May I See Your Badge(s)? The Bankruptcy Trustee's Power To Avoid Fraudulent Transfers Made With Actual Intent

• Published date: 20 July 2023
• Subject Matter: Criminal Law, Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: McLane Middleton, Professional Association
• Author: Mr Joseph A. Foster and Sabrina C. Beavens

Published: New Hampshire Bar News

July 19, 2023

Fraudulent transfer law has its roots in the Statute of Elizabeth, enacted in 1571 which voided any transfer made with the "intent to delay, hinder or defraud creditors." The statute served as the model for the Uniform Fraudulent Transfer Act which was adopted in New Hampshire in 1988 ("UFTA"). Actions to avoid fraudulent transfers involve relatively simple matters–the transfer of a home from husband to wife; and some of the most complex litigation bankruptcy courts adjudicate—the unwinding of a leveraged buy-out. They involve individuals with small amounts of debt and business entities with extremely complex credit facilities. Under the Bankruptcy Code, a trustee or debtor in possession has two statutory grounds to avoid a "fraudulent transfer"—Section 548 of the Bankruptcy Code and the UFTA using the powers granted under Section 544(b)(1) which permit the plaintiff to utilize state law to avoid certain transfers and obligations.

The Code and the UFTA provide two primary causes of action for a Trustee to avoid transfers or obligations. The Trustee must either prove that the debtor:

(1) transferred property or incurred an obligation with the intent to hinder, delay or defraud its creditors; or

(2) made a transfer or incurred an obligation for less than reasonably equivalent value and at the time such transfer was made or obligation incurred: (i) was insolvent; (ii) had unreasonably small capital; or (iii) intended to incur debts beyond its ability to repay them.

The first cause of action is often referred to as "actual fraud" and the second "constructive fraud". This article focuses on actual fraud.

To establish an "actual fraud" claim, the trustee must prove the debtor incurred the obligation or made the challenged transfer with the actual intent to hinder, delay or defraud it creditors. There is a heightened pleading standard for actual fraud claims. The trustee must state with particularity the circumstances constituting the alleged actually fraudulent transfer.

The burden of proof to establish actual intent to defraud is also high. Unlike most civil actions which only require proof by a preponderance of the evidence, the plaintiff must prove its actual fraud case by clear and convincing evidence. In re Jackson, 318 B.R. 5 (Bankr. D. N.H. 2004).

While on occasion a debtor or his transferee will admit an intent to defraud, In re Taylor, 642 B.R. 912 (Bankr. W.D. Ark. 2022)(estranged ex-wife admits husband...