United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 97-1819

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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 

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

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JOHN R. GIBSON, Circuit Judge.

Kip M. Kaler, Trustee in bankruptcy for James M. Craig, appeals the district

court's order dismissing his action to recover fraudulently conveyed property. The

Trustee makes an assortment of arguments that there were fraudulent transfers of the

Craig family's residence and a savings account from James to his wife Anne, and that
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the assets should be placed in James's bankruptcy estate. We affirm the district court's

decision on the claim of a fraudulent transfer relating to the savings account. We

reverse the district 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 considerable baggage in the form of a debt to the IRS of over one-half million

dollars and financial obligations resulting from a divorce. In 1992, he and Anne

married. In July 1993, James contracted to perform physician services for the

Carrington Health Center, earning in excess of $200,000 per year. Anne was also

employed full-time by the health center, earning approximately $33,000 per year. Anne

assumed most of the family's household duties including all cleaning, laundry, and yard

work.

In November 1993, Anne signed an agreement to purchase a 17-acre rural

homestead north of Carrington for $67,000, contingent upon financing. James sought

financing from Security State Bank, which agreed to loan James $82,000 on the

condition that Carrington Health guarantee repayment of the loan. Carrington Health

agreed to do so and pledged a Certificate of Deposit as security. In return, James

delivered to Carrington Health the original of an $82,053 promissory note which the

health center had given him for the purchase of his medical practice. James also

granted Carrington Health the right to offset its obligations to Security State Bank

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 December 10, 1993,

and the warranty deed was recorded on December 14, 1993. The family assumed

occupancy on April 4, 1994. James and Anne admit that they titled the property in
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Anne's name in an effort to shield it from James's creditors. While the Craigs had the

assistance of counsel in these transactions and were advised that the real estate would

be James's homestead, no homestead claim of exemption was made in these

proceedings. 

James made payments on the bank loan until March 1996, when a balloon

payment came due. James defaulted, and Security State Bank elected to offset

Carrington Health's certificate of deposit against James's indebtedness of $72,791. In

turn, Carrington Health offset this amount against the amount it owed to James on the

promissory note. 

During the time period at issue, the Craigs maintained two checking accounts

and three savings accounts, all in Anne's name. Concerned about his IRS debt, James

sought the advice of an attorney who, among other things, advised James not to

commingle his assets with Anne's. Accordingly, beginning in August 1994, James

deposited his income into a Super NOW account in Anne's name, and Anne deposited

her earnings into her savings account no. 2559. All household and other living

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, including those relating to the residence

and savings 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 their

value. The bankruptcy court denied the Trustee's claims 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 challenge to the findings of fact but only to

the conclusions of law. We review the district court's and the bankruptcy court's
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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

result of fraudulent transfers from James to Anne and that the account should have

therefore been included in the bankruptcy estate. The trustee argues that even though

Anne's earnings were the primary source of the account's funds, those earnings were

only available because James used his income to pay the bulk of the family's expenses.

In 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 trustee may avoid any transfer of an interest of the debtor in

property, or any obligation incurred by the debtor, that was made or

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 for

such transfer or obligation; and . . .

(B)(i) was insolvent on the date that such transfer was made or such

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 property or with an interest in property . . . ." 11 U.S.C. § 101 (54)

(1994). 

The Trustee concedes that the remaining funds in account no. 2559 are

attributable to Anne's earnings from her employment with Carrington Health and from

the sale of her Lumina automobile and her real property in South Dakota. Therefore,
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the Trustee does not contend that James fraudulently transferred his assets directly into

Anne's savings account, but rather maintains that James indirectly 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 burden of proof is on the Trustee to establish each element of a fraudulent

transfer under section 548. See Jenkins v. Chase Home Mortgage Corp. (Matter of

Maple Mortg., Inc.), 81 F.3d 592, 596 (5th Cir. 1996). 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 property and labor. N.D. Cent. Code § 14-07-03 (1997). Here, James

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, however, excluded these vehicles from the bankruptcy estate, concluding that

they were not "assets" because Anne had no equity in them, as the value of the vehicles

did not exceed the remaining indebtedness on them. The Trustee does not appeal the

exclusion of the vehicles from the estate, but instead includes James's payments on the

vehicles as part of his argument concerning account no. 2559. 

Regardless of whether the payments on the vehicles amounted to a fraudulent

transfer of assets, they do not give the estate any rights in Anne's savings account.

Under section 548, the Trustee can avoid fraudulent transfers of property out of the

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 to
Section 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

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increase her ownership interests in the various vehicles. Thus, these ownership

interests were the assets, if any, that James transferred to Anne. The Trustee has

abandoned his attempts to reach the ownership interests themselves because they are

of little value given the large amounts Anne still owes on the vehicles. The trustee

cannot choose instead 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 and Anne.

