Source: https://commercialforeclosureblog.typepad.com/indiana_commercial_forecl/fraudulent-transfer-act/
Timestamp: 2019-04-24 23:51:55+00:00

Document:
Fraudulent transfer and alter ego cases seem to almost always be factually dense and, therefore, difficult to summarize in a blog post. Since I've written about the essential elements of Uniform Fraudulent Transfer Act and alter ego claims in the past, I've decided simply to post the Court's opinion in Wine & Canvas v. Weisser, 2017 WL 2905026 (S.D. Ind. 2017) here.
United States District Judge Pratt authored a thorough, twenty-page opinion dealing with plaintiff's motion for turnover of trademarks and for funds received as royalties in connection with the pending proceedings supplemental. The two bases of the motion were (1) fruadulent transfer under Indiana Code 32-18-2-14 and 15 and (2) alter ego. The opinion spells out why the Court denied the plaintiff's motion on both theories. The Court found that the plaintiff did not show that the subject transfer was fraudulent or voidable. Further, the Court concluded that company 2 was not the alter ego of company 1.
For more on the law and the Court's reasoning, please review the opinion, which is a good illustration of how a court will walk through all of the relevant factors toward a decision denying relief.
Lesson. Fraudulent transfer claims can be expensive to prove and difficult to win, even if the underlying transactions stink. Lenders trying to collect a judgment, and borrowers/guarantors trying to avoid collection, can learn from Judge Simon’s Pringle opinion.
Case cite. Pringle v. Wittig, 2014 U.S. Dist. LEXIS 118453 (N.D. Ind. 2014) (.pdf).
Legal issue. Pringle involved two issues: (1) whether the defendant provided “reasonably equivalent value” for twenty-two houses he bought and (2) whether the real estate transactions were “made with the intent to hinder, delay or defraud” the plaintiff.
Vital facts. Garcia allegedly cheated Pringle out of millions in a real estate fraud scheme. Because Garcia was insolvent, Pringle sued Wittig, who allegedly participated in the scheme by buying several houses from Garcia during the collapse of Garcia’s scheme. Pringle asserted that Wittig helped Garcia shield assets from Pringle by buying properties from Garcia “on the cheap.” So, Pringle filed suit against Wittig to void the alleged fraudulent transfers.
Procedural history. Pringle was the federal district court’s decision on Wittig’s motion for summary judgment based essentially on the notion that Pringle failed to produce evidence of fraud.
Key rules. At issue was liability under the Indiana Fraudulent Transfer Act, Ind. Code 32-18-2-14 and 15. The Court noted that an action to set aside a fraudulent conveyance “does not negate the disputed transaction” but only subjects the conveyed property to execution “as though it were still in the name of the grantor.” There are two paths to victory under the IUFTA. First, plaintiffs can show that the transfer was made “with the actual intent to defraud creditors” (aka actual fraud). Second, plaintiffs can show that the transferor did not receive “reasonably equivalent value” in exchange for the transfer (aka constructive fraud). Actual fraud claims involve proof of the so-called “eight badges of fraud” discussed here previously (see 12/14/06 post). Constructive fraud claims focus on whether the transferor was insolvent and whether the property was transferred without the receipt of reasonably equivalent value in exchange.
Holding. The primary dispute in Pringle was whether Wittig gave “reasonably equivalent value” for the twenty-two houses he bought from Garcia, and the opinion discusses in detail the facts relevant to that question. As to both the actual and constructive fraud claims, the Court held that, but for two houses, Pringle had not established a case. The Court therefore granted summary judgment for Wittig concerning twenty of the sales. The remaining two transactions warranted a trial, however.
Fraudulent transfer claims have a shelf life and do not necessarily extend to all subsequent transferees. Hair v. Schellenberger, 2012 Ind. App. LEXIS 158 (Ind. Ct. App. 2012), which dealt with Indiana’s Uniform Fraudulent Transfer Act, Ind. Code § 32-18-2 (“UFTA”), explains some of the parameters of these cases. Hair was a dispute over who had superior title to certain real estate – a subsequent purchaser (“Purchaser”) or a purported judgment lien holder (“Judgment Creditor”).
