523(a)(2) Nondischargeability Against Fraudulent Transferee

By Alexander Beeby posted 08-26-2021 11:27 AM

Contributing Editors: Ian Rubenstrunk & Hassan Ahmad, Winthrop & Weinstine, P.A.

In Lariat Cos. v. Wigley (In re Wigley), 620 B.R. 87 (B.A.P. 8th Cir. Sept. 25, 2020), the bankruptcy appellate panel affirmed the judgment of the bankruptcy court, excepting the creditor’s claim from discharge under 11 U.S.C. § 523(a)(2). In this case the BAP examined whether the bankruptcy court had erred in determining whether the debtor’s receipt of transfers of property from her non-filing spouse satisfied the fraud requirements under 523(a)(2).

The dispute began in 2011, when the landlord creditor, received a judgement against the debtor’s spouse on his guaranty of a real property lease. Post-judgment, the debtor’s spouse then transferred property to the debtor to avoid payment to the creditor. The creditor then sued the debtor and her spouse to recover the value of the property transferred. A Minnesota state court held the couple jointly-and-severally liable for a fraudulent transfer under the Minnesota Uniform Fraudulent Transfer Act (MUFTA). The debtor then filed for bankruptcy.

The creditor sought to except its claim against the debtor from discharge under § 523(a)(2)(A) on the basis of fraud. The bankruptcy court ruled in the creditor’s favor and the debtor to appealed to the BAP. The BAP explained that for a creditor to prevail under the § 523(a)(2) exception for fraud, the creditor has to prove the debtor made a representation, while aware of its falsity, to deliberately deceive the creditor, who justifiably relied on the assertion, and which caused the creditor damage. In such cases the debt traceable to fraudulent conveyances would not be dischargeable.

The BAP agreed that the debtor’s spouse, as transferor, transferred assets to the debtor with the intent to hinder, delay, or defraud creditors, that the transferee possessed actual fraudulent intent in receiving the assets, and that the creditor was injured as a result. To determine the debtor’s spouse’s intent in transferring assets, the bankruptcy court considered the eleven badges of fraud in MINN. STAT. §§ 513.41-513.51, and found he met seven of them (such as transferring to an insider, retaining control over the property after transfer, having been sued before the transfer, etc.).

In order to evaluate the debtor’s intent in receiving these transfer, the bankruptcy court evaluated the totality of the circumstances. In particular, the bankruptcy court looked at the debtor’s knowledge of her spouse’s financial situation, the debtor’s knowledge of the guaranty lawsuit, and her spouse’s admission to wanting to protect himself and his family with the transfers. Finally, the bankruptcy court rejected the debtor’s argument that the transfers were made for estate planning purposes.

The BAP held that the bankruptcy court’s decision was adequately supported by the record and that the creditor was not required to provide extrinsic evidence of fraud under § 523(a)(2)(A). The BAP affirmed the bankruptcy court’s decision, finding that the debtor and her spouse engaged in a fraudulent transfer to escape liability to a creditor, bringing that transfer within the § 523(a)(2) exception.

Co-Editors in Chief
Alexander J. Beeby, Larkin Hoffman Daly & Lindgren Ltd.
Kesha Tanabe, Tanabe Law