J er r y St on e, St on e I nv es t m ent Co r po r at i on , and B et h Sm i l e w er e a l so d efe n d ant s i n t hi s m at t er at t he t r i al 1 le v e l. T h e y a re n o t p a rtic ip a tin g in th e a p p e a l.



### IN THE COURT OF APP EALS OF TENNESS EE

AT KNOXVI LLE Se pte mb er

17, 200 9 S es sio n BR EN D A S TO N E, in di vid ua lly an d de ri vat ive ly i n he r ca pa ci ty as a d ir ec to r of Appa la chi an Cav erns Foun da tio n v . SCOTT S MIL E, ET AL 

### . Appeal from t he Chancery Court for Sullivan County No. B0020971(M) John S . McLe llan, I II, Chancellor

No. E2009-00047-COA- R3-CV - FILED DECEMBER 18, 2009

The plaintiff initiated this action on behalf of a f oundation of which she was formerly a dire ctor. She sought to reinstate a de ed of trust s ec u ri n g a n o te belonging to the foundation and to set aside a fraudulent conveyance of

the prope rty that was subjec t to the deed of trust. The trial court found that the re le a se of

the de e d o f t

ru st w a s impr op e r andthat th e c on ve ya nc e wa s f ra udul e nt and , th us , re ins ta te d th e de e d o f t

ru st a ndse t a sid e the c on ve ya nc e of the pr op e rt y. W e a ff

ir m. Tenn. R. App . P. 3 Appeal as of Right; Judgment of the Chancer y Court

Affir med; CaseRem anded
J OHN W. M C C LARTY , J., delivere d the opinion of the court, in which C H A RL ES D. S US ANO , J R ., and D. M I CHAEL S W I NEY , JJ., joined. James D. Culp, Johnson City, Tennessee, f or Appe llant, Scott S mile. Joseph B. Lyle, Bristol, Tennessee , for Appe llee, Brenda Stone. OP IN ION
I. BACKGROUND This case arose as a r elated matter in the af termath of an earl i er d i vorce betwee n plaintiff, Brenda Stone, a nd her f

ormer husba nd, defe ndant Jerry Stone. 1 The Appa lachian Ca verns Foundation (“ Foundation”) is a nonprofi t company se t up by W ill ia m E . H a ssi ng e r i n 1 99 2 to ope rate a sc e nic a ttr a c tio n k no wn a s A pp a la c hian Ca ve rn s. Both Mrs. Stone and Mr. Stone we re me mbers of the B oard of Direc tors of t he F oundation, having joined in approximately 1994. Mr. Stone served as Pre sident of the Foundation and Mrs. Stone ser ved asA p roce ed i n g m ay b e b rou g h t in t h e ri g h t o f a co rpo rat i o n to p rocu re a j u d g m en t i n i t s favo r by an y dir ect o r. 2 T en n . C o d e A n n . § 4 8 -56 -40 1 (a). -2- Secre tary. Eve ntual l y , M r. Hassinger re signed from the Boar d. The re cord r evea ls that the Foundation met irregular ly.
Mr. Stone was a lso president of a n entity known as Stone Inv es tment Corporation (“Corpor ation”). O n Marc h 27, 2000, in his ca p ac i ty as preside nt of the Corporation, Mr. Stone exec uted a de ed of trust on be half of the Corporation, pledging as collate ral c erta in property owne d by the Cor

po ratio n in Sul liv a n Cou nty

-- 31 Se ve nte e nthStr e e t, B ri sto l - - t o s e c ur e a n in de bte dn e ss evidenc ed by a pr omissory note in the amount of $65,000 in favor of Mr. Hassinger

. That dee d of trus t w a s r e c or de d in the Re gis te r’ s Of fi c e fo r Sull ivan Coun ty. Th e pr op e rt y -- -- is the pr op e rt y in dispute in thi s case . When Mr . Hassinger died in 2002, he lef

t the promissory note to the Foundation. The promissory note ha d a maturity date of September 30, 2001. Howeve r, t he Corporation made no payments on the note -- it was past due and in default. As the yea rs went by, no r eal e ffort wa s ma de to c oll e c t or