Judgment lien. By statute, “all final judgments for the recovery of money . . . constitute a lien upon real estate . . . in the county where the judgment has been duly entered and indexed in the judgment docket as provided by law . . . after the time the judgment was entered and indexed.” I.C. § 34-55-9-2. Judgment Creditor held a money judgment against the former owners of the subject real estate that should have created a lien on the property, but the clerk of the court failed to properly index the judgment.
Acquisition. The lender for the former owners of the subject real estate foreclosed and took ownership of the property via sheriff’s deed – after the Judgment Creditor obtained her judgment. A few months later, Purchaser bought the foreclosed property from the lender following a title search that did not disclose Judgment Creditor’s judgment.
The transfer. In an effort to enforce her lien, Judgment Creditor brought a claim against Purchaser based on the theory that the former owners had fraudulently conveyed the real estate to a third party (a land trust) about three months following the date of the judgment and several months before the subject sheriff’s sale. If the former owners - the judgment debtors - fraudulently conveyed the subject real estate to the land trust, could the Court set aside the subsequent transfer to Purchaser?
Statute of limitations. The first issue in Hair was whether Judgment Creditor’s claim was time-barred. The UFTA establishes a statute of limitations “at the later of four years after the transfer was made or one year after the transfer was or could reasonably have been discovered by the claimant.” I.C. § 32-18-2-19. Judgment Creditor did not raise the claim until May, 2010, which was more than four years after the November, 2005 conveyance to the land trust and more than one year after the July 2006 recording of the deed to the land trust “which was the date upon which [Judgment Creditor] could have reasonably discovered the transfer.” The fraudulent conveyance claim was time barred.
A transfer or an obligation is not voidable under [the UFTA] against a person who took in good faith and for a reasonable equivalent value or against any subsequent transferee or obligee.
Purchaser was a “BFP” (a purchaser in good faith, for valuable consideration, and without notice of the outstanding rights of others) and thus was not subject to avoidance of the transfer of the real estate from the former owners to the land trust. Purchaser’s title search “did not require inquiry into the legitimacy of the [former owners’] transfer of the property to the land trust.” Even if the former owners’ transfer was fraudulent and even if Judgment Creditor’s claim was not time-barred, such transfer was not voidable vis-à-vis Purchaser.
For lenders and other parties seeking to recover debts from individuals or entities that have transferred assets with the intent to avoid collection, Hair reminds us that (1) an Indiana UFTA claim generally must be brought within four years of the transfer or one year from when one could reasonably have discovered the transfer and (2) a claim generally is not enforceable against an innocent purchaser for value.
This follows-up Part I, from March 29th, dealing with veil piercing from one company to another (alter ego doctrine) in order to recover a debt. Please click on Part I for introductory information about the subject case, Ziese & Sons v. Boyer. Today’s post focuses on the second theory of recovery – successor liability.
4. Where the purchaser is a mere continuation of the seller.
Ziese focused upon the second and fourth exceptions.
8. A transfer of property between family members.
Indiana courts examine these badges to determine whether a fraudulent asset sale took place. In Ziese, the Court concluded that genuine issues of material fact existed as to whether Ziese could recover under this theory. There was evidence that Group acquired assets of Corporation without giving consideration for them.
Exception 4 - mere continuation. The other exception at issue in Ziese was the “mere continuation” (a/k/a "direct continuation") concept that explores “whether the predecessor corporation should be deemed simply to have re-incarnated itself, largely aside of the business operations.” The focus is upon whether there is a continuation of shareholders, directors and officers into the new corporate entity. (Remember – successor liability only applies when one entity purchases the assets of another entity.) After analyzing the evidence in Ziese, the Court held that there were genuine issues of material fact regarding whether Group was a mere continuation of Corporation. Thus the Court remanded all claims for trial.
The Ziese opinion provides an excellent outline of Indiana law regarding the doctrines applicable to recovering debts owed by one corporation from a separate, yet connected, corporation. The Court’s analysis is a road map for the proof needed to prevail on these claims or, conversely, to defeat them.
