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An Overview of Virginia’s Fraudulent Conveyance Statutes and Case Law

March 19, 2020

A fraudulent conveyance is one undertaken “with intent to delay, hinder, or defraud creditors”.  Va. Code § 55.1-400.  Case law demonstrates that a court looks at the enumerated badges of fraud similar to a totality of circumstances analysis.  In general, there are many facts and scenarios which the law interprets to be signs of fraud, and from which fraudulent intent may be inferred.

I. Applicable Virginia Law

Under Virginia law, a fraudulent conveyance has no specific statute of limitations but is governed by the concept of laches. Laches is defined as the neglect or failure to assert a known right or claim for an unexplained period of time under circumstances prejudicial to the adverse party.  See In re: Porter, 37 B.R. 56, 66 (E.D. Va. 1984); Stewart v. Lady, 251 Va. 106, 114 (1996).

a. Section 55.1-400 – Void Fraudulent Acts[1]

Code § 55.1-400, which address fraudulent conveyances, states: 

Every (i) gift, conveyance, assignment, or transfer of, or charge upon, any estate, real or personal, (ii) action commenced or order, judgment, or execution suffered or obtained, and (iii) bond or other writing given with intent to delay, hinder, or defraud creditors, purchasers, or other persons of or from what they are or may be lawfully entitled to shall, as to such creditors, purchasers, or other persons or their representatives or assigns, be void. This section shall not affect the title of a purchaser for valuable consideration, unless it appears that he had notice of the fraudulent intent of his immediate grantor or of the fraud rendering void the title of such grantor. (emphasis added).

In a suit to set aside a fraudulent conveyance, proof of the fraudulent intent must be "clear, cogent and convincing." Hutcheson v. Savings Bank of Richmond, 129 Va. 281, 289 (1921).  Fraud may be proved not only by direct evidence, but also by circumstantial evidence.  Id.  In fact, "[b]ecause of the difficulty of establishing 'actual intent,' evidence of fraud may be, and generally must be, circumstantial."  In re: Porter, 37 B.R. at 63. 

Virginia courts consequently rely upon presumptions of fraud, known as "badges of fraud," which consist of facts and circumstances that establish a prima facie case of fraudulent conveyance.  See Hutcheson, 129 Va. at 291. The badges of fraud include the following:

(1) the relationship of the parties; (2) the grantor's insolvency; (3) pursuit of him by his creditors at the time; (4) want of consideration; (5) retention of possession of the property by the grantor; and (6) fraudulent incurrence of indebtedness after the conveyance.  Hutcheson, 129 Va. at 291. Once a party introduces evidence to establish a badge of fraud, "the burden shifts, and the defendant must establish the bona fides of the transaction."  First National Bank of Bluefield v. Pressley, 176 Va. 25, 28 (1940).

Hutcheson, 129 Va. at 291.   Once a party introduces evidence to establish a badge of fraud, "the burden shifts, and the defendant must establish the bona fides of the transaction."  First National Bank of Bluefield v. Pressley, 176 Va. 25, 28 (1940).

b. Section 55.1-402 – Creditor’s Action to Avoid Conveyances

Code § 55.1-402 states, in pertinent part, that “[b]efore obtaining a judgment for his claim, a creditor may, whether such claim is due and payable or not, institute any action that he may institute after obtaining such judgment to avoid a gift, conveyance, assignment, or transfer of, or charge upon, the estate of his debtor declared void by either Section 55.1-400 or 55.1-401.”[2]  This section allows a complaint to be filed by a creditor to set aside a conveyance, declared void by Sections 55.1-400 or 55.1-401, before obtaining judgment or decree, upon the ground that the above sections refer to fraudulent acts that are void.  Brown v. Putney, 90 Va. 447 (1894).

