Daily Development for Thursday, April 13, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

FRAUDULENT CONVEYANCES; PROCEDURE; PROOF OF INTENT: Plaintiff alleging fraudulent conveyance in federal court under Georgia version of Uniform Fraudulent Conveyance Act is not required to allege fraudulent act with “particularity” despite requirement of Section 9b of Federal Rules of Civil Procedure that any allegation of fraud be made with such particulairty.

NESCO, Inc. v.  CISCO, 2005 WL 29493353 (S.D. Ga. 10/7/05)

Section 9(b) of the Federal Rules states that “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity.  Malice, intent, knowledge and other condition of mind of a person may be averred generally.”

In the instant case, plaintiff, arguing a case in which Georgia law applied, alleged that during the pendency of a lawsuit (ultimately successful) to establish a breach of contract claim against defendant, defendant gave a mortgage to another party that rendered defendant essentially insolvent, and that defendant did not receive “reasonably equivalent value” for such mortgage. 

The plaintiff argued that the mortgage transaction evidenced the “badges of fraud” that are listed in the Georgia version of the Uniform Fraudulent Conveyances Act” OCGA Sec. 18-2-74(b) states that, in determining whether there was actual intent to defraud under the Act, consideration may be given (inter alia) to: whether the transfer was made at a time when a debtor was threatened with a lawsuit; whether the transfer was of substantially all the debtor’s assets and whether the transfer occurred just before a substantial debt was incurred.  Of course, all of these facts were true in this case.  The Plaintiff also argued (and the court appeared to accept) that it was a “badge of fraud” that the debtor continued to have control over the asset after the transfer.  The Plaintiff had included a reference to the precise mortgage, with recording information.

The court noted that the question of whether more particularity as to when and where the defendant had performed a fraudulent act in connection with a Uniform Act fraudulent transfer claim is a question about which federal circuits to not agree, although the question was one of first impression in the 5th Circuit, although the Seventh Circuit has applied the federal rule in such cases and federal district courts have not done so in Delaware and New York (as to constructive, rather than actual fraud).

The court noted here that the plaintiff had been vague about whether it was alleging actual or constructive fraud, and required plaintiff to replead to clarify this issue.  Nevertheless, it appeared to agree with plaintiff that no greater “particularity” was required than an allegation that pleaded certain facts that corresponded to “badges of fraud” under the Uniform Act.  

Comment: Although a trial court decision, the editor felt that the decision was noteworthy, because it was one of first impression, because other Circuit courts have disagreed, and most importantly because it appears to be correct, at least in the context of the transaction involved here.  The Uniform Act, it appears, can reach a conclusion of intent to avoid creditors from circumstantial evidence such as that set forth above.  Whether or not such intent is clearly “fraud” seems incidental to the purposes or language of the Act. 

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