Effective October 1, 1997, North Carolina has adopted the Uniform Fraudulent Transfer Act. The Act replaces the Fraudulent Conveyances statute in Article 3 of Chapter 9 of the General Statute. The Act provides remedies to creditors when debtors transfer property or incur obligations in an attempt to place assets beyond the reach of creditors.
The Act has made several changes to the prior law; it now includes the term "obligations" in addition to "transfers," gives separate treatment to creditors existing at the time the transfer or obligation was made and those who become creditors after, provides for setting aside transfers to insiders for antecedent debts, and provides new limitation periods.
The Act changes the old law by including obligations in the definition of transfers concerning fraudulent conveyances. Although the prior law did not include the term "obligations," case law expanded the definition of transfers to include obligations such as deeds of trust if made without adequate consideration. The legal principles with respect to fraudulent conveyances under prior law are set out in Aman v. Walker, 165 N.C. 224, 81 S.E. 162 (1914), as follows:
"(1) If the conveyance is voluntary and the grantor retains property fully sufficient and available to pay his debts then existing and there is no actual intent to defraud, the conveyance is valid.
(2) If the conveyance is voluntary and the grantor did not retain property fully sufficient and available to pay his debts then existing, it is invalid as to creditors, but it cannot be impeached by subsequent creditors without proof of the existence of a debt at the time of its execution which is unpaid, and when this is established and the conveyance avoided, subsequent creditors are let in and the property is subjected to the payment of creditors generally.
(3) If the conveyance is voluntary and made with the actual intent upon the part of the grantor to defraud creditors, [296 N.C. 377] it is void, although this fraudulent intent is not participated in by the grantee, and although property sufficient and available to pay existing debts is retained.
(4) If the conveyance is upon a valuable consideration and made with the actual intent to defraud creditors upon the part of the grantor alone, not participated in by the grantee, and of which intent he had no notice, it is valid.
(5) If the conveyance is upon a valuable consideration, but made with the actual intent to defraud creditors on the part of the grantor, participated in by the grantee, or of which he has notice, it is void."
The statute now codifies certain of these principles and broadly defines transfers as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset and include payment of money, release, lease, and creation of a lien or other encumbrance."
The Act also applies to both present and future creditors, although they are treated differently in some respects. Present creditors are those who have claims at the time of the transfer; future creditors are those whose claims arise after the transfer. Transfers are fraudulent as to both present and future creditors if they were "intended to hinder, delay or defraud a creditor or if reasonably equivalent value was not received in exchange" where the debtor is left with assets which are unreasonably small with respect to the business or transaction, or the debtor intended to incur debts beyond his ability to pay them when due.
Under the old law, there was no presumption of fraudulent conveyances; however the Act lists thirteen factors to consider in determining if a debtor acted with the intent to hinder, delay or defraud creditors, but the list is not exclusive nor conclusive. With present creditors, transfers are fraudulent if reasonably equivalent value was not received, and the debtor was insolvent or became insolvent as a result of the transfer. If a transfer is made when the creditor is insolvent, intent does not matter, and it is only fraudulent as to present creditors. A transfer is voidable if made to an insider for an antecedent debt if the debtor was insolvent at the time of the transfer and the insider had reasonable cause to believe that the debtor was insolvent. Insiders include relatives, partners, partnerships, corporations, directors, officers, person in control of the debtor, managing agents of the debtor, and affiliates.
The remedies available to creditors in the event of a fraudulent conveyance include avoiding the transfer to the extent necessary to satisfy the creditor's claim, attaching the asset and equitable relief, including injunctions, appointment of a receiver or any other relief required by the circumstances. Money damages are available when the transfer was made with the intent to hinder creditors. However, transfers cannot be set aside and money damages are not available from transferees who acted in good faith and gave reasonably equivalent value for the transfer. If a transfer is voidable, the creditor can recover the lesser of the value of the asset transferred or the amount necessary to satisfy the creditor's claim.
The good faith element may have an impact on title searching because civil actions may now have to be checked. If a transferor has a large claim alleged in a pending action which ultimately becomes liquidated, it could be argued that the good faith defense is unavailable due to constructive notice doctrines.
The statute of limitations has also been changed. Under the old law, a cause of action had to be brought within three years after the creditor knew or should have known of the transfer. Under the Act three statutes of limitation apply depending on the circumstances of the transfer: (1) four years after the transfer or obligation intended to hinder creditors and legal actions or if later, within one year after the transfer was or could have reasonably been discovered; (2) within four years after the transfer in other cases; (3) one year for actions to set aside transfers to insiders for antecedent debts.
The statute adopts the holding in BFP v. Resolution Trust Corp., 114 S. Ct 1757, 128 L. Ed 2d 556 (1994) by providing that a non-collusive foreclosure sale conducted in accordance with state law will not be deemed a fraudulent conveyance.
The following article is taken from "The 1031 Tax-Deferred Exchange" lecture materials that accompany lectures presented by Asset Preservation and Stewart Title Company concerning like kind exchanges. Future issues of our newsletter will contain additional information from the lecture materials.
(f) RECEIPT OF MONEY OR OTHER PROPERTY