Lender (judgment-creditor) obtained a $1+MM judgment against guarantor (judgment-debtor). Guarantor allegedly transferred millions of dollars to guarantor’s spouse. Lender, in proceedings supplemental, filed a motion seeking to avoid the transfer and targeted the spouse (garnishee-defendant). Was a separate cause of action (lawsuit) required? Did the spouse have a right to a jury trial? Did the spouse have to file a response to the lender’s motion? In PNC Bank, 2011 U.S. Dist. LEXIS 99917 (S.D. Ind. 2011) (rt click/save target as for pdf), Magistrate Judge Baker addressed those questions in his report and recommendations, which District Court Judge Pratt subsequently adopted.
2. A garnishee-defendant (third party) can be named for the first time during proceedings supplemental.
4. A court need not make a preliminary determination that a garnishee-defendant violated the Fraudulent Transfer Act before requiring the garnishee-defendant to appear.
Objection 1 – new claim? The first issue in PNC was whether the lender’s fraudulent transfer theory was a “new claim” that warranted the filing of a separate lawsuit.
2. On the other hand, if a judgment-creditor introduces new claims “unrelated to the enforcement of a judgment,” or if the judgment-creditor “seeks damages greater than the original judgment,” then the judgment-creditor has moved the case outside of proceedings supplemental, and a new cause of action is required.
3. Although proceedings supplemental can include a fraudulent conveyance claim, the recovery is not for the alleged wrong or for damages. Rather, “proceedings supplemental seek to continue the original cause of action by enforcing a previously granted judgment.” If the judgment-creditor is successful, the conveyance remains valid, and the only effect of the judgment is to subject the property to execution “as though it were still in the name of the grantor [judgment-debtor].” I interpret this to mean that the result is an order subjecting the transferred funds to further judgment execution proceedings (collection).
In PNC, unlike Rose, the lender’s original judgment amount and the amount targeted in its motion were precisely the same. Accordingly, Indiana law did not require a new cause of action (separate lawsuit).
Objection 2 – jury trial? The guarantor also asserted that the law required a new cause of action because the spouse had a right to a jury trial. Since proceedings supplement derive from equity, they usually should be conducted by the judge. Nevertheless, jury trials are not completely precluded. If questions of fact arise as to the claim involving the garnishee-defendant, then the parties may demand a jury trial. The Court in PNC recognized and preserved the spouse’s right to a jury trial.
Objection 3 – garnishee response required? In PNC, the lender wanted the Court to compel the spouse to file a written response (an answer) to the lender’s motion. Once a verified motion triggers proceedings supplemental, pursuant to Trial Rule 69(E) courts shall order garnishees to appear for a hearing or to answer interrogatories, but “no further pleadings shall be required.” Responsive pleadings are not required unless a new claim arises. Since there were no new issues of liability as to the spouse in PNC (see Objection 1), the Court did not require the spouse to file a response.
Not infrequently, a borrower’s loan collateral will fail to fully satisfy a secured debt, particularly after the add-ons of default interest, attorney’s fees and other costs of collection. In such cases, lenders must choose whether to pursue a recovery of the remaining, unsecured debt from either the borrower or a corporate or individual guarantor. Sometimes, a pre-loan and post-judgment comparison of financial statements causes lenders to question whether there may have been fraudulent transfers of assets that could be avoided and become a source of recovery. Guttierrez v. Kennedy, 2010 U.S.Dist. LEXIS 73053 (S.D. Ind. 2010) (.pdf) helps guide a judgment creditor’s decision of whether to incur the time and expense of pursuing suspected fraudulently-transferred assets.
Fact sensitive. No two fraudulent transfer/veil piercing cases are alike, and I’ve concluded that a detailed summary of facts in cases like Guttierrez adds little to the overall message. For more about the assets and relationships at issue, I recommend that you read the opinion.
