Uniform Fraudulent Transfer Act Applies to Property Distributed by a Divorce Decree

In a case before the Connecticut Supreme Court, Canty v. Otto, 41 A.3d 280 (Conn. 2012), the former wife of a convicted felon appealed a trial court ruling granting prejudgment relief to the administratrix of a homicide victim’s estate by challenging the administratrix’s right to recover against her as a creditor under the Uniform Fraudulent Transfer Act (“UFTA”). The Supreme Court affirmed the trial court ruling.

In early 2007, the local and state police began to investigate the former wife’s husband in connection with the disappearance of a woman with whom he had been involved outside of the marriage.  In mid-April, the husband transferred $8,000 from a joint marital account to an account that was held solely in his wife’s name.  Within a week of the transfer, the police found the remains of the missing woman on a Connecticut property that was co-owned by the husband and his son.  After this discovery, the husband and wife went together to the Department of Motor Vehicles to transfer title to a jointly owned vehicle solely to the wife, and traveled to Massachusetts to transfer title in residential property to the wife.  The husband made these transfers without valuable consideration.  Within a week of completing the property transfers, the wife contacted an attorney to file a dissolution action, which was commenced the same day and filed within a week.  Pursuant to the dissolution action, a notice of lis pendens was filed against the husband’s interest in two Connecticut properties.  Afterward, the estate of the deceased woman commenced a wrongful death action against the husband.  In May 2007, the state arrested him and charged him with one count of murder and two counts of tampering with physical evidence.

In June 2007, after a full hearing on the wrongful death action, the administratrix of the deceased woman’s estate obtained a prejudgment order against the husband in the amount of $4.5 million.  During this hearing, the trial court found probable cause to believe that the former wife did not truly intend to divorce her husband but rather intended to conspire with him to obtain a judgment of dissolution that would shield his assets from the victim’s estate. The trial court also found that the husband transferred assets shortly before the commencement of the dissolution action with specific intent to defraud his creditors, among which was the estate of the deceased.  Finally, the court found that the former husband had encouraged and facilitated his former wife’s institution of a dissolution action against him and did not seriously contest those proceeding in order to ensure that most or all of his assets could not be reached by the deceased’s estate in the wrongful death action.

The administratrix moved to intervene in the couple’s dissolution action to assert her rights as a creditor of the husband; the motion was denied and later dismissed on appeal.  In June 2008, the trial court issued a judgment of dissolution which included the division of marital property.  The former wife received all of the real property, and the former husband received an automobile, some shares of stock and the remaining balance of his retirement funds.  The former husband was convicted of murder in November 2008.

After the judgment in the wrongful death hearing, the administratrix filed an action against the former wife to recover against her under the UFTA and applied for a prejudgment remedy. In February 2010, the trial court hearing the motion for a prejudgment remedy concluded that there was probable cause to show that the assets transferred from the husband to the wife through the dissolution action were fraudulent actions.  In doing so, that court adopted the prior decision of the trial court, concluded that a dissolution judgment would be subject to a claim under the UFTA and awarded a prejudgment remedy in the amount of $670,000.  The former wife filed a motion for reconsideration in which she alleged that the amount of the prejudgment remedy was higher than the amount alleged to have been transferred. In April 2010, the trial court issued a memorandum of decision in which it agreed with the former wife that her one-half interest in the marital property could not be the subject of a fraudulent transfer and reduced the amount of the prejudgment remedy to $552,000.

The former wife appealed.  She contended that the administratrix, as a creditor of her debtor spouse, cannot collect the debt from her, the non-debtor spouse, by bringing an action under the UFTA, Conn. Gen. Sta. §§ 52-552a et seq.  The former wife first claimed that the distribution of marital assets in a dissolution decree was an equitable determination as to which portion of the marital estate each party was entitled and not a transfer as defined in the UFTA.  The former wife alleged that characterizing the distribution as a transfer and allowing the administratrix to bring a claim under the UFTA would disturb the distribution that was carefully crafted by the trial court and would create further complications for distributing marital property.  Second, the former wife alleged that the trial court’s determination that the dissolution was undertaken with actual intent to hinder, delay or defraud the estate of Smith was clearly erroneous and was not supported by evidence in the record.  Finally, the former wife alleged that the administratrix was improperly attempting to obtain a modification of a marital property distribution, which was prohibited under Connecticut law governing the assignment of property pursuant to a dissolution decree and modification of such judgments.

