Opinion ID: 2208110
Heading Depth: 1
Heading Rank: 3

Heading: Solvency After Each Transfer.

Text: We now come to the dispositive issue of this case: whether the Frescolns proved that Merrill was solvent after he made the stock transfers to his sons. The Frescolns argue that the evidence shows Merrill to have been solvent after each of the two transfers was made. The success of this argument, however, apparently depends on Merrill's statutorily exempt property being included in the calculation of his net worth. Reaching back over a century, the Frescolns contend that we should apply the test for solvency from McKown v. Furgason, 47 Iowa 636 (1878). That case said solvency is the ability to pay one's debts, regardless of whether one's property is subject to execution. Id. at 637. The Frescolns maintain that the district court should not have used tests for insolvency from the Uniform Fraudulent Transfer Act and the Uniform Fraudulent Conveyance Act, which require the value of exempt property to be excluded from the debtor's net worth. Without the value of Merrill's exempt property in the balance, the district court determined that he was insolvent at the time of each transfer. We think the test for insolvency used by the district court, which is embodied in the common law as well as the uniform acts, is the better one, and we adopt it. Under this test, most recently set out in the Uniform Fraudulent Transfer Act, an individual debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at fair valuation. Uniform Fraudulent Transfer Act § 2(a); see also Uniform Fraudulent Conveyance Act § 2(1) (similar definition); 37 Am.Jur.2d Fraudulent Conveyances § 15, at 704-05 (1968); 37 C.J.S. Fraudulent Conveyances § 106, at 945-46. On its face, this test would seem to be very similar to the one used in McKown. There, however, the type of property included in the calculation of solvency was very different. As we noted above, the McKown court included exempt property in the calculation. We think this approach is a poor one. Solvency that is based on exempt property is no better than insolvency to a creditor because the property is not available without affirmative action by the debtor. 37 C.J.S. Fraudulent Conveyances § 105, at 945. If a creditor cannot reach the property through some sort of legal process, we hold that the property cannot be used to show solvency. See id. The Uniform Fraudulent Transfer Act provides a better definition of the assets that should be included in a calculation of solvency: Asset means property of a debtor, but the term does not include: (i) property to the extent it is encumbered by a valid lien; (ii) property to the extent it is generally exempt under nonbankruptcy law; or (iii) an interest in property held in tenancy by the entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant. Uniform Fraudulent Transfer Act § 1(2) (emphasis added); see also Uniform Fraudulent Conveyance Act § 1 (assets defined as property of debtor that is not exempt from liability for debts). We adopt this definition because it assures that a solvency supported by such assets will have some meaning to a creditor, as the property can be reached through the legal process. Under this approach, creditors will not have to rely on a solvency that they cannot employ in the payment of the debts of an unwilling debtor. 37 C.J. S. Fraudulent Conveyances § 105, at 945. To the extent McKown v. Furgason, 47 Iowa 636 (1878), holds that solvency should be defined differently, we overrule it. Having adopted the uniform act definitions of insolvency and asset, we now turn to the issue of whether Merrill was solvent after he transferred the stock to his sons. Solvency must be determined as of the time the alleged fraudulent transfer took place. Balderston, 219 Iowa at 1256, 260 N.W. at 731. The dates in question here are July 2, 1985 and January 1, 1986. For both dates the Frescolns offer what they call credible evidence of Merrill's solvency. These calculations are questionable for two reasons. Not only do they include exempt property, which we have held is not an asset in this context, but they also include values of doubtful accuracy for Merrill's nonexempt property. The record shows that Merrill's financial statements contain very inconsistent land values, which sometimes vary more than 100% from one statement to another for a single parcel of land. We do not find such evidence very persuasive. More credible, we think, are the Poppen appraisals, which the district court also accepted. These appraisals include no exempt property and are very detailed. They show that Merrill's debts exceeded his assets by $104,400 after the July 2, 1985 transfer, and by $283,449 after the January 1, 1986 transfer. Because Merrill's debts exceeded his assets after each transfer, we hold that the Frescolns failed to satisfy their burden of proving his solvency, which arose along with the presumption of fraud. See Regal Ins. Co., 324 N.W.2d at 703. The stock transfers from Merrill to his sons are therefore fraudulent, giving the bank, as Merrill's creditor, the right to have its judgment receive priority over the rights of Merrill's sons in regard to the fraudulently conveyed stock. See id. Our conclusion that the transfers were fraudulent is buttressed by more direct evidence as well. The letter from Merrill to his attorney about transferring his home to the corporation to avoid attachment by another creditor indicates that Merrill may have had the actual intent to defraud his creditors. See Uniform Fraudulent Transfer Act 4(a)(1). Merrill's failure to change his will after the estate planning he did by forming the corporation also raises the possibility of actual intent to defraud. While actual intent to deceive does not have to be shown to prove constructive fraud, Regal Ins. Co., 324 N.W.2d at 703, this evidence lends additional support to our holding based on Merrill's insolvency.