Negative value. The key asset in Guttierrez involved a contract previously held by the judgment debtor that was transferred (assigned) to a related corporate entity. Indiana’s Uniform Fraudulent Transfer Act (“UFTA”) at Ind. Code § § 32-18-2-1 through 21 permits creditors to obtain avoidance of a fraudulent transfer to the extent needed to satisfy a claim. Guttierrez specifically touched upon the amount of the potential recovery. “The creditor may recover the lesser of the amount necessary to satisfy its claim or the value of the transferred asset.” Valuation is determined at the time of the transfer but can be adjusted “as the equities may require.” To the extent the asset may generate income from use, the liability of the transferee will be “limited in any event to the net income after the deduction of the expense incurred in earning the income.” After an examination of the facts in Guttierrez, the Court concluded that the judgment creditor could not recover under the UFTA because the subject contract had negative value after the deduction of the expenses incurred in earning the income.
No harm, no foul. From the perspective of judgment creditors, one lesson of Guttierrez is to ensure that the asset being chased is worth chasing. Guttierrez centered upon the capture of an income-producing asset (a contract) that, on its face, appeared to have significant worth. But the Court concluded that, after deducting operating/overhead costs, the contract had negative value. The judgment creditor’s efforts to seize the contract were for naught. While it may be understandable that a value determination cannot be made before a claim is filed, prompt post-filing discovery and investigation should be undertaken in order to assess what an income-producing asset may be worth. In Guttierrez, the subject transfers and corporate entities were suspect, but in the end those circumstances didn’t matter because the targeted asset turned out to be a liability.
If you're looking for an illustration of Indiana's fraudulent transfer laws in action, pull out a pen and a notepad, set aside thirty minutes and study Judge Miller's opinion in Boyer v. Crown Stock Distribution, 2009 U.S. LEXIS 12393 (N.D. Ind. 2009) (.pdf). The February 17, 2009 decision is too involved for me to summarize in a single post, or even two. Nevertheless, the case is worth mentioning, in this abbreviated fashion, in the event readers are contemplating the pursuit of an Indiana fraudulent transfer claim.
Boyer is a forty-page opinion that dissects a $3.3MM sale of Crown Stock's assets. Judge Miller, of Indiana's Northern District, affirms the bankruptcy court's October, 2006 decision, which avoided the transaction as fraudulent and required the defendant transferees to return the value of the property transferred. The opinion discusses Indiana's Uniform Fraudulent Transfer Act (UFTA), including specifically Ind. Code 32-18-2-14 and 15. The Court's analysis, in part, deals with whether the asset sale should have been treated as a leveraged buyout and collapsed. In addition, the Court evaluates the good faith transferee defense found in I.C. 32-18-2-18(b).
When (if) you read the opinion, you'll see how fact sensitive the dispute is, as may often be the case with fraudulent transfer claims. The litigation (a bankruptcy adversary proceeding), which began in March of 2004, resulted in a nine-day trial and an appeal to district court. Part of the case involved the assessment of expert testimony and related issues. It's my understanding Judge Miller's ruling is being appealed to the 7th Circuit Court of Appeals. The case is now in its sixth year. One of the things that struck me while reading the decision was just how complicated, expensive and time consuming these UFTA matters can be.
Judge McKinney’s October 22, 2008 denial of defendants’ motion to dismiss in Murray v. Conseco, 2008 U.S. Dist. LEXIS 85500 (S.D. Ind. 2008) (pdf: Murray) addresses the fairly novel approach of utilizing a common law unjust enrichment claim in a fraudulent transfer case. The U.S. District Court for Indiana’s Southern District concluded that the plaintiff creditor had stated a viable claim for unjust enrichment. As previously stated here, such causes of action can help secured leaders struggling with the collection of deficiency judgments.
History. Murray arises out of the demise of Conseco, Inc., which filed for bankruptcy in 2002. In 1996, Conseco created a loan program in which certain officers and directors could borrow money from a syndicate of banks to purchase large blocks of Conseco stock. Defendant Dennis Murray participated in the loan program and borrowed several million dollars. Conseco executed guarantees of Murray’s obligations. Murray entered into written agreements with the banks and Conseco in which he promised to repay the loans. Conseco’s bankruptcy filing constituted an event of default under the various loan documents and, consequently, Murray’s obligations became immediately due and payable. Pursuant to the guarantees, Conseco paid the amounts owed to the bank. Murray failed to repay the debt to Conseco, so Conseco filed suit.
