Anhui Omi Vinyl v. USA Opel Flooring (COA 23-993) 8/6/2024
Uniform Voidable Transactions Act Applied
Chris Burti, Vice President and Senior Legal Counsel

The appeal in Anhui Omi Vinyl Co., Ltd., v. USA Opel Flooring, Inc. F/K/A USA Flooring Importers, Inc. F/K/A USA Opel Flooring Importers, LLC, was filed by the defendant USA Opel Flooring, Inc. ("Opel") from order by the trial court holding that the transfer in question was voidable as to Opel's creditor, the plaintiff Anhui Omi Vinyl Co. Ltd. ("Omi"), because the transfer "was done with the intent to hinder, delay, or defraud" Omi contravening the Uniform Voidable Transactions Act and entering a million dollar plus judgment in favor of Omi.

The facts in this case as reported are convoluted and only those necessary to understand the opinion are set out here. The transfer of real property in question in this case resulted from a deed from Surface Source USA NC, Inc. ("Surface Source") of its sole asset, to Opel. Omi manufactures and exports luxury vinyl tile flooring to companies in the United States and Surface Source was a customer of Omi selling vinyl flooring from a building that it owned in Lexington, North Carolina (the "Surface Source Building"). The Surface Source Building was encumbered by a first priority lien in favor of Davidson County, securing an economic-development loan from the county.

Surface Source experienced financial difficulty and failed to pay more than $1,000,000.00 owed to Omi. Surface Source's CEO had Opel formed at that time to engage in the same business as Surface Source with the CEO owning 60% of Opel's stock. In June 2017, Omi filed suit against Surface Source on the debt and Surface Source actively defended Omi's suit, by filing an answer and counterclaim. In November, Surface Source sold the Surface Source Building, its only asset, to Opel for $1,030,000.00 "plus additional consideration." "At the time of the transfer, Opel was aware that the Surface Source Building was the only asset that Surface Source owned and that a secured creditor of Surface Source had already foreclosed on and sold all of Surface Source's other assets." At Surface Source's request, Davidson County subordinated its deed of trust against the Surface Source Building to a new deed of trust and the recorded subordination agreement identified Opel as the original borrower of the loan from Davidson County, rather than Surface Source.

The trial court entered judgment in favor of Omi however, "Omi was unable to collect on its judgment against Surface Source; the Davidson County Sheriff's Office returned Omi's writ of execution as unsatisfied because it 'did not locate property on which to levy.'" Omi then filed a complaint against Opel, alleging that Opel was liable to Omi in the amount of the judgment against Surface Source as a "mere continuation" of Surface Source under the doctrine of successor liability or, because the transfer of assets from Surface Source to Opel was a fraudulent transfer pursuant to the Uniform Voidable Transactions Act. The trial court held that the transfer of the Surface Source Building from Surface Source to Opel was voidable as a fraudulent transfer and, alternatively, that Opel was a mere continuation of Surface Source and liable to Omi in the amount of $1,139,971.21 plus interest.

Citing caselaw from 1841, the opinion states:

From "an early period in the judicial history of this State," North Carolina has recognized the voidability of fraudulent transactions. ... "The declared object in enacting [the statute] was to avoid and abolish feigned gifts, grants, alienations, &c., which may be contrived and devised of fraud, to the purpose and intent to delay, hinder, and defraud creditors and others of their just and lawful actions and debts." Our Supreme Court has long recognized the general principle that a transaction tainted by the intent to defraud a creditor may be voidable as to that creditor:

[T]he whole purpose of the parties to such conveyance must be the devotion of the property bona fide to the satisfaction of the preferred creditors, and no part of that purpose the hindering or delaying of creditors, except so far as such hindrance or delay is the unavoidable consequence of the preference so given. Every contrivance to the intent to hinder creditors - directed to that end - is "malicious" that is to say, wicked. . . . But if the hindrance of creditors form any part of the actual intent of the act done, so far the act is as against them a wicked or malicious contrivance - and it is not to be questioned that a conveyance or assurance, tainted in part with a malicious or fraudulent intent, is by the statute made void as against creditors in toto. (Citations omitted - Ed.)

The Court proceeds to discuss "badges of fraud" which may raise a presumption of fraudulent intent where a transaction that is not void on its face may nevertheless be found to be voidable as fraudulent:

"[C]ertain combinations of the several badges of fraud . . . make it incumbent on the party benefited by the alleged fraud to show the bona fides of the transaction.". As articulated by our Supreme Court, these badges of fraud included: failure to register a conveyance required by law to be registered within a reasonable time after its execution; the embarrassment of a grantor and his failure to reserve sufficient property to satisfy his indebtedness; inadequacy of price; unusual credit given by one in failing circumstances; secrecy in the execution of a conveyance; the fact that one involved in debt makes a conveyance to a near relation.

