Collections Blog Post 5: Fraudulent Conveyances

THIS IS AN ADVERTISEMENT FOR LEGAL SERVICES

When facing numerous creditors and/or substantial claims, some Judgment Debtors may try to transfer their property to a friend or relative for little or no money/consideration.  This attempt by a Judgment Debtor to preserve their assets and avoid the payment of just debts is called a “Fraudulent Conveyance,” and it’s not a new trick.

The Statute of Elizabeth, which laid the legal foundations for how to unwind Fraudulent Conveyances, was first codified in England in 1570. An early example of legal treatment of fraudulent conveyances is found in Twyne’s Case, 3 Coke 80 b, 76 Eng. Rep. 809 (Star Chamber 1601). In that case, the debtor was obligated to pay two creditors. When one of the creditors brought a debt collection action, the debtor secretly transferred to the other creditor the bulk of his estate. After the transfer, and while the case was pending, the debtor retained possession of the property and exercised full control of the assets. Only after the creditor obtained a Judgment and sought to enforce it upon the property, the creditor learned that the property was legally that of the other creditor. The creditor then brought an action to declare the transfer of property void for fraud. The Chancery Court identified certain “badges of fraud” from which the Court could infer a fraudulent intent by the transferor and the transferee:

(1)       the debtor transferred everything, without retaining even clothing or necessities;

(2)       the debtor’s continued possession and apparent ownership of the transferred goods;

(3) secrecy of the transactions;

(4) timing of the transfer (while suit was pending);

(5) the transferee’s agreement to let the debtor continue in possession and control of the transferred goods;

(6) self-serving declarations of honesty and truth.

In that case, the Court found each of these “badges” and voided the transfer to the other creditor thereby allowing the Plaintiff creditor to enforce his judgment on assets of the

Defendant.

Proving actual intent to defraud can be difficult. North Carolina has adopted similar rules regarding fraudulent conveyances.  See N.C. Uniform Voidable Transactions Act, N.C. General Statute § 39-23.1, et seq.; Aman v. Walker, 165 N.C. 224 (1914); Norman Owen Trucking, Inc. v. Morkoski, 131 N.C. App. 168 (1998).  When determining whether a fraudulent conveyance occurred, North Carolina Courts apply the following five principles:

(1) If the conveyance is voluntary, and the grantor retains property fully sufficient and available to pay his debts then existing, and there is no actual intent to defraud, the conveyance is valid.

(2) If the conveyance is voluntary, and the grantor did not retain property fully sufficient and available to pay his debts then existing, it is invalid as to creditors; but it cannot be impeached by subsequent creditors without proof of the existence of a debt at the time of its execution, which is unpaid, and when this is established and the conveyance avoided, subsequent creditors are let in and the property is subjected to the payment of creditors generally.

(3) If the conveyance is voluntary and made with the actual intent upon the part of the grantor to defraud creditors, it is void, although this fraudulent intent is not participated in by the grantee, and although property sufficient and available to pay existing debts is retained.

(4) If the conveyance is upon a valuable consideration and made with the actual intent to defraud creditors upon the part of the grantor alone, not participated in by the grantee and of which intent he had no notice, it is valid.

(5) If the conveyance is upon a valuable consideration, but made with the actual intent to defraud creditors on the part of the grantor, participated in by the grantee or of which he he [sic] has notice, it is void.

Morkoski, 131 N.C. App. at 173 (quoting Walker, 165 N.C. at 197).

Evidence of a Fraudulent Conveyance may not be discovered until the Plaintiff engages in post-judgment discovery or Supplemental Proceedings. The action to set aside a Fraudulent Conveyance would include the Plaintiff’s original debtor and the transferee. Applicable North Carolina law provides some protection for a bona fide purchaser. In that case, a Plaintiff may assert a lien or claim on the proceeds of the sale.

Unwinding a Fraudulent Conveyance can be a complicated legal task. If you need legal assistance getting paid what you’re owed, please feel free to contact The Law Offices of Peter Isakoff anytime, day or night, at (336) 863-8348 (Main) or (336) 864-9115 (Español).

DISCLAIMER: The information in this article is provided for informational purposes only. It is not offered as and does not constitute legal advice. The accuracy of the information may change pending changes in applicable law. If you have questions about a specific matter, you should contact a lawyer. The use of this article or any information provided in it does not establish any lawyer/client relationship.