DIVORCE IS NOT A TOOL FOR AVOIDING CREDITORS

Citizens State Bank Norwood Young America v. Gordon Brown (2014)

Background:

Husband and Wife were married for 23 years. During the marriage, Husband personally guaranteed commercial loans made by Citizens Bank (Bank) to two businesses. The businesses defaulted on the loans and Husband did not satisfy the loans under his personal guarantee. In January of 2010 the Bank sued Husband to enforce the personal guarantee. Wife was not named in the Bank’s lawsuit.

While the Bank’s lawsuit was pending, Husband filed for divorce against his Wife in what appears to be an attempt to avoid repaying his obligations to the Bank. As part of their uncontested divorce settlement, Husband was awarded all of the debt and Wife was awarded most of the liquid assets. Wife was awarded an investment account valued at $1.2 million while Husband was awarded a checking account valued at less than $3,000. Clearly this settlement favored Wife.

The Bank was awarded a default judgment against Husband in June of 2010 for the remaining balance on the loans, plus interest, costs and attorney fees.

Husband and Wife’s divorce was final in October of 2010. However, Husband and Wife continued to live together as a married couple after the divorce.

When the Bank was unable to collect on its judgment against Husband – because all of the liquid assets had been transferred to Wife – the Bank sued Wife. The Bank alleged the transfers in the divorce were made with the intent to defraud the Bank. And, therefore, the Bank should be allowed to satisfy its judgment against the assets awarded to Wife in the divorce. The Bank relied on the Minnesota Uniform Fraudulent Transfers Act (MUFTA) as justification for its lawsuit.

Minnesota Uniform Fraudulent Transfer Act (MUFTA):

The Minnesota Uniform Fraudulent Transfers Act’s (MUFTA) purpose is to prevent debtors from placing property that is otherwise available for the payment of their debts out of the reach of their creditors.

This case tells us that MUFTA can apply to transfers made in an uncontested divorce if those transfers were made for the purpose of avoiding a creditor.

An uncontested divorce means that the parties did not have any true disagreements about the value of assets or how those assets should be divided. While most people reach settlement agreements in their divorces, very few couples divorce without disputing the value of at least one item of property.

MUFTA uses 11 “badges of fraud” when assessing whether a fraudulent transfer has occurred. Those 11 “badges of fraud” are:

1.      The transfer was to an “insider”. An insider is someone who is highly trusted by the transferor.

2.  The debtor retained possession or control of the property transferred after the transfer.

3.      The transfer or obligation was disclosed or concealed.

4.      Before the transfer was made, the debtor had been sued or threatened with a lawsuit.

5.   The transfer was substantially all of the debtor’s assets.

6.      The debtor absconded.

7.    The debtor removed or concealed assets

8.    The debtor failed to receive reasonably equivalent value for the asset transferred.

9.     The debtor was insolvent or became insolvent shortly after the transfer was made.

10.  The transfer occurred shortly before or shortly after a substantial debt was incurred.

11.  The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

There is no magic number of badges needed to prove that a fraudulent transfer occurred; even one badge may be enough.  Therefore, a court must look closely at the details of each case to determine if MUFTA may apply.

WHAT DOES THIS CASE MEAN FOR YOU?

Divorce should not be used as a tool to avoid creditor claims against one or both spouses. If a creditor believes that a fraudulent transfer has occurred, that creditor can use MUFTA to set aside the transfer and collect on its debt. Therefore, it is important to discuss all debts at issue during a divorce with competent counsel to make sure that you are protected.