The Uniform Voidable Transactions Act (UVTA) is deemed by the Court to be consistent with this "centuries-old precedent" and lists among others the following elements for determining that a transfer is voidable as fraudulent:

(a) A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With intent to hinder, delay, or defraud any creditor of the debtor . . . .

The opinion provides guidance as follows:

When determining whether a transfer was made with the "intent to hinder, delay, or defraud any creditor of the debtor" under the Uniform Voidable Transactions Act, N.C. Gen. Stat. § 39-23.4(a)(1), the trial court may consider any of the following non-exclusive list of factors, which follow the spirit of the traditional badges of fraud:

(1) The transfer or obligation was to an insider;
(2) The debtor retained possession or control of the property transferred after the transfer;
(3) The transfer or obligation was disclosed or concealed;
(4) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) The transfer was of substantially all the debtor's assets;
(6) The debtor absconded;
(7) The debtor removed or concealed assets;
(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) The transfer occurred shortly before or shortly after a substantial debt was incurred;
(11) The debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor;
(12) The debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor reasonably should have believed that the debtor would incur debts beyond the debtor's ability to pay as they became due; and
(13) The debtor transferred the assets in the course of legitimate estate or tax planning.

The existence of these badges of fraud as found by the trial court: "raise[s] a presumption of fraudulent intent, and make[s] it incumbent on the party benefited by the alleged fraud to show the bona fides of the transaction..." and brings the Court's analysis the Uniform Voidable Transactions Act's good-faith exception.

A transfer that may be voidable by a creditor directly against the transferor may not be voidable against the transferee if the good-faith exception under the UVTA applies. A transfer or obligation is not voidable under N.C.G.S. Section 39-23.4(a)(1) against a person that took in good faith and for a reasonably equivalent value. The party seeking protection of the defense of the good-faith exception must prove its applicability by establishing both elements; "a person that took in good faith and for a reasonably equivalent value". The Court of Appeals concluded the trial court's determination that that Opel did not meet this standard was supported by the trial court's unchallenged findings of fact.

We will simply set out the Court of Appeal's analysis of the arguments in the appeal concerning the trial court's remedy as it is concise and clear.

Finally, Opel alleges that the trial court's order "suffers from a fatal logical flaw." Opel asserts that "[v]oiding the transaction cannot permit Omi to recover because the [Surface Source Building] was fully encumbered to secured creditors who had priority over Omi." Not only is this assertion irrelevant, Opel misapprehends the nature of the relief that the trial court ordered.

The opinion makes it clear that the "trial court did not, in fact, void the transfer of the Surface Source Building. The trial court merely entered "a judgment against [Opel] in an amount equal to [Omi]'s judgment against Surface Source." This is a remedy that the trial court is indisputably authorized to enter by statute. See N.C. Gen. Stat. § 39-23.8(b)(1).

Further, the fact that the Surface Source Building was encumbered by liens held by secured creditors does not create "a fatal logical flaw" in the trial court's order sufficient to mandate reversal. Rather, as Omi notes, the trial court's entry of judgment against Opel-in the same amount as Omi's judgment against Surface Source-merely restores Omi to its status quo position: as a judgment creditor, no more and no less.

What the case does not make clear to us, is what the priority of that judgment would be with respect to Opel's deed of trust to which Davidson County subordinated its deed of trust?

For title insurance underwriters, this issue typically comes up when the Attorney's Preliminary Opinion on Title reports that there is a civil action pending against the seller of the proposed seller in the transaction. The argument of the seller is that there as there is no judgment of record at the time of closing and the sale is arm's length and for full value, the transaction should be insurable. The concern of the underwriter is fourfold: 1. Is the transaction actually arm's length? 2. Is it for fair market value? 3. Will the exceptions of the Uniform Voidable Transactions Act apply to protect the transfer? 4. Will the insurer have to spend the money to defend an action on behalf of an insured even if the answers to the foregoing are all, in fact, affirmative? The task of counsel will be to confirm that the first three are answered in the affirmative and to convince the underwriter that the last issue is unlikely.

It should be observed that had Opel obtained title insurance for its mortgagee or itself, the insurer would have been on the hook for the cost of the defense and the amount of the judgment if the judgment was deemed to have priority over Opel's deed of trust, even if the judgment ultimately might be excluded from coverage under the terms, conditions and exclusions of an owner's policy for Opel.