Salt Lake City, Utah. The Utah Capitol houses the chambers of the Utah State Legislature, the … [+]
Utah attorney Gregory Jones got into a dispute with his former law firm, Mackey Price et al., over his share of the fees that were due to him from the firm’s successful representation in Fen-Phen litigation. Eventually, Jones sued the law firm and its two partners Randall Mackey and Gifford Price, alleging that he was due a larger share of the fees than he ultimately received, which was $165,000 from an award of Fen-Phen fees to the firm which was over $1 million.
Most importantly for our discussion here, Jones claimed that the law firm had made fraudulent transfers by way of oversized distributions to Mackey and Price individually so that Jones could not collect any judgment that he might win against the firm. For their part, the firm, and Mackey and Price individually, asserted in their defense to the fraudulent transfer claim that the distributions made by the firm were primarily for tax reasons, and not to thwart any judgment that Jones might obtain against the firm.
At trial, the Utah district court tossed our some of Jones’ claims on directed verdict, being his claims for breach of fiduciary duty and his fraudulent transfer claim. But that court allowed Jones’ claims that he was entitled to a bigger share of the Fen-Phen fees to go to the jury, and the jury awarded him $647,090 in damages against the law firm.
Just two days after the jury verdict, the Mackey Price Thompson & Ostler firm effectively ceased business, and Voila! the new firm of Mackey Price, LLC, came into existence ⸺ at the same address but with the lease moved to the new firm, with the same lawyers (sans Jones of course), with the same website and phone numbers and with the same clients. So, when the district court got around to issuing the judgment on December 1, 2017, upon Jones’s motion the court added Mackey Price, LLC, to the judgment as the (quite obviously) successor entity to the former firm.
Now, with Mackey Price, LLC, also having a judgment against it, lawyer Mackey and lawyer Price then formed yet a third law firm, this new one called “Mackey Price Law”, with Mackey and Price serving as the sole shareholders, officers and directors, and with security agreements in place which leveraged up all the assets of the new firm. Jones tried to get this third law firm added to his judgment too, but for whatever reasons the district court refused Jones’s request.
Everybody appealed everything, and the appeal landed at the Utah Supreme Court. In its Opinion, which I shall now relate, that Court first upheld the directed verdict against Jones on his breach of fiduciary duty claim, which is not the point of this article.
What is interesting to this article is the Court’s holding on Jones’s fraudulent transfer claim, which alleged that the law firm made oversized distributions to lawyers Mackey and Price for purposes of depleting the firm’s assets and thus rendering it unable to pay Jones’s claim. The crux of the district court’s ruling below was that there was a lot of evidence that Mackey and Price made the distribution from the law firm to themselves because they were aware of a potential tax liability that otherwise might have been created, which overwhelmed the other circumstantial evidence that they were intentionally stripping the firm of its assets. In other words, there was a “mixed motive” for Mackey and Price to make the distributions, and their tax reasons came out on top.
The Utah Supreme Court rejected this approach that in a single paragraph:
“¶45. Utah cases have not addressed this “mixed motive” question directly. But they have spoken of an actual intent to hinder, delay, or defraud when interpreting the Fraudulent Transfer Act or its variants. And courts in other jurisdictions have interpreted parallel language of the Uniform Fraudulent Transfer Act in the same way—holding that actual intent to hinder, delay, or defraud may be established on the ground that at least one of the defendant’s motives was an impermissible one. We agree with these holdings and disagree with the contrary view endorsed in other jurisdictions. We conclude that a plaintiff may carry her burden of showing that a defendant had actual intent to hinder, delay, or defraud without showing that it was the defendant’s sole or primary motivation. Thus, the question is whether there existed a legally sufficient evidentiary basis for a reasonable jury to conclude that MPTO made the payments from its trust account with an actual intent to hinder, delay, or defraud Jones.”
