Indiana Fraudulent Transfer Act: Statute Of Limitations And Bona Fide Purchaser Defenses

Fraudulent transfer claims have a shelf life and do not necessarily extend to all subsequent transferees.  Hair v. Schellenberger, 2012 Ind. App. LEXIS 158 (Ind. Ct. App. 2012), which dealt with Indiana’s Uniform Fraudulent Transfer Act, Ind. Code § 32-18-2 (“UFTA”), explains some of the parameters of these cases.  Hair was a dispute over who had superior title to certain real estate – a subsequent purchaser (“Purchaser”) or a purported judgment lien holder (“Judgment Creditor”). 

Judgment lien.  By statute, “all final judgments for the recovery of money . . . constitute a lien upon real estate . . . in the county where the judgment has been duly entered and indexed in the judgment docket as provided by law . . . after the time the judgment was entered and indexed.”  I.C. § 34-55-9-2.  Judgment Creditor held a money judgment against the former owners of the subject real estate that should have created a lien on the property, but the clerk of the court failed to properly index the judgment.  

Acquisition.  The lender for the former owners of the subject real estate foreclosed and took ownership of the property via sheriff’s deed – after the Judgment Creditor obtained her judgment.  A few months later, Purchaser bought the foreclosed property from the lender following a title search that did not disclose Judgment Creditor’s judgment.   

The transfer.  In an effort to enforce her lien, Judgment Creditor brought a claim against Purchaser based on the theory that the former owners had fraudulently conveyed the real estate to a third party (a land trust) about three months following the date of the judgment and several months before the subject sheriff’s sale.  If the former owners - the judgment debtors - fraudulently conveyed the subject real estate to the land trust, could the Court set aside the subsequent transfer to Purchaser? 

Statute of limitations.  The first issue in Hair was whether Judgment Creditor’s claim was time-barred.  The UFTA establishes a statute of limitations “at the later of four years after the transfer was made or one year after the transfer was or could reasonably have been discovered by the claimant.”  I.C. § 32-18-2-19.  Judgment Creditor did not raise the claim until May, 2010, which was more than four years after the November, 2005 conveyance to the land trust and more than one year after the July 2006 recording of the deed to the land trust “which was the date upon which [Judgment Creditor] could have reasonably discovered the transfer.”  The fraudulent conveyance claim was time barred.

BFP defense.  The Court in Hair also noted that a fraudulent conveyance “is a contract for sale or conveyance of property with intent to hinder or delay creditors.”  The UFTA, at I.C. § 32-18-2-18(a), states:

A transfer or an obligation is not voidable under [the UFTA] against a person who took in good faith and for a reasonable equivalent value or against any subsequent transferee or obligee.

Purchaser was a “BFP” (a purchaser in good faith, for valuable consideration, and without notice of the outstanding rights of others) and thus was not subject to avoidance of the transfer of the real estate from the former owners to the land trust.  Purchaser’s title search “did not require inquiry into the legitimacy of the [former owners’] transfer of the property to the land trust.”  Even if the former owners’ transfer was fraudulent and even if Judgment Creditor’s claim was not time-barred, such transfer was not voidable vis-à-vis Purchaser. 

For lenders and other parties seeking to recover debts from individuals or entities that have transferred assets with the intent to avoid collection, Hair reminds us that (1) an Indiana UFTA claim generally must be brought within four years of the transfer or one year from when one could reasonably have discovered the transfer and (2) a claim generally is not enforceable against an innocent purchaser for value. 

Innocent Purchaser Of Motorcycle Loses To Secured Party In Replevin Action

The vernacular of “foreclosure” typically relates to real estate, while “replevin” normally pertains to personal property.  For more, click on my prior post What Is Replevin?  In Dawson v. Fifth Third Bank, 965 N.E.2d 730 (Ind. Ct. App. 2012), the Indiana Court of Appeals teaches us that security interests in personal property generally will not be extinguished even if the ownership of that loan collateral changes. 

Situation.  In Dawson, Buyer purchased a motorcycle from Seller, who had given Buyer a certificate of title showing the motorcycle was free of any lienholders.  Buyer later learned that Seller fraudulently obtained the title and that the current certificate of title listed Bank as a lienholder.  Which party - Buyer or Bank - was entitled to possession of the motorcycle free and clear of all liens?

Replevin 101.  Replevin is a statutory remedy allowing one to recover possession of property “wrongfully held or detained” by another.  Ind. Code § 32-35-2 is the Indiana statute.  The elements of a replevin action require the plaintiff to prove (a) its title or right to possession, (b) that the property is unlawfully detained and (c) that the defendant wrongfully holds possession.  In the secured lending context, Indiana law is clear that, upon default, a creditor has the right to take possession of the collateral securing its claim and in accordance with the agreement with the defaulting party.

