Supreme Court of Virginia Adopts “Morgan Theory” of Presumptions In Fraudulent Conveyance Cases

The outcome of litigation often depends on which party has the burden of presenting evidence to support its claim (the “Burden of Production”) and persuading the judge or jury that it has a viable claim (the “Burden of Persuasion”).  Generally speaking, the party suing has both the Burden of Production and the Burden of Persuasion.  The party bearing the Burden of Proof and the Burden of Persuasion can lose its case even if the opposing party offers no evidence in opposition to the claim.  A prosecutor, for example, may not succeed in convicting a defendant in a criminal case when the defendant offers no evidence and simply pokes holes in the prosecutor’s case.

In certain types of litigation, the law recognizes presumptions that may shift the Burden of Production, the Burden of Persuasion, or both to the party being sued.  Fraudulent conveyance litigation is one such type.  When a creditor sues to avoid a transfer of property by a debtor on the grounds that the debtor transferred the property with “actual intent to hinder, delay, or defraud,” there is little chance that the creditor will achieve a “Perry Mason moment” in which the debtor admits that it did just that.  Consequently, for centuries, courts have recognized “Badges of Fraud” which, if present, shift the Burden of Proof and/or the Burden of Persuasion to the defendant.  But what burden shifts?  The Supreme Court of Appeals of Virginia examined that issue in its May 6, 2021 opinion in White v. Llewellyn.

Ann White was injured when her car was struck by a vehicle driven by Ann Llewellyn exiting the driveway of property that Ann Llewellyn then owned with her husband Brad Llewellyn.  White sued the Llewellyns for damages.

The Llewellyns had been experiencing marital problems before the accident.  They had separated and reconciled more than once.  However, while White’s lawsuit was pending, the Llewellyns divorced.  Ann deeded the property that she and Brad had owned jointly to Brad for no consideration.  Even though the property was owned by Brad, Ann and the Llewellyns’ children continued to live there rent free.

After obtaining a $1.5 million judgment against Ann, White filed suit to avoid Ann’s transfer of the property to her ex-husband on the grounds that Ann made the transfer with actual intent to hinder, delay, or defraud her.  White presented evidence that: (a) Ann transferred the property to Brad after White sued her; (b) Ann transferred the property for no consideration; (c) Ann had a close relationship with Brad; and (d) Ann continued to use and enjoy the property after she transferred it to Brad.  The Llewellyns both testified that the transfer of the property was unrelated to White’s pending suit, but was simply part of the division of property resulting from the divorce, and that Ann and the children continued to live in the property to minimize the trauma of the divorce to the children and spare them from having to change schools.

The trial court held that White’s evidence established Badges of Fraud and shifted the Burden of Production to the Llewellyns.   The Llewellyns satisfied the Burden of Production by presenting their testimony that the property had not been transferred as a result of White’s lawsuit and that Ann’s continued occupancy of the property when she no longer owned it was for the good of the Llewellyn children.  The trial court held that the Burden of Persuasion remained with White to establish by clear and convincing evidence that Ann transferred the property to Brad to hinder, delay, or defraud her.  According to the trial court, White did not meet that burden.  Consequently, the court ruled against White.  White then appealed to the Supreme Court of Appeals of Virginia.

The Supreme Court noted that there are two theories of presumptions.  Under the “Thayer Theory,” named for Professor James B. Thayer, a presumption shifts only the Burden of Production from the party suing to the party being sued.  As long as the party being sued comes forward with evidence in support of its defense, the Burden of Persuasion remains with the party suing.  Under the “Morgan Theory,” named for Professor Edward Morgan, a presumption shifts both the Burden of Production and the Burden of Persuasion to the party being sued.

The trial court followed the Thayer Theory.  The trial court based its approach on Rule 2:301 of the Virginia Rules of Evidence.  That Rule provides that:

Unless otherwise provided by Virginia common law or statute, in a civil action a rebuttable presumption imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption, but does not shift to such party the burden of proof, which remains throughout the trial upon the party on whom it originally rested.

Noting that Rule 2:301 is not “a single rule governing the effect of all presumptions,” the Supreme Court examined a series of its prior decisions in fraudulent conveyance cases dating back over more than 100 years to determine if Virginia common law “otherwise provided.”  In those decisions, the Supreme Court had held that once Badges of Fraud are presented so that a transfer is presumed to have been made with actual intent to hinder, delay, or defraud, the burden shifts to the party defending the transfer to establish “the bona fides of the transaction by clear and convincing evidence.”  Based on those cases, the Supreme Court said:

We conclude that, in requiring defendants to “prove” and “establish” the bona fides of a transaction by strong and clear evidence once the presumption of a fraudulent conveyance is established, our precedent has required the shifting of the burden of persuasion as well as the burden of production to the defendant, in fraudulent conveyance cases.

Because the trial court had shifted only the Burden of Production, but not the Burden of Persuasion, to the Llewellyns, the Supreme Court reversed the decision of the trial court.

The adoption of the Morgan Theory makes it more likely that a creditor seeking to avoid a fraudulent transfer in Virginia will win.  Once Badges of Fraud are shown to be present, the creditor will win unless the parties defending the transfer both: (a) produce evidence to rebut the presumption; and (b) persuade the court by clear and convincing evidence that the transfer was not made with actual intent to hinder, delay, or defraud.