Iowa Court Rules on Fraudulent Transfer Claims

On July 22, 2020, the Iowa Court of Appeals issued an opinion in a case seeking to set aside fraudulent transfers of a farm and three parcels of real estate. The court affirmed the district court’s order setting aside the transfer of the three parcels of land, but reversed the decision to set aside the transfer of the farm. The court ruled that the statute of limitations prevented the court from setting aside the otherwise fraudulent transfer of the farm.

Background

In 2011, Francis Glaser, who was seeking to avoid paying his creditors, transferred a one-half interest in a farm to his friend’s mother. In 2012, the mother transferred the farm to Glaser’s friend. In 2012, Glaser also transferred three parcels of real estate to his friend via quit claim deed for $1 each. Glaser died in 2014. Several creditors, including the Iowa Department of Revenue (DOR), soon filed claims against the estate. The DOR claimed that the decedent owed more than $100,000 in unpaid income taxes and asked the administrator of the estate to file a motion to set aside the allegedly fraudulent conveyances. The administrator complied and petitioned the court to “set aside the conveyances of the Decedent and include the Property transferred by Decedent within three (3) years of his death in the gross estate for income tax purposes.” The motion defined “the Property” as the three parcels conveyed to the friend. It did not reference the farm.

The friend resisted the motion and filed her own motion in limine, asking the court to prohibit any amendment to the original pleadings or allow the court to consider both the 2011 farm conveyance from the decedent to the friend’s mother and the 2012 conveyance of the farm from the mother to the friend. The court denied the request. In 2018, a bench trial was held. The district court ruled that the statute of limitations did not bar the administrator from amending the original pleading to include the farm transfer. It also found that the decedent conveyed the three parcels, as well as the farm to defraud creditors. The court ordered all these conveyances set aside and returned to the estate. The friend appealed.

Statute of Limitations

The statute of limitations to set aside a fraudulent transfer is five years. Iowa Code § 614.1(4). The friend claimed that the statute of limitations should bar the recovery of the farm to the estate because the original pleading in 2016 did not include a claim concerning the farm and the 2018 amendment did not relate back to the original complaint.

A pleading must give the defendant fair notice of the plaintiff’s claim. The administrator’s motion to set aside the conveyance of property clearly listed the claim against the three parcels of land. The motion did not mention the farm, any transfer to or from the friend’s mother, or any specific dates of when the farm ownership was transferred.

The court found that the original motion did not give fair notice of the claim to recover the farm.

The court next considered whether the amendment regarding the farm transfer sufficiently related back to the original claim and was therefore not barred by the statute of limitations. An amendment will relate back to the original pleading if it “arose out of the conduct, transaction, or occurrence” described in the original pleading. Iowa R. Civ. Pro. 1.402(5). Here, the transfer of the farm to the friend’s mother and then the subsequent transfer of the farm from the mother to the friend occurred in 2011 and 2012, respectively. The “conduct, transaction, or occurrence” described in the original motion was a 2012 transfer of three other parcels of land. Finding that the land transfers were separate incidents, the court held that the amendment did not relate back to the original motion. It thus reversed the trial court and held that the claim against the farm transfer was barred by the statute of limitations.

Clean Hands Doctrine

The Clean Hands Doctrine prevents a party who seeks legal relief from taking advantage of their own wrong doing. The friend argued that because the decedent conveyed the land fraudulently, the Clean Hand Doctrine prevents the administrator, acting for the decedent, from profiting by regaining ownership of the properties.  

Property liable for the debts of an estate includes those transferred with the intent to defraud creditors. Iowa Code § 633.368. The only person allowed to recover such property is the administrator of the estate. Id. When a statute and common law conflict, the statute will be applied. Therefore, the court ruled that the administrator had the right to recover the property because it was conveyed with the intent to defraud creditors.

Homestead Exemption

The Homestead Exemption prohibits the judicial sale of a primary residence. Iowa Code § 561.16. However, this exemption does not apply if the home was acquired illegally. Because substantial evidence established that the friend was involved in the fraud as well, the court ruled that the homestead exemption did not apply. Therefore, the court affirmed the ruling setting aside the transfer of the three parcels of land.