e nf or c e the ba la nc e ow e d. Ac c ord in g to Mrs. Sto ne , M r. Sto ne re fu se d to allow the Foundation to proce ed on the note and fore close on the pr operty. In Augus t 2004, the Foundation sold t he ca verns a nd its tangible assets for $84,646.54.
The Stones wer e later divorce d. In those proce edings, Mr. Stone rec eived his intere st in the Corporation as his sole property. In a collater al matter, Mrs. Stone obta ined a defa u l t j u dgment against Mr. S tone and the C orporation in January 2007. I n that action, to which the de fendant here , Scott Sm ile, was not a pa rty, M r. S t one wa s found to have “ acte d illegally, oppressively and fraudulently with respec t to the assets of the Foundation.” The Foundation was found to be the ho lde r o f the pr omi sso ry no te a ndwa s h e ld to b e e nti tle d to jud gme nt a ga ins t Mr . St on e fo r h is alleged a ctions in the amount of $105,084.11. Shortly before the def

ault judgment was ente red, Mr s. Stone discovere d that a re lease of the afor ementioned de ed of trust ha d been signed on behalf of F oundation on or about October 30, 2006; Mr . St on e a lso ha d e xe c ute d a qu itc la im d e e d tr a ns fe rring the pr op e rt y at is su e to M r. Smil e a ndhis wife, Beth Smile. Mrs. Stone t h en filed this action pursuant to Te nn. Code Ann. § 48-56- 401 (2002) alleging that Mr. Stone’s ac tions in signing the relea se dee d on behalf of the Foundation and 2 the quitclaim deed on behalf of C orporation wer e fraudulent and asking the t rial court to set both of those instruments aside.
Mrs. Stone asserte d in her c omplaint that the S miles, based on their prior dealings with the Stones, “ h a d a c tu a l kn o w le d g e o f th e d iv o r c e , th e d e a d lo c k o f th e Fo u n d a ti o n , th e N o te , D e e d of Trust lien, Jerry Stone’s lack of authority and the Enforc ement Ac tion.” Mrs. Stone alleged that “the tr a ns fe r o f the Pr op e rt y to Sc ott Smil e a ndBe th S mil e wa s a sh a m tr a ns a c tio n wi th th e in tent to delay, hinder

or defr aud the Foundation in the enforc ement of the Note and D eed of Trust in direct violation of the Tenne ssee Unif orm Fraudulent Transfer Act.” In t he alternative, Mrs. Stone cla imedT he Sm i l es fi l ed a c r oss cl ai m agai nst St on e I nv es t m ent Co r po r at i on and M r . St on e. 3
-3- that “the tra nsfer

of the Property is by an insolvent transfer or, and suc h conveyance is void pursua nt to the Tenne ssee Unif

orm Fraudulent Transfer

Act.” At trial, Mr. Stone claimed that the Hassinger note was, in e ffe ct, his property -- not that of the Foundation. He testified that he acquir ed the note a s partial payme nt on ear lier loans he ha d ma de to the Fou nd a tio n. Both Mr. Sto ne a nd Mr . Smile te sti fi e d tha t the c on ve ya nc e of the pr op e rt y at 3 1 Se v e n te enth Street wa s in consideration of a long-running tra nsaction betwe en them going bac k to at least to 2003, during which time Mr. Smile made numer ous advanc es of f unds to Mr. Stone, a nddidwo rk

on the pr op e rt y at is su e wo rth mo re than $ 10 ,0 00 . M r. Smil e state d th a t he a lso perf ormed services for

Mr. Stone on other prope rties. The Smiles admitted that, year s ago, Mr. Stone had conve yed to them a ne arby pr operty at 16 Seventee nth S t re et by a pr omissory note and dee d of trust. Acc ording to Mr. Smil e, howe ver, while there was no promissory n o t e, deed of trust, or similar instrument betwe en the pa rties rega rding this transaction, he ha d perf ormed his adva nces and service s for Mr. Stone ove r a pe riod of seve ral ye ars, and it had been agreed betwee n them that Mr. S tone would either pay him or conve y to him the buildi ng at 31 Sevente en t h S t re et i n satisfac tion of the debt. He claimed that the payments we re handled on the first transac tion e ssentially the same a s they wer e in the one at issue. Mr. Smile and his w ife both te stified rega rding their attempt to r econstruc t a payment history from handwritten ledgers; they a rrived at a figure of $44,590 paid at various dates. Mr. Smile stated that 3 he believe d approximate ly $7,000 of money and se rvice s had not bee n acc ounted for in the rec onstructed ledge r. He opined that the property at 31 Seventee nth Street is worth about $55,000. At the time of trial, howe ver, the Smil es cl ai m ed that they were unable to locate the handw ritten le dg e rs c on ta ini ng the inf orma tio n o n w hic h th e y b a se d th e ir c la ims

