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Are All Fraudulent Transfers Unfair or Deceptive Acts?

Ellis Winters

Ellis & Winters

Courts almost always treat fraud claims as per se (automatic) violations of N.C. Gen. Stat. § 75-1.1. Does that mean that fraudulent transfers of assets, likewise, automatically support recovery under section 75-1.1?

A recent decision of the North Carolina Business Court, KRG New Hill Place, LLC v. Springs Investors, LLC, allowed a 75-1.1 claim that was related to a fraudulent-transfer claim to survive summary judgment. The decision by Judge McGuire, however, stopped short of calling fraudulent transfers per se violations of section 75-1.1.

What is a fraudulent transfer? Although the name of the claim suggests an overlap with fraud claims, the two theories have some key differences:

  • First, although a fraud claim is based on case law alone, a fraudulent-transfer claim is statutory.
  • Second, a fraudulent-transfer claim involves only a narrow type of conduct: a movement of assets by a person who faces creditors.
  • Third, unlike a fraud claim, a fraudulent-transfer claim does not necessarily require subjective bad intent. To be sure, the North Carolina Fraudulent Transfer Act does allow a creditor to recover transfers that a debtor made with an intent to “hinder, delay, or defraud” creditors. But a creditor can also recover a transfer by satisfying objective criteria alone. For example, a creditor can recover if it proves that a debtor transferred an asset without receiving reasonably equivalent value in exchange, during a time when the debtor was insolvent or its remaining assets were unreasonably small.

In KRG, two development groups, KRG and Springs, made an agreement to develop their adjacent properties. As part of the development agreement, KRG and Springs agreed to build and improve roads near the two properties.

Shortly after the parties made the agreement, KRG stopped work on the roads. The parties had multiple disputes over their obligations to perform and pay for work under the development agreement.

KRG eventually demanded that Springs escrow almost $3 million for project costs. Shortly after KRG’s demand, Springs transferred real property to its individual owners and its affiliated companies.

Eventually, the disputes over the development agreement led to litigation in the North Carolina Business Court. KRG’s complaint included a claim that Springs’s property transfers violated the North Carolina Fraudulent Transfer Act.

KRG also asserted a related claim under section 75-1.1. KRG claimed that Springs had induced KRG to continue to perform under the development agreement, then fraudulently transferred assets to avoid Springs’s financial obligations under the agreement.

KRG seemed to pursue its fraudulent-transfer claims on both a subjective and an objective theory. It alleged that Springs made the transfers with the intent to hinder, delay, or defraud creditors, but it also alleged that Springs made the transfers without receiving reasonably equivalent value.

The parties filed cross-motions for summary judgment. The Business Court denied both motions. On KRG’s fraudulent-transfer claim, the court noted that the statute allows objective and subjective theories, such as those that KRG was pursuing. Without saying much more than that, however, the court concluded that “significant disputes of material fact” precluded summary judgment on the fraudulent-transfer claim.

The court then turned to KRG’s 75-1.1 claim. The court wrote that KRG’s fraudulent-transfer claim “could support” a 75-1.1 violation. This language, as we have noted before, falls short of announcing a per se violation.

Although the court did not say expressly that KRG, to maintain its 75-1.1 claim, had to show an intent to hinder, delay, or defraud creditors, the court’s reasoning hints at such a requirement. The court wrote that “conduct amounting to a fraudulent transfer designed to avoid the claims of creditors could support a claim for injury based on the alleged unfair and deceptive acts.” When the case proceeds to trial in January 2016, the parties will need to test the meaning of this sentence. The acid test would occur if the jury found an objectively fraudulent transfer—one for insufficient value—but not a transfer with bad subjective intent.

Finally, the court also allowed KRG’s 75-1.1 claim to proceed based on a different theory: that Springs induced KRG to continue to perform under the development agreement during a time when Springs and its principals were allegedly draining Springs’s assets.

The multiple theories that KRG is pursuing leave room for doubt on whether this case will add definition to the relationship between fraudulent-transfer theories and section 75-1.1. We’ll watch for further developments.

Author: George Sanderson

September 8, 2015
Posted in  Creditors Rights, Lender Liability, and Bankruptcy