## United States Court of Appeals
FOR THE EIGHTH CIRCUIT

___________ No. 97-1819

___________ In re: James M. Craig, *

Debtor, *

________________ *

* Kip M. Kaler, as Bankruptcy * Appeal from the United States Trustee for James M. Craig, * Bankruptcy Court for the

Plaintiff-Appellant. * *

*

* District of North Dakota.

v. *

* Anne L. Craig; James M. Craig, *

* Defendants - Appellees , * *

___________ Submitted: November 18, 1997 Filed: June 11, 1998

___________ Before BEAM, HEANEY, and JOHN R. GIBSON, Circuit Judges.

___________ JOHN R. GIBSON, Circuit Judge. Kip M. Ka ler, Trustee in bankruptcy for James M. Craig, appeals the distric t court's order dismissing his action to recover fraudulently conveyed property. Th e Trustee makes an assortment of arguments that there were fraudulent transfers of the Craig fami ly's residence and a savings account from James to his wife Anne, and that-2-

the assets should be placed in James's bankrup tcy estate. We affirm the district court's decision on the claim of a fraudulent transfer relating to the savings account. W e reverse the distri ct court's decision on the claim of a fraudulent transfer relating to the Craigs' residence and remand to the bankruptcy court.
James Craig is a physician who moved to North Dakota in 1991, bringing with him considerab le baggage in the form of a debt to the IRS of over one-half millio n doll ars and financial obligations resulting from a divorce. In 1992, he and Ann e married. In July 1993, James contracted to perform physician services for th e Carrington Health Center, earning in excess of $200,000 per year. Anne was als o employed full-time by the health center, earning approximately $33,000 per year. Anne assumed most of the family's household duties includi ng all cleaning, laundry, and yard work.

In Nov ember 1993, Anne signed an agreement to purchase a 17-acre rura l homestead north of Carrington for $67,000, contingent upon financing. James sought financ ing from Security State Bank, which agreed to loan James $82,000 on th e conditio n that Carrington Health guarantee repayment of the loan. Carrington Health agreed to do so and pledged a Certificate of Deposit as security. In return, Jame s delivered to Carrington Health the original of an $82,053 promissory note which th e he althcenter had given him for the purchase of his medical practice. James als o granted C arrington Health the right to offset its obligations to Security State Ban k against the amount owed on the promissory note . On December 10, 1993, James gave the bank a note for $82,000, and the bank loaned James that amount.
Instead of disbursing any cash payment to James, the bank paid $67,377 directly to the sellers of the homestead and deposited the remainder in a Super NOW account under Anne's name. The sellers deeded the homestead to Anne on De cember 10, 1993, and the warr anty deed was recorded on December 14, 1993. The family assume d occupancy on April 4, 1994. James and Anne admit that they titled the property in-3-

Anne's name in an effort to s hield it from James's creditors. While the Craigs had the assistance of counsel in t

hese transactions and were advised that the real estate would be Jam es's homestead, no homestead claim of exemption was made in thes e proceedings.

James made payments on the bank loan until March 1996, when a balloo n payme nt came due. James defaulted, and Security State Bank elected to offse t Carrington Health's certificate of deposit against James's indebtedness of $72,791. In turn, Carrington He alth offset this amount against the amount it owed to James on the promissory note.
During t he time period at issue, the Craigs maintained two checking account s and three savings accounts, all in Anne's name. Concerned about his IRS debt, James

sou ght the advice of an attorney who, among other things, advised James not t o
comm ingle his assets with Anne's. Accordingly, beginning in August 1994, Jame s deposited his income into a Super NOW account in Anne's name, and Anne deposited her earni ngs into her savings account no. 2559. All household and other livin g expenses were paid from the Super NOW account, leaving Anne's income and interest untouched. James filed a Chapter 7 bankruptcy on May 1, 1995.

On June 9, 1996 , the Trustee commenced an adversary proceeding challenging several transactions between James and Anne, inc luding those relating to the residence andsavings account no. 2559, as fraudulent. The Trustee succeeded in obtaining an order for the turnover of either a 1979 Porsche and a 1985 Suburban truck or thei r value. The bankruptcy court denied the Trustee's clai ms with respect to the real estate, Anne's savings account, and various vehicles. The district court affirmed the orders of the bankruptcy court.

The trustee concedes that there is no challen ge to the findings of fact but only to the conclusions of law. We review the district court's and the bankruptcy court's-4-

conclusions of law de novo. See C.T. Development Corp. v. D. Barnes (In re Oxford Development) , 67 F.3d 683, 685 (8th Cir. 1995).

I.

