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Alabama Court of Civil Appeals Clarifies The Requirements (and limitations periods) for Fraudulent Transfer Action

The Alabama Civil Court of Appeals recently issued a decision, International Management Group, Inc. v. Bryant Bank, No. 2170744, which, among other things, limits the potential for summary judgment in fraudulent transfer cases, especially where actual fraud must be proven.

In this case, Bryant Bank sued International Management Group (“IMG”) following its alleged insolvency, seeking to void a series of insider transfers of mortgages securing promissory notes to Bryant Bank. IMG’s principal, Michael Carter had personally guaranteed the promissory notes prior to filing personal bankruptcy. Ultimately, IMG and Mr. Carter defaulted on the promissory notes, and Bryant Bank obtained a default judgment against both IMG and Mr. Carter. Prior to the default judgment, however, Mr. Carter, through a series of insider transactions, transferred the mortgages to his parents, who subsequently passed away. Mr. Carter, as executor of his mother’s estate, then transferred the mortgages to himself following his bankruptcy. Bryant Bank claimed that IMG’s first transfer to another Carter-controlled company in 2010 was without any consideration and rendered IMG insolvent, thus rendering the transfers constructively fraudulent and void under the Alabama Uniform Fraudulent Transfer Act (“AUFTA”). If Bryant Bank could not void the transfers, its judgments against IMG and Mr. Carter were likely worthless, as neither party had sufficient assets to satisfy the judgments.  Following discovery, the trial court granted Bryant Bank’s motion for summary judgment and voided the transactions, which had the effect of voiding the transfers without the need for trial and made IMG no longer judgment-proof.

IMG and Mr. Carter appealed. The Alabama Court of Civil Appeals first decided several procedural matters, and then rendered important holdings on three main points. First, the appeals court decided that Bryant Bank had not met its burden on summary judgment with regard to constructive fraud. Under AUFTA, a plaintiff can prove constructive fraud if: (1) the transfer was made without the transferor receiving reasonably equivalent value for the transfer; and (2) the transfer was made when the transferor was insolvent, or the transfer rendered the transferor insolvent. The appeals court held that Bryant Bank had not indisputably shown that IMG was insolvent at the time of the first transfer, and therefore summary judgment was inappropriate as to constructive fraud.

Second, the appeals court held that whether Bryant Bank had filed the constructive fraud claim within the four-year statute of limitations was for the jury, and therefore would be decided at trial. Bryant Bank argued that, although it filed suit more than four years following IMG’s first transfer of the mortgages, its failure to file suit was excused by Alabama’s “discovery rule” (Ala. Code § 6-2-3), which tolls applicable statutes of limitation when the plaintiff can show it did not know about the alleged fraud and also lacked knowledge of facts that should have put it on notice of the potential fraud. The appeals court determined that Bryant Bank may not have known about the fraudulent transfers when they happened, but the bank had failed to produce uncontroverted evidence that it had no way to know about the transfers, especially in light of the fact that the mortgage transfers were recorded.

Finally, the appeals court determined that, to the extent Bryant Bank was required to show actual fraud to void the transfers, summary judgment was inappropriate, and reversed the trial court on that ground as well. In addition to constructive fraud, the AUFTA also empowers a court to void transfers that are made with the intent to hinder, delay, or defraud a creditor seeking to collect on a debt. The appeals court determined that, while Bryant Bank had certainly put forth evidence that IMG and Mr. Carter had transferred the mortgages with the intent to delay or defraud Bryant Bank, such evidence was not undisputed, as Mr. Carter had produced an affidavit denying any intent to defraud. The appeals court also noted that proving actual intent is almost always a jury issue, and not appropriate for summary judgment. On that basis, summary judgment was reversed.

It seems clear following the IMG case that creditors seeking to void the fraudulent transfers of debtors should both: (1) establish as clearly as possible that the debtor was insolvent at the time of the transfer to support a claim for constructive fraud; and (2) file the lawsuit as soon as possible following discovery of the transfer. Otherwise, an AUFTA plaintiff should be prepared for a costly trial to establish the actual fraud necessary to void the transfer and recover a judgment from the debtor. As reported here back in April, Alabama has recently adopted the Uniform Voidable Transactions Act (“UVTA”), which will apply to all transactions beginning January 1, 2019. While it is not clear, it does not appear that the result in Bryant Bank would have been different under the UVTA