Tuesday, January 21, 2014

Actual Fraud, Constructive Fraud, and Preferential Transfer

In the case of  In re Dealers Agency Services, Inc., 2007 WL 4699023 (Bankr.M.D.Fla.)(Glenn, J.),  the chapter 7 trustee filed an adversary proceeding to avoid the transfer of substantially all assets of the debtor corporation to a limited liability company within one year before the filing of the bankruptcy petition. The issue in this case was whether this transfer was a fraudulent transfer within bankruptcy code section 548 or Florida Statutes section 726.105 or a preferential transfer within bankruptcy code section 547.

The court found that section 548 and section 726.105 are substantially the same in their analysis of what must be proven for a finding of fraud. The court noted that it must be found that property was  transferred within one year or four years of petition and that the transfer was made with the actual intent to hinder, delay or defraud any entity to which the debtor was indebted.

The court noted that as it is difficult to establish actual intent, courts generally consider the totality of the circumstances and determine whether any badges of fraud are present. The court further noted that the 11th Circuit Court of Appeals adopted the badges of fraud contained in the Florida fraudulent transfer statute. In re Mc Carn's Allstate Finance, 326 B.R. 843, 850 (Bankr. M.D. Fla. 2005)(citing In re Levine, 134 F.3d 1046, (11th Cir.1998)). The court noted that the badges of fraud are set forth in section 726.105 (2)(a)-(k) and that while a single badge of fraud may create only a suspicious circumstance, several of them together may afford a basis to infer fraud.

The court stated that there is constructive fraud per 548(a)(1)(B) if and entity receives less than a reasonably equivalent value. In re Seaway International Transport, Inc. 341 B.R. 333 (Bankr. S.D. Fla. 2006). The court further stated that the statute does not define reasonably equivalent value and that the courts consider many factors, including good faith of the parties, disparity between fair value and what debtor receives, and whether the transfer was at arm's length. The court reviews what went out and what was received.

The court further stated that to find that a transfer is a preferential transfer per 547 (b), one must establish that a transfer of the property was made, the transfer was to or for the benefit of a creditor, and that the transfer was for or on account of an antecedent debt.