Opinion ID: 3011470
Heading Depth: 2
Heading Rank: 1

Heading: Interspousal Presumption of Actual Fraud

Text: In most actual fraud cases, insolvency is one of several relevant factors or badges of fraud the court may consider as evidence of fraudulent intent. See Sheffit v. Koff, 175 Pa. Super. 37, 42 (1953). As early as 1939, however, the Pennsylvania Supreme Court recognized a situation in which solvency was not relevant to the actual fraud inquiry: property transfers between husbands and wives for nominal consideration. See Iscovitz v. Filderman, 334 Pa. 585, 589 (Pa. 1939). In that situation, the court stated, the transfer itself was sufficient to create a presumption of fraud, and only a showing of fair consideration could successfully rebut the presumption. See id. Where the transaction is between husband and wife actual intent does appear where it is shown that there was a deed given for a nominal consideration. This is but a presumption of fact and places on the wife the burden of showing the fairness of the transaction. Iscovitz, 334 Pa. at 589. Moreover, because family collusion by a debtor is so easy to execute and so difficult to prove, the evidence to sustain the claim of the 6 wife in such cases must be clear and satisfactory. Id. at 589-90. Thus, in cases of interspousal transfer, whether there is a factual presumption of actual intent to defraud depends on whether there is adequate consideration for the transfer. The principle has been restated and applied numerous times in the past sixty years. See, e.g., County of Butler v. Brocker, 455 Pa. 343, 347-48 (1974); United States v. Klayman, 736 F. Supp. 647, 648 (E.D. Pa. 1990); United States v. Kudasik, 21 F. Supp.2d 501, 507 (W.D. Pa. 1998). This Court recently discussed the continuation of the principle under Pennsylvania's new fraudulent transfer statute. See In re Blatstein, 192 F.3d 88, 97-98 (3d Cir. 1999). Blatstein also highlights the more significant role solvency plays in constructive fraud, stating that under PUFCA's successor statute, when constructive fraud is at issue, the spouse may defeat the fraud claim by proving either fair consideration or solvency. See id. at 99. The trial court here specifically stated that it was reviewing this transaction for actual fraud, not constructive fraud. Lower Ct. Op. at 9. The trial judge found as a matter of fact that the conveyance was between husband and wife, and found as a matter of fact that consideration for the conveyance was not fair. The Greens do not challenge either of these findings, and the evidence suggests they are quite correct. Thus, the judge correctly construed PUFCA and correctly determined that the facts gave rise to a presumption of actual fraud regardless of whether Howard was solvent. B. Relevance of Solvency in Rebutting Presumption of Actual Fraud Green contends that even if the trial court correctly applied the presumption, under Pennsylvania law he can wholly rebut it by presenting evidence of solvency. But in its most recent pronouncement on interspousal transfers and the application of the fraud presumption in actual fraud cases, the Pennsylvania Supreme Court grounded its analysis on the question of fair consideration. See County of Butler, 455 Pa. at 348. County of Butler minimized any significance of solvency in the analysis of interspousal transfers for inadequate consideration. See id. at 347-48. The trial court reviewing the Greens' predicament correctly 7 followed suit, as have other federal courts. See, e.g., Klayman, 736 F. Supp. at 648; Kudasik, 21 F. Supp. 2d at 507. Resisting the implications of County of Butler, Green cites dictum from a 1957 case stating that a wife may rebut the presumption of actual fraud arising from an interspousal transfer alternatively by showing fair consideration or by showing that the husband's liabilities did not exceed his then remaining assets. Smith v. Arrell, 388 Pa. 117, 118 (1957). Green's argument here is not frivolous, because Smith does illustrate that Pennsylvania courts have occasionally equivocated on the relationship between solvency and actual fraud in interspousal transfers. For instance, the court in Smith cited three cases to support its statement that solvency is a defense to the interspousal presumption of actual fraud. First, the court cited to Iscovitz, which mandated review of the entire course of conduct of the grantor, including insolvency. Iscovitz, 334 Pa. at 589. But Iscovitz then directed that, if this review revealed a conveyance between husband and wife for nominal consideration, the court should presume actual intent to defraud, and dismiss the presumption only on a showing that the transaction was fair. Id. Second, the Smith court cited to People's Savings & Dime Bank & Trust Co. v. Scott to support the notion of a solvency defense to the interspousal presumption of actual fraud. 303 Pa. 294, 297 (1931). But People's Savings dealt with constructive fraud, and not actual fraud, so its application here is doubtful. Id. at 296. Finally, the Smith court cited to dicta in QueenFavorite Building & Loan Ass'n v. Burstein, suggesting that a presumption of actual fraud arising from an interfamily transfer may be offset by evidence, conjointly, of fair consideration and solvency. See 310 Pa. 219, 223 (1933). But the outcome of Queen-Favorite did not turn on a showing of solvency, thus diminishing the authority of the language used in the opinion. Moreover, the Queen-Favorite court cited in support of its solvency language People's Savings and Shaver v. Mowry, 262 Pa. 381, 386 (Pa. 1918), both of which dealt with constructive fraud, a distinct legal concept in which solvency is relevant as a defense. In short, Smith captures the vacillation of the Pennsylvania courts in seeking to evaluate the significance 8 of solvency to the presumption of interspousal fraud. Green's citation