property in a transaction that triggers a fraudulent conveyance statute can harm both parties.
For example: Imagine if an individual named Mr. Tower purchases the Grand Rapids Plaza Towers for $100, and Morty’s Bureau Mortgage (mortgagee) helps Mr. Tower (mortgagor) complete the purchase through a loan secured by a mortgage. One of the terms of this mortgage–and almost certainly all mortgages–prohibits the transfer of any portion of the property, here the Plaza Towers, without authorization by the mortgagee Morty. If Mr. Tower and his good friend William Weasel sever a portion of the tower through a transaction not involving Morty to make a little extra money; they likely have committed a fraudulently conveyance, and several other legal issues may implicate Mr. Tower and William Weasel (such as, breach of contract, business tort, which we won’t get into in this article).
The simplest remedy a creditor may seek against a debtor and the transferee under civil law is to invalidate the transfer through a legal proceeding to void the transfer (MCL 566.37). Further, the transferee and transferor generally have not cause of action against each other, public policy and the law leave the parties in the position in which they have placed themselves. In plain english, the transferee (William Weasel) loses his interest in the Plaza Tower, and likely has no method of seeking relief from the consequences of participating in the fraudulent transaction against Mr. Tower. From William Weasel’s perspective, this is exactly why due diligence, and properly recording interests where typical, is so important in every transaction.
