Opinion ID: 1280875
Heading Depth: 2
Heading Rank: 3

Heading: House Transactions

Text: In October of 1989, the Richardsons purchased the 205 Blunt Street home by making a $36,000 cash down payment and borrowing $144,000 from First Security Bank. Although the 205 Blunt Street home was titled solely in Phyllis' name, Gary signed the First Security Bank mortgage loan. In January of 1990, Gary used his 1989 year-end bonus to pay $50,000 on the $144,000 mortgage loan. This payment reduced the loan balance to $93,737.80 and reduced the monthly payment from $1467 to $953. In August of 1990, Gary unilaterally granted First Security Bank a security interest in his 1990 year-end bonus and ultimately used that bonus to make a $94,000 payment to pay off the mortgage in its entirety. As a result of the two payoffs, Phyllis obtained equity in the home of $144,000. The plaintiffs challenge the $50,000 and $94,000 payments on the ground that they constituted fraudulent conveyances from Gary to Phyllis. The Richardsons argue that the trial court erred in finding the two payments to be fraudulent conveyances for two reasons: (1) the payments merely represented an allowable preferential payment to a creditor by Gary; and (2) Gary made the payments with substantially exempt earnings. The trial court held that the payments constituted a fraudulent conveyance of property from Gary to Phyllis because Phyllis obtained $144,000 in equity and Gary received no consideration in return. The trial court relied on a Maryland Court of Special Appeals case, Pearce v. Micka, 62 Md.App. 265, 489 A.2d 48, 53 (1985), for the proposition that where an insolvent debtor husband uses earnings to pay off a mortgage for the benefit of his wife, to the extent that the payments increase the wife's equity in the property, a transfer of property from one spouse to another made or granted in prejudice of the rights of creditors has occurred. Although the court in Pearce was interpreting Maryland statutory law modeled after the Uniform Fraudulent Conveyance Act, the court's rationale is equally applicable to the case before us. Under Iowa law a debtor may prefer one creditor over another even if the debtor's intentions toward the nonpreferred creditor are spiteful and the action will delay or prevent the nonpreferred creditor from obtaining payment. First State Bank v. Kalkwarf, 495 N.W.2d at 712; Production Credit Ass'n, 485 N.W.2d at 472. A debtor husband may not, however, at the same time accomplish a transfer without consideration to his wife to the frustration of his creditors. Pearce, 489 A.2d at 53. As the court in Cashion v. Western Telegraph Co., 123 N.C. 267, 273, 31 S.E. 493 (1898) stated, generosity is not a virtue when dealing with the property of others. The preference of a creditor may not be used as a subterfuge for disguising a property transfer to a spouse without consideration. What the Richardsons accomplished was not the preference of a creditor, but was a fraudulent conveyance of property from Gary to Phyllis. At the same time, creditors may not reach property held in a wife's name which was acquired by the husband's exempt earnings while the earnings were exempt. Burk, 113 Iowa at 235, 84 N.W. at 1054. Pursuant to Iowa Code section 642.21, because Gary earned $425,983 in 1989 and $428,201 in 1990, 10% of these earnings were not exempt from the creditors' levies. The plaintiffs are entitled to $42,598.30 and $42,820.10 for each year respectively. Therefore, we modify the trial court's award of the full $144,000 to an award of $85,418.40. The trial court imposed a constructive trust on the 205 Blunt Street property in favor of the plaintiffs to satisfy the court's $144,000 judgment against Phyllis. The trial court ordered a judgment lien in the amount of $144,000 should attach to the property and the plaintiffs could execute and levy upon the property and sell it. The Richardsons challenge this remedy on the ground the mortgage payments were not fraudulent because they constituted a preferential payment to a creditor, the payments were made with substantially exempt funds, and the 205 Blunt Street property was Phyllis' homestead at the time of the payoff. A constructive trust is an equitable remedy courts apply to provide restitution and prevent unjust enrichment. Regal Ins. Co. v. Summit Guar. Corp., 324 N.W.2d 697, 704 (Iowa 1982). A constructive trust is a remedial device under which the holder of legal title to property is held to be a trustee for the benefit of another who in good conscience is entitled to the beneficial interest. Id. at 704-05 (quoting Loschen v. Clark, 256 Iowa 413, 419, 127 N.W.2d 600, 603 (1964)). Three types of constructive trusts exist: (1) those arising from actual fraud; (2) those arising from constructive fraud; and (3) those based on equitable principles other than fraud. Regal Ins., 324 N.W.2d at 705. The law requires the party seeking the remedy of constructive fraud to establish the right by clear, convincing, and satisfactory evidence. Id. The plaintiffs have established a right to the remedy of constructive trust by clear, convincing, and satisfactory evidence. As we have discussed above, the record clearly demonstrates Gary's intent to fraudulently place his earnings beyond the reach of the plaintiffs. In addition, that portion of Gary's earnings which were not exempt from levy can be easily traced to Phyllis' equity interest in the 205 Blunt Street property. A party in whose favor a constructive trust has been established may trace the property to where it is held and reach whatever has been obtained through the use of it. Cox v. Waudby, 433 N.W.2d 716, 718 (Iowa 1988). This is true for all property, including property constituting an individual's homestead. Id. at 718-19. We noted in Cox, the legislature never contemplated nor intended that a homestead interest could be created or maintained with wrongfully appropriated property. Id. at 719. Analogous to this proposition, we hold a homestead may not be created or maintained with non-exempt earnings fraudulently kept from the reach of creditors. We therefore affirm the trial court's imposition of a constructive trust on the 205 Blunt Street property in favor of the plaintiffs, but reduce the amount of the trust from $144,000 to $85,418.40 to reflect the extent of non-exempt funds.