c. Section 55.1-404 – Authority of Court to Set Aside

During an action to execute a judgment, it is important to note that a court may set aside a fraudulent conveyance or voluntary transfer pursuant to Section 55.1-400 on “its own motion, provided that all parties who have an interest in the property subject to the conveyance or transfer are given notice of the proceeding.”  Va. Code § 55.1-404.

d. Section 55.1-403 – Attorney Fees

In any action brought by a creditor pursuant to Section 55.1-400 or 55.1-402, where a conveyance is declared void, the court “shall award counsel for the creditor reasonable attorney fees against the debtor.”  Va. Code § 55.1-403.  Furthermore, upon a finding of fraudulent conveyance pursuant to Section 55.1-400, the court may assess sanctions (including attorney fees) against all parties who participated in the conveyance.  Id.

II. Badges of Fraud

As aforementioned, the Court looks for a combination of badges of fraud to establish a prima facie case.  Each of the badges are outlined below with the Court’s analysis of same.

a. Relationship of the Parties

Certainly, the relationship between parties, by blood or marriage, calls upon the Court for careful and close scrutiny for any transaction.  But a mere relationship in of itself is not a badge of fraud.  Johnson v. Lucas, 103 Va. 36 (1904).  In Hutcheson v. Savings Bank, 129 Va. 281 (1921), the relationship of a father and son did not of themselves constitute badges of fraud because the Court stated that “[i]t is perfectly true that persons standing in near relationship can deal with each other, and are not required to conduct such business differently from the manner in which they deal with other persons.”  Id. at 294.  But, the Court scrutinized that the father and son did not complete the subject transaction in accordance with the accustomed usages of business; there were no evidences of indebtedness for the conveyance (loans) from father to son.  Id.  Also, it was intended, and expected, for the father to be repaid, but the father allowed such payments to become delinquent; no payments were ever made to the father.  Id.  Finally, these debts were not listed on the son’s subsequent bankruptcy filing.  From these facts, the Court ruled it was sufficient to make out a prima facie case of fraud and imputed knowledge of the fraud from the grantor (son) onto the grantee (father). 

b. Grantor’s Insolvency

The mere fact that an insolvent debtor makes a conveyance is not conclusive evidence that the debtor perpetrated a fraud upon his creditors.  It is a material circumstance to be considered in connection with other circumstances which tend to show a fraudulent intention. See McClintock v. Royall, 173 Va. 408 (1939).  In Bank of Commerce v. Rosemary & Thyme, Inc., 218 Va. 781(1978), the Court ruled that Va. Code § 55-80 only penalized transactions where the party that received payment knew the payment was fraudulent.  The mere fact of payment of a valid debt by an insolvent corporation was insufficient to make the payment fraudulent even if it had the incidental effect of releasing other creditors.  Id.

c. Pursuit of Grantor by Creditors at Time of Conveyance

The badges of fraud have been implicated when there was threat of litigation by creditors at the time of the transfer, in addition other elements of fraud.  Westwood Bldgs. Ltd. P'ship v. Grayson, 96 Va. Cir. 312 (Fairfax County 2017)[3].  When looking at the timing of a conveyance, the Court considers the factual timeline as a whole and an assessment of the witness/evidence credibility.   Id. at 331.  The amount owed is a significant fact because any conveyance must be construed under the circumstances of whether there was the requisite intent to hinder or defraud the creditor.  See Lawyers Title Ins. Corp. v. P.R.T. Enters., 65 Va. Cir. 271, 276 (2004) (Attorney's letter conceded that millions were owed by PRT, putting it in dire financial straits.)

d. Consideration

This concept is uncomplicated. It is a well-settled rule of law that mere inadequacy of price is no ground for setting aside a conveyance, unless so gross as to shock the conscience and furnish decisive evidence of fraud.  Young v. Willis, 82 Va. 291 (1886); Flook v. Armentrout's Adm'r, 100 Va. 638 (1902).   Any transaction must evidence fair market consideration with observance of corporate formalities and records, as opposed to parties who “intermingle their funds via sham transactions whereby funds are transferred between one company or another in disregard of corporate formalities and on an as-needed basis.”  Flame S.A. v. Indus. Carriers, 39 F. Supp. 3d 769, 788 (E.D. Va. 2014), aff'd, 807 F.3d 572 (4th Cir. 2015).