. Mr . Sm ile a c kn ow le dg e d th a t he ha d kn ow n the Sto ne s f or 20 to 3 0 y e ars . H e a dmi tte d to be ing a c on vic te d fe lon , altho ug h no tes tim on y wa s give n as to the natur e of the fe lon y or wh e n it occur red.
In re buttal testimony, Mrs. Stone testified t hat s he became a war e that Mr. Smile was using the property at issue during 2004 or 2005. She rec alled that during that time frame , she witnessed Mr . Sm ile ha d wor

kme n in the bu ild ing c ha ng ing the loc ks

. Mr s. Sto ne re c a lle d th a t du ri ng he r v isi t to the property, she and Mr. Smile discussed the divorc e rather than the property matt er . She asserted, howeve r, that she did inform him there was a note on the prope rty. In re buttal to Mr. Stone’s testimony t h at s h e h ad refused to attend the Board mee ting at which the Foundation voted t o authorize the t ransf er of the Hassinger

note to Mr. Stone, Mrs. Stone de nie d h a vin g r e c e ive d a

no tic e of su c h me e tin g. She fu rthe r n ote d th a t Mr . St on e ha d f ile d a Rul e 17 Statement under oath i n t h e d ivorce proce eding that did not include any indebte dness to Mr. Smil e.-4-

In its op ini on , th e tr ia l c ou rt state d a s f

oll ow s: I . . . find that no conside ration wa s paid in cash a n d / o r s ervic es by Scott Sm ile and Beth Smile for the subject prope rty described in the quitclaim de ed dated November 29th, 2006

. . . : (a) T h e S m iles failed to produc e a sc intill a of e vidence to corrobor at e the loans or service s they contend w as totaled in va lue of $44,590.00 for payment of the su b j ec t property for a pe riod of 4/14/03 to 6/23/06; (b) Jerry Stone’s February 27th, 2006 Rule 17 St ateme n t fi led in the divorce proceed i n g . . . fails to list a debt to the Smi les; (c) The subjec t transfe r to the Smiles was not conducte d by these parties in a ma nner simil ar to the transfer of F ebrua ry 27t h, 1998 . . . ; (d) [N either] [t]he quitclaim deed .

. . nor the err oneous quitclaim de ed

. . . ref lects the alleged $55,000.00 va lue of the transfer conducte d by the parties; (e) The Cou rt fi nds that it is m ore tha n coincidenta l that the subject t ra n s fe r occur

red w ithin a short period of the time Je rry Stone wa s sued over the note, which was the subject of the c ase a djudicated by Ju dg e Be c k, pa

rt ic ularly in co ns ide ratio n o f the Ju dg e ’s a fo re sa id findings and Jerry Stone’s description of the event, a nd the Smile[s’] inabi li ty to s u b s tan ti a te th e ir c laim o f lo a n s a n d s e r v ic e s to J e rry Stone.
Th e Co urt f

ind s th a t th e Smil e s a

re no t bo na

fi de pu rc ha se rs du e to not purcha sing the subject prope rty for va luable conside ration . . . . Lastly, I fi n d t h at the Smiles are a war ded judgment aga inst S tone In ve stm e nt C or

po ratio n f or the va lue of

imp ro ve me nts to t

h ep r o p e r ty in the u n contested sum of $10,000.00, and may pursue a cla im for value of service s rende red f

or loans that they can document or w hich Jerry Stone admitted . . . in the amount of $44,590.00. . . .
* * *

In its or de r, the tr ia l c ou rt he ld a s f oll ow s: 1. The Deed of Trust dated March 27, 2000 . . . together w ith the lien there of is reinstated, the same a s if it had not be en rele ased, and the Te nn e sse e Re le a se De e d da te d Oc tob e r 30, 20 06

. . . is dee me d v oid and of no e ffe ct. . . . 2. The Quitcla im Deed da t ed November 29, 2006 from Stone Investment Corp. to Scott Smile and Beth Smile . . . is void and of no eff ect a s if the same ha d never been r ecor ded. . . .-5- 3. Scott and Beth Smi le have and re cover a judgment aga inst S tone Investment Corp. and Je rry St o ne in the amount of f ifty-four Thousand Five Hundre d Ninety and 99/100 Dollar s ($54,590.00).
* * * The trial c ourt there fore found both tr ansac tions to be fraudulent and decla red both the rele ase de ed a ndthe qu itc la im d e e d to be vo id and re ins ta te d the 20 00 de e d of trus t se c uring the pr omi sso ry no te in the a mou nt o f $ 65 ,0 00 . M r. Smil e fi le d a tim e ly a pp e a l.

