Indiana Commercial Foreclosure Law

BK Trustee Prevails On Indiana Fraudulent Transfer Claims

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.

Unjust Enrichment – Viable Alternative To A Fraudulent Transfer Claim

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.

Unjust enrichment.  The most enlightening part of Judge McKinney’s opinion addresses Conseco’s claim for unjust enrichment against Murray’s wife.  Under Indiana law, “a person who has been unjustly enriched at the expense of another is required to make restitution to [pay back] the other.”  In order to win an unjust enrichment claim, a plaintiff “must establish that a measurable benefit has been conferred upon the defendant under such circumstances that the defendant’s retention of the benefit without payment would be unjust.”  Here was Conseco’s theory: 

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. 

UFTA – constructive fraud.  Conseco also asserted a more traditional claim based on Indiana Code § 32-18-2-14 of the Indiana Uniform Fraudulent Transfer Act (“UFTA”).  The Court noted that this statute protects against two types of fraudulent transfers:  (1) transfers with actual intent to defraud and (2) transfers that are constructively fraudulent (as a matter of law).  The Court set out the test for when constructive fraud will be presumed: 

(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. 

Factual Questions Remain In Indiana Fraudulent Transfer Case

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. 

Fraudulent intent.  As previously documented in this blog, fraudulent intent in Indiana involves a fact-sensitive question and focuses upon certain “badges of fraud,” which include:

 1. Transfer of property by the debtor during the pendency of a suit;
 2. Transfer of property that renders the debtor insolvent or greatly reduces his estate;
 3. A series of contemporaneous transactions which strip a debtor of all property
  available for execution;
 4. Secret or hurried transactions not in the usual mode of doing business;
 5. Any transaction conducted in a manner differing from customary methods;
 6. A transaction whereby the debtor retains benefits over the transferred property;
 7. Little or no consideration in return for the transfer; and
 8. A transfer of property between family members.

The Court noted that “the existence of several of these badges may warrant an inference of fraudulent intent, but no particular badge constitutes fraudulent intent per se.” 

Questions deferred for trial.  The Court denied summary judgment and concluded that material questions of fact remained as to whether the transfers from the trustee to her parents were made in good faith and 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.     

INDIANA’S UNIFORM FRAUDULENT TRANSFER ACT: 2 Recent Cases

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. 

Richter/voiding a transfer. Richter reminds us of the very basic elements that must be alleged for a colorable claim to void a fraudulent conveyance.  The decision dealt with a  Trial Rule 12(B)(6) motion to dismiss for failure to state a claim, and the court outlined the fundamental elements of a fraudulent conveyance claim: 

1. An allegation of jurisdiction;
2. A statement of the date and the conditions under which the defendant executed a promissory note to the plaintiff;
3. A statement that the defendant owes the plaintiff the amount;
4. A description of the events surrounding the defendant’s conveyance of all of his property to the transfer recipient (a third party) for the purpose of defrauding and for delaying the collection of payment by the plaintiff; and
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.