Courts Have Broad Powers to Rectify Fraudulent Transfers

November 18, 2013 in Creditors Rights, Ohio Courts by Brad Council

Ohio has adopted the Uniform Fraudulent Transfer Act, which prevents debtors from transferring assets to defraud creditors. ORC § 1336. The Ohio Court of Appeals recently detailed the broad equitable powers that the courts possess to rectify fraudulent transfers of property used to hide assets from creditors in their decision Individual Bus. Servs. v. Carmack. 2013-Ohio-4819 (Ohio Ct. App., Montgomery County Nov. 1, 2013). In Cormack, the Defendant Danies Carmack transferred two pieces of real property to her husband and a related LLC shortly after being found liable for $192,055.61, in order to prevent the property from being used to satisfy the judgment. The trial court found Danies Carmack, her husband, and the LLC jointly and severally liable for the full judgment and the Ohio Court of Appeals affirmed the decision.

Danies Carmack owned and operated Individual Business Systems, Inc. (IBS) for fifteen years and was employed by the company for twelve years prior to assuming full ownership. Over the course of her ownership, she took $192,055.61 in loans from the company which were not repaid. In 2000, Danies retired and donated the company to Citizens Motorcar Company, including the outstanding loans. In 2002, during a suit against IBS for breach of a commercial lease, IBS filed a cross-claim against Danies alleging she had improperly removed money from the company on multiple occasions and classified the transactions improperly as loans to shareholders. IBS was granted summary judgment against Danies for the account receivable worth $192,055.61.

Immediately following the judgment against her, Danies transferred a piece of real property to her husband, Robert Carmack, and a Key West condominium to Sunset Cottages, LLC, an entity controlled by Robert. Danies was left without assets to pay the judgment against her and later filed for bankruptcy. IBS sued Danies, Robert, and Sunset alleging the transfers were fraudulent under ORC § 1336.04 and 1336.05 and the trial court found all three defendants jointly and severally liable for the entire $192,055.61 judgment against Danies. The defendants then appealed the judgment citing several assignments of error.

The defendants first allege that the Florida condominium could not be fraudulently transferred as it qualified for the Florida homestead exemption as Danies’ primary residence. The trial court determined that Danies’ primary residence was in fact Ohio and not Florida preventing the exemption from applying. The Court of Appeals found that the trial court’s finding was not against the manifest weight of the evidence and therefore upheld its decision.

The Defendants then alleged that the transfer of property from Danies to Sunset was not fraudulent under ORC § 1336.04(A)(1). To be fraudulent under the statute, the transfer must have been made “with actual intent to hinder, delay, or defraud any creditor of the debtor.” Due to the difficulty in determining actual fraudulent intent, ORC § 1336.04(B) provides eleven “badges of fraud” which may be used to presume fraudulent intent as they are circumstances frequently attending fraudulent transfers. If a creditor can show the presence of a sufficient number of badges of fraud, some courts have required as few as three, then the defendant must prove the transfer was in good faith and for a reasonably equivalent value to prevent the finding of a fraudulent transfer. The trial court found six badges of fraud were present in the transfer, (1) the transfer was to an insider, (2) Danies continues to use the property, (3) the transfer was concealed, (4) a lawsuit was filed against Danies prior to the transfer, (5) Danies was insolvent at the time of the transfer, and (6) the transfer occurred shortly after a substantial debt was incurred. The defendants argue that they have proved the transfer was not fraudulent as the plaintiffs were denied punitive damages, the LLC was created for the purposes of limiting premises liability, and Robert had agreed to hold Danies harmless for any debt on the property and pay her living expenses. The Court of Appeals agreed with the trial court and found such evidence insufficient to overcome the numerous badges of fraud.

The Defendants also alleged that the transfer of the property to Robert was not fraudulent under ORC § 1336.04(A)(1). The trial court again found six badges of fraud present in the transfer: (1) the transfer was to an insider, (2) Danies retained possession of the property and continued to live there, (3) the transfer was made shortly after a judgment was obtained against Danies, (4) the transfer consisted of substantially all of Danies’ assets, (5) there was no consideration for the transfer, and (6) Danies was insolvent at the time of the transfer. The defendants argued that the transfer was routine due to Robert’s real estate investment business and his continued payment for her living expenses constituted adequate consideration. The Court of Appeals found the transfer to be unique in the business and lacking any consideration and therefore fraudulent due to the numerous badges of fraud.

The defendants’ final arguments allege that they should not be jointly and severally liable for the full judgment amount and the exact values of the property were not determined at the time of transfer. While the statute generally only imposes liability for the value of the transferred property, the Court of Appeals found that the trial court has broad equitable powers to grant “any relief that the circumstances may require.” ORC § 1336.07(A)(2)(c). The court stated that the primary purpose of the statute is to provide compensation to a creditor who has been damaged by a fraudulent debtor. As the parties were closely related and used that relationship to commit the fraudulent transfers, were each involved with at least one fraudulent transfer, and IBS had been attempting to collect the debt for almost a decade, the Court of Appeals found that joint and several liability for all defendants was an appropriate equitable remedy. The appeals court also found that it was not necessary to determine the value of the property on the exact date of transfer as the trial court had considered the available evidence to estimate the value and the purpose of the statute is equitable compensation for damaged creditors.

The Carmack case illustrates the broad equitable power of the court to compensate creditors for fraudulent transfers. In Carmack, the court found Danies’ husband and his company liable for her judgment without any direct proof of fraudulent intent. The presence of sufficient badges of fraud allowed the intent to be presumed absent compelling evidence to the contrary. As such, creditors have a powerful tool to use in situations where debtors have attempted to hide or protect assets from creditors.

The Full Text of the Opinion May Be Found at: 

http://www.supremecourt.ohio.gov/rod/docs/pdf/3/2013/2013-ohio-4109.pdf

** Many thanks to William Abbey for his contributions to this article.  William is a law clerk with Slovin & Associates Co., L.P.A. and student at the University of Cincinnati College of Law.  **