Opinion ID: 197524
Heading Depth: 5
Heading Rank: 2

Heading: Inadequate Consideration

Text: 67 Peters likewise adduced sufficient evidence from which a rational jury could conclude that the operating assets were transferred to C & J for inadequate consideration. Id. The second Baker factor rests on the theory that inadequate consideration is competent circumstantial evidence from which the factfinder reasonably may infer that the transferor harbored a fraudulent intent to evade its obligations to creditors. See, e.g., Ricardo Cruz Distribs., Inc. v. Pace Setter, Inc., 931 F.Supp. 106, 110 (D.P.R.1996) (a fraudulent transfer of property from the seller to the buyer, evinced by inadequate consideration for the transfer); Casey Nat'l Bank v. Roan, 282 Ill.App.3d 55, 218 Ill.Dec. 124, 127, 668 N.E.2d 608, 611 (Proof of fraud in fact requires a showing of an actual intent to hinder creditors, while fraud in law presumes a fraudulent intent when a voluntary transfer is made for no or inadequate consideration and directly impairs the rights of creditors.), appeal denied, 169 Ill.2d 564, 221 Ill.Dec. 436, 675 N.E.2d 631 (1996); cf. Dickinson, 935 S.W.2d at 364 (recognizing inadequacy of consideration as badge of fraud); supra note 7. On the other hand, a valuable consideration negotiated at arm's-length between two distinct corporate entities normally is presumed adequate, particularly if the divesting corporation's creditors can continue to look to the divesting corporation and/or the sales proceeds for satisfaction of their claims. See A.R. Teeters, 836 P.2d at 1040; see also Arch Mineral Corp. v. Babbitt, 894 F.Supp. 974, 986 n. 11 (S.D.W.Va.1995) (one inquiry is whether divesting corporation retains sufficient assets from which to satisfy creditor claims), aff'd, 104 F.3d 660 (1997); Eagle Pac. Ins. Co. v. Christensen Motor Yacht Corp., 85 Wash.App. 695, 934 P.2d 715, 721 (1997) (inquiring whether divesting corporation is left unable to respond to [the] creditor's claims). 68 The total consideration for all Anson assets in this case was less than $500,000. 18 Fleet effectively wrote off its outstanding balances ($10,628,000) on the Anson loan in 1993, and provided C & J and Little Bay Realty new financing totaling approximately $2.9 million. See Fleet Credit Memo (10/14/93), at 4 (This [agreement] is to involve forgiveness of some of [Fleet's] legal balance in conjunction with a significant equity injection.) (emphasis added). Thus, though normally loans obtained by buyers to finance asset acquisitions would be considered in calculating the total consideration paid, here the two newly-formed acquiring companies actually incurred no new indebtedness to Fleet. In fact, if the two companies were determined to be Anson's successors, the asset sale would have gained them loan forgiveness approximating $7.728 million (i.e., $10,628,000, less new indebtedness of only $2.9 million), given their total exoneration from Anson's preexisting indebtedness to Fleet. Since the new Fleet loans cannot count as consideration, at least as a matter of law, C & J and Little Bay paid a combined total of only $1 million in additional cash consideration for the Anson operating assets and real estate, of which $550,000 was immediately reinjected into the two acquiring companies for capital improvements and debt service. See supra Section I. As a practical matter, therefore, C & J and Little Bay acquired all the Anson assets for only $450,000. 19 69 Although Peters utterly failed to demonstrate that the Anson assets were worth as much as $12,738,000, see supra Section II.A., it nevertheless adduced competent evidence as to their minimum value. Thus, the trial record would support a rational inference that the assets transferred by Anson had a fair value of just under $4 million. Fleet documents indicate that the book value of the operating assets approximated $5.2 million; Fleet's conservative estimate of their value approximated $2.11 million; and its conservative valuation of the real property was $1.78 million. Therefore, with a total minimum asset value just under $4 million, and a de facto purchase price below $500,000, a rational jury could conclude that C & J and Little Bay acquired the Anson assets at 12.5 cents on the dollar. 