MN Supreme Court: Creditors May Void Fraudulent Transfers of Assets in Uncontested Divorces

On July 9, 2014, in Citizens State Bank Norwood Young America v. Gordon Brown, et al., the Minnesota Supreme Court held that Minnesota’s Uniform Fraudulent Transfer Act (“MUFTA”) may be applied to transfers of assets made as a result of an uncontested divorce. Creditors should be vigilant in monitoring debtors who initiate divorces and transfer valuable assets to non-debtor spouses, as the divorce may be an attempt to fraudulently transfer assets.

Background
In Citizens State Bank Norwood Young America v. Gordon Brown, et al., Mr. Brown guaranteed loans from the bank to two of his companies. The companies defaulted, and Mr. Brown failed to make good on his guarantees. The bank obtained a judgment against the companies and Mr. Brown in June 2010. In October 2010, Mr. Brown divorced his wife of 23 years. In connection with the divorce, Mr. Brown and his wife entered into a consensual marital termination agreement, providing that Mr. Brown would keep certain assets that were mostly exempt from the claims of creditors, while Mrs. Brown would keep assets of significant value that were generally not exempt from the claims of creditors. In addition, the couple continued to live together after the divorce was final. The bank commenced a fraudulent transfer suit against Mrs. Brown, seeking to avoid the transfer and attach the transferred assets to satisfy the bank’s judgment against Mr. Brown.

The Court’s Ruling
Mr. and Mrs. Brown unsuccessfully argued that their marital termination agreement was immune from attack under MUFTA because the agreement was approved as “fair and reasonable” by a state court judge in the couple’s divorce proceeding. While the Supreme Court did not rule on the question of whether a property settlement in a contested divorce proceeding could be subject to attack under MUFTA, it did hold that, in an uncontested divorce, property settlements are subject to attack and agreed that the property settlement between the Browns was made with the intent to hinder, delay and defraud creditors.

Conclusion
After Brown, it is clear that creditors can attack property settlements in uncontested divorce proceedings if the settlement appears to be designed to avoid creditors.

Additional Information
If you have questions, contact one of Winthrop & Weinstine’s attorneys practicing in the areas of Creditors’ Remedies and Bankruptcy Law, Commercial Lending, or Community Banking.