Case Instruction –
When estate planning is being undertaken at the same time that a person is separated or getting a divorce, it is critical that the person engaging in estate planning fulfill their other obligations concerning asset disclosure in connection with the divorce or separation. A person may not simply shield their assets from a divorce by creating and transferring their assets to a trust or otherwise giving away assets.
As a plaintiff seeking to recover property alleged to have been misappropriated, the rules against fraudulent transfer may allow the transferred property to be recovered from the wrongdoer.
The US 1st Circuit Court of Appeals recently reviewed a district court decision in which the ex-husband’s alleged conduct inspired them to quote Sir Walter Scott: “what a tangled web we weave . . . when first we practice deceiving.”
In 2010, Janet and Robert Foisie decided to end their long-term marriage. They hired a private mediator and reached a divorce settlement agreement (“Agreement”) in which each of them kept roughly $20 million in assets. As part of the negotiation and agreement, both certified to one another and to their mediator that each had fully disclosed all of their assets. In 2011, Janet filed a marital dissolution action in their home state of Connecticut. In that action, Janet and Robert submitted their Agreement to the Court, together with their financial statements. Both affirmed before the Court that the financial disclosures were accurate and consistent with their Agreement. At their request, the Court entered a stipulated judgment of dissolution of their marriage pursuant to the terms of the Agreement.
In 2015, suspecting that Robert had not told her everything about the assets he owned at the time of their divorce, Janet engaged in the further civil discovery of Robert’s finances. Through Robert’s responses, Janet came to learn that Robert lied during their divorce about his ownership of substantial undisclosed overseas assets and rights to payment under numerous loan agreements. These undisclosed additional assets amounted to at least $39 million in value. Janet further alleged that Robert later transferred those assets as charitable gifts to his alma mater, Worcester Polytechnic Institute (WPI) following their divorce, in an effort to defraud her. Based on these discoveries, Janet sought to reopen the divorce case and brought a parallel civil action in tort and contract claims against Robert. Basing her claim under the Massachusetts Uniform Fraudulent Transfer Act (“UFTA”), Janet also filed the instant action seeking to avoid the transfers Robert (a non-party) made to WPI after their divorce and to recoup those assets as part of the marital estate to which she was entitled.
WPI defended the action by way of a motion to dismiss alleging a number of different grounds. Among those grounds, WPI argued that Janet as a plaintiff did not qualify as a “creditor” of Robert (the debtor) who made allegedly fraudulent transfers, and therefore, did not have such standing as a “creditor” entitled to relief.
Under the UFTA, a “creditor,” is defined as “a person who has a “claim.” A “claim” is defined to include a right to payment, whether or not that right is reduced to judgment, legal or equitable in nature, contingent, or disputed. Applying these definitions to the facts, the court found that Janet adequately presented a “claim” where she alleged she had a right to payment from Robert at the time of the transfers, both through her motion to reopen the divorce and her parallel civil action. The fact that her claims were disputed, unresolved, and not reduced to judgment did not prevent her from meeting the requisite definition of a “claim” to have standing as a creditor entitled to relief under the UFTA.
WPI countered that an earlier Massachusetts case, Welford v. Nobrega, narrowed the definition of “creditor” such that Janet lacked standing. Welford v. Nobrega, 565 N.E. 2d 1239, 30 Mass. App. Ct. 92 (Mass. App. Ct. 1991), aff’d, 586 N.E.2d 970, 411 Mass. 798 (Mass. 1992). In Welford, eleven years after the couple’s divorce, the ex-husband purchased a winning lottery ticket with his companion, and thereafter, transferred the winnings to a trust. The ex-wife claimed that she was entitled to an adjustment of alimony and support based on the winnings and sought to avoid the transfer to trust under the UFTA. The probate court sided with the ex-wife’s claim that the ticket proceeds were fraudulently transferred, but the Massachusetts Appeals court reversed. On appeal, the Appeals Court found that the ex-wife was not a creditor of her ex-husband under the UFTA and entitled to relief. While spouses may qualify as creditors with respect to transfers that occur when divorce is imminent, no Massachusetts case had allowed a divorced spouse creditor status when seeking modification of outstanding orders after the divorce became final. In order for the ex-wife to be a creditor of her ex-husband for her lifetime, special circumstances must exist unrelated to the prior marriage.
WPI’s argument did not persuade the federal court. The court found the language of Welford to be both dicta and distinguishable from the facts of Janet’s claims. In Welford, the assets in question, the alleged fraudulent transfer, and the plaintiff’s claim to the assets, all developed long after the divorce. By contrast, Robert’s hidden assets, Janet’s claim to the assets, and her right to payment existed at the time of their divorce proceeding and therefore, entitled her to stand as a creditor.
The Court held that Janet’s UFTA and common law claims were adequately pleaded, vacated the lower court judgment of dismissal against her, and remanded the case to the district court for further proceedings, including a redetermination of choice-of-law that governed. The court found that both Massachusetts and Connecticut had significant relationships to the litigation and that the issue is revisited after the parties completed their discovery and brought more information before the court.
Here, WPI is not alleged to have done anything wrong. In light of this decision, it seems prudent for donees to continue to closely scrutinize the circumstances in which large gifts are received, particularly in the context of a gift from a recently divorced donor. As the court did in this case, a donee may continue to look for so-called “badges of fraud” evidencing “circumstances so commonly associated with fraudulent transfers that their presence gives rise to an inference of intent.” Examples, in this case, included that Robert concealed assets from Janet during their divorce in his financial representations and that he transferred substantially all of his assets to WPI making himself insolvent.