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Fraud Claims Part 3 – Burdens of Proof

Fraud Claims Part 3 - Burdens of Proof by Kenneth Katz

Burdens of proof in voidable transaction claims differ from other types of cases because direct evidence can be elusive. In these cases, what can a creditor use as evidence that will be sufficient to prove that a voidable transaction has occured?

Typically, a plaintiff alleging fraud must draft the complaint to include very specific allegations, describing in detail exactly what happened and how the plaintiff was harmed by the defendant’s acts or omissions. However, in voidable transaction cases, courts recognize that the creditor may not have access to critical details such as when certain transfers were made; how much money was involved; or exactly what property was transferred and to whom. Since most debtors are either individuals or private entities, creditors are unlikely to have access to the debtor’s communications, receipts, or other records that could verify the creditor’s allegations. Recognizing this inherent issue in claims involving voidable transactions, a creditor alleging a claim of fraud against a debtor need only plead general facts to support the claim.

For instance, rather than having to plead something as specific as “On January 1, 2017, the debtor transferred $28,000 to his wife,” a creditor can simply allege that the debtor transferred assets to his wife after the judgment was entered. While more details could certainly strengthen the claim, something less specific can often be enough to survive a motion to dismiss and allow the case to proceed through discovery.

After stating a claim, the creditor must then prove the voidable transaction by a preponderance of the evidence. Knowing the difficulties creditors may face, courts only require creditors to produce enough evidence to show that a voidable transaction likely occurred. If a creditor can identify the property that was moved and demonstrate when it was moved, to whom it was moved, and that it was moved to an insider (a family member or affiliated entity) or that the transfer was otherwise made without reasonably equivalent value in return, the courts will shift the burden to the debtor to prove that the transfer was not fraudulent.

Cases involving actual fraud are different. Since the damages and penalties involved are greater, courts impose a higher standard of proof for claims of actual fraud than constructive fraud. While creditors need only prove claims of constructive fraud by a preponderance of the evidence, creditors alleging actual fraud must prove by clear and convincing evidence that the debtor engaged in the transfer of assets with the intent to defraud.

Proving actual fraud can be challenging. Depositions and document discovery may fill in some details, but may not be enough to prove intent. People rarely state in writing that they planned to transfer assets to avoid paying their debts, and debtors likely won’t admit as much during a deposition. These issues, plus the higher burden of proof, make cases of actual fraud particularly difficult for creditors.

In our next post, we will discuss what forms of relief courts can offer creditors if they suspect that the debtor is fraudulently disposing assets during a lawsuit or after a judgment is entered.

NOTE: This post has been amended to reflect the Uniform Voidable Transactions Act, which went into effect April 3, 2020.

Kenneth J Katz.jpgKenneth J. Katz
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