Test ~ Intent ~ Badges Of Fraud

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INTENT TEST ~ BADGES OF FRAUD

JayNote
Section 4(b) sets out particular factors by which a court may determine the debtor's true intent under Section 4(a)(1). The "Badges of Fraud" were first described in Twyne's Case, 76 ER 809 (Star Chamber, 1601). The continuation of the "Badges of Fraud" to modern times is an anachronism; this really should be thought of simply as a facts-and-circumstances test, whereby the court will look at the totality of the relevant facts and circumstantial evidence to discern the debtor's objective intent. Since the list is not exhaustive, a court could find the requisite debtor's intent even in the total absence of any factor, if other circumstances proved that intent.
Unfortunately, some courts will simply count the factors, weigh them equally, and apply a "Yankees beat Dodgers 8-4" sort of approach, which is about as utterly wrong a way to consider this issue as could be.
Also, if you are starting your analysis of a voidable transaction here — which many unfamiliar litigators do — you are starting in the wrong place! Start here instead.

BADGES OF FRAUD § 4(b)

§ 4(b) In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether:

(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.
Prefatory Note (UFTA 1984).
Because intent to hinder, delay, or defraud creditors is seldom susceptible of direct proof, courts have relied on badges of fraud.
The weight given these badges varied greatly from jurisdiction to jurisdiction, and the Conference sought to minimize or eliminate the diversity by providing that proof of certain fact combinations would conclusively establish fraud.
In the absence of evidence of the existence of such facts, proof of a fraudulent transfer was to depend on evidence of actual intent.
Reporter's Comment to § 4(b) cmt. 6.
Subsection (b) is a nonexclusive catalogue of factors appropriate for consideration by the court in determining whether the debtor had an actual intent to hinder, delay, or defraud one or more creditors.
Proof of the existence of any one or more of the factors enumerated in subsection (b) may be relevant evidence as to the debtor’s actual intent but does not create a presumption that the debtor has made a voidable transfer or incurred a voidable obligation.
The list of factors includes most of the so-called “badges of fraud” that have been recognized by the courts in construing and applying the Statute of 13 Elizabeth and § 7 of the Uniform Fraudulent Conveyance Act. Proof of the presence of certain badges in combination establishes voidability conclusively—i.e., without regard to the actual intent of the debtor—when they concur as provided in § 4(a)(2) or in § 5.
The fact that a transfer has been made to a relative or to an affiliated corporation has not been regarded as a badge of fraud sufficient to warrant avoidance when unaccompanied by any other evidence of intent to hinder, delay, or defraud creditors.
The courts have uniformly recognized, however, that a transfer to a closely related person warrants close scrutiny of the other circumstances, including the nature and extent of the consideration exchanged. See 1 G. Glenn, Fraudulent Conveyances and Preferences § 307 (Rev. ed. 1940).
The second, third, fourth, and fifth factors listed are all adapted from the classic catalogue of badges of fraud provided by Lord Coke in Twyne’s Case, 3 Coke 80b, 76 Eng.Rep. 809 (Star Chamber 1601).
Lord Coke also included the use of a trust and the recitation in the instrument of transfer that it “was made honestly, truly, and bona fide,” but the use of the trust is voidable only when accompanied by indicia of intent to hinder, delay, or defraud creditors, and recitals of “good faith” can no longer be regarded as significant evidence of intent to hinder, delay, or defraud creditors.
Reporter's Comment to § 4(b) cmt. 7.
In considering the factors listed in § 4(b) a court should evaluate all the relevant circumstances involving a challenged transfer or obligation.
Thus the court may appropriately take into account all indicia negativing as well as those suggesting intent to hinder, delay, or defraud creditors, as illustrated in the following reported cases {given below} . . ..