70 At these minimal levels, adequacy of consideration presents an issue for the factfinder. See Nisenzon v. Sadowski, 689 A.2d 1037, 1042-43 (R.I.1997) (under R.I. fraud conveyance statute, adequacy of consideration is for factfinder, and reviewable only for clear error); see also Pacific Gas & Elec. Co. v. Hacienda Mobile Home Park, 45 Cal.App.3d 519, 119 Cal.Rptr. 559, 566 (1975) (Adequacy of consideration is a question of fact to be determined by the trier of fact.); Gaudio v. Gaudio, 23 Conn.App. 287, 580 A.2d 1212, 1221 (1990) ([T]he adequacy of the consideration in an action to set aside a fraudulent conveyance is an issue of fact.); Textron Fin. Corp. v. Kruger, 545 N.W.2d 880, 884 (Iowa.Ct.App.1996) (We refrain, however, from adopting any mathematical rules to determine the adequacy of consideration. All the facts and circumstances of each case must be considered.). On the present record, therefore, it was error to determine as a matter of law that no rational factfinder could conclude that 12.5% of fair value was inadequate consideration for the Anson assets. See, e.g., Miner v. Bennett, 556 S.W.2d 692, 695 (Mo.Ct.App.1977) (The assumption by the grantees of the mortgages in an amount equal to approximately one fourth of the value of the property was not an adequate consideration for the transfer.) (emphasis added). 71 Moreover, even assuming arguendo that the circumstantial evidence of fraudulent intent presented by Peters, in the way of demonstrating inadequate consideration, could not have survived the Rule 50(a) motion for judgment as a matter of law, Peters adduced competent direct evidence of actual fraudulent intent as well. Actual fraud is a successor liability test entirely independent of the circumstantial mere continuation test. See H.J. Baker, 554 A.2d at 205 (describing mere continuation test as [a]n exception, not as the exception, to the general rule of nonassumption; citing, with approval, Jackson, 241 A.2d at 477, which recognized the actual fraud test as distinct from the mere continuation test, see id. at 475); 20 Cranston Dressed Meat, 57 R.I. at 348, 190 A. 29 (noting that nonassumption presumption applies only in the absence of fraud); see also Joseph P. Manning Co. v. Shinopoulos, 317 Mass. 97, 56 N.E.2d 869, 870 (1944) (UFCA case) ([A]t common law, if the conveyance is made and received for the purpose of hindering, delaying or defrauding creditors it is fraudulent and can be set aside without regard to the nature or amount of consideration.); Eagle Pacific, 934 P.2d at 721 (noting that, besides the separate mere continuation theory, [s]uccessor liability may also be imposed where the transfer of assets is for the fraudulent purpose of escaping liability). 72 Peters adduced direct evidence that Considine and Jacobsen entered into the asset transfer with the specific intent to rid the business of all indebtedness due entities not essential to its future viability, including in particular the Peters sales commissions. Peters notified Anson in March 1993 that it intended to pursue Anson vigorously for payment of its sales commissions. See Dickinson, 935 S.W.2d at 364 (recognizing, as badge of fraud, transfers in anticipation of suit or execution); supra note 7. The intention to evade the Peters debt is explicitly memorialized in Jacobsen's notes, and yet more explicitly in the May 5, 1993 memo from Considine to Fleet (If Fleet can find a way to foreclose the company [viz., on its security interests in Anson's real estate and operating assets] and sell certain assets to our company that would eliminate most of the liabilities discussed above, then we would offer Fleet ... $3,250,000.). Thereafter, Fleet presciently forewarned Considine that its counsel was not convinced that you will be able to do this [i.e., shed the Peters debt] without inviting litigation, and then insisted on an indemnification clause from C & J should any such litigation eventuate, see Credit Agreement p 8.10 (Oct. 26, 1993). Moreover, it is immaterial whether Considine believed that this evasive maneuver was essential to ensure the solvency and success of the Anson business; fraudulent intent need not be malicious. See Balzer & Assocs., Inc. v. The Lakes on 360, Inc., 250 Va. 527, 463 S.E.2d 453, 455 (1995) ([M]alicious intent is not an element required to prove the voidability of the transfer.). 21 73