Daily Development for
Friday, April 18, 2003

by: Patrick A. Randolph, Jr.
Professor of Law, UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Here are two fascinating fraudulent conveyance cases - in one, arguably no
creditor.  In the second, arguably no insolvency.  Both contain useful
lessons for potential plaintiffs.  I'm transferring late from home and
don't have my usual "tail" on this DD.  Please apply the  tail from of the
other Daily Developments (There are now over 1500) to this one.

FRAUDULENT CONVEYANCES; CREDITORS: A conveyance made prior to the incurring
of debts to creditors now challenging the conveyance as fraudulent may be
treated as fraudulent if made with the intent to defraud these later
arising creditors.

Smith v. Orman, 822 So. 2d 975 (Miss. App. 2002)

Smith was named executrix in her brother's will.  In the six weeks prior to
her formal application for appointment as executrix, Smith appropriated
some of her deceased brother's estate to her personal use.  On the same day
that she applied for formal appointment, she also transferred a fee
interest in a farm to her daughter, reserving a life estate in herself.

In the following six years, Smith expropriated quite a bit of additional
money from the estate, for her own use and that of her son.  During that
time, she filed a false accounting and otherwise mislead the heirs of the
state about her activities.  Ultimately, the heirs filed suit, got a new
accounting, and sought reimbursement of the misappropriated funds.  In
connection with that suit, they filed to set aside the conveyance of the
farm as a fraudulent conveyance.

Smith admitted that the transfer of the farm rendered her without assets to
pay her debts, but argued that the purpose was in fact to defraud another
creditor, not in this action.  She noted that the transfer of the farm
occurred a short period before she was appointed executrix of the estate,
and that the beneficiaries of the estate were not then her creditors.

The court concluded that the relevant question is whether there was reason
to believe that Smith was in fact attempting to shield her property from
these creditors, even though their claims had not yet fully ripened.  It
noted that she had already stripped some money from the estate prior to her
appointment.

The court also noted that the ordinary three year statute of limitations
would not apply here because Smith fraudulently withheld information that
would have permitted the estate beneficiaries to realize that they had a
claim.  The court distinguished a prior Mississippi case that had refused
to toll the statute based upon fraud because the creditor had not exercised
"due diligence."  In that case, although the debtor had testified falsely
in a creditor's claim hearing, the creditor knew that it had a claim and
could have examined the property records and detected the
conveyance.  Here, unlike in the precedent case, the creditors were misled
about the presence of the claim itself.

The court also slugged the Smith with punitive damages and the attornies'
fees of the beneficiaries.  It established a constructive trust on the
farm.  The grantees of the farm included parties who themselves were
potential claimants as beneficiaries of the estate.

Comment 1: The editor found interesting the notion that the fraudulent
purpose could operate prospectively.  This Seems right in theory.  Note
that the conveyance in fact stripped the debtor of assets.   But if her
assertion was true that she had another "live" creditor that she really
intended to defraud, it does seem that the court stretches the analysis a
bit to help out these creditors.  The court clearly bases its conclusion on
the "future intent to defraud" analysis and does not rely upon the small
diversions made prior to the appointment and the challenged transfer.

Comment 2: One piece of testimony is worth noting, as the court did.  In
response to a question as to why Smith and her son could not produce copies
of bank statements relating to the decedent's personal checking account,
from which $11,000 disappeared in a week's time, the son  testified that
the statements arrived but were discarded unopened, since "you must have so
much
room to keep things."

FRAUDULENT CONVEYANCES; INSOLVENCY: A debtor without liquid assets may be
found insolvent for fraudulent conveyance purposes if it is not paying
debts when due even if it has been awarded a multimillion dollar judgment
which was on appeal at the time of the challenged conveyance.

Levin v. Ethan Allen, 823 So. 2d 132 (Fla. App. 2002)

Plaintiff, a furniture manufacture  was in a dispute with Georgetown, a
retailer,  about late payments for furniture that plaintiff had shipped to
Georgetown's stores.  Plaintiff terminated its business at those stores,
thus allegedly diverting business to other stores carrying plaintiff's
brand.  In the same action, Georgetown sued for tortious interference and
plaintiff counterclaimed  for the late payments.  The trial court, without
a jury gave Georgetown a verdict for tortious interference including over
$7 million for future profits.  It also awarded a judgment of $2.5 million
for plaintiff on the furniture payments.

While an appeal was pending, Georgetown transferred the real estate it
owned and effectively became insolvent.  In one case, it transferred
property to a company owned by the Levins, the same parties that owned
Georgetown, who also received a $425,000 mortgage on the property.  Later,
that property was sold to third parties and Levins were paid for the
mortgage.  In another case, Georgetown gave Levins a $500,000 third
mortgage on the property allegedly for no consideration.  Later, Levins
acquired the first mortgage on the property and foreclosed from that
position.  Plaintiff in the fraudulent conveyance action argued that the
third mortgage shielded $500,000 in equity from the reach of
creditors.  (Whether there was in fact any impact on creditors is an issue
to be resolved on remand.)

Later, the net $5 million judgment in favor of Georgetown was reversed,
leaving the $2.5 million judgment in favor of plaintiff as a claim against
Georgetown, and Plaintiff sought to have the benefits from the above real
estate transactions disgorged on the grounds that they constituted
fraudulent conveyances.

The majority, in this 2-1 decision, first affirmed the trial court ruling
that the presumption of insolvency that arose from the fact that Georgetown
was no paying creditors (mortgage creditors and property taxes) was not
overcome by the evidence of the judgment on appeal.  As to Levin's argument
that  the judgment on its face should have been treated as an asset, the
court commented: "A judgment on appeal may be presumed correct, but it does
not follow that the
judgment is . . . an asset worth its face amount."

As to the argument that the judgment nevertheless had settlement value, the
court acknowledged
that this could be true, and  that the trial court had erroneously refused
to consider evidence of
proposed settlement offers.  But the appeals court noted  that there had
been no formal proffer of
proof by Levins, so the issue was not preserved on appeal.  (The dissenting
judge scoffed that in
a judge-tried trial it was very likely that the judge was fully aware of
the evidence concerning
settlement even without an offer of proof, and that the lack of a proffer
should not have
prevented reversal on this ground.)

Comment 1: The case certainly underscores the old maxim "it ain't over till
its over."  Parties
who find themselves in the gloomy position of appealing a significant net
judgment against them
in favor of an insolvent creditor would wise to keep this in mind and keep
careful track of the
disposition of the creditor/debtor's property, just in case the light at
the end of the tunnel in fact
is real.

Comment 2: If, indeed, there was concrete evidence of a significant
settlement offer, it does seem
that injustice occurred here someplace, either in the trial court's rulings
or the judgments made
by the Levin's counsel not to make a formal proffer.