Fraudulent Transfers | Burdens of Proof

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Gregory W. Mitchell

Gregory W. Mitchell



Gregory Mitchell joins Freeman Law to lead its bankruptcy practice. Mr. Mitchell is a native of the Dallas area, graduating from Southern Methodist University with a Bachelor’s Degree in Economics in 1991 and with his J.D. in 1994. In 1995, he obtained an LL.M. in Taxation from New York University. Mr. Mitchell currently directs the SMU Dedman School of Law’s federal taxpayer clinic. Mr. Mitchell’s background in tax makes him a natural fit for Freeman Law.

Prior to joining Freeman Law, Mr. Mitchell was the managing partner of The Mitchell Law Firm, L.P., a small firm he started in 2004, where he ran a diverse practice primarily focused on bankruptcy, tax and related litigation matters.

Prior to starting his own firm, Mr. Mitchell served as a Partner and General Counsel with Tax Automation, L.P., a national tax consulting firm. Mr. Mitchell was previously the National Director of Tax Technology at Ryan & Company, a national tax consulting practice, as well as a Senior Manager with KPMG, a “Big Four” accounting firm.

So this is the fifth and final installment of my five-part series on fraudulent transfers. In previous blogs, I laid out the basic statutory framework regarding fraudulent transfers, as well as described generally the difference between actual and constructively fraudulent transfers (Part 1). In Part 2, we took a detailed look at the elements of a fraudulent transfer under both the Bankruptcy Code as well as Texas law. In Part 3, we took a deeper dive into the badges of fraud that courts use to analyze the existence of actual fraudulent intent. In Part 4, we took a more detailed look at insolvency. In this final installment, we’re going to address the various burdens of proof that affect parties on both sides of a transaction.

With respect to actual fraudulent transfers, Plaintiffs must provide evidence that the Debtor made each transfer with actual intent to hinder, delay, or defraud “any entity to which the debtor [is] … indebted.” § 548(a)(1)(A); Furr v. TD Bank, N.A. (In re Rollaguard Sec., LLC), 591 B.R. 895, 918 (Bankr. S.D. Fla. 2018) (“In order to prosecute a claim based on actual intent to hinder, delay, or defraud a creditor, the plaintiff must show that the alleged fraudulent intent is related to the transfers sought to be avoided.”).  Therefore, it’s important to note that Plaintiff’s burden applies separately to each transfer, and not just some general intent regarding all transfers.

From Part 2, you will recall that the first element of an actual fraudulent transfer under either the Bankruptcy Code or the Texas Uniform Fraudulent Transfer Act (“TUFTA”) is the existence of a creditor. Regarding that first element, the burden is on the Plaintiffs to demonstrate the existence of an actual creditor with an allowable claim against the debtor.” In re Northstar, 616 B.R. at 724. Further, “the so-called ‘triggering’ creditor must be the same creditor on both the transfer date and the date of commencement of the case.” Id. “If there is no [such] creditor . . . the [plaintiff] is powerless to act under § 544(b)(1). Id. 

Plaintiffs further have the burden of establishing fraudulent intent. From previous installments, recall that courts typically rely on circumstantial evidence, known as badges of fraud, to infer intent. We learned in Part 3 that there is no clear authority on how many badges of fraud must be present to sufficiently establish actual intent under either the Bankruptcy Code or TUFTA. We do know that, as a matter of law, a finding of fraudulent intent cannot properly be inferred from the existence of just one badge of fraud. And we also know that the burden is on the Plaintiffs to establish the existence of “actual intent to hinder, delay, or defraud any creditor of the debtor” – including the presence of multiple badges of fraud.  See, e.g., In re The Heritage Org., 413 B.R. 438, 464 Bankr. N.D. Tex. 2009.

Once the Plaintiffs have met the burden of establishing: (1) the existence of a creditor; (2) the existence of a debtor; (3) that the debtor transferred assets shortly before or after the creditor’s claim arose; and (4) that the debtor did so with actual intent to hinder, delay, or defraud any of the debtor’s creditors, then – and only then – the burden shifts to the defendant to show that the transferor had a legitimate purpose in making the transfer.” Id.

With respect to constructive fraudulent transfers, under TUFTA, the Plaintiffs have the burden to show that the transfers were made by the Debtor without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:  (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due.  Tex. Bus. & Comm. C. §24.005(a)(2).

Under the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(B), to prove constructive fraudulent intent, the Plaintiffs must show that the Debtor received less than a reasonably equivalent value in exchange for such transfer or obligation and one of the following:

11 U.S.C. § 548(a)(1)(B).

Specifically, and importantly, the Plaintiffs bear the burden to establish the lack of reasonably equivalent value – not the other way around.  Yaquinto v. CBS Radio, et al., Adv. Proc. No. 19-03226-sgj (Bankr. N.D. Tex., July 13, 2022); In re McConnell, 934 F.2d 662, 665 n.1 (5th Cir. 1991); Altus Brands II, LLC v. Alexander, 435 S.W.3d 432, 441 (Tex. App.—Dallas 2014, no pet.).  Therefore, a Plaintiff does not satisfy its burden simply by establishing the existence of transfers by the Debtor.  The Plaintiff must go further to establish that reasonably equivalent value for such transfers does not exist.  Plaintiffs cannot rely on mere suggestion or innuendo and thereby place the burden on the Defendant to establish the existence of reasonably equivalent value.

Once a Plaintiff can establish the existence of an actual or fraudulent transfer, the burden then shifts to the defendant transferee to establish that such transfer or obligation is not voidable based on the fact that such transferee took such transfer in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.  That defense is found in the Bankruptcy Code at 11 U.S.C. § 548(c), and under TUFTA at Tex. Bus. & Comm. C. §24.009.  Therefore, it is possible that a plaintiff could establish the existence of a fraudulent transfer, but still not be able to undo or avoid the transfer in question.

Hopefully this series has provided a little clarity as it relates to fraudulent transfers. A future goal is to establish a 50-state analysis on fraudulent transfer law that could benefit those struggling with this topic from around the country.