The Trustee contends that the value of Anne's savings account no. 2559 is the

re sult of fraudulent transfers from James to Anne and that the account should hav e therefore been inclu ded in the bankruptcy estate. The trustee argues that even though Anne's earnings were the primary source of the account's funds, those earnings wer e only available because James used his income to pay the bulk of the family's expenses. I n the alternative, the Trustee contends that the savings account is a joint asset of the Craigs, and that the estate is therefore entitled to some portion of it.
The Bankruptcy Code provides:

(a) The tru stee may avoid any transfer of an interest of the debtor i n property, or any obligation incurred by the debtor, that was made o r incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily-- . . . (2)( A) received less than a reasonably equivalent value in exchange fo r such transfer or obligation; and . . . (B)(i) was insolvent on the date that such transfer was made or suc h obligation was incurred . . . .

11 U.S.C. § 548 (1994). A transfer is defined under the Bankruptcy Code as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with prop erty or with an interest in property . . . ." 11 U.S.C. § 101 (54) (1994).

The Trustee concedes that the remaining funds in account no. 2559 ar e attributable to Anne's earnings from her employment with Carrington Health and from the sal e of her Lumina automobile and her real property in South Dakota. Therefore,-5-

the Trustee does not contend that James fraudulentlytransferred his assets directly into Anne's savings account, but rather maintains that James in directly transferred his assets to Anne by using his income to pay more than his fair share of the family's expenses, thereby allowing Anne to accumulate wealth in account no. 2559.

The b urden of proof is on the Trustee to establish each element of a fraudulent tra nsfer under section 548. See Jenkins v. Chase Home Mortgage Corp. (Matter o f Maple Mortg., Inc.) , 81 F.3d 592, 596 (5th Cir. 1 996). The bankruptcy court held that the trustee did not meet this burden, and the district court affirmed. The Trustee' s theory is premised on James's payment of the family's expenses. However, under North Dakota law, a husband and wife share a duty to support one another through both their individual p roperty and labor. N.D. Cent. Code § 14-07-03 (1997). Here, Jame s contributed the bulk of the financial support for the family, while Anne contributed the bulk of the domestic labor. In such a case, this court is not in a position to conclude that one spouse's contribution so overwhelmed the other's as to constitute a transfer of assets between marital partners.

James did use his income to pay installments on several vehicles titled to Anne. Normally, these payments would be considered a transfer of assets. The bankruptcy court, h owever, excluded these vehicles from the bankruptcy estate, concluding tha t they were not "assets" because Anne had no equity in them, as t he value of the vehicles did not exc eed the remaining indebtedness on them. The Trustee does not appeal the exclusion of the vehicles from the esta te, but instead includes James's payments on the vehicles as part of his argument concerning account no. 2559.
Regard less of whether the payments on the vehicles amounted to a fraudulen t transfe r of assets, they do not give the estate any rights in Anne's savings account

. Under s ection 548, the Trustee can avoid fraudulent transfers of property out of th e debtor's estate and return the transferred property to the estate. To the extent that Anne gained anything from James's payments on the vehicles, it was that they helped toSection 548 of the Bankruptcy Code does not apply to the alleged transfer 1 because the relevant transactions took place more than one year before James filed

-6- increase her ownership interests in the various vehicles. Thus, these ownershi p interests were the assets, if any, that James transferred to Anne. The Trustee ha s aban doned his attempts to reach the ownership interests themselves because they are of lit tle value given the large amounts Anne still owes on the vehicles. The truste e cannot choose in stead to reach assets independent from and more valuable than those allegedly transferred to Anne from James.
The Trustee also argues that account no. 2559 is a joint asset of James an d Anne. Th e savings account is in Anne's name and is comprised solely of Anne's wages an d proceeds from sales of her own property. Under North Dakota law, a spo use's earnings

are t reated as the individual property of that spouse. See N.D. Cent. Code § 14-07

- 08(2) (199 7) ("The earnings of one spouse are not liable for the debts of the othe r spouse. . . .") Aside from the duty of mutual support, neither spouse has any interest in the property of the other. See N.D. Cent. Code § 14-07-04 (1997). Accordingly, we conclude that account no. 2559 is not a joint asset and s hould not be included in the bankruptcy estate.

II. A.
The Trustee argues that Anne 's ownership of the Craigs' residence resulted from th e James's fraudulent transfer of assets to Anne, and, therefore, either the real estate or its equivalent in value should come into the bankruptcy estate. The Craigs respond that a f raudulent transfer did not occur because the transactions leading to Anne' s ownership of the residence did not constitute a transfer of James's assets under North Dakota's codification of the Uniform Fraudulent Transfer A ct, N.D. Cent. Code ch. 13- 02.1 (1997). 1for bankruptcy. See 11 U.S.C. § 548(a).

