Court: District Court, N.D. Indiana; August 25, 1986; Federal District Court
The court is reviewing an appeal regarding a bankruptcy court's order from April 24, 1986. The appeal raises two main issues: (1) the amendment of the pre-trial order to include 11 U.S.C. 544(b) (1979) and (2) whether the bankruptcy court correctly determined the debtor's transfer of property to her daughter was constructively fraudulent. Oral arguments took place on August 12, 1986, and the bankruptcy court's decision was ultimately affirmed.
The case involves debtor Hanna Marie Delagrange, who transferred real estate in Allen County, Indiana, to her daughter Judith Ann McKinley in October 1977. In return, Delagrange received a life estate and an oral promise from her daughter for lifelong care. After the transfer, McKinley sold the property and purchased another home for Delagrange. At the time of the transfer, Delagrange's financial situation included approximately $3,500 in income, a home with $29,611.34 equity, a $1,300 certificate of deposit, $700 to $800 in a checking account, and a car.
The bankruptcy court noted Delagrange had multiple financial obligations, including a foreclosure judgment against her and personal guarantees totaling $57,000 to two banks, along with a debt of $8,800 to another bank. Following the transfer, a fraudulent transfer complaint was filed by the trustee on February 6, 1980, initially under 11 U.S.C. 544(a), with arguments made for 11 U.S.C. 544(b) as well. The bankruptcy court ruled in favor of the trustee under 11 U.S.C. 544(a) in May 1981, but subsequent appeals led to a decision that the bankruptcy court had erred in applying 11 U.S.C. 544(a)(3) and should have considered 11 U.S.C. 544(a)(1) and 544(b).
Following a motion to alter the judgment, the court reaffirmed its decision and remanded the case to the bankruptcy court. The parties agreed that the facts did not establish liability under 11 U.S.C. § 544(a)(1), leading the bankruptcy court to amend the pre-trial order to allow recovery under 11 U.S.C. § 544(b), determining the conveyance was constructively fraudulent based on state law as referenced in Nader v. C.I.R. This appeal addressed the bankruptcy court's amendment of the pre-trial order.
The appellants contended that the bankruptcy court erred in amending the order, claiming that § 544(b) could not be tried by the parties' consent and alleging that the court overlooked the appellee's agreement to proceed solely under § 544(a). However, the court's June 29, 1984, ruling clarified that the bankruptcy court should evaluate these claims. Four factors were outlined for consideration regarding the amendment: (1) prejudice to the trustee from not modifying; (2) prejudice to the debtor from modification; (3) the impact of modification on the case's orderly conduct; and (4) any willfulness, bad faith, or neglect by the trustee.
The bankruptcy court analyzed these factors, noting stipulations from July 9, 1985, including that a retrial under § 544(b) would not require new factual evidence and that the facts were insufficient for liability under § 544(a)(1). The trustee supported amending the pre-trial order, while the appellants did not submit a brief. The court agreed with the bankruptcy court that amending the pre-trial order was appropriate, emphasizing that § 544(b) might be the only remaining remedy for the trustee. The appellants failed to demonstrate how they would be prejudiced by the amendment, and the bankruptcy court concluded that modifying the order would not disrupt the efficient handling of the case, as no further evidence would be presented.
The appellants' challenge to the modification of the pretrial order lacks strength due to their failure to provide additional evidence or arguments to address any surprise from the modification. The parties agreed that the trustee did not act with willfulness or bad faith when including 11 U.S.C. 544(a) in the complaint, making the argument against the trustee's actions untenable. Consequently, the bankruptcy court's decision to amend the pretrial order to incorporate 11 U.S.C. 544(b) is upheld.
The court also examines whether the bankruptcy court erred in determining that the debtor’s property transfer to her daughter was fraudulent under 11 U.S.C. 544(b). This statute allows the trustee to void transfers that are voidable under applicable law by creditors holding unsecured claims. The substantive law governing the voidability of transfers is derived from state law, as Section 544(b) does not provide specific provisions for such determinations.
Initially, the bankruptcy court ruled that the debtor did not possess actual intent to defraud under Indiana's statutory fraud law (I.C. 32-2-1-14). However, it found a strong presumption of fraud based on the presence of "badges of fraud." Both parties agree these badges exist but dispute the implications of the court's original findings. The appellants contend that because the initial ruling on I.C. 32-2-1-14 was unchallenged, recovery under 11 U.S.C. 544(b) is barred, as Indiana law limits fraudulent conveyance claims to statutory grounds. Conversely, the appellee argues that the presumption of fraud identified by the bankruptcy judge supports a claim under state constructive fraud principles.
The resolution of this appeal hinges on whether Indiana recognizes a non-statutory cause of action for fraudulent conveyance. In Nader v. C.I.R., the court clarified that Indiana law does not mandate proof of actual intent to defraud for a transfer to be subject to creditor claims, indicating that constructive fraud principles apply without requiring such intent.
The bankruptcy court's April 24, 1986 opinion reaffirmed its determination that the debtor's transfer of property to her daughter exhibited badges of fraud, establishing a strong presumption of fraud. This presumption was deemed sufficient for a constructive fraud claim, which aligns with precedent set in Nader. Appellants argued, citing Jackson v. Farmers State Bank and Arnold v. Dirrim, that Indiana does not recognize common law fraudulent conveyance. However, the Jackson case focused on whether insolvency is essential in fraudulent conveyance claims and did not negate the existence of common law constructive fraud. It affirmed the presumption of fraud based on Arnold v. Dirrim, underscoring that circumstantial evidence can satisfy the fraudulent conveyance statute without requiring specific intent to defraud, as held in Eyler v. C.I.R. The court found that the circumstantial evidence and badges of fraud were adequately established, supporting the bankruptcy court's ruling on constructive fraud. The findings of circumstantial evidence are factual and can only be reversed if clearly erroneous; the bankruptcy court's conclusions were upheld. No precedents were found to dispute the viability of constructive fraudulent conveyance in this case. Consequently, the bankruptcy court's decision is fully affirmed.
