A version of this article was printed in Minnesota Lawyer™ on October 13, 2014. Reprints are available from Minnesota Lawyer at minnlawyer.com or by calling 612-333-4244.

Fraudulent Transfers and Divorce Settlements by Alan C. Eidsness and Jaime Driggs The decree awarded husband the The first issue decided by the parties’ homestead (valued at $421,900), Supreme Court was whether MUFTA had Minnesota’s Uniform his 1999 Cadillac (not valued), his 401(k) any application at all in this context. The Fraudulent Transfer (valued at less than $140,000), a Court held that MUFTA’s broad definition Act (“MUFTA”) is not a checking account (valued at less than of “transfer” encompassed transfers common $3,000), and corporate stock (valued at made pursuant to uncontested marital consideration when less than $80,000). The decree made dissolution decrees, a result consistent advising marital husband solely responsible for the with that reached by several other dissolution clients. But Alan C. Eidsness parties’ joint debts of more than states. a decision from the $270,000 and made husband solely The Court then reviewed whether Minnesota Supreme responsible for his personal guarantee summary judgment was properly granted Court holding that obligations of approximately $8.8 by analyzing a number of badges of MUFTA applied to million. fraud: (1) “the transfer . . . was to an transfers made The decree awarded wife an insider”; (2) “the transfer was of pursuant to an investment account that had been solely substantially all the debtor’s assets”; (3) uncontested in husband’s name (valued at $1.2 the debtor failed to receive reasonably dissolution decree Jaime Driggs million) and husband’s 50% interest in a equivalent value for the asset transferred means that MUFTA is partnership (valued at $300,000). These or obligation incurred; (4) “the debtor something to be aware of in situations two assets secured a loan to a different was insolvent or became insolvent where one of the parties is facing a lender of $1.1 million. The decree also shortly after the transfer was made”; (5) significant creditor. awarded wife a savings account in her “before the transfer was made or In Citizens State Bank Norwood name (valued at $84,000). obligation was incurred, the debtor had Young Am. v. Brown, 849 N.W.2d 55 After the divorce, husband and wife been sued or threatened with suit”; (6) (Minn. 2014), husband guaranteed loans continued to live together in the marital “the transfer occurred shortly before or made to two businesses. On January 8, homestead that husband had been shortly after a substantial debt was 2010, the bank sued husband to enforce awarded. When the bank could not incurred”; and (7) “the debtor retained the personal guarantees after the collect on its judgment against husband, possession or control of the property businesses defaulted on the loans. it brought an action under MUFTA to go transferred after the transfer.” Minn. Husband commenced a marriage after the assets that husband had Stat. § 513.44(b). dissolution proceeding on March 15, transferred to wife under the decree. In considering whether the transfers 2010. A default judgment was entered The bank’s motion for summary were to insiders, the Court explained against husband and in favor of the bank judgment was granted by the district that the relevant point in time is when on June 29, 2010. Husband and wife court based on the existence of a the transfer is “so far perfected that a signed a Marital Termination Agreement number of “badges of fraud,” the factors creditor on a simple contract cannot (“MTA”) on October 5, 2010 and the under MUFTA used to evaluate whether acquire a judicial lien” absent MUFTA. dissolution decree was entered on a transfer was made with a fraudulent This occurred when the dissolution October 13, 2010. intent. Husband and wife appealed and decree was entered and not when the the Court of Appeals affirmed. parties signed their MTA (when they were still spouses and insiders). Because homestead which had a nonexempt where divorcing spouses who innocently the decree also dissolved the parties’ value of only $61,900. Based on this stipulate to entry of a decree marriage, the parties were not spouses disparity and husband’s agreement to be inadvertently find themselves on the at the time of the transfer. However, responsible for the parties’ joint debts of receiving end of a MUFTA claim brought because people living together and $270,000, husband did not receive by a desperate creditor looking to cast a having a close relationship can constitute reasonably equivalent value for the wide net. Consider the example posited insiders under MUFTA, the parties were assets he transferred to wife. by the Justice Anderson in his concurring nonetheless insiders even if they were Next, the Court evaluated whether opinion of a business owner who is no longer spouses at the time of the “the debtor was insolvent or became struggling financially but stipulates to a transfer. They had been married for 23 insolvent shortly after the transfer was decree which is more favorable to his years before the dissolution and made or the obligation was incurred.” wife because he believes the business continued to live together in the Husband was insolvent after the will recover and he intends to repay his homestead thereafter. The parties dissolution because his nonexempt creditors when that happens. Citizens presented no evidence to support their assets were less than the $270,000 debt State Bank provides some guidance for assertion that they were living together he took on even without considering the advising dissolution clients facing only because of financial considerations. personal guarantee obligations. potential MUFTA issues. Husband challenged the district There was no dispute that husband First, the reality is that some of the court’s determination that he had had been sued or threated with a lawsuit badges of fraud may simply be transferred substantially all of his assets at the time of the transfer in October inescapable. For example, your client in the dissolution because he retained 2010 because the bank had commenced probably will have little to no control the homestead valued at $421,900 and suit in January 2010. over whether “before the transfer was his 401(k), valued at less than $140,000. The Court then considered whether made or obligation was incurred, the The Supreme Court agreed with the the transfers “occurred shortly before or debtor had been sued or threatened district court because “assets” are shortly after a substantial debt was with suit.” But to the extent that your defined by MUFTA to exclude “property incurred.” For purposes of this analysis, client anticipates what may be coming, it to the extent it is generally exempt under the debt was incurred on June 29, 2010 would be better to have the divorce nonbankruptcy law.” Minn. Stat. when the default judgment was entered entered sooner rather than later. § 513.41(2)(ii). Because Husband’s 401(k) against husband. The transfers occurred Be mindful of how property is titled was exempt, it was not an asset. And shortly after this on October 13, 2010 and what transfers will be required to because $360,000 of the homestead was when the dissolution decree was implement the division of property. exempt, its value was only $61,900. Also, entered. Typically, this is not something we pay this remaining value of the homestead Finally, the Court considered much attention to because a marital also did not count as husband’s asset whether “the debtor retained possession asset titled in one spouse’s name is because in 2009 husband had signed a or control of the property transferred nonetheless a marital asset. But title is quit claim deed transferring his interest after the transfer.” The bank submitted important in evaluating whether “the to wife. Under the Court’s analysis, evidence showing that several months transfer was of substantially all the husband had nonexempt assets before after entry of the dissolution decree in debtor’s assets” because that analysis the dissolution consisting of his checking October 2010, husband’s name was focuses on transfers of assets in the account ($3,000), corporate stock continuing to appear on statements for debtor’s name and would not appear to ($80,000), investment account ($1.2 the $1.2 million investment account that include assets titled in the name of the million), and a partnership interest had been awarded to wife. Husband and debtor’s spouse to which the debtor ($300,000). Because husband transferred wife presented statements showing that would have a right as part of the division the investment account and partnership wife’s name was on the account by of marital property. interest to wife while retaining only his October 2011. While there was a factual Similarly, pay attention to what checking account and corporate stock, he dispute relating to this last badge of property is exempt. This is not a typical had transferred substantially all of his fraud, the Court held that summary consideration in sizing up a potential assets. judgment was proper because a number settlement on a balance sheet but it is The same analysis regarding exempt of other badges of fraud were hugely important in evaluating whether property drove the inquiry of whether established which gave rise to an someone has transferred substantially all husband had received reasonably inference of fraud that husband and wife of their assets, whether they have equivalent value for the assets he had failed to rebut. received reasonably equivalent value for transferred. In exchange for the assets Although the facts pointing to fraud the assets they transferred, and whether totaling $1.5 million husband transferred seemed fairly clear in Citizens State Bank, someone was insolvent or became to wife, husband received the it is not difficult to imagine a scenario insolvent after the transfer. An equal