e. Retention of Interest in the Thing Transferred

One of the badges whereby a fraudulent intent may be discovered is the circumstance that the grantor remains in possession of the granted property; however, the retention of possession of the property may be provided for in the conveyance and be consistent with its terms and objects.  Young v. Willis, 82 Va. 291 (1886).  In Fox Rest Assocs., L.P. v. Little, 282 Va. 277, 286 (2011), the evidence established a prima facie case of fraud against Mr. Little by demonstrating several badges of fraud, which shifted the burden of proof to the defendants.  First, Mr. Little retained an interest in the funds that he deposited into the SunTrust Account because the account was held jointly with his wife, giving each the right to access the funds.  Id.  Second, all of the transfers were made after Mr. Little was aware of the plaintiff’s dissatisfaction with his management of Fox Rest, which led to the derivative action.  Id.  Third, Mr. Little retained possession of his law firm’s office equipment after an equipment sale.  Id.

f. Fraudulent Incurrence of Indebtedness after the Conveyance

In the review of relevant case law, there was not substantive discussion on this badge.

III. The Remedy for Plaintiff Creditor

Hypothetically, if a plaintiff creditor were to establish a fraudulent conveyance under Va. Code § 55.1-400, then the statute renders the conveyance void.  This remedy returns the fraudulently conveyed assets to the transferor, but as a general rule it does not authorize a court to award an in personam judgment when the transaction is set aside.  See Westwood Bldgs. Ltd. P'ship v. Grayson, 96 Va. Cir. 312, 324 (Fairfax County 2017) (“Those who participate in occasioning the transfer are called upon in equity to undo their conduct if the Plaintiff prevails in order to restore the status quo.”)  Also, a court will award the plaintiff creditor reasonable attorney’s fees against the debtor pursuant to Va. Code § 55.1-403.  Furthermore, the court may assess sanctions against anyone (parties, lawyers, professionals, etc.) who participated in the conveyance.  Id.

IV. Conclusion

This is a reiteration of the points raised above.  For a debtor, any conveyance will be closely scrutinized.  If there are enough facts (relationship, timeliness, potential amount of judgment), then a plaintiff creditor may argue, in good faith, the badges of fraud are implicated even if there is no evidence of an improper intent.  As a result, every aspect of a debtor’s transaction/conveyance must comply with Virginia law and the accustomed usages of business in the industry.  Also, debtors may wish to insulate themselves against criticism by retaining counsel to conform with the aforementioned law in the Commonwealth.  Finally, debtors should observe all formalities and maintain records to oppose any allegations of fraudulent intent. 

Barrett Luxhoj is a Pender & Coward attorney focusing his practice on construction law, insurance defense and civil litigation.

[1] Formerly Va. Code § 55-80, but repealed by Acts 2019, c. 712 , cl. 11, effective October 1, 2019.

[2] Unlike Va. Code § 55.1-400, Section 55.1-401 does not require finding of an intent to hinder, delay or defraud on the part of the grantor or grantee.  In re: Porter, 37 B.R. at 65.  Rather, it provides that if a transferor is insolvent at the time a transfer is made, without valuable consideration, then the transfer shall be voidable by prior creditors.  Id.  The Court has ruled that the enactment "was intended to defeat frauds perpetrated upon existing creditors by the marriage of an insolvent debtor, accompanied by gifts to his wife."  Snydor v. Grand Staff, 96 Va. 473, 478-79 (1898).

[3] Note that Section 55.1-402 entitles a creditor to file an action to avoid the conveyance “before obtaining a judgment for his claim.”  Hence, a potential creditor need not wait until the underlying legal action has run its course before filing suit to challenge a debtor’s conveyance.

 

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