The savings account is in Anne's name and is comprised solely of Anne's wages and

proceeds from sales of her own property. Under North Dakota law, a spouse's earnings

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

08(2) (1997) ("The earnings of one spouse are not liable for the debts of the other

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 should not be included in the

bankruptcy estate. 

II.

A.

The Trustee argues that Anne 's ownership of the Craigs' residence resulted from

the 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 fraudulent 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 Act, N.D. Cent. Code ch. 13-

02.1 (1997).1
for bankruptcy. See 11 U.S.C. § 548(a).

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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 without receiving a reasonably equivalent value

in exchange. See 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 reasonable consideration. Nevertheless, the bankruptcy court

held that the Trustee could not reach the residence because the transactions did not

constitute a transfer of an identifiable asset. The bankruptcy court assumed that the

only assets which could have been transferred were the residence itself or the $67,000

paid to the previous owners of the property by First Security State Bank. The

bankruptcy court reasoned that because James 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,

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

02.1-01(12). 

Under this definition, the bankruptcy court erred in its assumption that the

residence or the $67,000 were the only assets which could have been transferred. The

residence 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

residence. A party, however, need not surrender ownership in an asset in order to

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
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encumbrance." N.D. Cent. Code § 13-02.1-02. James made a direct transfer to

Carrington Health within the meaning of the statute when he allowed an encumbrance

to be placed on his promissory note for the sale of his practice and delivered the note

to Carrington Health.

James's transfer to Carrington Health, however, was not a fraudulent transfer

because it did not diminish 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

liability to Security State Bank. Because of Carrington Health's guarantee, the bank

loaned $82,000. In National Bank of Newport v. National Herkimer County Bank, 225

U.S. 178 (1912), the Supreme Court reasoned that, in analyzing a transfer, courts

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 assets

which was reasonably equivalent in value to the interest he transferred to Carrington

Health. 

This, however, 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 to pay $67,000 to the owners of the residence and to pay the remainder into the

Craigs' Super NOW account. 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 an

arrangement, federal courts have held that fraudulent conveyances occurred in instances

where a debtor'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).

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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 assets to his children where the debtor assigned mining

leases to a corporation in return for the issuance of original corporate stocks being

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 that the stock was issued by the corporation to the wife and

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 bankrupt 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 could have avoided a transaction in which James purchased the real estate

and subsequently placed the property in Anne's name. By instead signing a note for

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

Although the above cases were decided under fraudulent conveyance laws

different than North Dakota's current statutory provisions, we believe the broad

definition of transfer under the Uniform Fraudulent Transfer Act would likewise

encompass a transaction such as that before us, with James signing a note for loan

proceeds 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
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an asset or interest in an asset. An indirect transfer occurs when the debtor surrenders

an asset or interest to a third party for the ultimate benefit of the alleged transferee. See

Kellogg v. Blue Quail Energy, Inc. (In the Matter of Compton Corp.), 831 F.2d 586,

591-92 (5th Cir. 1987), on rehearing, 835 F.2d 584 (1988) (interpreting similarly

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 debtor's unsecured creditors. Id. at 594-95. The court

concluded that the trustee could recover from the indirect transferee regardless of

whether the direct transfer to the bank was itself legitimate. Id. In its analysis, the Fifth

Circuit recognized that historically "[t]he term 'transfer' as used in the various

bankruptcy statutes through the years has always been broad enough to cover such

indirect transfers and to catch various circuitous arrangements." Id. at 592. 

James's allocation of funds for the residence fits comfortably within the definition

of indirect transfer set forth in Kellogg. James directly transferred his interest in most

of the loan monies to the sellers of the real estate. 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 nearly

identical to the definition provided in the Bankruptcy Code and interpreted in Kellogg.

Compare N.D. Cent. Code § 13-02.1-01(12) with 11 U.S.C. § 101(54). The similarity

in definitions has been viewed as an intentional effort to bring state fraudulent transfer

law into conformity with federal bankruptcy law. See 5 Collier on Bankruptcy ¶

548.02[1][a] (Lawrence P. King ed., 15th 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 the

definition of transfer under North Dakota's fraudulent transfer laws.
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The only wrinkle that this case presents is the fact that James never physically

possessed the loan proceeds before they were transferred to the sellers of the residence.

The Uniform Fraudulent Transfer Act, however, does not require that the debtor

physically possess the asset. Rather, the Act states that a transfer may not 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 North Dakota Supreme Court would

read an additional physical possession requirement into the statute, particularly where

such a requirement would thwart the overall purposes of the Uniform Fraudulent

Transfer Act. We therefore hold that James's allocation of the loan funds to pay for the

residence was 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 Trustee argues that the bankruptcy court erred in determining that the

residence qualifies as James's homestead. The Trustee raises several challenges both

to James's ability to claim a homestead exemption and to the significance of a

homestead exemption. However, 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 the

homestead exemption issue assumed that James's only interest in the residence was

"mere occupancy." James suggests in his brief that, if the residence is included in the

estate, he will 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
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bankruptcy court. 

A true copy. 

Attest:

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