Daily Development for Friday, September 17,
Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
Note two notes on the same case here:
FRAUDULENT CONVEYANCES; LEASES: Lease
extensions in the face of an impending execution on a judgment against the
lessor were not fraudulent conveyances where the extensions continued a
longstanding business relationship between the lessor and the lessee and
otherwise showed no indicia of fraud.
Ralfs v. Mowry, 586 N.W.2d 369 (Iowa 1998).
The defendant began leasing farmland from a
landowner in the early 1980s. In 1990, the defendant loaned the landowner a sum
of money, secured by a mortgage on the property and negotiated a twoyear lease.
Shortly thereafter, a default judgment was entered against the landowner, which
she fought unsuccessfully. The judgment was not properly registered in Iowa
until February 1994. The property was sold at a sheriff's sale in February 1995
in execution on the judgment and conveyed to the plaintiff by sheriff's deed in
April 1996. In the meantime, the defendant and the landowner had negotiated
extensions of their lease agreement through 1994 and then, in 1994, renegotiated
the agreement to extend that lease through February 1996, with three oneyear
extension options in the tenant. Once he obtained title to the property, the
plaintiff brought an action claiming superior possessory rights to the property
based on allegations that the lease extensions were fraudulent conveyances made
to keep the property out of the hands of the judgment holder and, therefore,
The Court defined a fraudulent conveyance as
a transaction by which the owner of real or personal property prejudices the
legal or equitable rights of the owner's creditor by placing the property beyond
the creditor's reach. The doctrine applies to leases as well as conveyances of
fee title. To determine if a particular conveyance is fraudulent, a court must
look for "badges or indicia of fraud" such as inadequacy of
consideration, the insolvency of the transferor, pendency or threat of
thirdparty litigation, secrecy or concealment, departure from usual business
measures, reservation of benefits to the transferor, and retention of the
property by the transferor. The plaintiff must prove that fraud exists by clear
and convincing evidence.
In this instance, the Court held that the
plaintiff fell far short of meeting this burden of proof. The lease extensions
between the defendant and the landowner continued an existing business
relationship of over ten years' duration. The rent paid by the defendant for the
property was commensurate with rents paid for neighboring properties. The
landowner was not insolvent, and the lease extensions were done openly and with
notice to the plaintiff, who at the time had no possessory interest in the
property. Because the lease extensions were not motivated by deceit, they did
not rise to level of fraudulent conveyances.
Comment 1: Note that this is an application
of a common law fraudulent transfer concept. Many states have statutes that
define the requirements somewhat differently. Of course, the fraudulent advance
concept in bankruptcy is different again, and requires no indicia of fraud
(although it does require a showing that the transfer price was inadequate.)
Comment 2: The editor has set forth the
"naked holding" above, but the case is more interesting in that is
contains a subtext suitable for a "made for TV" movie (or perhaps just
a "made for the law classroom." King, widowed and left with a farm,
leased the farm to Mowry. Thereafter, King took up residence with Mitsui,
apparently in California. King and
Mitsui then fell into a financial dispute which became the subject of
litigation. King's farm was subject
to a mortgage. She refinanced the mortgage with Mowry, her tenant. At that time
she negotiated a new two year lease with Mowry. In 1991, Mitsui obtained a
$134,000 default judgment in California in 1991.
There ensued a lengthy battle over the
farmland as Mitsui identified it and attempt to establish and execute a lien
against it. Mowry and King renegotiated the mortgage, advancing an additional
$15,000 in order to assist King in fighting Mitsui, and simultaneously entered
into another extension of the lease for an additional two years, with three one
year options in Mowry thereafter.
Ralfs, an owner of a neighboring, helped to
finance King's battle with Mitsui to preserve King's title, apparently because
Ralfs wished to buy the farm. Ralfs loaned money to a corporation related to
King in order to try to set aside the California judgment. But when King's
efforts to do this failed, Ralfs decided "if you can't lick em, join em,"
and moved to Matsui's side. He contracted bo buy Matsui's interest in the farm
should Matsui prevail in his efforts to execute upon it.
