Iowa Court Declines to Void Farmland Transfer to Son

On July 20, 2022, the Iowa Court of Appeals affirmed the dismissal of a petition to void the transfer of a farm. A farmer filed for divorce five months after the couple gifted two-thirds of their farm operation to their son. His ex-spouse brought this lawsuit for fraudulent misrepresentation and sought to void the farm transfer. The Court of Appeals concluded that the circumstances surrounding the farm transfer did not indicate an intent to defraud, but instead supported a finding that the farmer desired to keep the farming operation in the family.

Background

A couple owned a farm together. One operated the farm while the other spouse worked as a teacher until qualifying for social security disability benefits in 2017. Their son worked on the farm as well. The farmer had health issues and began to feel “burnt out” from farming, especially from the financial aspect of the operation.

In April 2018, the farmer met with an attorney to discuss if bankruptcy was an option to eliminate the farm debt. The operation had a large loan of almost $350,000 that continued to grow. The farmer felt that the debt continued to increase because of his spouse’s spending. After learning that bankruptcy was not an option to preserve the multi-generational farm, he decided the best option was to sell the farm to their son, use the funds to pay off the debt, and move into town for a traditional “nine-to-five job.”

The couple worked with several legal and tax advisors to help them transfer the farm to their son with the goals of minimizing tax liability and paying off the farm debt. To accomplish this, the couple sold the farm—valued at $2,485,000—to their son for $850,000 and gifted the remaining value. The closing took place in June 2018. However, after the closing the couple continued to struggle with debt. In July, the farmer met with his attorney alone to discuss the couple’s finances.

Five months after the transfer of the farm was complete, the farmer petitioned for a divorce. The farmer submitted a financial affidavit showing marital assets of $438,000. This consisted primarily of the remaining sale proceeds. The spouse filed this suit against the farmer and their son alleging that the two purposefully reduced the value of the marital assets. She brought claims of fraudulent misrepresentation and undue influence and petitioned for the court to void the farm transfer under the Iowa Uniform Voidable Transactions Act. Iowa Code §§ 684.1 et seq. The district court dismissed the spouse’s petition. The spouse appealed.

Iowa’s Uniform Voidable Transaction Act

A future creditor may void the transfer of an asset if the debtor made the transfer with “actual intent to hinder, delay, or defraud any creditor of the debtor.” Iowa Code § 684.4(1)(a). Here, the district court determined that divorce proceedings made the spouse a future creditor of the farmer. Iowa Code § 684.4(2) lists several factors which indicate whether there is a satisfactory explanation for the asset transfer rather than an actual intent to defraud. Algreen v. Gardner, 2018 WL 3057438, at *3 (Iowa Ct. App. June 20, 2019).

The spouse claimed that the district court did not consider several of these factors including:

• The transfer or obligation was to an insider.
• The debtor retained possession or control of the property transferred after the transfer.
• The transfer or obligation was disclosed or concealed.
• The transfer was of substantially all the debtor's assets.
• The transfer occurred shortly before or shortly after a substantial debt was incurred.

Iowa Code § 684.4(2)(a), (b), (c), (e), (j). The Court of Appeals determined that the district court did consider these factors; however, it found against the spouse.

Considering the first factor, the court agreed that the son met the definition of an insider. An “insider” includes the “relative of the debtor.” Iowa Code § 684.1(8)(a)(1). However, the court explained that the transfer to an insider does not necessarily indicate intent to fraud. This factor must be taken in consideration with the other factors.

To support her argument, the spouse pointed out that the son retained the farmer as an employee of the operation. The son explained that he simply needed an employee to help with the business. However, the son controlled the assets and made the business decisions. Accordingly, the Court of Appeals agreed that this factor did not weigh in favor of the spouse.

Next, the spouse argued that the farmer concealed his intent to divorce throughout the transfer process. Specifically, she claimed that the farmer’s phone calls to the attorney before and after the transfer demonstrated his intent to dissolve their marriage. The farmer testified to the contrary, claiming that he never discussed divorce as an option until he met with the attorney the month after the transfer. The court noted that the son’s testimony that his parents began to fight about finances more frequently after the farm transfer corroborated this.

The spouse also alleged that the reduction of the couple’s marital assets from approximately $2.5 million to less than $500,000 indicated fraud. However, there was evidence that the spouse was able to review the paperwork, was aware that they were making a large gift, and was an active participant in the deal. Similarly, because the spouse was involved in the discussions, the court determined that the spouse’s active participation weakened her argument that the farmer and son had committed fraud. Iowa Code § 684.4(2)(j).

The Court of Appeals concluded that, although some factors may have supported the spouse’s argument, the farmer satisfactorily explained that he transferred the operation due to the stress of farming and with the goal of keeping the farm in the family. As such, the court affirmed the dismissal of the voidable-transfer claim.

Intentional Misrepresentation and Undue Influence

The court next considered whether the district court erred in dismissing the spouse’s intentional misrepresentation and undue influence claims. To prove fraud or undue influence, the plaintiff has the burden of showing that a confidential relationship existed between the parties.

On appeal, the spouse claimed that this burden should have shifted to the farmer because he had greater contact with the legal and tax professionals involved in the transfer. The court disagreed as the testimony of the professionals demonstrated that the spouse had access to the relevant documents and had equal knowledge of the transfer. Because no confidential relationship existed, the court affirmed the dismissal of the spouse’s claims.