Fraudulent Transfers | Badges Of Fraud

JurisdictionUnited States,Federal,Texas
Law FirmFreeman Law
Subject MatterCriminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
AuthorMr Gregory Mitchell
Published date07 January 2023

After a break for the holidays, this is the third of an expected five-part series on fraudulent transfers. In my first blog, I laid out the basic statutory framework, as well as a described generally the difference between actual and constructively fraudulent transfer. In the second blog, we took a detailed look at the elements of a fraudulent transfer under both the Bankruptcy Code as well as Texas law. In this third installment, we will take a deeper dive into the badges of fraud that courts use to analyze the existence of actual fraudulent intent.

As we discussed in the last installment, one of the elements of an actual fraudulent transfer under either the Bankruptcy Code or the Texas Uniform Fraudulent Transfer Act ("TUFTA") is that the debtor transferred assets with actual intent to hinder, delay, or defraud any of the debtor's creditors. Whether a transfer was made with actual fraudulent intent is a fact question. Given that direct evidence of actual intent is rarely available (no one is going to readily admit that they intended to defraud their creditors), courts typically rely on circumstantial evidence, known as badges of fraud, to infer intent. Badges of fraud have been described as bridges that connect "questionable acts commonly associated with fraud to findings of actual fraudulent intent." 5 Collier on Bankruptcy ' 548.04(1)(b) (16th 2022).

The Bankruptcy Code does not explicitly list badges of fraud, but the Fifth Circuit has recognized the following badges of fraud in analyzing actual fraud under the Bankruptcy Code:

  1. the lack or inadequacy of consideration;
  2. the family, friendship or close associate relationship between the parties;
  3. the retention of possession, benefit or use of the property in question;
  4. the financial condition of the party sought to be charged both before and after the transaction in question;
  5. the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt onset of financial difficulties, or pendency or threat of suits by creditors; and
  6. the general chronology of events and transactions under inquiry.

See Soza v. Hill (In re Soza), 542 F.3d 1060, 1067 (5th Cir. 2008) (quoting Chastant v. Chestnut (In re Chastant), 873 F.2d 89, 91 (5th Cir. 1989)). Other circuits have found used similar badges of fraud in their analysis of actual intent.

Under Texas law, TUFTA provides a non-exclusive list of badges of fraud that may be considered to find actual intent on the part of a debtor. The badges of fraud listed in the statute include:

  1. the transfer or obligation was to an insider;
  2. the retained possession or control of the property transferred after the transfer;
  3. the transfer or...

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