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22 Houses Evaporate But Judge Rejects Creditor's Indiana Fraudulent Transfer Claims

Lesson.  Fraudulent transfer claims can be expensive to prove and difficult to win, even if the underlying transactions stink.  Lenders trying to collect a judgment, and borrowers/guarantors trying to avoid collection, can learn from Judge Simon’s Pringle opinion. 

Case citePringle v. Wittig, 2014 U.S. Dist. LEXIS 118453 (N.D. Ind. 2014) (.pdf).

Legal issuePringle involved two issues:  (1) whether the defendant provided “reasonably equivalent value” for twenty-two houses he bought and (2) whether the real estate transactions were “made with the intent to hinder, delay or defraud” the plaintiff.

Vital facts.  Garcia allegedly cheated Pringle out of millions in a real estate fraud scheme.  Because Garcia was insolvent, Pringle sued Wittig, who allegedly participated in the scheme by buying several houses from Garcia during the collapse of Garcia’s scheme.  Pringle asserted that Wittig helped Garcia shield assets from Pringle by buying properties from Garcia “on the cheap.”  So, Pringle filed suit against Wittig to void the alleged fraudulent transfers. 

Procedural historyPringle was the federal district court’s decision on Wittig’s motion for summary judgment based essentially on the notion that Pringle failed to produce evidence of fraud. 

Key rules.  At issue was liability under the Indiana Fraudulent Transfer Act, Ind. Code 32-18-2-14 and 15.  The Court noted that an action to set aside a fraudulent conveyance “does not negate the disputed transaction” but only subjects the conveyed property to execution “as though it were still in the name of the grantor.”  There are two paths to victory under the IUFTA.  First, plaintiffs can show that the transfer was made “with the actual intent to defraud creditors” (aka actual fraud).  Second, plaintiffs can show that the transferor did not receive “reasonably equivalent value” in exchange for the transfer (aka constructive fraud).  Actual fraud claims involve proof of the so-called “eight badges of fraud” discussed here previously (see 12/14/06 post).  Constructive fraud claims focus on whether the transferor was insolvent and whether the property was transferred without the receipt of reasonably equivalent value in exchange. 

Holding.  The primary dispute in Pringle was whether Wittig gave “reasonably equivalent value” for the twenty-two houses he bought from Garcia, and the opinion discusses in detail the facts relevant to that question.  As to both the actual and constructive fraud claims, the Court held that, but for two houses, Pringle had not established a case.  The Court therefore granted summary judgment for Wittig concerning twenty of the sales.  The remaining two transactions warranted a trial, however.

Policy/rationale.  “Reasonably equivalent value” is not defined in the IUFTA.  The Court concluded that the law requires “something more than consideration to support a contract,” and there is no fixed formula.  Factors to be considered include whether the transaction was made at arm’s length, whether the transferee acted in good faith and “most importantly” a determination of the fair market value of the property transferred and received.  The opinion in Pringle summarized the evidence submitted by both sides and concluded that Wittig made “a strong case that he paid fair market value for each house” (but for two).  Whereas, Pringle relied only on county tax assessments, which “do not reflect … fair market value….”  Pringle failed to offer appraisals, comparable sales or testimony from real estate agents.  As to the two transactions that survived, however, Pringle successfully showed that, on the same day Garcia sold the houses to Wittig, Wittig sold the houses to Garcia’s IRA, in a deal akin to a “secret or hurried transaction not in the usual mode of doing business.”     

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