Third Circuit Finds Rebuttable Presumption of Fraud Under UFTA

The Third Circuit recently vacated a District Court decision and held that a rebuttable presumption of fraud is created under the Uniform Fraudulent Transfer Act (UFTA) when certain badges of fraud are found. MSKP Oak Grove, LLC v. Venuto, 2020 WL 7496512 (3d Cir. Dec. 21, 2020). Appellants were the landlords and creditors of a Florida location of a chain of tanning salons, the parent company of which (Appellee-Debtors, along with the four individual family members who owned all the company’s shares) sold the majority of its assets in 2007. However, in doing so, Appellee-Debtors kept 57 franchise leases, including the one with Appellants. Following the closing of the asset sale, money was wired from the buyer to the four individual family members as well as the parent company, which proceeded to transfer that money out to the individuals’ other businesses and obligations, leaving the parent company with little cash on hand. As such, the parent company defaulted on its lease.  Appellants then won a judgment against the debtors in Florida, but the parent company was insolvent. A suit against the parent company and individual family members followed in New Jersey District Court, where Appellants claimed the Appellee-Debtors were liable under New Jersey’s UFTA. After a bench trial (during which the presiding judge passed away), the District Court ruled for Appellees, finding that Appellants had failed to prove fraud by clear and convincing evidence.

The Third Circuit vacated the District Court’s findings and remanded to the District Court. The Third Circuit found that under the UFTA, a creditor bears the burden of showing the debtor’s “actual intent” of fraud by clear and convincing evidence, and a court may infer intent when “badges” of fraud are present, after which the debtor must “clearly rebut” that inference. The Third Circuit found that in this case, multiple badges of fraud were shown by clear and convincing evidence, as the parent company had made shareholder distributions to “insiders (the family members who owned all the stock),” the parent company had not gotten a “reasonably equivalent value for the transfer,” and had “removed assets” following the sale. The Court also found that further evidence of fraud might be found on remand, including as to whether the parent company retained control over the transferred funds, and whether certain other aspects of the transfer may have been concealed. Furthermore, the Court found that claims of “constructive fraud” and of “fraudulent transfer as to a present creditor” were improperly dismissed, as there was evidence that the parent company might have become insolvent because of these transfers of funds to shareholders. As such, the Appellants have “proven three badges of fraud and raised open questions about three others [which] supported an inference of fraud that the [appellee-debtors] must rebut [, and] on constructive fraud and fraudulent transfer, the District Court must find more facts and apply the right legal standard.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.