In Connecticut, the UFTA requires three elements for a creditor to claim recovery:  (1) the debtor made a transfer or incurred an obligation; (2) the transfer is made after the creditor’s claim arose; and (3) the debtor made the transfer with the actual intent to “hinder, delay or defraud” the creditor.  Conn. Gen. Stat. § 52–552e.  UFTA defines the term “transfer” very broadly, including “every mode … voluntary or involuntary…of disposing of or parting with an asset or an interest in an asset.” Conn. Gen. Stat. § 52-522b (12).   Such a transfer is fraudulent under the UFTA if the creditor’s claim arose before the transfer was made and the debtor made the transfer with requisite actual intent.  Conn. Gen. Stat. § 52-552e.

The Supreme Court concluded that the plain language of the UFTA supports the conclusion that distribution of property in a dissolution decree is a transfer under the UFTA.  The federal bankruptcy code defines “transfer,” 11 U.S.C. § 101(54)(D), using terminology similar to the UFTA, and bankruptcy courts characterize property settlements pursuant to divorce decrees as transfers of property.  The court further supported this conclusion with reference to the statute governing assignment of property and conveyance of title in dissolution actions, Conn. Gen. Stat § 46b-81, which uses terms such as “assign,” “pass title,” “vest title,” and “conveyance.”  Case law in other jurisdictions expressly rejects the allegation that characterizing the distribution of assets in a dissolution decree as a transfer would disturb the court’s equitable determination.  The Supreme Court agreed with the reasoning and policy considerations stated by the California Supreme Court: “[i]n view of this overall policy of protecting creditors, it is unlikely that the [l]egislature intended to grant married couples a one-time-only opportunity to defraud creditors by including the fraudulent transfer in [a marital separation agreement].” Mejia v. Reed, 74 P.3d 166 (Cal. 2003). Therefore, the court concluded that the distribution of property in the divorce decree was a transfer that could be subject to a UFTA claim.

The Connecticut UFTA sets forth a series of factors which a court may consider in determining “actual intent” to fraudulently transfer property.  Conn. Gen. Stat. § 52-522e(b).  These factors include whether the debtor retained possession or control over the property after the transfer, whether the debtor had been threatened with a suit before the transfer was made, whether the transfer was of substantially all the debtor’s assets, and whether the value of the consideration received by the debtor was reasonable equivalent to the value of the assets transferred.  A person’s intent to defraud is to be inferred from his conduct under the surrounding circumstances, and is an issue for the trier of fact to decide. State v. Nosik, 715 A.2d 673 (Conn. 1998).

In her application for prejudgment remedy, the administratrix alleged the conveyance of the Massachusetts property and the entire divorce proceeding were undertaken with intent to shelter assets; the timing of these acts, occurring so quickly after the husband became a suspect in the disappearance of the deceased, offered a reasonable inference of fraudulent intent.  According to Connecticut law, in a hearing on an application for prejudgment remedy, the trial court need only make a finding of probable cause, which is a bona fide belief in the existence of facts essential under law for the action. Based on the evidence in the record, the Supreme Court concluded that the trial court finding of probable cause was not an abuse of its discretion. Additionally, the Supreme Court concluded that the trial court properly determined that probable cause existed that the husband commenced the dissolution action with actual intent to hinder, delay or defraud the administratrix.  These findings, combined with the determination that the property settlement under the divorce decree constituted a transfer, permitted the administratrix to bring her claim for prejudgment relief against the former wife.

The Supreme Court additionally noted that the administratrix was not seeking to set aside the dissolution decree, but rather attach certain assets that were transferred to the former wife as a result of the decree.  A financial order is severable when it is not interdependent with other orders and is not improperly based on a factor that is linked to other factors.  Therefore, her claim was not an improper attempt to modify a court judgment in contravention of Connecticut law.

Therefore, Supreme Court determined that the trial court properly granted the administratrix’s application for a prejudgment remedy.

Should you have any questions relating to marital proceedings or personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

written by Lindsey Raber, Esq.