Courts will enforce deeds on their express text and will not reform deeds lightly

A funny thing sometimes happens when I’m really close to taking a judgment against somebody.

At some point after the initial demand letter goes out and usually before I take my judgment, they start transferring all their assets out of their name.

We’ve talked about this before. Tennessee has a 4 year statute of limitations for fraudulent conveyances, and so a creditor has the ability to “undo” these “eve of judgment” transactions.

But, nevertheless, when finances get bad and creditors are knocking at the door, debtors still transfer property out of their names.

The Tennessee Court of Appeals recently looked at a matter like this in Scott Trent, et. al. v. Mountain Commerce Bank, et. al., E201801874COAR3CV, 2019 WL 2575010 (Tenn. App. June 24, 2019).

In that case, two individuals owned a piece of real property and, in 2010, one of them quitclaimed all interest over to a third-party limited partnership. In 2012, creditors started taking judgments against the individuals and, in 2013, a judgment lien was recorded.

After another sale to some innocent third party buyers, the issue came to light: When only one of the individuals signed the 2010 quitclaim, was all the ownership interest transferred, i.e. did the 2013 judgment lien attach to that remaining interest?

The non-creditor parties argued that the clear intent of the 2010 quitclaim was to transfer all interests to the new owner. They even recorded a Deed of Correction to fix the omission of the other individual’s signature.

The argument was based on the concept of reformation of deeds.

“Reformation is an equitable doctrine by which courts may correct a
mistake in a writing ‘so that it fully and accurately reflects the agreement of the parties.’” Lane v. Spriggs, 71 S.W.3d 286, 289 (Tenn. Ct. App. 2001).

“A court of chancery in Tennessee has the power to reform and correct errors in deeds produced by fraud or mistake. To be the subject of reformation, a mistake in a deed must have been mutual or there must have been a unilateral mistake coupled with fraud by the other party, such that the deed does not embody the actual intention of the parties.” Wallace v. Chase, No. W1999-01987-COA-R3-CV, 2001 WL 394872, at *3 (Tenn. Ct. App. Apr. 17, 2001) (internal citations omitted).

“Still, we have also held that reformation on the basis of mistake is only appropriate where the intent of both parties is clear and is the same.” Hunt v. Twisdale, No. M2006-01870-COA-R3-CV, 2007 WL 2827051, at *8 (Tenn. Ct. App. Sept. 28, 2007). “And, mistake must be shown by “clear, cogent, convincing evidence.” Lane, 71 S.W.3d 289-90 (quoting Dixon v. Manier, 545 S.W.2d 948, 950 (Tenn. Ct. App. 1976)); see also Sikora v. Vanderploeg, 212 S.W.3d 277, 287 (Tenn. Ct. App. 2006) (“Because the law strongly favors the validity of written instruments, a person seeking to reform a written contract must do more than prove a mistake by a preponderance of the evidence. Instead, the evidence of mistake must be clear and convincing.”). Sipes v. Sipes, No. W2015-01329-COA-R3-CV, 2017 WL 417222, at *3-4 (Tenn. Ct. App. Jan. 31, 2017).

The present opinion turned on the fact that the second owner didn’t sign the 2010 quitclaim. ” Tennessee law allows reformation of a deed when the instrument does not “reflect the true intent of the parties.” Holiday Hosp. Franchising, Inc. v. States Res., Inc., 232 S.W.3d 41, 51 (Tenn. Ct. App. 2006). Because only one owner signed the 2010 quitclaim, the text of the deed was clear, and a party not listed or referenced on the deed can’t assert a mistake or be added.

I’d guess that the parties absolutely intended that 100% ownership was to transfer in that 2010 quitclaim, and it’s not as easy as a decision as the Court makes it seem to be. In the end, the Court may have balanced the equities here.

 

 

 

Joe Paterno’s Estate Planning Sure Sounds like a Fraudulent Conveyance

Amid all of the Penn State mess, the discussion is shifting from potential criminal liability to civil liability, as victims are talking to lawyers about filing civil lawsuits to recover monetary damages.

