(d) Badges of fraud.
General statement. We have noted that the greatest difficulty in cases to set aside fraudulent conveyances, is to prove the case. The creditors might be able to prove circumstances that would put a purchaser on notice and thereby charge him with knowledge but it might be that the purchaser is believed to have had actual knowledge, and even to have been in connivance with the debtor. In such a case there may be what the law calls "badges of fraud," signs or labels which indicate the irregular and fraudulent nature of the transaction. Ever since Statute 13th Elizabeth, Ch. 5, and Twyne's Case, there have been certain well known "badges of fraud," which we will now consider. These badges of fraud do not necessarily prove that there has been fraud; but they are evidences of fraud, or, constitute a prima facie case of fraud. In some cases, however, and in some jurisdictions, they constitute fraud itself, or, as it is said, "legal fraud", and there can be no rebuttal of the fraud so constituted or presumed.
Retention of possession by seller. It has long been the law that where personal property is sold under an absolute bill of sale, there must be an immediate and notorious change of possession. Retention by the vendor makes out a case of fraud. In some states, the case thus made out is only a prima facie one, subject to rebuttal by evidence that the sale was in fact honest. But in other Courts, the actual good faith in the transaction is immaterial.234
Change of possession need not consist in change of location. It is enough if the purchaser goes in charge, and assumes control in such a manner that any one interested could find that a change had taken place.
234. In the following states retention is considered as prima facie evidence of fraud, rebuttable by evidence that the sale was actually for value and in good faith; Alabama, Arizona, Arkansas, Delaware, Florida, Georgia, Indiana, Kansas, Louisiana, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oregon, Rhode Island, South Carolina, Tennessee, Texas, Virginia, West Virginia, and Wisconsin. In the following states retention of possession is conclusively presumed to be fraud: California, Colorado, Connecticut, Idaho, Illinois, Iowa (unless recorded), Kentucky, Maine, Maryland (unless recorded), Masachusetts, Missouri, Montana, Nevada, Oklahoma, Pennsylvania, South Dakota, Utah, Vermont, Washington (unless recorded). In Mexico and Wyoming not clearly established.
Thus, if a store is sold, and the new owner goes into possession, assuming control, so that any one concerned would be put to inquire whether a change had not taken place, this would be a sufficient change of possession and the sale would be good against the seller's creditors.
A reasonable time is allowed for the change of possession.
If goods are ponderous or scattered and therefore immediate possession is difficult, these circumstances enter into the case and govern the reasonableness of the time for removal.
Inadequate consideration. Gross inadequacy of price is usually taken in connection with other circumstances to make out a badge of fraud. In itself it is not an evidence of fraud unless great enough to "shock the conscience." Even then it is not final proof of fraud. It may be shown that notwithstanding the gross inadequacy, the transaction was in fact honest.
Consideration fictitious in part. If all of a consideration expressed is fictitious the conveyance is void where a voluntary conveyance would be void, for it is voluntary. If part of the consideration is fictitious, this is a badge of fraud. Thus if one should convey property for a valid consideration, and another consideration wholly fictitious is recited, as a debt which never existed, this shows a fraudulent arrangement between the parties. The parties by such recital, that is, by their attempt to give the conveyance an appearance of fairness, are really creating evidence against themselves.
Sales of entire stock in trade in bulk are not improper and the fact that there is such a sale shows no fraud. Yet it is also true that fraud may easily be accomplished by such sales and if there is anything irregular in the sale, as where made hurriedly, or for a bulk price without inventory, etc., all goes to show that the transaction was fraudulent.
In some states laws have been passed known as bulk sales laws requiring that one who sells his entire stock in trade in bulk, shall notify his creditors, or make a certain specified public notice, or both.