KRS Summary on Fraudulent Transfers
A fraudulent transfer (fraudulent conveyance) is an attempt to avoid debt by transferring money to another person or company. It is often an issue in debtor/creditor relations, particularly in bankruptcy when referring to insolvent debtors.
Kentucky Revised Statute 378.010 provides, in pertinent part, that: “Every gift, conveyance, assignment or transfer … made with the intent to delay, hinder or defraud creditors … shall be void as against such creditors.” KRS 378.010.
Kentucky Revised Statute 378.020 provides that:
Every gift, conveyance, assignment, transfer or charge made by a debtor, of or upon any of his estate without valuable consideration therefor, shall be void as to all his then existing creditors, but shall not, on that account alone, be void as to creditors whose claims are thereafter contracted, nor as to purchasers from the debtor with notice of the voluntary alienation or charge.
Generally, in an action to set aside a conveyance for fraud, the fraud must be established by the heightened standard of clear and convincing evidence. Russell Cnty. Feed Mill, Inc. v. Kimbler, 520 S.W.2d 309, 311 (Ky.App.1975). However, one exception to the standard of proof is the doctrine of badges of fraud. Badges of fraud exist when: 1) the transfer or conveyance is between persons who are related or occupy a confidential relationship, 2) where the transfer or conveyance contains false statements and recitals as to consideration, 3) where the transfer or conveyance is made by a debtor in anticipation of a suit against him or after a suit has begun or is pending against him, and 4) where the transfer or conveyance is made by a debtor who transfers all or any appreciable part of his property when he is insolvent or financially embarrassed. Id. at 311. A plaintiff’s showing of a badge of fraud allows a court to presume intent to defraud. Id. at 312. This presumption shifts the burden of proof to the defendant, who must then establish, by clear and convincing evidence, a legitimate reason motivating the transfer. Id. Princesse D’Isenbourg et Cie, Ltd. v. Kinder Caviar, Inc. 2013 WL 147841, 5 (E.D.Ky.) (E.D.Ky.2013).
The purpose of the fraudulent conveyance statutes in Kentucky is to place creditors in the same position they were in prior to the voidable transfer. See Mattingly v. Gentry, 419 S.W.2d 745, 747 (Ky.1967).The Kentucky statutes for fraudulent conveyances only allow recovery for a fraudulent conveyance from a transferor or transferee. Unlike the Uniform Fraudulent Transfer Act, the Kentucky statutes do not explicitly allow recovery from a beneficiary of the transfer. Compare Unif. Fraudulent Transfer Act § 8(c) with KRS 378.010—.100.(“[ A] direct liability fraudulent conveyance claim is only actionable against the transferor or transferee.”); see also Princesse D’Isenbourg et Cie, Ltd. v. Kinder Caviar, Inc., No. 3:12–cv–4–DCR, 2013 WL 147841, at *6 (E.D.Ky. Jan. 14, 2013) (citing GATX Corp., 879 F.Supp. 2d at 642) (holding that only the transferor or transferee can be liable for a fraudulent conveyance claim).
KRS 413.120(11) provides that action brought for relief or damages on the grounds of fraud or mistake is subject to a five year statute of limitations. KRS 413.130(3) further clarifies that in an action for relief or damages for fraud or mistake pursuant to KRS 413.120(11), the cause of action is not deemed to have accrued until the discovery of the fraud or mistake, subject, however, to a ten year maximum statute of limitations from the time of the perpetration of the fraud.