Gifted Conveyance Not Fraudulent When Transferor Not Insolvent as a Result

July 19, 2013 | Roger McEowen

Under the common law, a fraudulent conveyance can be rescinded. A fraudulent conveyance is established when an owner of the property seeks to place the property beyond the reach of creditors or prejudices the legal or equitable rights of creditors. The court looks for badges of fraud such as inadequate consideration for the conveyance, insolvency of the transferor, and threat of third-party claims. In this case, the executor of his father’s estate sought to set aside conveyance of property by the father in 1978 to another family member (the executor’s sister), by claiming the conveyance was fraudulent.

After the father divorced the executor’s mother, he signed a contract in 1978 in which he sold sixty acres of land to his daughter (the sister) while retaining a life estate in the property. The contract required a down payment of $3,000 and annual payments of $3,000 until $30,000 had been paid. The daughter never made a payment because the father stated he was gifting the payment to her. The daughter signed the contract with this understanding and the father recorded the contract and never demanded payment. It was “known” among the children that the conveyance was an attempt to avoid paying alimony to the wife.

In 2006, the father was diagnosed with dementia. The executor took the father to an attorney’s office to execute a new will removing the sister as a residual beneficiary. The executor also had a provision added to the will that stated the payments for the land conveyed in 1978 had not been received and that the executor was to require an accounting from the sister. A battle for conservatorship occurred and after a hearing, the court appointed another brother to be conservator.

During the time the brother was conservator, he planted corn on the 60 acres. An attorney was later named as conservator and the brother was paid by the conservator for work and expenses in planting the crop on the parcel. The payment was made from an account set up by the attorney conservator to pay farm expenses. The father died in August before the crop could be harvested. The executor and another brother were issued no trespassing notices by the conservator because they wanted to immediately harvest the crop for silage. The crop was harvested later that fall and the conservator paid the brother for his work in harvesting.

The current action, a declaratory judgment petition, was filed by the executor to rescind the contract for the 60 acre parcel to the sister as a fraudulent conveyance and to declare the estate entitled to the growing crop under the doctrine of emblements. After a trial, the court denied the request to set aside the transfer and held that because the crop was not mature at the time of the father’s death that the estate was not entitled to the proceeds from the harvested crop. The executor appealed.

On appeal, the court held that the conveyance to the sister had some questionable issues, such as the father’s retained interest in the property, the blood relationship and a lack of consideration for the conveyance. But, the transaction was recorded and the entire family knew of the transfer. In addition, the father remained solvent following the transfer as held by the divorce proceedings when the father attempted to modify his alimony obligation. Because of the openness of the transaction and the solvency of the father after the conveyance, the court held that the transfer was not fraudulent under the common law and would not be set aside. The court also rejected the notion that the sister held the land in constructive trust for the rest of the family because there was no evidence the sister acted in bad faith or forced the father to convey the property to her.

The court did, however, hold that the profits from the crop belonged to the estate under the doctrine of emblements. The evidence established that the brother planted the crop on behalf of his father when he was conservator and the current crop year expenses were paid from the father’s account. As such, the unharvested crop did not pass to the sister when the father’s life estate terminated and she became owner in fee simple. The court explained that the doctrine of emblements applied because the father’s life estate terminated at a time he could not control or ascertain beforehand unlike a transfer of a fee simple. Because of this, the estate was entitled to the profits from the crop.  Carson v. Rothfolk, No. 3-504/12-1021, 2013 Iowa App. LEXIS 767 (Iowa Ct. App. Jul. 10, 2013).