Proving an Intentional Fraudulent Transfer under the Bankruptcy Code and the UFTA: A Clear and Convincing Preponderance of Uncertainty

Univ. of Richmond Law School's Professor A. Benjamin Spencer, founder of the Split Circuits Blog (previously noted here), has posted today on a split recently discussed by Columbus Bankruptcy Judge John E. Hoffman, Jr. regarding the level of proof (whether "preponderance" vs. "clear and convincing") necessary to establish the existence of an intentional fraudulent transfer under Bankruptcy Code section 548(a)(1)(A) (which enables a trustee to avoid a transfer or obligation incurred "with actual intent to hinder, delay, or defraud" the debtor's creditors).  See In re Canyon Systems Corp., 343 B.R. 615 (Bankr. S.D. Ohio 2006) (pdf)

According to Chicago's Bankruptcy Judge Eugene R. Wedoff, the reason the preponderance standard must apply is because the US Supreme Court held in Grogan v. Garner, 498 U.S. 279, 286 (1991) (WL), that the "preponderance" standard of proof applies to all causes of action arising under the Bankruptcy Code “unless particularly important individual interests or rights are at stake.”  As Judge Wedoff explained in Baldi v. Lynch (In re McCook Metals, L.L.C), 319 B.R. 570 (Bankr. N.D. Ill. 2005) (pdf): 

There is a dispute over whether the higher, clear and convincing evidence standard applies to proof of actual fraud under 548(a)(1).  See Taylor v. Rupp (In re Taylor), 133 F.3d 1336, 1338 (10th Cir. 1998) [pdf].  The same dispute exists under the UFTA [i.e., the Uniform Fraudulent Transfer Act, adopted in most states (but not NY)].  See In re Solomon, 300 B.R. 57, 62-63 (Bankr. N.D. Okla. 2003) (holding that Oklahoma would apply the preponderance standard); Word Investments, Inc. v. Bruinsma (In re TML, Inc.), 291 B.R. 400, 436 [Bankr. W.D. Mich. 2003] (collecting authorities, and holding that Michigan would apply the clear and convincing standard under its version of the UFTA's predecessor, the Uniform Fraudulent Conveyance Act). The Illinois courts do not appear to have addressed the question.

There is no apparent reason for treating the interests of a defendant in an actual fraud proceeding under § 548(a)(1) as more important than the interests at stake in Garner-the dischargeability of a debt under § 523(a)(2). 

Conversely, while there are cases holding that the "preponderance" standard applies in state law-based intentional fraudulent transfer actions, a strong majority of UFTA cases appear to favor application of the "clear and convincing" standard to such cases.  See, e.g., Grochocinski v. Zeigler  (In re Zeigler), 320 B.R. 362 (Bankr. N.D. Ill. 2005), where Chicago's Bankruptcy Judge John Squires (author of these handy tips) wrote:

This Court has held that the movant has the burden of proving all elements of actual fraud under Illinois law by clear and convincing evidence.  In Baldi v. Lynch (In re McCook Metals, L.L.C.), 319 B.R. 570 (Bankr. N.D. Ill.2005), however, Chief Judge Wedoff noted in a footnote that the Illinois courts have not addressed the appropriate burden of proof applicable to an actual fraud claim under the UFTA. Id. at 587 n. 11.  Although he expressly declined to decide whether the higher standard of proof would apply to an actual fraud claim under the Illinois UFTA, he held that a movant need demonstrate its claim under § 548(a)(1) (the equivalent of § 160/5(a)(1) under the UFTA) by a preponderance of the evidence standard. Id.  With all due respect to Judge Wedoff, until the Illinois courts hold otherwise, this Court will continue to apply the clear and convincing standard of proof to actual fraud claims under § 160/5(a)(1) of the UFTA.

See also, McCain Foods USA Inc. v. Shore (In re Shore), 317 B.R. 536 (Bankr. 10th Cir. 2004);  Sergeant v. G.R.D. Invs. L.L.C. (In re Schaefer), 331 B.R. 401 (Bankr. N.D. Iowa 2004); Dahar v. Jackson (In re Jackson), 318 B.R. 5 (Bankr. D.N.H. 2004) (all applying the "clear and convincing" standard to intentional fraudulent transfer actions under the UFTA).

© Steve Jakubowski 2006

Written By:Stephen Boyd On August 19, 2006 7:12 AM

Note that the First Circuit recently weighed in on the issue and upheld the Dahar v. Jackson decision which had held that the preponderance of the evidence standard should be applied.

Written By:anna sutter On August 15, 2007 4:56 PM

Hi, Interesting stuff. Quick question: Does that last post mean that the parenthetical in the original post ("clear and convincing" standard applies) for Dahar was wrong?

Written By:Steve Jakubowski On August 15, 2007 6:06 PM

Thanks for your comment. I'm still around, as you can see, just taking a bit of a blogging break to smell the roses and -- more importantly -- prepare for the birth of twins in September!

The bankruptcy court in Dahar noted that the clear and convincing standard applies, but rejected the claim of actual fraud even under the preponderance standard. Thus, the Dahar bankruptcy court's opinion regarding the applicability of the clear and convincing standard in actual fraud cases looks like dicta.

Because the bankruptcy court rejected the actual fraud claim, the First Circuit on appeal only had to address the issue of constructive fraud. In so doing, it agreed with the bankruptcy court that the preponderance of the evidence standard applies. So, bottom line, I think my parenthetical in the original post was correct.

All the best to you and thanks again for commenting.

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