Saturday, September 15, 2012

FYI: Ill App Ct Rules No Fraudulent Transfer, When Borrower's Interest Was Forfeited to USA and Remainder Belonged to Recipient

In a bank's fraudulent transfer action, the Illinois Appellate Court, First District, recently held that a transfer of assets from an insolvent borrower to his spouse was proper with respect to those assets where the borrower had forfeited his share of certain of the assets to the U.S. government, but fraudulent with respect to those assets in which he retained his interest. 
A bank obtained a judgment against a borrower in excess of $3,000,000, in connection with the borrower's default on a note.  The bank then filed a complaint against the borrower and his spouse, alleging that the borrower transferred various valuable assets to his spouse to prevent full collection of the judgment, in violation of Illinois' Uniform Fraudulent Transfer Act. 
The borrower's spouse filed a motion to dismiss, wherein she argued among other things that because the borrower had forfeited his interest in the disputed property to the United States government, the transfer could not be fraudulent.  She further argued that the transfer was necessary to allow her to pay for household expenses, including maintaining certain properties pending their sale, as required by the couple's agreement with the government. 
The spouse's forfeiture argument was based on a plea agreement that the borrower entered in other litigation with the United States.  In that agreement, the borrower acknowledged and agreed that the government would file a civil complaint against two properties then owned by the borrower; that the borrower relinquished his ownership of those properties; and that therefore he could not effectuate the transfer of either property.  The agreement further indicates that the government would not seek to satisfy its judgment against the spouse's interest in the marital estate, and that the spouse agreed to maintain the properties while they were on the market. 
The lower court denied the spouse's motion to dismiss.  The spouse then answered the complaint, admitting that she received the assets and adding several affirmative defenses, including that she needed the assets to pay for household expenses as many of the former couple's marital assets were frozen pursuant to divorce proceedings. 
Both parties moved for summary judgment. The lower court found for the spouse as to the two properties described above, and for the bank as to most of the remaining assets.  The spouse appealed. 
As you may recall, the Uniform Fraudulent Transfer Act (the "Act") deems transfers fraudulent where, among other factors, an insolvent debtor does not receive a "reasonably equivalent value" in exchange for a transfer that takes places after the debtor incurs an obligation to a creditor.  740 ILCS 160/6(a). 
On appeal, the spouse did not challenge that the borrower was insolvent, or that his debt to the bank was incurred prior to the transfers.  Instead, she raised several arguments to the effect that the transfers were not fraudulent.  The Court considered each in turn. 
First, the spouse argued that the borrower had no assets to transfer in the first place, because he had forfeited all of his assets to the government.  The Court disagreed, finding that the plain language found in documents reflecting the agreement between the government and the borrower "unequivocally limit the reach of the forfeiture judgment to the two real properties." 
The spouse attempting to avoid this conclusion by noting that the agreement with the United States placed a value on all of the borrower's assets, and included an agreement from the government to not collect against the spouse's portion of those assets.  Therefore, she argued, the United States seized all of the borrower's estate. 
The Court again disagreed, noting that the estate was valued to shield the spouse from the borrower's forfeiture, and did not change the scope of the same. 
Next, the spouse argued that the transfers were necessary to allow her to maintain the real property pursuant to the agreement with the United States.  The Court found that argument unconvincing, noting that the spouse had access to over $1,000,000 at the time of the disputed transfer. 
Accordingly, the judgment of the lower court was affirmed. 

Ralph T. Wutscher
McGinnis Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874

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