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To Love And To Cherish, Till Debt Do Us Part – Sacrificing Marriage To Defraud Bank

There are certainly legitimate, good faith methods of estate planning and asset protection that enable the proactive insulation and preservation of assets. However, unscrupulously playing shell games with assets to avoid paying debt obligations when due is a familiar occurrence to the finance industry or any business trying to recover money owed. It may take the form of fraudulently transferring assets into a trust or offshore account, selling property to a straw man or shell company, or transferring assets to a family member for little to no consideration. It seems the number of creative ways of shifting around assets to put them out of reach of creditors is limited only by the extent of one’s imagination. And a few people have really gone to extremes to avoid paying their debts.

A Minnesota community bank faced such a situation a few years ago. In that case, a commercial debtor used a sham divorce, entered pursuant to an uncontested marital dissolution decree, in order to effectuate numerous fraudulent transfers. The debtor guaranteed approximately $8.8 million of commercial loans the bank made to two business entities. Both of the business entities defaulted on their respective loans, and the debtor failed to satisfy his obligations under his personal guarantee. The bank sued the debtor to enforce the personal guarantee; the debtor’s wife, who was not a guarantor on the loans, was not named as a party to the lawsuit.

While the bank’s lawsuit was pending, the debtor commenced an action to dissolve his 23-year marriage. The debtor entered into a voluntary Marital Termination Agreement (“MTA”) on very favorable terms for his wife, which was ultimately approved by the family court and reduced to a judgment. The MTA transferred a disproportionate share of valuable marital assets out of the debtor’s name and over to his then ex-wife. The net value of the debtor’s individual assets before the dissolution exceeded $1.5 million. The debtor transferred to his wife over $1.3 million of these assets, retaining only a few modestly valued assets and the family home with a non-exempt value of $61,000. On the other hand, the debtor accepted sole responsibility for joint marital debt obligations worth more than $270,000, and the debtor retained his personal loan guarantee obligations to the bank of approximately $8.8 million. These transfers occurred shortly after the bank obtained its judgment on the debtor. Not surprisingly, the bank was unable to collect from the debtor on its judgment. After the divorce the couple continued to live together in the family home.

The bank brought a fraudulent transfer action under the Minnesota Fraudulent Transfer Act (now known as the Minnesota Uniform Voidable Transactions Act, or, “MUVTA”1) in order to seize assets the debtor transferred to his then ex-wife through the Marital Termination Agreement. The bank moved for summary judgment contending that the transfers were made with the intent to defraud the bank based on the existence of several “badges of fraud” as defined in MUVTA. The trial court found that the debtor: 1) transferred assets to an insider (his former wife); 2) concealed the transfers from the bank; 3) transferred substantially all of his assets; 4) did not receive a reasonably equivalent value for the transfers; 5) became insolvent after the transfers; and 6) transferred his assets shortly after his debt to the bank became delinquent.

The bank was successful in its suit, but the debtor appealed, ultimately making it up to the Minnesota Supreme Court. The Supreme Court upheld the invalidation of the transfers and, in so doing, established for the first time that transfers made pursuant to an uncontested MTA and divorce decree can be fraudulent and voidable under Minnesota law. See Citizens State Bank Norwood Young America v. Brown, 849 N.W.2d 55 (Minn. 2014).2 Another important takeaway from the foregoing case is that the Supreme Court held that a couple need not be married for there to be a “transfer of assets to an ‘insider.’” The term “insider” may include individuals living together for an extended time in the same household or as permanent companions. Id. at 63.

The foregoing situation occurs more frequently than one might expect. I have represented several banks on loan recovery matters where the debtors, in order to avoid repaying their debts, moved to “divorce friendly” states, obtained quick uncontested divorces with disproportionate asset allocations to non-debtor spouses, and then immediately moved back to Minnesota and picked their lives right back up as though they were still a blissfully married couple.3

In light of the Citizens State Bank Norwood Young America case, lenders, and other businesses that are owed money (in the form of receivables, judgments, or otherwise), now have the ability to prevent unscrupulous individuals from winning at the asset shell game. With this in mind, do not assume that a debtor’s assets transferred to their [former] spouse in an uncontested divorce (and possibly a contested divorce) are now out of reach. This of course does not mean all divorces are subject to attack under MUVTA. However, it does mean that asset transfers made pursuant to uncontested (and contested) divorce proceedings at suspicious times should be examined with scrutiny and a healthy dose of skepticism.

1 Minnesota Statutes §§ 513.41-.51 (2015).
2 The Supreme Court did not reach the broader question of whether MUVTA applies to contested marital dissolutions.

3 Another frequently used tactic I have encountered in practice is for the non-debtor spouse (or sibling, child or other “insiders”) to establish a new business entity engaged in the same industry as the debtor. The debtor abandons his original business entity, which is often laden with debt, and goes to work for the insider’s new entity as an “employee” (usually paid under the table) doing the same work as the original business, and usually with the same customers. Simultaneously, there is often a series of fraudulent transfers of assets from the original business entity to the new entity- sometimes masked as “sales” of assets.

About the Author

Jack Atnip III is an experienced litigator and creditors’ rights attorney who practices in the areas of Commercial Litigation, Financial Services, Collections/Creditors’ Rights, and Bankruptcy. Contact Jack by email or at (612) 305-1501.

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