II. I SSUE
Th e iss ue pr e se nte d f

or re vie w b y M r. Smil e is a s f oll ow s: Di d th e tr ia l c ou rt

e rr in s e tti ng a sid e the re le a se of the deed of tr us t a ndqu itc la im deed e xecute d by Jerry Stone on behalf of Stone Investment Corporation in favor of appellant, Scott Smile?

III . STANDARD OF REVIEW
We r eview this ca se de novo on the rec ord wi t h a pre sumption of corre ctness of the trial c ou rt ’s fi nd ing of

fa c t, u nle ss the pr e po nd e ranc e of the e vid e nc e is o the rw ise . T e nn . R. Ap p. P. 13(d). No pr esumption of corr ectne ss attache s to the trial court’s decisions re garding que stions of law. Wilson v. Wilson , 984 S.W.2d 898, 900 (Tenn. 1998)

. In a fraudulent conveyance c ase, the burden of proof is by a pr eponder ance of the e vidence

. Jame s v. Jose

ph , 1 S.W.2d 1017, 1019 (Tenn. 1928) . The trial c ourt’s judgment is presumed c orre ct and will be af

firmed u n l es s t h er e i s an er ror of law or unle ss the court finds that the e vidence preponde rate s against the judgment. H a r w e l l v . H a r we ll , 6 1 2 S.W.2d 182, 183 (Tenn. Ct. App. 1980).
IV. DI SCUS SION This case arises unde r the Uniform Fraudulent Tra nsfer Act, Te nn. Code Ann. § 66-3- 301 (2 00 4) e t se q. Te nn . Co de An n. § 6 6- 3- 30 6 p ro vid e s: A t rans fer mad e . . . b y a

de bto r i s f

ra ud ule nt a s to a

c re dit or wh os e c la im a

ro se befor e the tra nsfer

was made . . . if the debtor ma de the transfer . . . without rece iving a re asonably e quivalent value in e xchange for the tran s fe r . . . and the de btor was insolvent at that time or the debtor be came insolvent a s a result of the transfe r . . . . Tenn. Code Ann. § 66- 3-306(a ). Thus, the e lements of the c laim are :-6-

1) Creditor’ s claim arose befor e the transfer ; 2) De btor did not rece ive a r easona bly equivalent value ; 3) De btor was insolvent or r ender ed insolvent by the transf er. Te nn . Co de An n. § 66 -3 -3 03 pr ov ide s that “ [a ] de bto r is ins olv e nt if the su m of

the de bto r’ s d e bts is greate r than a ll of the debtor’s assets, at a fair valuation.” Tenn. Code Ann. § 66-3- 304 define s fair c onsideration as “ given for a transfe r or a n obligation if, i n ex change for the tr ansfe r or obligation, property is transfe rre d or an antece dent debt is secur ed or satisfied . . . .” In de termining whether consideration is i nadequate, a mathe matical formula is not used. C o u rt s consi der the circ umstances of the particula r ca se. See B igger v. Fields , No. M2004-01489-COA- R3-CV, 2005 WL 2043762, at *3-4 (Tenn. Ct. App. M.S., Aug. 24, 2005) (citing Meac ham v. Hale y , 270 S.W.2d 503 (Tenn. Ct. App. 1954))

. As this court noted in Nad le r v. M ou nta in V all ey Cha pe l B us ine ss T

ru st , No. E2003-00848- COA-R3-CV (Te nn. Ct. App. E.S., June 30, 2004),

[a] conveyance is c onsidered f rau d u l en t in Tennesse e if it is made “[w ]ithout a fair

consideration, leaving the grantor insolvent; or

. . . [m]ade with actual in t ent t o hinder, de lay or de fraud cre ditors.” A determination of whether a conve yance is fraudulent is dependent up on the fa c ts a nd c ir c ums ta nc e s o f e a c h c a se ; su c h f ra udis t yp ic a lly proven by c ircumstantial evidenc e. Such circ umstantial indicators of fraud are often termed as “badge [s] of fraud” and have been de scribed a s “ a n y f a c t[ s ] th a t th r o w [ ] s u s p ic io n o n th e tr a n s a c ti o n and call[ ] for a n explanation.”

Id. at *2 (interna l citations omit ted). Courts in Te nnessee have he ld the following to be badge s of fraud: 1. The tra nsfer or is in a pre carious financial c ondition.

