Article courtesy of Jeff Dutson of King & Spalding
Debtor’s knowledge imputed to debtor’s co-principals, rendering land sale from debtor to debtor’s co-principals voidable under the UVTA as to debtor’s creditor.
Cherry Cmty. Org. v. Sellars, 871 S.E. 2d 706 (N.C. 2022)
A North Carolina nonprofit entity focused on the preservation and restoration of a historic Black, working-class neighborhood (the “creditor”) contracted with a real estate development company (the “debtor”) to build a new housing development. The creditor sold the debtor a parcel of prime real estate (the “property”) for below the market rate in exchange for a promise that the debtor would devote a portion of the new development to housing for vulnerable populations. The debtor did not fulfill that promise, entering instead into a joint venture with the owners of another real estate development group (the “co-principals”) with the goal of combining their adjoining properties to develop a mixed-use project. Under the common law and North Carolina state law, the joint venture established an agency relationship between the debtor and the co-principals.
As a result of the debtor’s failure to incorporate any affordable housing into the new development, the creditor filed a breach of contract suit against the debtor. While that lawsuit was on appeal, the debtor offered to sell the property, previously valued at $2.2 million, to the co-principals for $1.1 million (the “land sale”). The debtor and the co-principals agreed to conceal the land sale and to close quickly to avoid any potential obstacles that the impending appellate ruling would have on the land sale. By the time the land sale closed, the appellate court had ruled in the creditor’s favor, ultimately yielding a $7 million judgment for the creditor at trial. Upon learning of the land sale, the creditor filed a second lawsuit against both the debtor and the co-principals, arguing that the debtor’s conveyance of the property to the co-principals was voidable under North Carolina’s Uniform Voidable Transactions Act (the “UVTA”).
The UVTA renders a transaction voidable when a debtor conveys property to a third-party transferee with the intent to defraud a creditor. Although the UVTA affords protections to third-party transferees who take in good faith, transferees who take in bad faith are not similarly protected. Here, the co-principals argued that they purchased the property from the debtor in good faith. While the trial and appellate courts agreed with the co-principals, the North Carolina Supreme Court disagreed. The court stated that the debtor demonstrated fraudulent intent by concealing the land sale and selling the property for less than reasonably equivalent value, among other badges of fraud. Citing the imputed knowledge doctrine, the court held that the debtor’s knowledge was imputed to the co-principals because of the agency relationship that the parties’ joint venture established. Accordingly, the co-principals were excluded from the UVTA’s good faith purchaser for value haven, leaving the land sale subject to voidability.