Conseco alleges that it is a creditor of Murray; that it has asserted a valid fraudulent transfer claim against him; that Murray conferred a measurable benefit on Margaret Murray through his fraudulent transfers; and that Margaret Murray has been wrongfully enriched at Conseco’s expense. Therefore, Conseco argues that it would be unjust for Margaret Murray to retain Murray’s fraudulently transferred assets without payment to Conseco.
Third parties? The tricky question in the case surrounded Mrs. Murray’s assertion that Indiana law required Conseco to have directly benefited her. Because she did not receive any benefit (money) directly from Conseco, Mrs. Murray contended the claim should have been dismissed. The legal issue was whether a benefit conferred by a third party (her husband) could support an unjust enrichment action in Indiana. The Court, citing analogous case law against Mrs. Murray, concluded that Conseco properly stated a claim for relief even though Conseco alleged that Mr. Murray, and not Conseco, conferred the benefit.
(1) the debtor made a voluntary transfer; (2) at the time of the transfer, the debtor had incurred obligations elsewhere; (3) the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer; and (4) after the transfer, the debtor failed to retain sufficient property to pay the indebtedness.
Judge McKinney denied the motion to dismiss filed by Murray on the UFTA claim. Conseco met the pleading requirements of the cause of action, mainly because Murray allegedly voluntarily transferred sums of money to his wife at a time when he owed substantial sums of money to Conseco.
When analyzing various avenues for relief in which you, as a secured creditor, feel that a borrower or a guarantor has transferred assets in order to avoid collection, consider the propriety of suing the transferee based upon a theory of unjust enrichment. Although I’ve not seen the theory in action, the unjust enrichment theory seems to lend itself to the possibility of an easier burden of proof than the UFTA claim. I’d love to hear from those of you who have experienced any advantages to this alternative theory.
A secured lender’s efforts to collect a debt can from time to time evolve into a cause of action for fraudulent transfer. As noted by the Indiana Court of Appeals in its May 20, 2008 decision in Hoesman v. Sheffler, 2008 Ind. App. LEXIS 1031 (Ind. Ct. App. 2008), “the purpose of a fraudulent transfer claim is the removal of obstacles which prevent the enforcement of the judgment … [and, if successful,] will subject the [transferred] property to execution….” For secured lenders, normally a fraudulent transfer claim will come into play, if at all, when a lender is attempting to enforce a deficiency judgment.
Underlying judgment. In Hoesman, an individual, acting as a trustee for a family trust, stole about $349,000 from the trust. The trial court entered a judgment against the trustee for about $288,000, which reflected the total damages recoverable under Indiana law minus, among other things, about $300,000 that the trustee put back into the trust after acquiring money from her parents.
The allegedly-fraudulent transfer. The Court’s opinion surrounded the impact of the parents’ payment of the $300,000 that the trustee used to “reimburse” the trust. The potential problem was that, after the trustee acquired the $300,000, she executed a promissory note to her parents for $300,000, together with a security agreement in which the trustee pledged as collateral for the “loan” several vehicles she owned and a mortgage on her residence. The trustee also transferred all of her shares in a closely-held S-Corp (a farm) to her parents. A key question in Hoesman was whether the transfer of the stock and the security interests in the vehicles and the residence should be avoided. If so, then the plaintiff could satisfy the judgment from those assets. If not, then the parents’ lien or interests in those assets could shield them from collection.
Gift vs. loan. The plaintiff contended the transfer of $300,000 from the parents to the trustee was a gift, for which the trustee incurred no legal obligation. Arguably, therefore, the subsequent stock transfer and security agreement were not given for consideration (value). On the other hand, if the $300,000 transfer was a loan, then the stock and security agreement were given to the parents in exchange for value, and the parents were competing creditors of the trustee. The Court summed-up the issue as follows: “the [plaintiff’s] success under a fraudulent transfer theory depends upon whether [the trustee’s] transfers to her parents were made (1) for a bona fide and honest debt; (2) in good faith; and (3) free of fraudulent intent.
