Judge Hillman Rules No Fraudulent Conveyance in Divorce Transfer

In the recent case of In re Prichard, 2007 WL 458021 (Bankr.D.Mass., Feb 12, 2007) Massachusetts bankruptcy judge William C Hillman found in favor of the debtor in a fraudulent conveyance action brought by the trustee. Mr. Prichard had owned a house with his ex-wife which he transfered to her alone pursuant to a separation agreement incorporated into a judgment of divorce. The case was brought under the old Massachusetts version of the Uniform Fraudulent Conveyance Act which was repealed in favor of the Uniform Fraudulent Transfer Act in 1996. However, much of the reasoning in the case applies under both laws. In the actual-fraud prong of the trustee's case, he alleged that the debtor had an actual intent to hinder, delay or defraud creditors when he made the transfer. This sort of allegation requires an examination of the indicia or so-called "badges" of fraud. My guess is that the trustee brought this case because after the divorce the debtor moved back in with his ex-wife. His wife testified that this was not a "normal situation" but it also appears from the testimony that the couple did not resume a married lifestyle but merely carried on a civil co-existence. The judge stated: "I could conclude that the Trustee met his initial burden of demonstrating actual fraud under § 7 of the UFCA simply because Thomas conveyed his property in favor of a family member over his creditors." The court then went on to find additional badges of fraud that solidified its conclusion that the trustee had met his initial burden. The issue then became whether there was "sufficient evidence of a legitimate supervening purpose for the transfer of the Property, such as to rebut the indication that [the debtor] effected the transfer of the Property with fraudulent intent." The judge declined to find that the marital difficulties leading to the transfer were a sham, stating that at "at the time of the transfer, Thomas did not retain any interest in the Property, but transferred his interest in it to [his ex-wife] who assumed complete responsibility for the Property and household's upkeep. To conclude now that this transaction was some sort of sham would require that I find that [the debtor and his ex-wife] staged their marital difficulties, while Thomas set up separate residences in 1989 and for the five years following, with the full intention of eventually returning to live in the Property in 1994. The evidence does not so prove and I do not so conclude."