Insight: Are contracts rescindable in creditor fraud?
The Puerto Rico Civil Code establishes that legal transactions carried out in fraud of creditors are rescindable or voidable.
It is presumed that a legal transaction is granted in fraud of creditors when:
- it is dated after the credit of the injured creditor, or it is carried out to prevent the consequences of a malicious act
- it consists of excluding an asset from the debtor’s assets, or preventing its incorporation, even if they are rights in expectation or mere powers, or granting new guarantees to previous credits
- it produces or aggravates the insolvency of the debtor
- it is granted with the intention of undermining the action of creditors, which is presumed in businesses carried out between relatives within of the fourth degree of consanguinity or second degree of affinity, in gratuitous ones and in onerous ones if it is carried out after a sentence or after a seizure order has been issued against the grantor.
What remedies are available?
A rescission action is the legal remedy that the creditor can file to rescind the effects of a legal transaction carried out in fraud of their credit.
The ruling decreeing the rescission has the following effects:
- declaring the legal transaction unenforceable against the creditor to the extent necessary to satisfy their credit
- affecting the acquirer of the asset sold in fraud of the creditors, and the sub-acquirer, except if they act in good faith and acquire for consideration
The action only benefits the plaintiff creditor. Furthermore, regarding the real rights that fall on real estate, they will be addressed in accordance with the provisions of the real estate registration legislation.
The above legal actions can only be exercised when the creditor has no other remedy to enforce their credit.
There is a figure called “simulation” and it is important in this discussion.
Simulation occurs if the grantors of a legal transaction agree to carry it out by expressing a false cause, regardless of whether a disguised legal act exists. The act of fictitious interposition of a person is considered simulated.
The simulated legal transaction is void if it is illicit. It is voidable if it harms the rights of a third party. The rights acquired in good faith and for consideration by third parties are protected.
Furthermore, regarding the real rights that fall on real estate, they will be addressed in accordance with the provisions of the real estate registration legislation.
This content was produced by Microjuris, as part of their Corporate Social Responsibility to answer frequently asked legal questions they receive from the communities they serve. This information should not be considered legal advice, and you should consult a licensed legal professional with any questions.
