FRAUDULENT CONVEYANCE LAW APPLIES TO UNCONTESTED MARITAL DISSOLUTION DECREES

On July, 9, 2014, the Minnesota Supreme Court held that the Minnesota Uniform Fraudulent Act (MUFTA), Minnesota Statute, Section 513.44, applies to uncontested marital dissolution decrees (Citizens State Bank Norwood Young America v. Brown). The court further affirmed the judgment that set aside the transfers and allows the Bank to satisfy its judgment from the assets that were fraudulently conveyed.

Specifics of the Case

In this case, the bank had tried, without success, to collect on a judgment for more than $290,000 against the ex-husband; he had also had debts in excess of eight million dollars. The bank then filed a fraudulent conveyance action against both former spouses, arguing that the ex-husband had conveyed “substantially all of his assets” to his ex-wife. In the marital-termination agreement, Gordon Brown retained nearly nine million dollars in debt, including his person guarantee obligations of $8.8 million as well as more than $270,000 in joint debt, while he transferred about two million in assets to Judy Brown.

The court noted that MUFTA, like fraudulent conveyance statutes going back to 1571, relied on “badges of fraud,” namely suspicious circumstances, to determine whether a conveyance was fraudulent. Under MUFTA, badges of fraud include transfers to “insiders” and transfers of “substantially all of the debtor’s assets.”

The Minnesota Supreme Court first found that MUFTA applies to transfers of assets made according to an uncontested marital dissolution decree. The court noted that there was no exception for transfers made pursuant to an uncontested marital dissolution decree. The court did not reach the question of whether MUFTA applies to contested marital dissolution decrees.

Although the Browns were not spouses at the time of the transfer because the transfer did not occur until the district court entered the dissolution judgment and decree and dissolved the Browns’ marriage, the Minnesota Supreme Court nonetheless found that Judy Brown was an insider under MUFTA. The court emphasized that the ex-spouses continued to have a close relationship, noting that they still lived together after the marriage. The court rejected the Browns’ argument that economic factors often “make it impossible for divorced spouses to live separately.” The court noted that, after the dissolution decree, Gordon Brown owned the marital home, and Judy Brown had more than two million dollars, with the result that there were no facts in the record indicating any economic difficulty preventing the ex-spouses from living separately.

The Minnesota Supreme Court also affirmed the finding that Gordon Brown transferred substantially all of his assets. The court rejected the Browns’ argument that Gordon Brown retained the marital home, valued at $421,290 and a 401(k) account with more than $100,000 because assets under MUFTA do not include property exempt from creditors’ claims such as homesteads valued up to $360,000 and pension accounts.

The court further affirmed that Gordon brown did not receive reasonably equivalent value for the assets he transferred, as he transferred about $1.5 million in assets to Judy Brown while the only asset she transferred to him was the home, which was largely exempt from creditors’ claims, and he retained the joint marital debt. Because his net worth was negative after the transfers, he was insolvent. Further, the transfer took place nine months after Gordon Brown had been sued on his personal guarantee.

The Minnesota Supreme Court held that, because there were several badges of fraud, fraud was inferred, and, here, the Browns did not rebut the inference of fraud. The court did reverse the part of the decision that allowed the Bank to levy on Judy Brown’s savings account, as that account was in her name before the dissolution and, therefore, was not transferred by the marital-termination agreement.

An Experienced Attorney is of the Utmost Importance

Given this decision, when parties to the marriage have debts or have been sued by creditors or even threatened with suit by creditors, they should consult with an experienced family law attorney. Jeffrey R. Arrigoni, Attorney at Law can help ensure that you follow all necessary procedures to help you avoid allegations of fraud.