(1) the transfer or obligation was to an insider;

Reporter's Comment to §4(a).
Whether the transfer or obligation was to an insider: Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582-83 (2d Cir. 1983) (insolvent debtor’s purchase of two residences in the name of his spouse and the creation of a dummy corporation for the purpose of concealing assets held to evidence intent to hinder, delay, or defraud creditors); Banner Construction Corp. v. Arnold, 128 So.2d 893 (Fla.Dist.App. 1961) (assignment by one corporation to another having identical directors and stockholders constituted a badge of fraud); Travelers Indemnity Co. v. Cormaney, 258 Iowa 237, 138 N.W.2d 50 (1965) (transfer between spouses said to be a circumstance that shed suspicion on the transfer and that with other circumstances warranted avoidance); Hatheway v. Hanson, 230 Iowa 386, 297 N.W. 824 (1941) (transfer from parent to child said to require a critical examination of surrounding circumstances, which, together with other indicia of intent to hinder, delay, or defraud creditors, warranted avoidance); Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955) (transfer from daughter to mother said to be indicative of intent to hinder, delay, or defraud creditors, but transfer held not to be voidable due to adequacy of consideration and delivery of possession by transferor).

(2) the debtor retained possession or control of the property transferred after the transfer;

Reporter's Comment to §4(b).
Whether the transferor retained possession or control of the property after the transfer: Harris v. Shaw, 224 Ark. 150, 272 S.W.2d 53 (1954) (retention of property by transferor said to be a badge of fraud and, together with other badges, to warrant avoidance of transfer); Stephens v. Reginstein, 89 Ala. 561, 8 So. 68 (1890) (transferor’s retention of control and management of property and business after transfer held material in determining transfer to be voidable); Allen v. Massey, 84 U.S. (17 Wall.) 351 (1872) (joint possession of furniture by transferor and transferee considered in holding transfer to be voidable); Warner v. Norton, 61 U.S. (20 How.) 448 (1857) (surrender of possession by transferor deemed to negate allegations of intent to hinder, delay, or defraud creditors).

(3) the transfer or obligation was disclosed or concealed;

Reporter's Comment to §4(c).
Whether the transfer or obligation was concealed or disclosed: Walton v. First National Bank, 13 Colo. 265, 22 P. 440 (1889) (agreement between parties to conceal the transfer from the public said to be one of the strongest badges of fraud); Warner v. Norton, 61 U.S. (20 How.) 448 (1857) (although secrecy said to be a circumstance from which, when coupled with other badges, intent to hinder, delay, or defraud creditors may be inferred, transfer was held not to be voidable when made in good faith and transferor surrendered possession); W.T. Raleigh Co. v. Barnett, 253 Ala. 433, 44 So.2d 585 (1950) (failure to record a deed in itself said not to evidence intent to hinder, delay, or defraud creditors, and transfer held not to be voidable).

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

Reporter's Comment to §4(d).
Whether, before the transfer was made or obligation was incurred, a creditor sued or threatened to sue the debtor: Harris v. Shaw, 224 Ark. 150, 272 S.W.2d 53 (1954) (transfer held to be voidable when causally connected to pendency of litigation and accompanied by other badges of fraud); Pergrem v. Smith, 255 S.W.2d 42 (Ky.App. 1953) (transfer in anticipation of suit deemed to be a badge of fraud; transfer held voidable when accompanied by insolvency of transferor who was related to transferee); Bank of Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D.Ark. 1963) (although threat or pendency of litigation said to be an indicator of intent to hinder, delay, or defraud creditors, transfer was held not to be voidable when adequate consideration and good faith were shown).

(5) the transfer was of substantially all the debtor’s assets;

Reporter's Comment to §4(e).
Whether the transfer was of substantially all the debtor’s assets: Walbrun v. Babbitt, 83 U.S. (16 Wall.) 577 (1872) (sale by insolvent retail shop owner of all of his inventory in a single transaction held to be voidable); Cole v. Mercantile Trust Co., 133 N.Y. 164, 30 N.E. 847 (1892) (transfer of all property before plaintiff could obtain a judgment held to be voidable); Lumpkins v. McPhee, 59 N.M. 442, 286 P.2d 299 (1955) (although transfer of all assets said to indicate intent to hinder, delay, or defraud creditors, transfer held not to be voidable because full consideration was paid and transferor surrendered possession).

(6) the debtor absconded;

Reporter's Comment to §4(f).
Whether the debtor had absconded: In re Thomas, 199 F. 214 (N.D.N.Y. 1912) (when debtor collected all of his money and property with the intent to abscond, intent to hinder, delay, or defraud creditors was held to be shown).