2. The tra nsfer or knew there was or soon w oul d b e a large mone y judgment rende red a gainst the transfe ror. 3. Inade quate c onsideration wa s given for the transfe r. 4. Secre cy or ha ste existed in ca rrying out the tra nsfer

. 5. A family or friendship relationship existed between the transfer or and the tra nsfer ee( s). 6. The tra nsfer

included all or su b s t anti ally all of the tra nsfer or’s nonexempt prope rty.-7- 7. Th e tr a ns fe ro r re ta ine d a life e state or oth e r i nte re st i n th e pr op e rt y transfe rre d.
8. The transfer or failed to produce available evidenc e explaining or rebutting a suspicious transa ction. 9. There is a lack of

innocent purpose or use f or the tra nsfer

. Id. (citing In re Hic ks , 176 B.R. 466, 470 (Bankr. W.D. Tenn. 1995). The prese nce of one or more of the ba dges of f

raud give s rise to a presumption of fr aud and shifts the bur den of disproving fr aud to the defe ndant. See M

acon Bank

& Trust Co. v. Holland , 715 S.W.2d 347, 349 (Tenn. Ct. App. 1986) (c iting Gurlich’s Inc . v. My rick , 3 8 8 S

. W

. 2 d 3 5 3 ( T e n n . C t

. A p p . 1 9 6 4) ; Nas hv ill e Mi lk Producers, I

nc. v. A lston , 307 S.W.2d 66 (Tenn. Ct. App. 1957))

. As noted in Bigger v. Fie lds , “[w ]hen r eviewing the trial court’s ha ndling of “badge s of fraud,” it is important to recognize that they ar e to be considere d from Mr. Smile’s viewpoint. See id. , 2005 WL 2043762, at *5. “[W ]hate ver the intent of [Mr. Stone], if [ Mr. Smile] entere d into the transac tion in good faith, gave adequate or fair consider ation and had no know ledge or notice of the grantor’ s fraudulent intent, the n t h e co nveyanc e cannot be attac ked by cr editors.” Id. Mr . Sm ile contends that he should be consider ed a pur chase r in good faith. The re lease of the de ed of trust sec uring an e xisting unpaid debt evidenc ed by the note w as clea rly not in the best interest of the Foundation. Our review o f the re cord r evea ls the following “badge s of fra

ud” pre sent in this case:
1. Mr. S t o n e an d his Corporation wer e in a “ prec arious fina ncial condition.”
2. Mr. Stone and the Corporation knew there was or soon would be a lar ge money judgment ente red a gainst the Corporation and that the Foundation would be looking to foreclose upon the prope rty. 3. The Corporation did n o t rec eive a dequate consideration for the property. 4. Mr. Stone, shortly a fter the Foundation’s suit on the note, ca used the Corporation to h as tily release the dee d of trust without the approva l and knowledge of the Foundation’s Board o f Dire ctors contra ry to the intere sts of the Foundation. He transf err ed the property without the knowledge of Mr s. Ston e or the other member of the Boar d. 5. Mr . St on e a ndMr . Sm ile we re go odfrie nd s.-8- 6. The tra nsaction wa s more than c oinci d en t al

. Mr. Stone did not produce any evidence e xplaining or rebutting a suspicious transac tion. 7. There is a lack of

an innoce nt purpose for

the transf

er. Further, we find that the re cord shows the Foundation’s claim against the Corporation arose befor e the Cor po ratio n’ s tr a ns fe r o f the pr op e rty to th e Smil e s; the Cor po ratio n tr a ns fe rr e d th e pr op e rt y without rece iving a rea sonably equivale nt value in exc hange f or the transfer ; and t he Corporation wa s in so lve nt at th e tim e of the tr a ns fe r or be c a me ins olv e nt a s a re su lt o f the tr a ns fe r. Th e c ri te ri a of Tenn. Code Ann. § 66-3-306( a) is ther efore satisfied. The evidenc e bef ore us doe s not preponde rate against the finding of the trial court. When viewed from the standpoint of what Mr. Smil e knew or should have know n, the evidenc e supports the trial c ourt’s conc lusion.

V. CONCLUSION The trial court acte d properly in setting a side the quitclaim de ed and deed of trust. The trial court’s judgment, ther efor e, is aff irmed and this matter is re manded with costs of the appea l assessed against Appe llant, Scott S mile.

___________________________________ JOHN W . McCLARTY, JUDGE