4 2 division of property will appear for including detailed findings explaining disproportionate under MUFTA if one of the division of assets). the parties happens to be receiving all of While MUFTA is not likely to be a the exempt assets. routine part of most dissolution If the division of property is practices, it is important to evaluate disproportionate, include detailed potential consequences when working findings explaining why that is the case. on cases where one of the parties has a For example, if property is being used to major creditor. buy out or buy down a spousal maintenance claim or satisfy a Alan C. Eidsness, shareholder and family law contribution to a dependent spouse’s attorney can be reached at attorneys’ fees, make sure that is [email protected]. Jaime Driggs, reflected in the findings. Detailed shareholder and family law attorney, can be findings will help establish that the reached at [email protected]. debtor spouse received reasonably equivalent value for the assets transferred. Where parties are cooperating, they may not feel a sense of urgency to take care of transferring title to assets in order to implement the division of property. But for assets awarded to the non-debtor spouse that are jointly titled or titled in the name of the debtor spouse, make sure that the parties do so right away to avoid creating the appearance that the debtor has retained possession or control of the asset. Although there may be practical reasons to live together after the divorce, where a potential MUFTA claim is a real concern, remind clients that doing so will likely make them insiders. Living with friends or relatives is not ideal but it is one of the badges of fraud over which the parties have an ability to control. Finally, remember that there are many reasons which would justify dividing assets disproportionately that do not fall within the parameters of the badges of fraud. For example, a spouse’s poor health or one party’s depletion of assets during the marriage are considerations recognized in the family law context that escape analysis under MUFTA. Evidence of these reasons for the division of assets in the decree may be used to rebut an inference of fraud if one is created by the presence of several badges of fraud (which is another reason

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