(7) the debtor removed or concealed assets;

Reporter's Comment to §4(g).
Whether the debtor had removed or concealed assets: Bentley v. Young, 210 F. 202 (S.D.N.Y. 1914), aff’d, 223 F. 536 (2d Cir. 1915) (debtor’s removal of goods from store to conceal their whereabouts and to sell them held to render sale voidable); Cioli v. Kenourgios, 59 Cal.App. 690, 211 P. 838 (1922) (debtor’s sale of all assets and shipment of proceeds out of the country held to be voidable notwithstanding adequacy of consideration).

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

Reporter's Comment to §4(h).
Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred: Toomay v. Graham, 151 S.W.2d 119 (Mo.App. 1941) (although mere inadequacy of consideration said not to be a badge of fraud unless it is grossly inadequate, transfer held to be voidable when accompanied by other badges of fraud); Texas Sand Co. v. Shield, 381 S.W.2d 48 (Tex. 1964) (inadequate consideration said to be an indicator of intent to hinder, delay, or defraud creditors, and transfer held to be voidable because of inadequate consideration, pendency of suit, family relationship of transferee, and fact that all nonexempt property was transferred); Weigel v. Wood, 355 Mo. 11, 194 S.W.2d 40 (1946) (although inadequate consideration said to be a badge of fraud, transfer held not to be voidable when inadequacy not gross and not accompanied by any other badge; fact that transfer was from father to son held not sufficient to establish intent to hinder, delay, or defraud creditors).

(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

Reporter's Comment to §4(i).
Whether the debtor was insolvent or became insolvent shortly after the transfer was made or obligation was incurred: Harris v. Shaw, 224 Ark. 150, 272 S.W.2d 53 (1954) (insolvency of transferor said to be a badge of fraud and transfer held voidable when accompanied by other badges of fraud); Bank of Sun Prairie v. Hovig, 218 F.Supp. 769 (W.D. Ark. 1963) (although the insolvency of the debtor said to be a badge of fraud, transfer held not voidable when debtor was shown to be solvent, adequate consideration was paid, and good faith was shown, despite the pendency of suit); Wareheim v. Bayliss, 149 Md. 103, 131 A. 27 (1925) (although insolvency of debtor acknowledged to be an indicator of intent to hinder, delay, or defraud creditors, transfer held not to be voidable when adequate consideration was paid and whether debtor was insolvent in fact was doubtful).

(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and

Reporter's Comment to §4(j).
Whether the transfer occurred shortly before or shortly after a substantial debt was incurred: Commerce Bank of Lebanon v. Halladale A Corp., 618 S.W.2d 288, 292 (Mo.App. 1981) (when transferors incurred substantial debts near in time to the transfer, transfer was held to be voidable due to inadequate consideration, close family relationship, the debtor’s retention of possession, and the fact that almost all the debtor’s property was transferred).

(11) the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.

Reporter's Comment to §4(k).
Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor:
The wrong addressed by § 4(b)(11) is collusive and abusive use of a lienor’s superior position to eliminate junior creditors while leaving equity holders in place, perhaps unaffected.
The kind of disposition sought to be reached is exemplified by that found in Northern Pacific Co. v. Boyd, 228 U.S. 482, 502-05 (1913), the leading case in establishing the absolute priority doctrine in reorganization law.
There the Court held that a reorganization whereby the secured creditors and the management-owners retained their economic interests in a railroad through a foreclosure that cut off claims of unsecured creditors against its assets was in effect a voidable disposition. See Bruce A. Markell, Owners, Auctions and Absolute Priority in Bankruptcy Reorganizations, 44 Stan.L.Rev. 69, 74-83 (1991). For cases in which an analogous injury to unsecured creditors was inflicted by a lienor and a debtor, see Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206 (3d Cir. 1990) (lender foreclosed on assets of steel company at 5:00 p.m. on a Friday, then transferred the assets to an affiliate of the debtor; lender made a loan to the affiliate to enable it to purchase at the foreclosure sale on almost the same terms as the old loan; new business opened Monday morning); Jackson v. Star Sprinkler Corp. of Florida, 575 F.2d 1223, 1231-34 (8th Cir. 1978); Heath v. Helmick, 173 F.2d 157, 161-62 (9th Cir. 1949); Toner v. Nuss, 234 F.Supp. 457, 461-62 (E.D.Pa. 1964); and see In re Spotless Tavern Co., Inc., 4 F.Supp. 752, 753, 755 (D.Md. 1933).





BADGES OF FRAUD TOPICS AND OPINIONS

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