Despite several fals starts, Matsui was
unable to get his California judgment filed unti 1994 and he executed in
February, 1995. Matsui and Ralfs then fell into a dispute over their agreement,
triggering more litigation, which was settled with Ralf's obtaining Matsui's
sherriff's deed (presumably following a statutory redemption period) in April of
At this time, the farm was in the first of
the three one year option periods under the Mowry lease and subject to the
senior Mowry mortgage. Ralfs argued that the Mowry lease was a fraudulent
conveyance designed to keep Matsui off the property. The court, reviewing the
matter de novo, found, as set forth above, that the lease was a continuation of
an existing business relationship that predated the Matsui problems and that the
lease was for fair value.
The court did not really discuss the fact
that the Mowry mortgage, which was negotiated at the time of the dispute with
Mitsui, did appear to be tied to that litigation. Perhaps this is because the
original mortage was nothing more than a refinancing of preexisting indebtedness
to a third party. But it permitted Ralfs to dodge the $15,000 advance another
way, discussed here under the heading "Mortgages; Future Advances. "
FUTURE ADVANCES; VALIDITY: Judgment lien creditor can attack validity of future
advance claims in mortgage that is senior to the creditor's lien on grounds that
original mortgage debtor did not anticipate that advances were related to the
Ralfs v. Mowry, 586 N.W.2d 369 (Iowa 1998).
The "soap opera" like tale giving
rise to this litigation is set forth in the report of the case under
"Fraudulent Conveyances; Leases."
In a nutshell, Mowry refinanced an earlier
debt on King's farm in 1991. In 1993, Mowry and King agreed to enlarge the
amount secured by the mortgage by $15,000 to permit King to fight an impending
judgment from a California lawsuit. The extension agreement was not recorded. In
1994, that judgment was validly recorded. In 1996, following an execution on the
judgment, the execution purchaser desired to clear the title of the Mowry
mortgage, but claimed that he should not have to pay the additional $15,000
The court's discussion of the issue of the
$15,000 advance is quite sketchy, but it appears to view the $15,000 as a future
advance. If this is the case, then the original mortgage would have provided for
future advances, and thus the fact that the renegotiation of the mortgage was
not recorded would not have made Ralfs a BFP, permitting him to avoid the
mortgage on those grounds.
But Iowa has a strong policy requiring a
close relationship between future advances and a original loan purpose. The
court seems to be suggesting that the necessary relationship did not exist here,
so the property was not encumbered by the mortgage.
Comment 1: It is interesting to note that the
party benefitting from the application of the future advance doctrine is not the
mortgage debtor, but a judgment lien creditor. Presumably King, the mortgage
debtor, remains liable on the $15,000 note, although it now is unsecured.
The court's discussion of this issue is so
abbreviated that perhaps it is best to ignore it entirely. The court points out
that the parties did not argue the point. But it is a holding on a legal issue
by a state supreme court, and therefore we are bound to at least consider
whether it makes precedent. If it does, the precedent is a questionable one.
The fundamental purpose of the Iowa rule on
future advances is to protect a mortgage debtor from unwittingly incurring
additional mortgage debt under a vaguely worded future advance clause. But
this case does not involve that concern, since the mortgage willingly entered
into an (unrecorded) modification that stating the mortgage stood as serurity
for the new advance. So the mortgage debtor was not fooled.
If the original mortgage contained language
permitting such advances, the subsequent execution sale purchaser had inquiry
knowledge of the possibility of advances , and should have ascertained what the
mortgage balance was.
If the original mortgage did not contain a
future advance clause, then, of course, the execution sale creditor may have a
stronger argument. But if that is the case, then the Iowa's court's referring to
the Iowa law on future advance mortgages is out of place here.
For a more standard application of the future
advance doctrine, see Gardner v. Guldi, 724 So.2d 186 (Fla. 5th DCA 1999),
reported under this heading. (Florida court denies application of mortgage
future advance clause to subsequent loan that was separately secured and lacked
any documentation linking it to the original clause. )
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