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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.