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FRAUDULENT TRANSFERS[1]
Avoidence of fraudulent transfers differs from avoidance of preferences. Preferences represent
legitimate payments honestly owed; a fraudulent transfer generally is viewed as one that skews the division
of property among creditors and wrongfully depletes the estate—although such is not always the case.
While preference avoidance aims to ensure that all unsecured creditors are treated equally, the avoidance
of fraudulent transfer focuses on the relationship between the debtor and the creditor.
I. Fraudulent Transfers: Section 548
A bankruptcy trustee can recover fraudulent transfers and obligations in a bankruptcy proceeding
pursuant to 11 U. S.C. §548 or state fraudulent transfer laws.
debtor, that was made or incurred on or within two years before the date of the filing of the petition if the
debtor voluntarily or involuntarily made such transfer or incurred such obligation through either actual fraud
or constructive fraud.
A. Actual Fraud - 11 U.S.C. 548(a)(1)(A).
If the trustee is proceeding under § 548(a)(1)(A), the trustee must prove actual intent to hinder, delay
or defraud any entity to which the debtor was or became, on or after the date that such transfer occurred or
such obligation was incurred or indebted. There is a split of authority whether the trustee must show intent
by clear and convincing evidence or merely by a preponderance of the evidence. See In re C.F. Foods, LP,
280 B.R. 103, 111 (Bankr. E.D. Pa. 2002) (and cases cited therein). Since it is unlikely that there will be
direct evidence of fraudulent intent, it usually must be proved by circumstantial evidence. Further intent to
defraud need not be proved; instead, intent to hinder or delay is sufficient. The intent can be that of either
the transferee or debtor, and the transferee’s intent may be imputed to the debtor if the transferee is in a
position to control the debtor. To prove actual intent, the trustee can use the presumption that one intends
the legal consequences of his acts as well as the “badges of fraud” that have been employed since the
Statute of Elizabeth [1571], and a form of which presently are enacted under North Carolina law in the
Uniform Fraudulent Transfer Act, N.C.G.S. § 39-23.4(b). See e.g,. Whitaker v. Mortgage Miracle, Inc. (In re
Summit Place, LLC), 298 R.R. 62 (W.D.N.C. 2002). The traditonal badges of fraud include: (1) a transfer of
all of the debtor’s property; (2) a transfer of title but retention of possession by the debtor; (3) a secret
conveyance; (4) a trust relationship between the debtor and transferee; (5) a conveyance during pending
litigation; (6) the instrument itself suspiciously refers to the transfer as bona fide; (7) inadequate
consideration; and (8) a gift to family member. See Twyne’s Case, 3 Coke 80b, 76 Eng. Rep. 809 (1601).
The North Carolina Uniform Fraudulent Transfer Act, N.C.G.S. § 39-23.4(b), states that the following
factors also may be considered when determining the existence of fraudulent intent:
(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;