of Smith shrewdly highlights strands of Pennsylvania law that have suggested that solvency may be a defense to the presumption of interspousal fraud. But his effort fails here for two reasons. First, County of Butler overruled sub silentio the Smith dicta that Green cites. County of Butler stated that for purposes of actual fraud, a debtor does not have to render himself insolvent. . . in order to establish a fraudulent intent. . . . [The creditor] need only show an intent to hinder, delay or defraud on the part of the [debtor] to make the conveyance fraudulent. Our cases have established the principle that as between husband and wife fraud is presumptively present when the conveyance is for a nominal consideration and is challenged by creditors . . . . County of Butler, 455 Pa. at 347 (internal quotation and citations omitted). Put another way, a debtor may remain solvent and still face a presumption of actual fraud by making an interspousal transfer for nominal consideration. Further, Smith's congruence with the present case is questionable. In Smith, a wife who received a $25,000 judgment note from her husband after loaning him $10,000 protested application of the interspousal transfer presumption on the ground that she was still single at the time of the transaction. The Smith court mentioned in passing that solvency was a possible defense, but the debtor did not rely on it there and the court did not apply it. Thus, despite the existence of Smith, the trial judge did not err in following the teachings of County of Butler, the more recent and more analogous case. In light of County of Butler, the judge was certainly not incorrect to deem solvency substantially irrelevant in evaluating the presumption that Howard's transfer to Mary was fraudulent. The present facts are that the transfer was to a spouse for a wholly inadequate consideration. No matter how healthy Howard Green's balance sheet might have been, the factual presumption of actual fraud would survive. We therefore regard the trial court's assessment of Pennsylvania law as applied here to be substantially accurate. On the present facts, particularly where there is clear and convincing evidence of inadequate consideration, solvency is an inconsequential factor. Under PUFCA, [f]air consideration is given for property or obligation: (a) [w]hen, in exchange for such property or 9 obligation, as a fair equivalent therefor and in good faith, property is conveyed or an antecedent debt is satisfied; or (b) [w]hen such property or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained. 39 Pa. Stat. Ann. S 353 (1993). The trial court found as a matter of fact that Mary did not give fair consideration, and the Greens do not challenge this finding of fact. Thus, Mary did not successfully rebut the presumption of actual intent. C. The Presumption is in Accord with Subsequent Events Moreover, the judge did not wear blinders in presuming that Howard acted with actual fraudulent intent. The court took account of the totality of the circumstances, an approach clearly endorsed by Godina v. Oswald, which states that [s]ince fraud is usually denied, it must be inferred from all facts and circumstances surrounding the conveyance, including subsequent conduct. 206 Pa. Super. 51 (1965) (quoting Sheffit, 175 Pa. Super. at 41.). Howard's subsequent conduct included creating the Roylan Finance Company and installing Mary's mother as its owner solely for the purpose of granting a mortgage on the property, just days after contesting the IRS's claim for taxes owed. Subsequent conduct also involved granting Roylan a security interest in all of his personal property shortly before the $17 million judgment was entered against him in the bankruptcy trustee's lawsuit. These facts reinforce the trial court's ultimate conclusion that, all things considered, Howard's proffered evidence of solvency was irrelevant to the question of his intent to defraud creditors. D. Howard's Solvency Finally, we note that despite his doggedness on this issue, Howard likely cannot prove that he was solvent as of April 13, 1981, the date he transferred the property to Mary. A person is insolvent under the Uniform Fraudulent Conveyance Act when the present, fair, salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured. 39 Pa. Stat. Ann. S 352(1) (1993). Debts are defined as any legal liability whether matured 10 or unmatured, liquidated or unliquidated, absolute,fixed, or contingent. 39 Pa. Stat. Ann. S 351 (1993). The United States is considered a creditor from the date when the obligation to pay income taxes accrues, essentially on April 15 of the year following the tax year in question. United States v. St. Mary, 334 F. Supp. 799, 803 (E.D. Pa. 1971). Further, the Pennsylvania Supreme Court has found that awareness of a probable legal action against a debtor amounts to a debt for purposes of determining solvency. See Baker v. Geist, 457 Pa. 73, 76-77 (1974). As of April 15, 1980, Howard was in debt to the United States for the underreported amount of his 1979 federal income taxes, $51,845. And Howard transferred the property to Mary just two months after Fidelity filed for bankruptcy protection. It was this filing, and the appointment of a bankruptcy trustee, that led to the 1983 complaint against Howard and the eventual $17 million judgment against him. Thus, at the time Howard conveyed the property, he was on notice of a possible suit by the bankruptcy trustee. Howard could reasonably estimate that the tax debt and bankruptcy debt together would reach several million dollars. These looming debts, when compared with his collapsing portfolio, suggest that Howard was insolvent at the time of the transfer to Mary. So even if solvency were relevant to the question of actual fraud in this case -- we repeat that it is not -- Howard's arguments are still unavailing.