Does Rule 9(b)’s Heightened Pleading Standard Apply to Fraudulent Transfer Claims?

Courts are divided as to whether rule 9(b)’s heightened pleading standard applies to fraudulent-transfer claims. Normally, a complaint under the federal rules must only contain “a short and plain statement of the claim showing that the pleader is entitled to relief….”[1] But sometimes, stricter standards apply. “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.”[2]

“When the Rule 9(b) pleading standard applies, the complaint must contain factual allegations stating the ‘time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what [that person] obtained thereby.’”[3] “In other words, to properly allege fraud under Rule 9(b), the plaintiff must plead the who, what, when, where, and why as to the fraudulent conduct.”[4]

The circuit courts that have addressed the question provided little or no direct analysis in support of their holdings. The Second Circuit held that Rule 9(b) applies because “‘actual intent to hinder, delay, or defraud’ constitutes fraud….”[5] The Seventh Circuit applied Rule 9(b) without significant analysis.[6] The Eighth Circuit at least twice held without discussion that claims under the Minnesota Uniform Fraudulent Transfer Act are subject to Rule 9(b).[7] The Fifth Circuit expressly declined to say whether rule 9(b) applies to fraudulent transfer claims.[8]

The only circuit that provided analysis in support of its ultimate holding did so somewhat indirectly. The First Circuit held that an actual fraudulent transfer constitutes “actual fraud” for purposes of the § 523(a)(2)(A) discharge exception. In reaching this holding, the court was mindful of the Supreme Court’s direction to study common law as it existed in 1978 when the Bankruptcy Code became law.[9]

The court looked specifically to the Restatement, which “recognizes several types of ‘fraud,’ including … ‘fraudulent interference with [property rights]’….”[10] According to the court, the comments to the restatement made it clear that “fraud” included fraudulent conveyances.[11] Based on this holding, the court remanded for the district court to consider whether the pleading was sufficient under Rule 9(b).

Lower court opinions often contain more nuance. The majority of decisions differentiate between actual and constructive fraudulent transfers. These courts hold that rule 9(b) applies to actual fraudulent-transfer claims, but not constructive fraudulent transfer claims.[12] One explanation is that “[a]lthough tagged with the title ‘fraudulent,’ fraud has nothing to do with [a] constructive fraudulent transfer claim.”[13] “The transaction is based on the transferor’s financial condition and the sufficiency of the consideration provided by the transferee.”[14]

Some lower court opinions hold that Rule 9(b) does not apply at all. One reason is that “‘a claim for fraudulent transfer involves no allegations of fraud on the part of the defendant transferee, but only by the non-party transferor.’”[15] “Thus, ‘where a complaint does not allege that the defendants themselves committed fraudulent acts, Rule 8 applies,’ rather than the particularity requirement of Rule 9(b).”[16] This is unquestionably a minority view.

What seems to get less attention than it deserves is the second sentence of Rule 9(b): “Malice, intent, knowledge, and other conditions of a person’s mind may be alleged generally.”[17] After all, an actual fraudulent transfer only requires proof of intent to defraud.[18] One court minimized this sentence’s impact by stating that it “must not be mistaken for license to base claims of fraud on speculation and conclusory allegations.”[19] But speculatory and conclusory allegations would not be sufficient under Rule 8, either.[20] There does not appear to be any satisfactory analysis available regarding why the second sentence of Rule 9(b) is not outcome-determinative on this issue.

There are also two common loopholes to consider. First, courts frequently hold that the heightened standard is relaxed for a bankruptcy trustee, who has no first-hand knowledge of the underlying transfer.[21] Second, courts also frequently apply a presumption of fraud in Ponzi scheme cases, under which fraudulent intent and insolvency are presumed if there are adequate allegations of a Ponzi scheme.[22]

While there is a prevailing view among courts regarding the appropriate pleading standard for fraudulent-transfer claims — that is, actual fraudulent transfers must be pled with particularity, but constructive fraudulent transfers need not be — the opinions run the gamut. The best practice is to plead fraudulent-transfer claims with sufficient particularity to satisfy Rule 9(b).