“Badges of Fraud” Make a Prima Facie Case of Fraudulent Conveyance

prima facie case
In McCarthy v. Giron, the Judge Gerald Bruce Lee of the U.S. District Court for the Eastern District of Virginia considered what is necessary to establish a prima facie case of fraudulent conveyance. The Court recognized several facts and circumstances commonly referred to as “badges of fraud” which, if established, create a prima facie case of fraudulent conveyance which must then be rebutted by defendants. In McCarthy v. Giron, 1:13-cv-01559, 2014 WL 2696660 (E.D.Va. June 6, 2014), a bankruptcy trustee brought an adversarial proceeding against Carlos I. Giron and Carlos A. Giron to hold them personally liable for the debts of their company, C & C General Buildings, Inc. (“C & C”), and for fraudulent conveyance. Judge Lee adopted the bankruptcy court’s recommendation regarding a claim of fraudulent conveyance because the Trustee made a prima facie case of fraudulent conveyance based on the presence of certain badges of fraud which were not rebutted by the defendants. The “badges of fraud” formula is an evidentiary rule that gives rise to an inference that a transaction is a fraudulent attempt to evade a creditor.  Once this inference arises, the burden of proof switches from the plaintiff to the defendant to prove the legitimacy and good-faith of the transaction. Judge Lee first looked to the evidence for badges of fraud.  “Under Virginia law, certain facts and circumstances have become badges of fraud, or presumptions of fraud that establish a prima facie case of fraudulent conveyance.” Id. (citing Fox Rest Assoc, L.P. v. Little, 717 S.E.2d 126, 131 (Va.2011).)  The Bankruptcy Court detected a number of badges of fraud related to the transaction:
  1. Threat of litigation by its creditors at the time of transfer
  2. The transfer left the debtor insolvent
  3. Gross inadequacy of consideration for the conveyance
  4. Close relationship (i.e., family members) between the parties
Judge Lee, however, emphasized that “the close relationship of the parties, while not a determining factor of fraud in itself, strengthens the presumption of impropriety arising from the other circumstances discussed.” Id. If badges of fraud are found and a prima facie case of fraudulent conveyance is established, the burden of proof shifts to the defendant to prove the propriety of the alleged fraudulent transaction. Id. (citation omitted). In the instant case, Judge Lee found that the trustee made a prima facie case of fraudulent conveyance which Defendants failed to rebut “because they did not offer any evidence to explain the legitimacy of the transfers, and chose not to testify.” Id. Accordingly, the Court adopted the Bankruptcy Court’s recommendation that the fraudulent conveyance made by Defendants on behalf of C&C was voidable. A debtor who seeks to evade judgments is an old problem, as old as the western legal system itself.  In fact, the “badges of fraud” formula was first set forth in 1601 in Twyne’s Case.[1]  But in recent years, the Virginia General Assembly has breathed new life (and teeth) into the Commonwealth’s fraudulent conveyance statutes with the amendment of Virginia Code § 55-82.1 in 2012.  This amendment granted a court wide discretion to award sanctions and attorney’s fees against any party who assisted or participated in a fraudulent conveyance.  This is a major development in the law impacting creditors’ rights.  Counsel who represent creditors and other financial institutions should keep in mind this remedy.
[1] Twyne’s Case, 3 Coke Rep. 80b, 76 Eng. Rep. 809 (Star Chamber 1601)