Apparently when you divorce your spouse shortly after being sued, and then agree to transfer virtually all of your non-exempt property to your spouse, after which you continue to live together after the divorce.

At least that’s the holding in Citizens State Bank Norwood Young American vs. Gordon Brown, et al., –N.W.2d –, A12-1257 (Minn. 2014), a case I’ve been blogged about before, and thankfully the decision struck a careful balance between subjecting all divorce decrees to a presumption of fraud (my fear) and achieving the broader purpose for which Minnesota enacted the Uniform Fraudulent Transfers Act (UFTA).

Amicable Settlement or Business Divorce?

If you haven’t been following the case, the facts are roughly as follows:

Gordon Brown guaranteed various commercial loans made by Citizens State Bank, and was eventually sued by the bank after the original borrowers defaulted.  Judgment was entered against Gordon (then in his early 90s) in June of 2010 for the amount of $290,000 .  While the lawsuit was pending, Gordon petitioned for divorce from his wife, Judy, of 23 years, and the parties executed a marital termination agreement, which was later reduced to a Stipulated Judgment and Decree, approved by the Court, and entered in October 2013.

According to the Court of Appeals opinion, Gordon (age 94) received $644,000 in assets primarily consisting of the marital home (valued at $421,900), a $140,000 401(k), $80,000 in stock, and $3,000 in cash. Gordon also remained solely responsible for guaranteed debt in excess of $8.8 million.

By contrast, Judy (age 55), retained her $84,000 savings account, and also received $1.2 million from Gordon’s RBC Wealth Management account, Gordon’s one-half interest in a partnership (of which his portion was worth $300,000), and $213,000 in additional property. Neither party was awarded spousal maintenance though Gordon’s income totaled $4,000 per month while Judy’s was less than $1,000.

Unable to collect against Gordon, the Bank moved to void the divorce transfers to Judy as fraudulent and levy on those assets.  The district court granted summary judgment finding that the Brown’s divorce decree exhibited several statutory “badges of fraud” which the Browns had failed to rebut.  The Court of Appeals affirmed, holding, on an issue of first impression, that UFTA (MUFTA in Minnesota) applies to transfers made in accordance with an uncontested divorce decree, and stating that the facts, “support[] a singular conclusion that the Browns had actual intent to defraud.” The Court also applied a pre-MUFTA presumption that transfers between “spouses” are presumptively fraudulent, holding that the Browns qualified as “spouses” and failed to rebut that presumption.

The Supreme Court accepted review in July of 2013, and oral arguments were held in December.  Gordon Brown passed away during the pendency of the appeal.

A Narrow Holding

The threshold question for the Court was whether MUFTA could be used to void transfers under a judicially-approved divorce decree.   The Court found it could, at least in cases where that decree was “uncontested.”

Tracing UFTA’s lineage as far back as 1571, the Court reasoned that the language, history, and intent of the Fraudulent Transfers Act offered no basis for excluding divorce decrees from the myriad other transfers covered by the statute.  The Court also cited case law from several other jurisdictions including California, Michigan, Oregon, and Connecticut. See Mejia v. Reed, 74 P.3d 166 (Cal. 2003); Estes v. Titus, 751 N.W.2d 493 (Mich. 2008); Fadel v. El-Tobgy, 264 P.3d 150 (Or. Ct. App. 2001); Canty v. Otto, 41 A.3d 280 (Conn. 2012). Rather than put too fine a point on it, the Court refrained from adding Oklahoma and several federal bankruptcy courts to its list, though it easily might have. See Dowell v. Dennis, 998 P.2d. 206 (Okla. Civ. App. 2000).

The Court then proceeded to affirm the lower Court’s findings on six of the eleven possible badges of fraud including the Browns’ “insider status,” the fact that Gordon transferred virtually all of his non-exempt assets, the absence of “reasonably equivalent value for the assets transferred,” Gordon’s subsequent insolvency, the presence of a pending lawsuit at the time of the divorce, the proximity in time of the transfer to the time the debt was incurred, and Gordon’s alleged control of property even after the transfer.

Notably, the Court declined to hold that Gordon and his wife were “spouses” at the time the transfers were made–the divorce decree having dissolved the marriage–and thus avoided the question as to whether the transfer was “presumptively fraudulent” under earlier case law. See Kummet v. Thielen, 298 N.W.2d 245 (Minn. 1941).  However, the Court observed that because the Browns continued to live together and maintained a close relationship they could be considered “insiders” for the purposes of UFTA.

Despite what one justice described as a case with all the hallmarks of a “business divorce,” counsel for the Browns argued that transfers pursuant to a court-approved divorce decree could not be fraudulent, precisely because they were court approved.

The Justices were having none of it.  And understandably so.  Gordon, age 94, passed virtually any property that could be levied against to his wife who was almost 40 years his junior.  Certainly, the Court might be excused for thinking some creative estate planning was afoot.  The Browns arguments also weren’t helped by the fact that they offered virtually no evidence to rebut the Bank’s allegations of fraud, relying instead on their divorce’s judicial stamp of approval.