Here, many of the badges of fraud are arguably present . . .. However, this is not a typical fraudulent transfer case, as the debtor (the trustee) had received (either by gift or by loan) assets that appear to be worth more than those dissipated, and used the received assets to repay the Trust. On the other hand [the trustee’s] transfer of assets and grant of security came well after [her] parents transferred funds to [her]. If the [plaintiff’s] theory that the transfer of funds was a gift is correct, the subsequent transfers and grant of security could be found fraudulent.
The case thus must go to trial to examine and weigh the disputed facts. For more on the elements of a fraudulent claim, please click on the .pdf of the Hoesman opinion, and you can also click on these two statutes – Ind. Code § 32-18-2-14 and § 32-18-2-18 – upon which the plaintiff in Hoesman relied. These are sections from the Uniform Fraudulent Transfer Act.
Lookout. When you’re struggling with a judgment debtor (borrower or guarantor) on the hook for a deficiency judgment, be on the lookout for suspect asset transfers and funny business between family members. The eight badges of fraud outlined above are a good place to start when analyzing the viability of a fraudulent transfer claim.
If you’re a lender involved in commercial foreclosure actions, you should be at least minimally familiar with the elements of a fraudulent conveyance. This is because a fraudulent conveyance claim may result in the collection of funds that your borrower once had but improperly transferred away. I cannot tackle the entire body of law here. But two recent decisions from the United States District Court for the Southern District of Indiana highlight a few principles applicable to this subject. The cases are Symons International v. Continental Casualty Company, et al., 2007 U.S. Dist. LEXIS 27356 (S.D. Ind.), decided March 31, 2007 (SymonsOpinion.pdf), and Richter v. Corporate Finance Associates, 2007 U.S. Dist. LEXIS 29155 (S.D. Ind.), decided April 19, 2007 (RichterOpinion.pdf ). Indiana’s Uniform Fraudulent Transfer Act (“IUFTA”) can be found at Ind. Code § 32-18-2, and a link to the Act is on the left side of my blog’s homepage.
5. The plaintiff’s demand of the court.
Failure to allege any of these elements will result in the dismissal of the claim.
Fraudulent transfer defined. The IUFTA defines a fraudulent transfer in I.C. § 32-18-2-14 and 15. Section 14 involves a situation where “the debtor made the transfer with actual intent to hinder, delay or defraud any creditor of the debtor or if the debtor did not receive reasonably equivalent value in exchange for the transfer.” Symons at 47. Importantly “lack of consideration, standing alone, is insufficient to support a charge of fraud – fraudulent intent must be proven as well.” Id. at 48. Section 15 deals with situations where “the debtor did not receive reasonably equivalent value in exchange for the transfer, and the debtor was insolvent at the time or became insolvent as a result of the transfer.” Id. at 47.
Symons/transferee liability. This case, decided in the context of a Trial Rule 56 motion for summary judgment, involved multiple issues, many of which are irrelevant to secured lenders. But one very relevant question in Symons had not been answered before by an Indiana court, namely whether an officer or director of a “first transferee” who was found to have personally participated in the fraud can be held personally liable under the IUFTA. The defendants’ contention was that they did not qualify as “transferees” of the assets. See, I.C. § 32-18-2-18(b). Judge Young noted that the IUFTA does not define the term “transferee” but that it should generally be defined as one to whom a transfer of property is made. Symons at 44. Judge Young held that there were facts upon which a reasonable jury could conclude that the individuals in question personally participated in the fraudulent transaction and thus could be liable under the IUFTA. Id. at 46.
Learn more. For those who want to become more familiar with the IUFTA and the remedies afforded by it, the Richter and Symons opinions offer good illustrations of the law in action. I encourage you to read the .pdf’s. This limited post may help to familiarize you with the issue, but it’s impossible to cram everything into one article. You can be sure that this subject will continue to be covered on my blog, however.

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