Fraudulent Conveyance at Issue in Divorce Case

This case demonstrates the damage that can be done and the confusion that may result when a family member steps into the middle of a divorce proceeding. “A fraudulent conveyance is a transaction by which the owner of real or personal property places the land or goods beyond the reach of the owner’s creditors, to the prejudice of the creditor’s legal or equitable rights.” Here, a married couple divorced in 2007.  Before the divorce, the husband built hog confinement facilities on land owned by his parents. He financed the confinements with a $250,000 bank loan. He made payments on the loan until the time of the divorce when he stopped making payments in hopes of forcing a foreclosure to reduce his assets so that his ex-wife would be awarded less property in the divorce. The wife intervened in the foreclosure proceedings to try to preserve the asset for the property distribution. 

At trial, the husband claimed that he was indebted to his parents and that the hog confinement had “little or no value.” The court valued the confinement operation at $450,000 and found that the husband was “engaged in a financial shell game” and using his family to hide assets. Substantial evidence was presented at trial that the husband’s parents were engaging in deception to hide their son’s assets. A decree was entered and the trial court ordered the husband to pay child support and pay his ex-wife $75,000 as an equalization payment to make the property division equitable. 

The next year, the ex-wife filed a contempt action and stated that her ex-husband was willfully violating the divorce decree by failing to pay child support and by failing to pay the equalization payment. In the meantime, the ex-husband executed a “bill of sale,” attempting to transfer the hog finishing operation to his mother. He claimed that the consideration for the “sale” was $143,464 of “debt forgiveness.”  Despite this attempt at a transfer, the court ordered a levy against the hog finishing operation to pay the debt to the ex-wife. Again, the ex-husband did not remit the payment. 

The ex-wife next filed a petition against her ex-mother-in-law, alleging that the transfer of the hog operation was a fraudulent conveyance. Upon hearing the mother’s conflicting testimony, the trial court found that the transfer of the hog operation was fraudulent and set aside the transfer. The ex-husband appealed, but the Iowa Court of Appeals agreed with the trial court’s finding of a fraudulent conveyance. The ex-husband was technically a “debtor” and the ex-wife was a “creditor” in this situation. 

In Iowa, if a debtor attempts to dispose of property with the intent to delay or defraud creditors, the transaction may be set aside. Generally, courts look to a number of factors to determine whether a conveyance is fraudulent. Fraud may be shown by inadequate consideration, insolvency of the transferor, departure from usual business practices, threat of pending litigation, or secrecy or concealment. The appellate court found nearly all of the factors present in the conveyance of the hog operation and affirmed the trial court’s order that the conveyance be set aside. Olson v. Elsbernd, No. 0-584/10-0236, 2010 Iowa App. LEXIS 1543 (Iowa Ct. App. Dec. 8, 2010).