Opinion ID: 1211468
Heading Depth: 2
Heading Rank: 2

Heading: The Uniform Fraudulent Conveyance Act.

Text: Plaintiffs invoke three separate statutory sections in support of their argument to invalidate the transactions by which Voldens became secured creditors instead of stockholders in Arrow. This Court has stated that: The Act protects creditors where a debtor has made a conveyance of his property which diminishes his assets to the prejudice of the rights of his creditors. First National Bank in Albuquerque v. Abraham, 97 N.M. 288, 291, 639 P.2d 575, 578 (1982). The statute permits a plaintiff to prove actual or constructive fraud, but such proof must be established by clear and convincing evidence, Id. at 292, 639 P.2d at 579. We turn now to see whether the trial court erred in concluding that plaintiffs failed to carry their burden, according to the three pertinent statutory sections, NMSA 1978, §§ 56-10-4, 10-5, and 10-7 (Repl.Pamp.1986).
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration. This language clearly requires proof of both insolvency and lack of consideration. First National Bank, 97 N.M. at 292, 639 P.2d at 579. The trial court concluded as a matter of law that Arrow was not insolvent before or immediately after the July 29, 1982 transactions and that Arrow received fair consideration for its debt to Voldens. Plaintiffs challenge these conclusions, but not the findings of fact upon which they are premised. If there is substantial evidence in the record to support the findings of fact, then the conclusions of law must be sustained, unless the trial court has abused its discretion. Albuquerque National Bank v. Albuquerque Ranch Estates, Inc., 99 N.M. 95, 106, 654 P.2d 548, 559 (1982).
This Court has established the propriety of the balance sheet test for insolvency. First National Bank, 97 N.M. at 292, 639 P.2d at 579. Here the trial court found that Arrow had a net worth in April, 1982 of $1,637,934. Subtracting the $1,000,000 debt to Voldens left a net worth of $537,934. Plaintiffs contend instead that the fair market value of Arrow's assets was close to the $879,360.50 gross proceeds from the auction sale. The court found, however, that the auction, due to its forced sale nature whose terms were without reserve, did not reflect the fair salable value of Arrow's assets at the time of their transfer to Wards. Substantial evidence supports the finding that Arrow was not insolvent.
Section 56-10-3 of the Act defines consideration as: A. when in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied; or B. when such property, or obligation, is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared with the value of the property or obligation obtained. Here Arrow and Wards agreed to purchase Voldens' entire interest in the company. The court found no bad faith. We agree that the value of the company is a fair equivalent, not disproportionately small, for the purchase price, although the down payment seems unsubstantial in comparison, and although the security interests made future financing difficult, if not impossible, for Wards. We determine that there exists substantial evidence to support the trial court's conclusion that plaintiffs failed to carry their burden. Conceding that the question of fair consideration is the closer one, it still is only half of what plaintiffs were required to prove.
A prima facie showing under this section must include a conveyance made without fair consideration and with the result of an unreasonably small capital remaining. Again, plaintiffs failed to make such a showing. Despite the heavy leverage on the transaction, substantial evidence supports a finding of fair consideration. As for the remaining capital, the record reflects that there was uncontradicted testimony precisely on point. Thus, the court's unchallenged finding supports its conclusion that plaintiffs' proof did not prevail.
The creditor must prove intent to defraud, or must allege and prove the commonly accepted badges of fraud. First National Bank, 97 N.M. at 292, 639 P.2d at 579. The court below found that the transaction was entered into at arms-length and in good faith by the parties, who were each represented by counsel. Further, the fact that Ward operated the business for nearly a year negates any inference of intent to defraud. Plaintiff simply did not show by clear and convincing evidence enough badges to sustain a conclusion of actual or constructive fraud. Id. at 293, 639 P.2d at 580. We conclude that the trial court did not abuse its discretion in dismissing plaintiffs' statutory cause of action.