One Way to Discourage Terror Attacks: Sue
The other day over lunch, a colleague asked what I, as a contracts professor, thought about going after terrorists with the law of fraudulent conveyance. The idea hadn’t occurred to me, but it makes sense. At the margin, we might even be able to affect the incentives for carrying out terror attacks.
Consider: As we now know, the San Bernardino shooters took out a loan of $28,000 from the peer-to-peer marketplace Prosper, evidently without any intention of paying it back. If, as news reports suggest, they transferred half of the money to a family member, and if at the time they did so they intended to die, then the case for fraudulent conveyance seems pretty straightforward.
The doctrine of fraudulent conveyance, which goes back to an English statute of the 16th century, is part of the law in every state. It’s designed to protect the integrity of the lending process, thereby keeping costs low. The basic model – what the legal scholar Grant Gilmore labeled the “vulgar type” of fraudulent conveyance – occurs when Lender makes a loan to Borrower, who then transfers the money to Buddy, with the intention of making the debt uncollectible by Lender. Lender can then sue Buddy for the money. The touchstone, says one leading treatise, “is the unjust diminution of the estate of the debtor that otherwise would be available to the creditor.” The test is one of intention. If the debtor makes the transfer in order to keep assets from the creditor, then the conveyance is fraudulent.
Not all fraudulent conveyance cases involve loans. For example, in Handy Boat v. Professional Services, decided by the Supreme Judicial Court of Maine in 1998, a business owner set up a separate corporation and transferred $60,000 in assets to it, receiving nothing of value in return. He then vacated premises on which his rental agreement had two years yet to run. When the landlord sued, the business that had originally rented the premises had no assets. They were all in the new corporation. The court found the conveyance to be fraudulent, and ordered the tenant to pay. Moreover, the amount due was not merely the unpaid rent, but (potentially) the entire value of the assets fraudulently transferred.
How does this relate to the San Bernardino terrorists? If they indeed borrowed money from Prospero while already planning to die, then they obviously did not intend to pay it back. This would make the reported transfer of half the loan to a family member a fraudulent conveyance, made to keep the money from creditors. Under those circumstances, the lender could, if it so chose, proceed against her for the funds.
There is even a California case on point. In Bryson v. Manhart (1936), a businessman facing financial trouble changed the beneficiary of his substantial insurance policy, meaning that upon his death the proceeds would not become a part of his estate. He then committed suicide. The court held that the creditors could sue the new beneficiary for the money, because the change had been made in order to avoid the need for the estate to repay the loans. The analogy to San Bernardino I assume to be obvious.
To use the law of fraudulent conveyance against the families of suicide attackers is not a matter of being petty or vengeful. It’s a matter of trying to restructure the incentives of potential terrorists. Again according to news reports, terrorists in the past have frequently “drained their bank accounts and exhausted credit lines before embarking on what they believed would be a suicide mission.” If this is part of the modus operandi, it suggests a rational concern for family members who will be left behind. The potential terrorists are trying to provide for them.
Consequently, if lenders go after the families, there is a reduction in the incentive for the attack. They don’t get to keep the money after all. There is no unfairness toward the family members, because they are not entitled to the fraudulently conveyed funds to begin with.
Most terrorists, to be sure, are likely to be sufficiently determined that the prospect of being unable to transfer funds to their families would make no difference. And wealthy countries and other entities that fund terror can still promise to take care of the families of those launching suicide attacks (as Islamic State reportedly does). But if the practice of borrowing to the hilt and distributing the money is indeed a widespread part of the modus operandi of the potential terrorist, then at least at the margin one would expect to see a shift, however small, in the decision calculus.
The law of fraudulent conveyance has been tried – true, without noticeable success – by families of terror victims to win judgments against Iran. (The Iran treaty will likely make these efforts even less likely to succeed, although plaintiffs are still trying.)
But this idea is different. We’re focusing here on domestic terrorists who intend to carry out suicide attacks but still want to provide for those they will leave behind. Even if the realization that it’s impossible to transfer funds this way deters only a handful of attackers, that handful would matter – especially when, as events continue to show, it's the homegrown terrorists who are hardest to identify and stop.
Yes, there are a number of exceptions, but a list would be tiresome to both reader and writer.
The colleague whose question inspired this column is my friend Akhil Amar.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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Stephen L Carter at firstname.lastname@example.org
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