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“Debtor” In Alleged Fraudulent Transfer Must Be Liable For Creditor’s Underlying Claim

Lesson. If there is no underlying claim, then there can be no fraudulent transfer.

Case cite. Underwood v. Fulford, 128 N.E.3d 519 (Ind. Ct. App. 2019)

Legal issue. What is a “debtor” under Indiana’s Uniform Fraudulent Transfer Act?

Vital facts. This case arises out of a tangled web of disputes between parties to a real estate transaction. Many suits and many years led to this particular opinion. To cut to the chase, Underwood alleged that Kinney, before he died, conveyed certain properties to his wife for the purpose of defrauding Underwood, a purported creditor of Kinney (later, his Estate). The Underwood decision dealt with both the underlying action for damages and the fraudulent transfer action. The nature of Underwood’s primary claim is not important here. The key is that both the trial court and the Court of Appeals concluded that the Estate owed no money to Underwood.

Procedural history. The trial court dismissed Underwood’s fraudulent transfer claim, and Underwood appealed.

Key rules. Indiana's UFTA, at Ind. Code § 32-18-2-14, generally provides that:

A transfer made … by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made…, if the debtor made the transfer ... with actual intent to hinder, delay, or defraud any creditor of the debtor[.]

The statute defines a “debtor” as “a person who is liable on a claim.” I.C. § 32-18-2-2.

Indiana courts previously have declared, “a defendant cannot logically be held liable for a fraudulent transfer … if he is not to be held liable for the creditor’s underlying claim.” In other words, when a “UFTA defendant is not a debtor to the plaintiff, dismissal is proper.”

Holding. The Court affirmed the trial court’s dismissal of the UFTA action.

Policy/rationale. The Court first concluded on a separate contention that Underwood had no claim for damages against the Estate. Based on that premise, the Estate was not a “debtor” under the UFTA. For reasons that frankly are not altogether clear, Underwood continued to press her theory that the Estate was a debtor, but the Court found that she “failed to present a cogent argument” in support of her theory. The outcome is not surprising here, but the discussion is nonetheless noteworthy. For those who may be analyzing the viability of a fraudulent transfer claim, Underwood highlights who can be a “debtor” under the UFTA and why that definition is significant.

Related post. More On Piercing The Corporate Veil In Indiana, And The UFTA
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