(4) Conveyance for value as fraudulent.

(a) In general.

We have noted how a debtor even though he be insolvent may transfer a good title to his property to one who has given value and taken in good faith, and creditors of such a party cannot complain. Of course if such creditors have acquired liens on such property before it is transferred, the property will remain subject to such liens no matter through how many hands it passes. It shall be our purpose in this subdivision to inquire what constitutes value, and what constitutes good faith, or stated in another way, what constitutes notice to the purchaser of the fraud that is being practiced by the debtor. We may assume that the debtor by such conveyance is hindering, delaying or defeating his creditors, for otherwise they would have no right to complain. We shall notice that it is not necessary to charge the purchaser with actual knowledge, as there are many circumstances which constitute notice in the law, regardless of the actual good faith in the particular case. A purchaser is bound to know that if he purchases under circumstances that should arouse his suspicion, he is bound to investigate the seller's real intent and the effect of the conveyance. If a purchaser should have notice, he is taken to have notice, though in the particular case he purchased innocently and has given value. There are certain circumstances which in the law constitute fraud and there are other circumstances that constitute evidences of fraud, and a purchaser must know the law and be governed accordingly.

As a purchaser to be protected in a fraudulent conveyance must (1) give value and (2) take in good faith or without notice, we shall inquire, first, what constitutes value and, second, what constitutes notice.

(b) What constitutes value.

We shall under the next subdivision in reference to notice, see that the inadequacy of the consideration may be so great as to show fraud and that the purchaser is a party thereto or chargeable therewith. Here we may simply notice that the inadequacy of the value does not keep it from being value. In other words, a purchaser may be protected as a purchaser for value even though he has not given the full market value of the thing purchased. Thus D, a debtor, in a scheme to defraud his creditors, sells to P, a piece of real estate. P by the price agreed upon gets an exceptionally good bargain; this in itself is not material. He is a purchaser for value and as such his purchase cannot be disturbed.

Clearly the purchase of property for money paid by the purchaser, or for tangible property parted with by him, is a purchase for value.

A sale may still be for value though the consideration consists in a promise in the shape of promissory notes, etc. If, however, the sale is to one on credit who is not fully financially responsible or the debt is not secured, the sale will not be upheld. And if unusual terms are given they will be considered as evidences of fraud between seller and purchaser.

While as between the parties themselves a conveyance of property in return for a promise to render future services or support, may be upheld, yet clearly it would open the door to fraud to hold that conveyances of this sort will be upheld against creditors. Thus A, having certain property and being indebted, conveys all his property to B, in return for B's promise to support him the rest of his life. A's creditors can have this conveyance set aside. If B is no party to any fraud, and has actually furnished support, the conveyance will be upheld to the amount of the support he has thus actually given.

To pay or to secure an already existing indebtedness, one may make a conveyance and it will be upheld as a valid conveyance for the purpose of paying or securing the debt. Thus D is indebted to A, B and C. To C he conveys certain property to secure or to pay the debt. Although this amounts to preferring C over the other creditors yet it will stand, as a conveyance for value. Under the Federal Bankruptcy Law, however, it might be set aside, provided proceedings in bankruptcy were begun by the other creditors within four months from the time the conveyance was made, and provided also C knew or had reasonable cause to know that a preference was intended.

(c) The participation in, or notice of the fraud, by the purchaser.

Having now considered what may constitute value, and assuming that the property in question has not been conveyed as a gift, but that the purchaser has really or apparently given value, let us inquire what conduct or notice makes him a party to the fraud so that he will be prevented from setting up his title against the creditors who seek to set aside the conveyance. If he is an active party to the fraud in the sense that he agrees to receive the property in order to defeat creditors and afterwards convey it back again, then our subject presents little difficulty. Such a purchaser is an actively guilty party and cannot crave the law's protection. If we want simply to charge him with knowledge or notice, we may consider that he may be charged with knowledge because he has (1) actual notice; or (2) constructive notice. Let us consider these two heads.

If the creditor knows that actual fraud is being attempted by the conveyance to him, then he is a party to a transaction which will not stand if attacked on that ground by the creditors. The difficulty in such a case would be to prove his knowledge. The presence of some of the "badges of fraud" we will consider hereafter might help in that respect.

A purchaser cannot be blind to the obvious meaning and effect of a conveyance. If the circumstances are such that he should be put on inquiry he must pursue the inquiry that a reasonably prudent man under the same circumstances would have made. Besides this, there are circumstances which in law constitute fraud, and in that case the purchaser would as a matter of law be a party to the fraudulent conveyance.

We may consider the following circumstances as to whether they will put a purchaser on inquiry.

(1) Inadequate Consideration. Inadequate consideration does not in itself put a purchaser on notice unless it is "gross," that is, a very substantial inadequacy, there being nothing to explain why it is so inadequate. But inadequacy of consideration, especially if very great, may be material as evidence in connection with other evidence of actual notice or connivance. Aside from these considerations, we have found that inadequate consideration is a sufficient consideration to support a purchase even against creditors.

(2) Bulk Sale of All of Stock in Trade. One can buy an entire stock in trade without danger of thereby becoming charged with notice of the seller's fraudulent intent (if any). But if the sale is made secretly, or hastily, and without proper inventories, or if there are any facts to arouse a prudent man's suspicion, the purchaser will be charged with notice. Besides, there are now in many states "Bulk Sales Acts" which make a bulk sale fraudulent as to creditors unless they are notified as the law directs.

(3) Knowledge of Grantor's Insolvency. This in itself is insufficient to constitute notice of fraud, for we know that an insolvent person may still sell his property, but we can readily see how this, as an element, might make a stronger case.

(4) In General. We see from these illustrations that it simply becomes a question in any case of applying the general rule that a purchaser is chargable with notice when the circumstances would constitute notice to a reasonably prudent man, the average buyer.