A recent opinion of the Court of Appeals of Tennessee in a fraudulent transfer case provides an excellent summary and roadmap of what it takes to prove a fraudulent transfer under Tennessee law. The Uniform Fraudulent Transfer Act, which has been adopted in Tennessee, can be a bit much to get one’s head around, at least without a good bit of review and study. The recent opinion is useful because the facts of it are tailor-made to demonstrate how the provisions of the Act are applied and the result.
Here are the key facts of the case:
- Father owned an LLC, the business of which was installing drywall
- Father owed a Drywall Supplier about $350,000
- In October of 2007, Father signed a note to the Drywall Supplier for the amount he owed
- In March of 2009, Father sold the LLC to his Son for $12,000
- Drywall Supplier filed a lawsuit to set aside the transfer of the LLC to Son, alleging it was a fraudulent transfer
In its fraudulent transfer case, Drywall Supplier alleged that the transfer of the LLC to Son was a fraudulent transfer under the actual fraud statute and, also, under the constructive fraud statute, both of which are part of the Uniform Fraudulent Transfer Act. The trial court found that the transfer was not fraudulent under either provision of the Act. The Court of Appeals affirmed the trial court in all respects.
Under the actual fraud statute, a plaintiff must prove that the transfer was made “with actual intent to hinder, delay, or defraud” a creditor. Since proving fraudulent intent almost always requires circumstantial evidence, the statute lists eleven (11) factors that are to be considered in determining whether there was intent to defraud. If a plaintiff is able to prove the existence of one or more of those factors (often called “badges of fraud”), a presumption of fraud arises. Once that presumption has arisen, the burden shifts to the defendant to prove that there was no fraudulent intent.