Daily Development for Wednesday, March 21, 2002

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

FRAUDULENT CONVEYANCES; RIGHTS OF PARTIES TO TRANSFER: Although a fraudulent conveyance of real property by father to his son is voidable at the option of a creditor, it remains valid vis-a-vis the father and son.

Jessen v. Jessen, 41 P.3d 543 (Wyo. 2002).

As a consequence of the rule stated above, in this case the court determined that t if the lien creditor forecloses, the father can redeem the property from the foreclosure sale, but thereafter the ownership vests in the son.

Father quitclaimed property to his son when son was three years old. Years later, this conveyance was set aside as fraudulent by a court. The IRS foreclosed on the property for unpaid taxes. The father got a loan from his uncle in return for a quitclaim deed of the property to the uncle (with a repurchase option). The father then redeemed the property.

A dispute between the son and father as to the ownership of the property arose and the uncle was joined. The father and son settled and the son and uncle went to trial.

The Wyoming Supreme Court held that fraudulent conveyances are voidable at the option of creditors, but remain valid vis-a-vis the parties to the conveyance. Because the IRS voided the conveyance for its purposes, the father was a party with redemption rights. However, because the conveyance was valid as between the father and son, the father could not deed the property to the uncle. The uncle, however, received an equitable lien on the property.

Comment 1: Everything seems logical to the editor. The court notes that the father had lived on the property for at least eight years following the transfer to the son and had kept the proceeds of farming it to pay his own expenses. Ultimately, the property had been placed in the hands of a public conservator, from which it was foreclosed.

Comment 2: The recognition of the uncle's interest as an equitable lien is the most that the uncle could have hoped for, since the uncle had notice of the underlying facts. The uncle is lucky that he's not left with anything, since he paid to receive a quitclaim deed, which he got. See report under heading: "Equity; Equitable Liens; Unjust Enrichment."

EQUITY; EQUITABLE LIENS; UNJUST ENRICHMENT: Party providing funds to redeem parcel from foreclosure in belief that redeeming party will be able to provide an interest in such parcel will be granted an equitable lien as against third party with actual ownership rights in parcel when third party originally obtained title gratuitously.

Jessen v. Jessen, 41 P.3d 543 (Wyo. 2002)

The originating facts are set forth under the heading "Fraudulent Conveyances; Rights of Parties to Transer." Basically, father transferred to his three year old son, and the transfer, years later, was set aside in federal court by a the IRS as a lien creditor. The IRS then foreclosed. Under the foreclosure process, father had a statutory redemption right.

Uncle, believing, like father, that the federal court judgment had voided son's title and left title in father, loaned money to father to effectuate a redemption, against a quitclaim deed from father to uncle with an option back to the father. Most courts will treat such a quitclaim/option back arrangement as an equitable mortgage, and the court later characterized this transaction as a "loan."

The court noted that the redemption from the IRS took place on the last day of the redemption process, when, at least apparently, the property would otherwise be lost to everyone. Uncle advanced the money in the good faith belief that he would receive a lien against the property. There was some reason to believe that this was a correct assumption.

The court states that "[g]iven these circumstances in this particular case, we are compelled to affirm the trial court's order . . . ."

Comment: The court doesn't say so outright, but it appears to be stacking up the uncle's equities against the son's. The son apparently got the property for free to begin with, and never actually relied upon his ownership.

On these narrow facts, the editor agrees with the outcome, but notes the anomaly of creating a lien against a property owner to secure a debt incurred by another. The court says nothing as to whether the son would have a right over against the father. If the editor correctly apprehends the court's analysis, the court would not give such a right, since it concludes that it is imposing the equitable lien in order to avoid unjust enrichment in the son.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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