Not to say that the Browns’ arguments didn’t have merit.  During oral arguments, counsel for the Browns made a point of stressing the slipperly-slope nature of voiding transfers made in divorce decrees, particularly where dissolution settlements can be carefully crafted bargains. Similar arguments were successful in at least one prior case:

[A]s a matter of policy, we believe that to engraft the fraudulent transfer remedies onto a valid and approved marital settlement agreement would result in needlessly complicating the already emotional laden dissolution process. It might result in the unraveling of a dissolution agreement painstakingly negotiated between the parties and their attorneys. We do not carry the rights of an alleged defrauded creditor that far, absent the express intent by the Legislature to do so.

See Gagan v. Gouyd, 86 Cal Rptr. 2d. 733 (Cal. Ct. App. 1999). Unfortunately, Gagan‘s reasoning has fallen on hard-times, having been repudiated even in its own state.

And the Supreme Court was careful to stress the limited nature of its ruling.

  • It applies only to uncontested marital dissolution decrees.
  • While, historically, a presumption of fraud attached to transfers between spouses, that presumption does not extend to transfers between ex-spouses under a divorce decree (to the extent it exists at all).  Further, the Court’s decision to treat the Browns as “insiders” for fraudulent conveyance purposes appears to apply only to those (extremely rare) ex-spouses who continue to live together and maintain a “close relationship.”
  • Finally, the Court reversed the Banks attempts to levy on savings accounts which belonged to Wife prior to the divorce, holding that those accounts were never “transferred.”

Some Helpful Reminders

If the Court’s own language isn’t enough, Justice Anderson wrote separately to “emphasize the unusual nature of the facts in this case that support summary judgment,” particularly:

[T]he absence of any indication of adversity between Gordon Brown and his wife in the context of the dissolution of their marriage and the absence of any evidence indicating that the transfers were made for a legitimate purpose rather than to defraud Gordon Brown’s creditors.

Justice Anderson stressed that the Court’s references to “uncontested dissolutions” should not be read as applying to any divorce that settles short of trial:

In my view, not much is required to move an “uncontested” divorce proceeding into the adversarial category…But many contested, disputed, or adversarial marriage dissolutions, with varying degrees of intensity, eventually become “stipulated” for purposes of dissolving the marriage. Thus, the fact that a divorce is labeled “stipulated” or appears uncontested in the final proceeding does not necessarily mean that the divorce was not adversarial. And in adversarial divorces, even adversarial divorces that are eventually labeled “stipulated,” it may well be that the former spouse receiving the transfer does not have insider status, thus eliminating one badge of fraud.

So while parties cannot use a divorce decree to protect otherwise questionable asset transfers, creditors also cannot count on automatically being able to collect from a debtor’s ex-spouse:

[C]aution should be the watchword when evaluating summary judgment motions in spousal transfer cases where fraud is alleged

So all-in-all a fair balance between ensuring fairness to creditors while protecting family court litigants from excessive uncertainty.

Some Parting Words

We also have three unpublished cases out of the Court of Appeals, though all three are affirmances with fairly minimal discussion.  Not much to write home about when we have a Supreme Court Opinion to discuss.  Still for those interested:

In re the Marriage of Kouttay vs. Yahia, A13-1362 (Minn. Ct. App. July 7, 2014) affirmed the district court’s findings relative to a spousal maintenance and child support obligor’s income from operating a taxi where both sides presented conflicting evidence as to Husband’s income. While the Court noted that the judgment and decree was “atypical in that it does not contain enumerated findings touching expressly on each of the spousal-maintenance factors,” the Court of Appeals found that a consideration of the relevant factors was “implicit in the findings the district court made for general purposes or for purposes of child support,” and affirmed the spousal maintenance award.

In re the Marriage of Smoot vs. Smoot, A13-2214 (Minn. Ct. App. July 7, 2014) affirmed the District Court’s order allowing Mother to relocate out-of-state with the parties’ five children to finish her education. Father argued that the District Court’s findings incorrectly analyzed the statutory relocation factors. The Court of Appeals disagreed and affirmed both the relocation and the $11,000 need-based attorney fee award to Mother.

In re the Marriage of Kehlenbeck vs. Kehlenbeck, A13-2033 (Minn. Ct. App. July 7, 2014) affirmed the District Court’s denial of Mother’s custody and child support modification motions.  Mother alleged that the children “spent the majority of their time at her home” justifying a modification of custody (as the children had become “integrated” into Mother’s home) as well as satisfaction of her prior child support obligation by virtue of Mother providing “a home, care and support for the child[ren] while the child[ren]” were living with Mother. See Minn. Stat. 518.18 (regarding custody modification); and Minn. Stat. 518A.38, subd. 3 (regarding satisfaction of child support).  The lower Court denied Mother’s motion without an evidentiary hearing and the Court of Appeals affirmed.  Observing that Mother already received “liberal” visitation under the current parenting time order (45.1-50% with one child and 10-45% with the other), the Court found that Mother’s allegations that the children spent “the majority of their time in her home” or “50% or more time with her” only demonstrated that the children “are spending slightly more time with her then they are permitted to spend by court order,” and thus did not rise to the level of a substantial change in circumstances required by statute.  With a decision of only five pages, it’s difficult to evaluate the reasoning.

That’s it for this week’s Round-Up. ‘Til next week.

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