Bankr. EDNC: BB&T v. Murray- Avoidance of Fraudulent Conveyance; Ultra Vires Acts

Summary: A few hours prior to a foreclosure sale, 15 parcels of real property were transferred to the Debtors by three corporations owed by the Debtors.  The Debtors shortly thereafter filed Chapter 11.  BB&T commenced an Adversary Proceeding seeking to avoid the transfers as fraudulent conveyances and because some were made ultra vires and brought a Motion for Summary Judgment. In determining whether a transfer was a fraudulent conveyance the court first turned to the non-exclusive list of factors found in N.C. Gen. Stat. 39-23.4(b):

1. The transfer or obligation was to an insider;
2. The debtor retained possession or control of the property transferred after the transfer;
3. The transfer or obligation was disclosed or concealed;
4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
5. The transfer was of substantially all of the debtor’s assets;
6. The debtor absconded;
7. The debtor removed or concealed assets;
8. The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
10. The transfer occurred shortly before or shortly after a substantial debt was incurred;
11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor;
12. The debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor reasonably should have believed that the debtor would incur debts beyond the debtor’s ability to pay as they became due; and
13. The debtor transferred the assets in the course of legitimate estate or tax planning.

While the Court found that "[i]t is clear that some of the factors under the statute are implicated by the transfers" it nonetheless found that there was countervailing evidence of non-fraudulent intent, in that the underlying debts were guaranteed by the Debtors, secured by cross-collateralized deeds of trust, and that the filing of one Chapter 11 petition, rather than a total of four, served a valid goal of efficiency. BB&T nonetheless argued that as a matter of law it was entitled to summary judgment pursuant to N.C.G.S. §  39-23.4(a)(2) as the transfers were made  "[w]ithout receiving a reasonably equivalent value in exchange for the transfer," and the debtor both was engaged in a business or a transaction for which the their remaining assets  were unreasonably small or intended to incur debts beyond their ability to pay.  While the Debtors did not "pay" directly for the transferred properties, they nonetheless argued that by personally financing a bankruptcy case they provided value.  The Court found that advancing litigation costs could constitute value, with the equivalence of that value a factual dispute.  Further, if the Debtors’ contention that there is no equity in the property were affirmed, then the transfer of real property without value was equivalent to receipt of zero value.  Further, the Court held that there was no evidence of any business or transactions that the corporations were engaged in nor that any new debts were being incurred. BB&T further argued that the transfers were constructively fraudulent under N.C.G.S. § 39-23.5, which requires:

1. The existence of a creditor whose claim arose before the transfer was made or the obligation was incurred;
2. The debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and
3. The debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

The Court rejected this finding that while the transfers indisputably occurred after the obligation was incurred and that it was very probably that the Debtors and the corporations were insolvent,  the equivalence of the transfer was still open to factual dispute. BB&T sought to void the transfers as being ultra vires in violation of N.C.G.S. § 57C-6-05.   The Court held that even if this were true, the statute does not provide a remedy, leaving it to the Court to do so.  AS the transfers neither affected the amount of the debt nor the collateral,  the Court held that avoidance for ultra vires acts would not be equitable. Lastly, the Court held that it was premature to rule on the question of fraud asserted under N.C.G.S. § 39.23.7(a)(1). BB&T v. Murray- Avoidance of Fraudulent Conveyance; Ultra Vires Acts.PDF