Recently, the New York Times reported that Penn State coach Joe Paterno transferred full ownership of his house to his wife, Sue, for $1.00 (and for “love and affection”) in July 2011 (4 months before the scandal was publicly reported). The local taxing authorities place the value of the house at nearly $594,484.40.  Lawyers for Paterno say that the transfer was simply an estate planning tool.

If you had read my post about fraudulent transfers, however, you might wonder if the transfer was made with an eye toward getting valuable assets out of Paterno’s name and into the name of somebody who would not be named in litigation (i.e. where someone with a judgment against Mr. Paterno couldn’t reach it).

Lawyers often urge clients to make similar transfers, especially when faced with lawsuits. “What’s the harm,” they might say, because, maybe, the creditors will not notice it or four years will pass. If discovered, the “fix” might be to simply convey the property back, right?

Not always. Here’s the downside: a crafty collections lawyer won’t just ask to set aside the transfer; instead, the creditor would ask that it be awarded a monetary judgment against the transferee of the property, a judgment in the amount of the value fraudulently given.

So, in the Paterno case, that plaintiff would ask for a money judgment against Mrs. Paterno for $594,483.40, which is the value of the property, minus the $1.00 Mrs. Paterno paid.  Mrs. Paterno has never been named as a potential civil defendant in any of the potential lawsuits, but this $1 transfer certainly opens that discussion.

The lesson here is to be careful about being the recipient of somebody else’s estate (or asset protection) planning. They might drag you down with them.

When Enforcing Judgments, Look Back Four Years for Potential Fraudulent Transfers in Tennessee

From time to time, the judgment enforcement process hits a brick wall because your debtor is “judgment proof,” which means that they don’t own anything: no car, no property, and no cash.

This can be a disconnect from reality, especially where the debtor lives in a big house with a fancy car parked in the driveway. How can this guy be broke?

That’s when I investigate fraudulent transfers, which are transfers out of the debtor’s name to a third party—a wife, parent, or child—to keep the assets out of the creditor’s reach.  This is more common than you’d think.

Tennessee has adopted the Uniform Fraudulent Transfer Act, at Tenn. Code Ann. § 66-3-301 et seq. That Act provides for a number of “badges of fraud,” such as transfers to an “insider”, transfers that render the person insolvent, transfers where equal value is not given for an asset, or transfers with “actual intent” to hinder or defraud creditors.

“Actual intent” means what someone is “thinking,” which, you can guess, is hard to prove.  As a result, the Act provides some common ways to prove intent, at Tenn. Code Ann. § 66-3-305(b). These include:

  • The debtor retained possession of the asset;
  • The transfer was kept a secret;
  • Prior to the transfer, the debtor had been sued or threatened with suit;
  • The transfer was to an insider;
  • No equivalent value was provided; and
  • The transfer was made prior to a substantial debt was incurred.

Under Tennessee law, a creditor can attack fraudulent transfers from up to four (4) years preceding your lawsuit.

Long story short, when enforcing a judgment in Tennessee, don’t just examine what your debtor owns, but look also to what he used to own.  Then, look back at least 4 years, because, in Tennessee, fraudulent transfers can be attacked for a long time.

Transfers of the big assets (like real property) are all of public record, so your cause of action can easily be discovered, if you know to look for it.

Michael Vick’s Gifts May Result in Fraudulent Transfer Lawsuits

The Wall Street Journal’s Bankruptcy Beat Blog reports that the Bankruptcy Trustee is going after Michael Vick for making allegedly fraudulent transfers to family and friends. Well, the Trustee is technically going after the family and friends to recoup the $2 million in gifts and transfers.

Under Section 548 of the Bankruptcy Code, a trustee can reach back and recover transfers within two years of the case filing, where the debtor had “intent” to delay or defraud creditors or where the debtor didn’t receive “reasonably equivalent value” in exchange for the transfer. This is fairly common: as things start going bad, an insolvent person transfers his valuable property to others in order to keep it out of his creditors’ reach.

But, where a bankrupt just gives money or property to others, particularly friends and family, that puts a big target on those recipients. The goal of the fraudulent transfer statute is to recover those assets, and then distribute them evenly to all creditors–not just the people the debtor likes. (Note to Creditors: Most states have similar laws as well.)

So, whether the goal was to protect his assets or help his family, all Vick did was get them sued in Bankruptcy Court.