Having made this finding, the Court next stated that under the pre-2017 Utah Uniform Fraudulent Transfers Act (UFTA), the creditor’s standard of proof for a fraudulent transfer was by “clear and convincing evidence”, which is a higher standard than the mere “preponderance of the evidence” standard that came into effect when Utah adopted the Uniform Voidable Transactions Act in 2017. Because all the acts complained-of by Jones occurred prior to 2017, he had to meet the higher “clear and convincing evidence” standard.
But even applying this higher standard of proof, the Court concluded that a jury could have reasonably found in favor of Jones had the matter gone to the jury, and thus reversed the directed verdict against him. For the same reasons, the Court also reinstated Jones’s punitive damages claim.
The Court also resolved some other issues as well, including giving the (first) new law firm of Mackay Price, LLC, another chance to prove that it was not the successor entity to the original law firm. The Court then remanded the case back to the district court for a do-over on some of these reversed issued.
For lay readers unfamiliar in the nuances of legal burden, what the Utah Supreme Court said what that the methodology of determining that the non-creditor purposes for the transfer outweighed the creditor-defeating purposes of the transfer was wrong (51% beats 49%), and, instead, that a fraudulent transfer could be found if the debtor had any (1% or more) intent to defeat the rights of its creditor when it made the transfer. Or, to put it another way, the only important question is whether the debtor had any intention of defeating the rights of the creditor when it made the transfer, and that the debtor may have also had other motives is simply irrelevant to this question.
This case demonstrates that there really is no such thing as a “mixed motive” fraudulent transfer case, but only motive cases, meaning that any motive on the part of the debtor to defeat the rights of its creditors will establish the requisite intent under the UFTA/UVTA. Planners seem to think that they can just come up with any old story about what they did and why they did it, and then it is Miller Time! But it doesn’t work that way at all. Instead, the explanation for the planning must be more than a plausible explanation for the planning, but a winning explanation that the non-creditor reasons for the planning were the sole, only and exclusive reasons for the planning ⸺ which is a much steeper, if not often strictly vertical, mountain to climb. Just mumbling something about “business planning” or “estate planning” or “succession planning” or, as here, “tax planning” is not going to save the transaction if creditor problems later develop and there is even the slightest appearance that the planning was meant to defeat the rights of those creditors.
Which is to say that if one wants win a fraudulent transfer analysis on summary judgment, the evidentiary record must be completely devoid of any significant evidence that the debtor had any intent whatsoever to defeat the rights of creditors in making the transfer. Else, get ready to try to explain it all to what will be an understandably skeptical jury.
Notably, this opinion also once again affirms that distributions from a business entity to its owners can be a voidable transaction. The definition of what constitutes a “transfer” in the UFTA/UVTA is amazingly broad, and basically encompasses any method by which the title to an asset (including cash) passes from the debtor to the transferee. Distributions are easily swept into this wide net.
As an aside, one of the issues that the Utah Supreme Court does get wrong is its statement that intent had to be proved by “clear and convincing evidence” under the UFTA, but that was changed to the lesser “preponderance of the evidence” under the UVTA. The truth is that the UFTA always contemplated that only the “preponderance of the evidence” standard would apply, but some courts (including the Utah courts) consistently botched that issue by incorrectly focusing on the “fraud” aspect of a fraudulent transfer, which of course has very little to do with the misrepresentational fraud that requires the higher “clear and convincing” standard of proof in other areas of the law. What the UVTA did do was to attempt to correct this error by basically saying, “Hey, you dummies wearing the black robes, you’ve been getting this standard wrong all along.” It is thus somewhat amusing to see these courts now being finally forced to backtrack on their error by blaming the change on the adoption of the UVTA when in fact that was the UFTA standard all along. Whether the courts will similarly get the message that the “pleading with specificity” requirement that they have similarly wrongly imposed for fraudulent transfer cases arising out of the UFTA has also gone bye-bye under the UVTA, is yet to be seen.
Jones v. Mackey Price Thompson & Ostler, 2020 UT 25, 2020 WL 2507664 (Utah, May 14, 2020). Full opinion at