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If an LBO does not undergo review and later enters bankruptcy, creditors will enjoy the presumption of constructive fraud.
Another significant departure from bankruptcy law includes the carve-out of a two-year statute of limitations for claims brought against a charitable organization under either an actual fraud theory or a constructive fraud theory.
It follows then that regardless of whether the trustee proceeds under the actual or constructive fraud provision, the substantive issue is the value that the investor gave in exchange for her payout.
As a result of Zuckerberg's constructive fraud, all consideration received by him or was promised to him in exchange for the General Partnership's assets, including, but not limited to, cash, stock, stock options, restricted stock units and/or any other consideration, were received, and continue to be held, by him in constructive trust for the benefit of the General Partnership and Ceglia as a 50% owner of the General Partnership.
This author has tried to place the mentioned standards of fraud "on a continuum where the suggested standard ranges from, at the one extreme, where fraud must be egregious, to the other extreme, a broader constructive fraud approach, where an intention to defraud is not a necessary element.
19) To establish a constructive fraud claim, the trustee must first show that the debtor had an interest in the property or funds transferred to the investor.
Applying this analysis to a typical mortgage fraud claim in which the broker firm (but not necessarily the principal) committed the fraud ,it would appear that the constructive fraud test would apply--that is, that the lender need only show that the corporation was a mere sham by satisfying the requirements as stated above.
Note that the constructive fraud doctrine appears to catch some purely innocent behavior that has the effect of damaging an insolvent debtor's creditors (by taking away assets or by giving rise to a competing obligation).
Elliot and Willingham (1980) state that the law distinguishes between actual fraud, which is intentional, and constructive fraud, which is not deliberate.
A North Carolina court of appeals ruled that shareholders of a corporation could maintain a constructive fraud action against an accounting firm.
Constructive fraud would include a transfer of assets for less than fair consideration, which leaves the transferor either insolvent with an unreasonably small amount of capital, or unable to pay its debts when they become due [9].
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