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Tennessee Court Finds Fraudulent Conveyance Between Husband and Wife

Collecting a judgment or debt owed from either a husband or wife, but not owed by them jointly, can be difficult, if not impossible. Why so? Jointly owned property, in many circumstances, is not subject to a creditor’s claim against just one of the spouses. Some spouses try to avoid paying debts by transferring property they own individually to the other spouse so that both spouses own the property jointly. When this occurs, it is possible, depending on the facts, that a Tennessee court might declare the transfer to be a fraudulent conveyance (also referred to as a “fraudulent transfer”).

If a transfer is found to be a fraudulent conveyance, a Tennessee court has a range of options to assist a wronged creditor. It might negate the transfer so that the property reverts to the spouse with the debt so that his or her creditors can collect against it. Or, it might order the property sold to satisfy the claim of a creditor. In some circumstances, a court might even enter a money judgment in favor of a creditor and against the spouse which received the fraudulent conveyance.

In a recent fraudulent conveyance case, the Court of Appeals of Tennessee ruled that the transfer of a 27 acre farm by one spouse to the other was a fraudulent conveyance. Here are the facts:
• Fred Hobbs obtained powers of attorney for uncles who had substantial assets
• Fred Hobbs used the powers of attorney to transfer farmland of one uncle worth over $1 million dollars to himself and to misuse funds of his other uncle
• Using his ill- gotten gains, Fred Hobbs purchased a 27 acre farm in March of 2005
• The deed to the 27 acre farm was in the name of Fred Hobbs only
• Thereafter, in late 2005 and early 2006, two separate lawsuits were filed against Fred Hobbs by the parties acting on behalf of the uncles he had bilked
• In January of 2007, before a judgment in either lawsuit against him had been entered, Fred Hobbs conveyed the 27 acre farm to himself and his wife, Sherry Hobbs, as tenants by the entireties (the surviving spouse would, therefore, be the sole owner of the property)
• Judgments were entered against Fred Hobbs in both cases in late 2009 and early 2010
• In June of 2010, Fred Hobbs died
In determining that the transfer of the 27 acre farm was a fraudulent conveyance, both the trial court and appellate court applied Tennessee Code Annotated §66-3-305 (part of the Uniform Fraudulent Conveyance Act as enacted in Tennessee). Under that section of the Act, a transfer can be declared fraudulent for either of two different reasons: (1) If the transfer was made with the actual intent to hinder, delay or defraud any creditor; or, (2) if the transfer was made without the transferor (Fred Hobbs) receiving a reasonably equivalent exchange and where the transferor, because of the transfer, was left unable to pay his debts (to summarize broadly the very technical language of that section of the Act).

In determining whether there was actual intent to hinder, delay or defraud a creditor, Tennessee courts have long recognized that no one who has engaged in an intentional fraudulent transfer is likely to admit it, and that such intent must be proven by circumstantial evidence. To that end, T.C.A. §66-3-305 provides eleven factors, sometimes referred to as “badges of fraud,” for a court to weigh in determining whether there was the requisite intent.

In the case at hand, the court found that nine of the eleven badges of fraud were present with respect to the transfer of the farm from Fred Hobbs to his wife, Sherry Hobbs. One of those was that Sherry Hobbs paid nothing to receive her interest in the 27 acre farm. In defending the fraudulent conveyance lawsuit, Sherry Hobbs argued that Fred Hobbs did receive adequate consideration for transferring to her an interest in the farm—her love and affection. The Court of Appeals rejected Mrs. Hobb’s argument. Under the Uniform Fraudulent Conveyance Act, it noted, consideration must have “utility” from a “creditor’s viewpoint” in order to be considered legitimate.