Sham and remedial doctrines

Abstract

This article articulates a general theory of sham, understanding it as a species of fraud uniquely characterized by the deceptive misuse of an otherwise valid legal form to defeat a substantive rule of law or policy. It then considers two theoretical questions underlying the design and structure of civil remedial doctrines that protect potential victims and claimants against fraudulent sham transfers. First, should a sham avoidance doctrine require evidence of the challenged wrongdoer’s subjective fraudulent intent, or should the doctrine alternatively allow for more objective proof, such as circumstantial evidence of surrounding facts indicative of a sham transfer? Secondly, is a bright-line rule prohibition or a holistic standard for ex post evaluation more likely to be effective as a remedy for sham transactions, and how do concerns about efficiency of judicial review weigh in this rendition of the rules-versus-standards debate? The article identifies the Fraudulent Transfer Doctrine as the dominant approach for addressing sham transactions in the United States, which imposes a standard rather than a rule, and allows for proof of either subjective fraudulent intent or objective circumstantial evidence of badges of fraud in connection with the challenged transaction. The article then surveys other specialized sham avoidance doctrines, developed to address abusive tax trusts and spousal disinheritance, which illustrate experimentation with both subjective state-of-mind criteria and rule-based prohibitions, with mixed reception and success.