May I See Your Badge(s)?  The Bankruptcy Trustee’s Power to Avoid Fraudulent Transfers Made with Actual Intent

Joe Foster Headshot
Joseph A. Foster
Director, Corporate Department
Photo of Sabrina Beavens
Sabrina C. Beavens
Of Counsel, Corporate Department and Real Estate Practice Group
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 insolvent for 15 years and transferred property to her to keep it away from his creditors), courts recognize that a debtor will rarely admit that the transfer was made with the intent to defraud. Therefore, they evaluate the transferor’s intent based on “the circumstances surrounding the transfer, taking particular note of certain recognized indicia or badges of fraud[.]” In re Blais, 2021 WL 4483099 (Bankr. D. N. H. 2021) (quoting Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st 1991)).

In cases where there is not direct testimony to support a finding of actual fraud, the courts look to the UFTA which includes a non-exhaustive list of the so-called “badges of fraud” which includes:

  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 after a substantial debt was incurred; and
  11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. (N.H. RSA 545-A:4, II).

Case law generally provides that proof of a single badge of fraud is insufficient to establish an actual intent to defraud.  On the other hand, the presence of several badges without strong countervailing evidence is generally found to be sufficient.  See Max Sugarman, 926 F.2d at 1254-55 (noting a “single badge of fraud may spur mere suspicion; the confluence of several can constitute conclusive evidence of an actual intent to defraud, absent significantly clear evidence of a legitimate supervening purpose.”); Jackson, 318 B.R. at 14 (“The law … allows the badges to act as a substitute for direct proof of intent and permits, but does not require, the fact finder to draw inferences of bad intent from them. Any badge of fraud is potentially relevant to proving fraudulent intent, but no single badge alone creates a presumption of bad intent”).

Bankruptcy Judge Michael Fagone, sitting by designation in New Hampshire said it well in a case involving the determination actual fraud in connection with the dischargeabilty of a debt:

[T]he analysis of the badges is not a mathematical exercise in which the factfinder simply checks “yes” or “no” for each badge and then compares the results to produce a definitive answer. Instead, the badges of fraud are tools used by courts to help analyze the evidence presented to answer the ultimate question, namely, whether a specific transfer was made with intent to hinder, delay, or defraud creditors. The statutorily identified badges are not talismanic, and the court must resolve the factual question of intent based on its assessment of all the evidence.

In re Blais, 2021 WL 4483099 (Bankr. D. N. H. 2021).

Finally, it is important to remember that the actual fraud may be established if there is proof that the debtor made the transfer with the intent to:  hinder, delay or defraud.  The statute is written in the disjunctive and proof of only one of the three is required.  Hindering a creditor or delaying its recovery alone can be sufficient.