-7-

The Uniform Fraudulent Transfer Act provides that a transfer is fraudulent as to present creditors if the debtor made the transfer with actual intent to hinder, delay, or defraud creditors, or made the transfer with out receiving a reasonably equivalent value in exchange. S ee N.D. Cent. Code § 13-02.1-04. The bankruptcy court found ample evidence that the transactions relating to the residence involved both an actual intent to defraud and a lack of reasona ble consideration. Nevertheless, the bankruptcy court held that the Trustee could not reach the residence because the transactions did no t constitute a transfer of an identifiable asset. The bankruptcy court assumed that th e only assets which could have been t ransferred were the residence itself or the $67,000 paid to the previous owners of the property by First Security State Bank. Th e bankruptcy court reasoned that because Jam es never actually possessed either of these assets, he could not be said to have transferred them.

In its analysis, the bankruptcy court defined the term "transfer" too narrowly

. The Uniform Fraudulent Transfer Act defines "transfer" broadly to include "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money,

re lease, lease, and creation of a lien or other encumbrance." N.D. Cent. Code § 13

- 02.1-01(12).

Under thi s definition, the bankruptcy court erred in its assumption that th e residence or the $67,000 were the only as sets which could have been transferred. The residenc e and the money were the only assets transferred in the limited sense that the previous owners completely surrendered ownership of the assets. Security State Bank paid the $ 67,000 to the sellers of the real estate, and the sellers gave Anne title to the resid ence. A party, however, need not surrender ownership in an asset in order t o effectuate a transfer. Transfer, as defined under the Uniform Fraudulent Transfer Act, can be the grant of an interest in an asset, including the "creation of a lien or other-8-

encum brance." N.D. Cent. Code § 13-02.1-02. James made a direct transfer t o Carrington Health within

the meaning of the statute when he allowed an encumbrance to be p laced on his promissory note for the sale of his practice and delivered the note to Carrington Health.

Ja mes's transfer to Carrington Health, however, was not a fraudulent transfe r because it did not diminis h James's estate. Rather, Carrington Health secured James's debt to Security State Bank to the same extent that the note secured Carrington Health's liabil ity to Security State Bank. Because of Carrington Health's guarantee, the ban k loaned $82,000. In National Bank of Newport v. National Herkimer County Bank , 225 U.S. 17 8 (1912), the Supreme Court reasoned that, in analyzing a transfer, court s should look at

the effect of the transfer and not the circuity of the arrangement. Id. at 184. The effect of James's transfer to Carrington Health was that he obtained the right to the disbursement of a loan in an amount proportional to the encumbrance placed on his $82,053 promissory note. In other words, James received an interest in asset s whichwas reasonably equivalent in value to the interest he transferred to Carrington Health.

This, how ever, does not complete our inquiry. James's transactions with Carrington Health

and Security State Bank yielded him a valuable property interest, a loan of $82,000. Rather than receive the loan in a cash payment, James directed the bank t o pay $67,000 to the owners of the residence and to pay the remainder into the Craigs' Super NOW accou nt. In turn, the homeowners deeded the residence to Anne.

James allocated his interest in an asset to pay for a house and have it placed in his wife's name. While the North Dakota state courts have not addressed such a n arrangement, federal courts have held that fraudulent conveyances occurred in instances where a deb tor's assets were used to acquire property in the name of the debtor' s relatives.In addition to these federal cases, several state courts have have held that a 2 husband's purchase of real estate in his wife's name is a fraudulent conveyance as to the husband's creditors and that the property is available for the payment of the husband's debts. See , e.g. , Conrad v. Diehl , 129 S.W.2d 870, 878 (Mo. 1939); Davis v. Yonge , 85 S.W. 90, 91 (Ark. 1905); Berry v. Berry , 24 A. 957, 957-58 (Me. 1892).

-9- Applying New Mexico state law, the Tenth Circuit, in Atlas Corporation v

. DeVilliers , 447 F.2d 799 (10th Cir. 1971), cert. denied , 405 U.S. 933 (1972), held that a debtor fraudulently conveyed as sets to his children where the debtor assigned mining leases to a corporation in return for the issuance of original corporate stocks bein g issued to the debtor's children. Id. at 806. Addressing a similar set of transactions, a federal district court, applying federal law, reasoned,

The fact tha t the stock was issued by the corporation to the wife an d daughter in return for funds invested by the bankrupt works no change in the transaction which stands as if the stock had originally been issued to the ba nkrupt and voluntarily transferred by him to his wife and daughter. A person may not do by indirection what he is forbidden to do directly.

