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Marital bliss sacrificed to defraud bank

The lengths some debtors will go to avoid paying what they owe.

Written by Matthew J. Bialick and Jack Atnip, III

Having a debtor shift assets to avoid paying a debt is nothing new to bankers.  Whether this takes the form of a debtor transferring assets into a trust, “selling” valuable property to a straw man, or simply “gifting” the property to family members, most bankers have had experience with some or all of these fraudulent tactics.  And some debtors will really go to extremes to avoid paying their debts.

A Minnesota community bank recently faced such a situation, when a commercial debtor used his own sham divorce, entered pursuant to an uncontested family court divorce decree, to effectuate a fraudulent transfer.  In this case, the debtor entered into a voluntary marital termination agreement, on very favorable terms for his wife, which was ultimately approved by the family court judge and reduced to a judgment and decree.  This judgment- not surprisingly- transferred a great deal of property out of the debtor’s name and over to his now “ex” wife for no money at all.  And this transfer occurred right before the bank obtained a judgment on the debtor. 

But rather than just sitting idly by, the Bank brought a fraudulent transfer action under the Minnesota Fraudulent Transfer Act, which sought to set aside various transfers made pursuant to the divorce decree as fraudulent.  The Bank was successful in its suit, but the debtor appealed all the way up to the Minnesota Supreme Court.  Not being fooled for a moment, the Supreme Court ultimately upheld the invalidation of the transfers and, in so doing, established for the first time that a transfer made pursuant to a divorce decree can be fraudulent under Minnesota law.  See Citizens State Bank Norwood Young Am. v. Brown, 849 N.W.2d 55 (Minn. 2014). 

We’ve represented banks on loan recovery matters where people have moved to “divorce friendly” states, obtained quickie lop-sided uncontested divorces, and then picked their lives right back up in Minnesota as though they’re still a married couple.  In light of the above case, lenders now have the ability to prevent unscrupulous debtors from getting away with it.  And with that in mind, do not just assume that because a debtor’s assets were transferred in a divorce you cannot recover those assets.  Of course, this does not mean all divorces are fraudulent and subject to attack, but it does mean that transfers made pursuant to uncontested divorce proceedings at suspicious times should be examined with care.

It’s amazing how far some debtors will go to avoid paying their loan obligations.