Transfers With Intent To Hinder, Delay Or Defraud: History Of The Badges Of Fraud

Hindering and delaying the flow of water (photo by Marilyn Swanson)

By: Donald L Swanson

Fraudulent conveyance law, with its “badges of fraud” approach, has been around for a very long time.  We now have a new and fascinating article, by Prof. Emily Kadens, that provides new information and insights on this history. [Fn. 1]

One suggestion is that “badges of fraud” date back as far as medieval Roman law.

A more customary view is that avoidance of conveyances made with “actual intent” to defraud date back to England’s Fraudulent Conveyance Act of 1571 (aka, Statute of 13 Elizabeth), which voids transfers made with, “the end, purpose and intent to delay, hinder or defraud creditors.”

As to badges of fraud, specifically, conventional wisdom points back to 1602 and the English case of Attorney General v. Twyne & Pearce, et al., (commonly known as “Twyne’s Case”) as the starting point. 

What follows is an attempt to explain some of that history, based on Prof. Kadens’s article, and then look at the staying power of badges of fraud over the last 100 years. 

Twyne’s Case

–Some History

On April 28, 1602, twelve of the leading men of England, sitting as judges on the Court of Star Chamber, decided Twyne’s Case.

Edward Coke, the prosecutor, wrote a report of the case.  And Coke’s version of the decision has become a cornerstone of American commercial law.  Judges regularly cite Coke’s report for its specific points of analysis, making it one of the most durable decisions of the common law tradition.

–Some Facts

Twyne’s Case famously concerns fraudulent conveyance. A classic fraudulent conveyance occurs when a debtor transfers some or all of his assets to a third party with the intent to keep them from the debtor’s creditors.

Coke’s report gives judges a test, composed of six “badges of fraud,” to evaluate when a transfer, even one made for good consideration, was accomplished with the intent to defraud.  Here is a list of those six badges:

  1. Debtor made a general conveyance of all his goods without any exception;
  2. Debtor retained possession of the property and used it as his proper goods;
  3. The transaction was done in secret;
  4. Debtor made the conveyance with knowledge of a pending suit for debt against him;
  5. Debtor and the transferee had a “trust” between them; and
  6. The deeds contained a suspect and unusual clause stating that the transactions were done “honestly, truly, & bona fide.”

These badges fall into two general categories: (1) evidence of Debtor’s intent to defraud creditors; and (2) evidence that Debtor did not make a genuine conveyance.

 –A Prior Foundation?

“Badges of fraud” have become synonymous with Twyne’s Case in modern lawyers’ minds, and many assume that in this trial the Star Chamber took up the question of the “signs and marks of fraud” for the first time. 

Prof. Kadens suggests, however, that badges of fraud did not appeared for the first time in Twyne’s Case.  It seems unlikely, she suggests, that suddenly in 1602 the judges of the Star Chamber realized they needed a device to identify fraudulent acts.  There had to be a prior foundation for the badges of fraud concept.  After all:

  • One of the main responsibilities of the Star Chamber was to punish fraud;
  • Prior to Twyne’s Case, the judges were already comfortable with the concept, declaring that, “The deed has all the badges of fraude”; and  
  • A recent dissertation examining trust cases in Exchequer suggests that “Twyne’s case merely added finishing touches to the badges of fraud approach.”

Uniform Laws—Over the Past Century

The “actual intent” to hinder, delay or defraud creditors legal standard, and the related badges of fraud approach for identifying “actual intent,” have had amazing staying power.  The last 100 years illustrates.  Consider this.

–Uniform Fraudulent Conveyance Act (1918)

Back in 1918, the National Conference of Commissioners on Uniform State Laws “approved and recommended for enactment in all the states” the Uniform Fraudulent Conveyance Act. 

This Act contains, in Section 4:

  • A reference to transfers made “with actual intent to hinder, delay, or defraud any creditor of the debtor”; and
  • An identification of eleven badges of fraud for which “consideration may be given, among other factors,” in determining “actual intent” to hinder, delay or defraud.

The eleven badges of fraud are the following:

  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 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; and
  11. the debtor transferred the essential assets of the business to a lienor who then transferred the assets to an insider of the debtor

–Uniform Fraudulent Transfer Act (1984)

Then in 1984, the same National Conference of Commissioners on Uniform State Laws “approved and recommended for enactment in all the states” the Uniform Fraudulent Transfer Act. 

This Act revises and updates the old Uniform Fraudulent Conveyance Act.  However, Section 4 of this newer Act is identical to Section 4 of the prior Act, including its “actual intent to hinder, delay, or defraud any creditor” and all eleven of its badges of fraud.  

–Uniform Voidable Transactions Act (2014)

Then, in 2014, the same National Conference of Commissioners on Uniform State Laws “approved and recommended for enactment in all the states” the Uniform Voidable Transactions Act.

This Act revises and updates the old Uniform Fraudulent Transfers Act.  Yet, Section 4 of this newer Act is identical to Section 4 of the prior two Acts, including their “actual intent to hinder, delay, or defraud any creditor” and all eleven of its badges of fraud.  

Comparison of Olde and New Badges

Coke’s olde badges of fraud (back in 1602) are six in number, while those from the twentieth and twenty first centuries are eleven in number.

Here’s how they coincide:

  • Coke’s # 1:  Debtor made a general conveyance of all his goods without any exception—this is the same as number 5 of the uniform laws (transferred substantially all debtor’s assets);
  • Coke’s # 2: Debtor retained possession of the property and used it as his proper goods—this is the same as number 2 of the uniform laws (debtor retained possession);
  • Coke’s # 3: The transaction was done in secret—this is the same as numbers 3 and 7 of the uniform laws (debtor concealed the transfer and removed or concealed assets);
  • Coke’s # 4: Debtor made the conveyance with knowledge of a pending suit for debt against him—this is the same as number 4 of the uniform laws (debtor had been sued or threatened with suit);
  • Coke’s # 5: Debtor and the transferee had a “trust” between them—this is the same as number 1 of the uniform laws (transfer to an insider); and
  • Coke’s #6: The deeds contained a suspect and unusual clause stating that the transactions were done “honestly, truly, & bona fide”—this is also the same as numbers 3 and 7 of the uniform laws (debtor concealed the transfer and removed or concealed assets).

The uniform laws add five additional badges of fraud based, presumably, on developments in commercial activity and in commercial laws over the intervening centuries.  Such additions in the uniform laws are:

  • Number 6—Debtor absconded;
  • Number 8—Less than a fair consideration was received in exchange;
  • Number 9—Associated insolvency;
  • Number 10—Incurring additional debt before or after the transfer; and
  • Number 11—Manipulating lien rules for transferring assets to an insider.

Conclusion

Fraudulent transfer rules for actual intent to hinder, delay or defraud creditors and related badges of fraud standards have been around for a very long time.  And it’s obvious that the presence of both is here to stay.

———————

Footnote 1.  Information and quotes in this blog post are based on the recent article titled, “New Light on Twyne’s Case,” 94 American Bankruptcy Law Journal 1 (2020), by Emily Kadens, Professor of Law at Northwestern University Pritzker School of Law.  

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