Merriam v. Venida

Blouse Corp. , 23 F.Supp. 659, 661 (S.D.N.Y. 1938). In this case, the Trustee co uld have avoided a transaction in which James purchased the real estate and subs equently placed the property in Anne's name. By instead signing a note fo r funds which were

disbursed to the seller to pay for property conveyed to Anne, James merely altered the form and not the substance of the transaction. 2

Alt hough the above cases were decided under fraudulent conveyance law s differe nt than North Dakota's current statutory provisions, we believe the broa d def initionof transfer under the Uniform Fraudulent Transfer Act would likewis e
encom pass a transaction such as that before us, with James signing a note for loa n proce eds distributed to a seller conveying property to Anne. The Uniform Fraudulent Transfer Act defines transfer to include both "direct and indirect" modes of parting with-10-

an asset or interest i n an asset. An indirect transfer occurs when the debtor surrenders an asset or interest to a third party for the ultimate ben efit of the alleged transferee. See Kellogg v. Blue Quail Energy, Inc. (In the Matter of Compton Corp.) , 831 F.2d 586 , 591-9 2 (5th Cir. 1987), on rehearing , 835 F.2d 584 (1988) (interpreting similarl y worded definition of transfer under 11 U.S.C. § 101(50)(Supp. V 1987)).

In Kellogg , the Fifth Circuit held that an indirect transfer existed where the debtor granted a bank a greater interest in the debtor's assets in return for the bank's issuance of a letter of credit to one of the debt or's unsecured creditors. Id. at 594-95. The court concl udedthat the trustee could recover from the indirect transferee regardless o f whether the direct transfer to the bank was itself legitimate. Id. In its analysis, the Fifth Circuit r ecognized that historically "[t]he term 'transfer' as used in the variou s ba nkruptcy statutes through the years has always been broad enough to cover suc h indirect transfers and to catch various circuitous arrangements." Id. at 592.

James's allocation of funds for the residence fits comfort ably within the definition of indire ct transfer set forth in Kellogg . James directly transferred his interest in most of the loan monies to the sellers of the real es tate. His admitted purpose, however, was to give Anne title to the real estate and thereby shield the asset from his creditors.

The definition of transfer under the Uniform Fraudulent Transfer Act is nearl y identical to the definit

ion provided in the Bankruptcy Code and interpreted in Kellogg

. Compare N.D. Cent. Code § 13-02 .1-01(12) with11 U.S.C. § 101(54). The similarity in definitions ha s been viewed as an intentional effort to bring state fraudulent transfer law int o conformity with federal bankruptcy law. See 5 Collier on Bankruptcy ¶ 548.02[1][a] (Lawrence P. King ed., 15 th ed. 1998). Accordingly, we believe, if faced with the issue, the Supreme Court of North Dakota would conclude that a debtor' s payment for property placed in the name of the debtor's spouse would fall within th e definition of transfer under North Dakota's fraudulent transfer laws.-11-

The only wrinkle that this case presents is the fact that James never physicall y possessed the loan proceeds before they were transferre d to the sellers of the residence. The Unifor m Fraudulent Transfer Act, however, does not require that the debto r physically possess the asset. Rather, the Act states that a transfer maynot be made until the debtor has acquired "rights in the asset transferred." N.D. Cent. Code § 13-02.1- 06.4. James acquired rights to the amount of the loan at the time that he and the bank signed the loan documents. We do not believe the N orth Dakota Supreme Court would read an additional physical possession requirement into the statute, particularly where

suc h a requirement would thwart the overall purposes of the Uniform Fraudulen t Transfer Act. We therefore hold that James's allocation of the loan funds to pay for the residencewas an indirect fraudulent transfer to Anne and that the Trustee accordingly has the same power to reach the property as he would if the property had been placed in James's name.

B.

The T rustee argues that the bankruptcy court erred in determining that th e residence qualifies as James's homestead. The Trustee raises several challenges both to James's a bility to claim a homestead exemption and to the significance of a homestead exemption. H owever, it would be premature for this court to address these issues. James has not claimed a homestead exemption and, in fact, has claimed an "in lieu of homestead" exemption. Further, the bankruptcy court's discussion of th e homeste ad exemption issue assumed that James's only interest in the residence wa s "m ere occupancy." James suggests in his brief that, if the residence is included in the estate, hewill amend his petition to claim the exemption. We therefore remand to the bankruptcy court to allow James the opportunity to do so and to allow the bankruptcy court to address the homestead exemption in the proper context.

In conclusion, we affirm the district court's decision as to Anne 's savings account, reverse the district court's decision as to the residence and remand to the-12-

bankruptcy court.
A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT