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Judgment Creditor Entitled To Recover Entire Value Of Real Estate Fraudulently Conveyed

Lesson. Although the transferee of real estate fraudulently conveyed theoretically could retain, or receive credit for, money spent to improve or otherwise increase the value of the subject property, the credit will only apply to improvements made after the fraudulent transfer. Otherwise, the judgment creditor will be entitled to the full value of the real estate, unless there is evidence of an inequitable windfall to the creditor.

Case cite. State v. Lawson, 128 N.E.3d 471 (Ind. Ct. App. 2019)

Legal issue. Whether judgment creditor was entitled to one-half ($7,500), or the full amount ($15,000), of proceeds from the sale of a Husband’s interest in real estate fraudulently transferred to him by Wife, the judgment debtor.

Vital facts. In 2017, the State obtained a large civil judgment against Wife for alleged theft. The State claimed that, when the theft was about to be discovered, Wife fraudulently conveyed to Husband her interest in the subject real estate. The property previously had been owned by Husband and a family member, both of whom spent $7,500 each improving the property in the 1990’s. In 2004, Husband transferred his one-half interest to Wife’s daughter, who later transferred her interest to Wife. Upon learning of the theft investigation in August 2014, Wife quitclaimed her one-half interest in the real estate back to Husband. While the litigation was pending, the parties agreed to the sale of Husband’s interests in the real estate for $15,000, which was deposited with the trial court pending the outcome of the case.

Procedural history. Following a bench trial, the trial court found that Wife had fraudulently transferred her interest in the real estate but ordered only $7,500 of the sale proceeds to be released to the State. The trial court ordered the remaining $7,500 to be released to Husband “for his equitable interest in the Property.” The State appealed.

Key rules.

Lawson involved the interpretation of Indiana’s Uniform Fraudulent Transfer Act. Under the Act, a creditor may bring a claim to set aside a fraudulent conveyance made by a debtor. As relevant here, a conveyance is fraudulent and voidable if the debtor made the transfer or incurred the obligation with actual intent to hinder, delay, or defraud a creditor of the debtor. I.C. § 32-18-2-14.

Section 18 was the key provision at issue and states in relevant part:

(b) To the extent that a transfer is avoidable in an action by a creditor under section 17(a)(1) of this chapter, the following rules apply:

    (1) Except as otherwise provided in this chapter, the creditor may recover judgment for the value of the asset transferred, as adjusted under subsection (c), or the amount necessary to satisfy the creditor’s claim, whichever is less....

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(c) If the judgment under subsection (b) is based upon the value of the asset transferred, the judgment must be for an amount equal to the value of the asset at the time of the transfer, subject to adjustment as the equities may require.

The Indiana Court of Appeals interpreted “subject to adjustment as the equities may require” to mean: “A defrauded creditor is entitled to the full value of the fraudulently transferred property at the time of the transfer, and an equitable adjustment is permitted only when an inequitable windfall would result by granting the creditor the full value of the property.”

Holding. The Indiana Court of Appeals reversed the trial court and held that the State was entitled to a judgment for the full $15,000.

Policy/rationale. The trial court granted $7,500 to Husband under the equitable test of Section 18(c) based upon his cash outlay to improve the real estate in the 1990’s. On appeal, the State asserted that it should obtain the full value of the asset, as provided in Section 18(b) and (c). Significantly, Husband incurred the $7,500 “long before” the fraudulent transfer and after he himself transferred the property to Wife’s daughter. The Court of Appeals' focus was on whether any improvements had been made after the fraudulent transfer, and there had been none. Because Husband had not increased the value of the real estate after the subject transfer, “the equities did not require [Husband] to be reimbursed.”

Related post. “Negative Value” Dooms Indiana Fraudulent Transfer And Direct Continuation Claims

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I represent parties in disputes arising out of loans that occasionally involve post-judgment fraudulent transfer issues.  If you need assistance with a similar matter, please call me at 317-639-6151 or email me at john.waller@woodenlawyers.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.

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