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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.