Competing rights.  Bank held a security interest in the motorcycle based upon Seller’s promissory note and security agreement.  The most current certificate of title on file with the Bureau of Motor Vehicles reflected Bank’s security interest.  Bank had never released its lien.  In what proved to be a fatal error, Buyer purchased the motorcycle without checking with the BMV to verify that the certificate of title supplied by Seller was the most recent one.  Since Seller was in default under the security agreement based upon non-payment, Bank, as the secured party, had the right to take possession of the motorcycle.  Ind. Code § 26-1-9.1-609(a).  Buyer did not dispute Bank’s rights.  Rather, Buyer contended that its purchase, and thus ownership, of the motorcycle precluded Bank from arguing that Buyer wrongfully held possession of the motorcycle – one of the elements of an Indiana replevin claim.  Bank, while not contesting ownership, asserted that such ownership was subject to Bank’s lien. 

Ownership immaterial.  A security agreement is effective against purchasers of collateral.  Ind. Code § 26-1-201-9.1.  Third-party purchasers are therefore at risk if they buy encumbered personal property from a seller/debtor in default.  Although Buyer had an interest in the motorcycle as its purchaser, the interest was not superior to Bank’s perfected security interest.  The Court affirmed the trial court’s summary judgment for Bank accordingly. 

Perfection.  Footnote 4 of the Dawson opinion contains lots of information related to certificates of title and the issue of perfecting Bank’s security interest.  Bank’s perfection was a non-issue, but the Court’s remarks are informative.

Equitable estoppel.  The Court in Dawson devoted a portion of its opinion to Buyer’s claim for equitable estoppel.  The discussion focused on certificates of title and which party was in the best position to protect itself based upon the public records.  The opinion is helpful for those who deal with motor vehicle transactions.  In the end, Bank was not responsible for Seller’s loss. 

 

Indiana Collection Theories Of Piercing The Corporate Veil, Alter Ego, Successor Liability And Mere Continuation: Part II

This follows-up Part I, from March 29th, dealing with veil piercing from one company to another (alter ego doctrine) in order to recover a debt.  Please click on Part I for introductory information about the subject case, Ziese & Sons v. Boyer.  Today’s post focuses on the second theory of recovery – successor liability. 

Successor liability, generally.  Plaintiff Ziese’s second contention was that defendant Group was liable for Corporation’s debt based upon certain exceptions to the general rule against successor liability, which centers upon the fraudulent sale of assets.  (Although the Ziese opinion did not rely upon Indiana’s Fraudulent Transfer Act, these kinds of cases are very similar to one another.)   Importantly, successor liability “is implicated only when the predecessor corporation no longer exists, such as in the case of dissolution or liquidation in bankruptcy.” 

Indiana’s general rule is that, when one corporation purchases the assets of another, the buyer does not assume the debts or liabilities of the seller.  There are four exceptions:

 1. An implied or express agreement to assume liabilities;
 2. A fraudulent sale of assets done for the purpose of evading liability;
 3. A purchase that is a de facto consolidation or merger; or
 4. Where the purchaser is a mere continuation of the seller.

Ziese focused upon the second and fourth exceptions. 

Exception 2 - fraudulent sale.  Regarding the second exception, Indiana courts look to eight badges of fraud, which are different than the eight badges of fraud applicable to the veil piercing theory discussed in Part I:

 1. The transfer of property by a debtor (defendant) during the pendency of a suit;
 2. A transfer of property that renders the debtor (defendant) insolvent or greatly reduces his estate;
 3. A series of contemporaneous transactions which strip the debtor (defendant) 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 (defendant) 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.

Indiana courts examine these badges to determine whether a fraudulent asset sale took place.  In Ziese, the Court concluded that genuine issues of material fact existed as to whether Ziese could recover under this theory.  There was evidence that Group acquired assets of Corporation without giving consideration for them. 

Exception 4 - mere continuation.  The other exception at issue in Ziese was the “mere continuation” (a/k/a "direct continuation") concept that explores “whether the predecessor corporation should be deemed simply to have re-incarnated itself, largely aside of the business operations.”  The focus is upon whether there is a continuation of shareholders, directors and officers into the new corporate entity.  (Remember – successor liability only applies when one entity purchases the assets of another entity.)  After analyzing the evidence in Ziese, the Court held that there were genuine issues of material fact regarding whether Group was a mere continuation of Corporation.  Thus the Court remanded all claims for trial.

The Ziese opinion provides an excellent outline of Indiana law regarding the doctrines applicable to recovering debts owed by one corporation from a separate, yet connected, corporation.  The Court’s analysis is a road map for the proof needed to prevail on these claims or, conversely, to defeat them.