Carolina Court of Appeals recently held
that a creditor's fraudulent conveyance
claim was time-barred, even though
the creditor did not know about the
fraudulent nature of the transfer. The
Court of Appeals elected to adopt the
minority position held by other courts
across the country, which have reviewed
when the statute of limitations begins
to run on a claim under the Uniform
Voidable Transactions Act, formerly
known as the Uniform Fraudulent
Transfer Act (UFTA).
LLC v. Jack M. Berry and 585 Goforth
Road, LLC ("KB Aircraft") (790 S.E.
2d 559 (2016)) involved a workout of
a distressed aircraft loan. Mr. Berry, a
guarantor of the loan, owned a vacation
mountain home in North Carolina. The
value of the house was substantial,
and it was not encumbered by any
debt. In 2008, the aircraft loan went
into default. The creditor worked with
the borrower from 2008 to 2010 to
restructure the loan, modifying the
loan on four separate occasions in an
attempt to give the borrower breathing
room to service the loan. Unbeknownst
to the lender, Mr. Berry transferred his
mountain house to a limited liability
company, 585 Goforth Road, LLC, at the
beginning of the workout negotiations.
The LLC was owned by Mr. Berry and
his wife. Mr. Berry would later testify
that this mountain house was the
sole remaining asset in his name and
that he intentionally transferred the
mountain house out of his name so that
he would have no assets in his name.
Each of the modification agreements
provided, among other things, there
had been no material change in the
financial condition of the borrower or the
guarantor, Mr. Berry.
The borrower ultimately defaulted
after the fourth modification of the loan in
2010. The loan was sold to a new lender.
The new lender conducted a title search
after it acquired the loan and discovered
the transfer. It immediately filed suit
against the borrower and the guarantor
in Florida on the underlying claims for
default on the aircraft loan. Following
three years of litigation, the new lender
against the borrower and Mr. Berry as the
guarantor in excess of $10 million in 2013.
The new lender immediately domesticated
the Florida judgment in North Carolina and
after that, filed a separate action under the
UFTA to set aside the conveyance of the
mountain house.
The trial court in North Carolina
dismissed the case as not being brought
in a timely fashion. On appeal, the North
Carolina Court of Appeals upheld the
dismissal. The Court of Appeals held that
a literal reading of the UFTA dictated
that the clock started running on the new
lender's fraudulent conveyance claim at
the time of the transfer of the property. It
refused to adopt the reasoning of many
other courts across the country, construing
the very same statutory language, which
ruled that the clock does not start running
until the creditor knows about the
fraudulent nature of the transfer.
Previously North Carolina's courts had
held that the mere recording of a deed
which served to transfer real estate was
not sufficient to put a creditor on notice
that the transfer was fraudulent. However,
the Court of Appeals held that those cases
were not applicable to the time limitations
outlined in the UFTA.
The majority of courts reviewing
this issue have ruled that the statute of
limitations does not begin to run until
the creditor is aware of the fraudulent
nature of the transfer.
Hawaii, Pennsylvania, Texas, Utah and
the 3
adopted the minority position.
Florida, Delaware and New Mexico. For
construction and equipment leasing industries for
30 years in matters including mechanics liens,
bond claims, delay claims, warranty disputes
and bankruptcy issues. He leads a practice
group whose attorneys concentrate in matters
of construction law, commercial and business
litigation, representation of equipment lessors
and commercial creditor bankruptcy.
Myers, LLP
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
smithdebnamlaw.com