Plaintiff Shows Actual and Constructive Fraud in Fraudulent Transfer Suit – IL Court

The plaintiff mortgage lender in Summitbridge Credit Investments II, LLC v. Ahn, 2017 IL App (1st) 162480-U sued the husband and wife borrower defendants for breach of a mortgage loan on two commercial properties in Chicago

Two days after the plaintiff obtained a $360K-plus default judgment, the defendants deeded a third commercial property they owned to their adult children.

The plaintiff caught wind of the post-judgment transfer during citation proceedings and in 2015 filed a fraudulent transfer suit to undo the property transfer.  The trial court granted summary judgment for the lender and voided the defendants’ transfer of property. The defendants appealed.

Affirming, the First District recited and applied the governing standards for actual fraud (“fraud in fact”) and constructive fraud (“fraud in law”) under Illinois’s fraudulent transfer act, 740 ILCS 160/1 et seq. (the “Act”)

The Act allows claims for two species of fraud under the Act – actual fraud and constructive fraud, premised on Act Sections 5(a)(1) and 5(a)(2) and 6(a), respectively.  (Also, see http://paulporvaznik.com/uniform-fraudulent-transfer-act-actual-fraud-constructive-fraud-transfers-insufficient-value-il-law-basics/5646)

Actual Fraud and ‘Badges’ of Fraud

Actual fraud that impels a court to unwind a transfer of property requires clear and convincing evidence that a debtor made a transfer with actual intent to hinder, delay or defraud creditors.

Eleven badges or indicators of fraud are set forth in Section 5(b) of the Act.  The factor the Summitbridge Court particularly homed in on was whether there was an exchange of reasonably equivalent value.  That is, whether the defendants’ children gave anything in exchange for the transferred commercial property.

In analyzing this factor, courts consider four sub-factors including (1) whether the value of what was transferred is equal to the value of what was received, (2) the fair market value of what was transferred and what was received, (3) whether it was an arm’s length transaction, and (4) good faith of the transferee/recipient.  Reasonably equivalent value is measured at the time of transfer.

In opposing the plaintiff’s summary judgment motion, the defendants made only conclusory assertions they lacked fraudulent intent.  Moreover, they failed to come forward with any evidence showing they received consideration for the transfer.

In summary, because there were so many badges of actual fraud present, and the debtors offered no proof of consideration flowing to them in exchange for quitclaiming the property, the appeals court affirmed the trial court’s actual fraud finding.

Constructive Fraud

Unlike actual fraud, constructive fraud (i.e., fraud in law) does not require proof of an intent to defraud.  A transfer made for less than reasonably equivalent value of the thing transferred that leaves a debtor unable to meet its obligations are presumed fraudulent.  A fraudulent transfer plaintiff alleging constructive fraud must prove it by a preponderance of evidence – a lesser burden that the clear and convincing one governing an actual fraud or fraud in fact claim.

Constructive fraud under Act Section 5(a)(2) is shown where a debtor did not receive a reasonably equivalent value for the transfer and the debtor (a) was engaged or was about to engage in a business or transactions for which the debtor’s remaining assets were unreasonably small in relation to the business or transaction, or (b) intended to incur, or believed or reasonably should have believed he would incur, debts beyond his ability to pay as they came due.

Section 6(a) constructive fraud applies specifically to claims arising before a transfer where a debtor doesn’t receive reasonably equivalent value and was insolvent at the time of or resulting from a transfer.

The First District agreed with the lower court that the plaintiff sufficiently proved defendants’ constructive fraud.  It noted that the plaintiff’s money judgment pre-dated the transfer of the property to defendant’s children and there was no record evidence of the debtors receiving anything in exchange for the transfer.

Take-aways:

Summitbridge provides a useful summary of fraud in fact and fraud in law fraudulent transfer factors in the context of a dispositive motion.

Once again, summary judgment is the ultimate put-up-or-shut-up litigation moment: a party opposing summary judgment must do more than make conclusory assertions in an affidavit.  Instead, he/she must produce specific evidence that reveals a genuine factual dispute.

The defendants’ affidavit testimony that they lacked fraudulent intent and transferred property to their family members for value rang hollow in the face of a lack of tangible evidence in the record to support those statements.

 

 

 

Published by

PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.