The Minnesota Supreme Court heard oral arguments recently in the case of Citizens State Bank Norwood Young America v. Brown et al.
While I expect to be writing much more about this case in the months to come, the facts are these:
Gordon and Judy Brown divorced in 2010, after stipulating to the division of all their marital assets and liabilities. Their Judgment and Decree, which was approved and entered by the district court, awarded Gordon, age 94, net assets and debts which left him with a negative net worth of $8,500,000, while Judy, age 55, received assets of $2,000,000. Following the entry of the Judgment and Decree, Citizens State Bank–which held personal guarantees from Gordon of over $220,000–filed suit to have the transfers to Judy under the divorce decree set aside as fraudulent. The district court granted summary judgment in favor of the bank.
The Court of Appeals affirmed, holding that, despite their divorce, Gordon and Judy remained “insiders” for the purposes of the Uniform Fraudulent Transfers Act (UFTA), and thus the transfers made pursuant to their divorce decree were presumptively fraudulent.
While I’ll hold my color commentary until we have the full Supreme Court ruling in hand, the Court of Appeals’ reasoning should be extraordinarily disconcerting for anyone involved in a divorce. If all transfers to an ex-spouse in a divorce decree are presumptively fraudulent, the ramifications cannot be overstated. While the Brown’s divorce may have the hallmarks of a “business divorce” as one of the Justices stated, one cannot help but hope that bad facts don’t result in bad law. Here, the Bank had the opportunity to seek a personal guarantee from Judy, and did not. Now, the bank seeks to retroactively reallocate assets in a divorce. This cannot be the answer.