The letter ruling by the Delaware Court of Chancery in Daugherty v. Highland Capital Management, C.A. No. 2017-0488-SG, (Del. Ch. January 16, 2018), provides a helpful description of the elements of a fraudulent transfer claim and their application to facts involving efforts to escape collection efforts.
Background Facts: The essential background facts involve allegations that funds were transferred from an escrow account, without value, in order to avoid efforts to collect on a judgment. In particular, based on an award in Texas of $2.6 million against an entity abbreviated as HERA, the funds that had been placed in escrow to cover that judgment were transferred out of a lawyer’s escrow account. The law firm was not implicated in any wrongdoing according to the opinion because it was following the instructions given to it by the person creating the escrow account. Subsequent to the transfer of the funds from escrow, HERA filed an affidavit averring that it was insolvent.
Key Findings of Court: On a factual level, the court found that after the funds were transferred without value, it left HERA insolvent for the primary purpose of the defeating the efforts of the creditor of HERA to collect a judgment. For purposes of a motion to dismiss, that satisfied the necessary elements of a claim for fraudulent transfer.
Notable Reasoning of the Court: The court’s reasoning in this short letter ruling was that once a claim was reduced to a judgment, and the amount in the bank account was transferred without value, leaving HERA insolvent, those allegations satisfy the elements of a claim in Sections 1304, 1305 and 1309 of Title 6 of the Delaware Code–at least for purposes of surviving a motion to dismiss.