ACLI Government Securities, Inc. v. Rhoades
1987 U.S. Dist. LEXIS 1084, 653 F. Supp 1388 (1987)
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Rule of Law:
A conveyance of property made by a debtor is fraudulent if it is made without fair consideration and renders the debtor insolvent, or if it is made with the actual intent to hinder, delay, or defraud a creditor, which can be inferred from 'badges of fraud' such as an intrafamily transfer made for inadequate consideration immediately before a large judgment is entered.
Facts:
- Daniel Rhoades and his sister Norma Rhoades, who were also law partners, jointly owned a 68-acre property in Putnam County, New York, with Daniel holding a three-fifths interest.
- On May 10, 1983, a jury returned a verdict of over $1.2 million against Daniel Rhoades and in favor of ACLI Government Securities, Inc. (AGS) in a separate securities lawsuit.
- On May 19, 1983, nine days after the jury verdict and one day before the judgment was formally signed, Daniel Rhoades conveyed his entire interest in the Putnam County property to Norma Rhoades.
- The deed for the conveyance stated the consideration was '$1.00 and unspecified other good consideration.'
- The Rhoades siblings claimed the transfer was in satisfaction of a large antecedent debt Daniel owed Norma, related to treasury bonds she had allegedly entrusted to him for investment.
- The personal and business finances of Daniel and Norma Rhoades were extensively commingled, and they admitted that no formal accounting had ever been conducted between them.
- Months before the transfer, Daniel Rhoades submitted a sworn affidavit regarding his financial condition that made no mention of any significant debt owed to his sister.
- The judgment against Daniel Rhoades, which ultimately totaled over $1.5 million, remains largely unsatisfied.
Procedural Posture:
- ACLI Government Securities, Inc. ('AGS') filed a lawsuit against Daniel Rhoades and Norma Rhoades in the United States District Court for the Southern District of New York, which served as the trial court.
- AGS sought a judgment declaring that Daniel Rhoades's transfer of his interest in a Putnam County property to his sister was a fraudulent conveyance designed to avoid satisfying a prior judgment.
- The case was decided after a three-day non-jury trial before the district court judge.
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Issue:
Does a debtor's conveyance of his interest in real property to his sister, made one day before a significant money judgment is entered against him and for unsubstantiated consideration, constitute a fraudulent conveyance under New York Debtor and Creditor Law?
Opinions:
Majority - Lasker, District Judge
Yes, the conveyance constitutes a fraudulent conveyance under three separate provisions of New York law. The court found the transfer fraudulent first under § 273-a because it was made without fair consideration by a defendant in a pending lawsuit who subsequently failed to satisfy the judgment. The defendants failed to meet their heightened burden in an intrafamily transaction to prove the existence of a legitimate antecedent debt, as their testimony was contradictory and their finances were hopelessly commingled. Second, the conveyance was fraudulent under § 273 because it was made without fair consideration and rendered Daniel Rhoades insolvent; the court found his claims of other substantial assets to be incredible, and their value was insufficient to cover the $1.5 million judgment. Finally, the conveyance was fraudulent under § 276 because it was made with actual intent to defraud, as evidenced by multiple 'badges of fraud,' including the close family relationship, the suspicious timing (one day before judgment was entered), the inadequacy of consideration, and the debtors' knowledge of the large, pending creditor claim. Norma Rhoades's own testimony that she wanted the property to prevent a sheriff from seizing it was direct evidence of fraudulent intent.
Analysis:
This case serves as a quintessential example of how courts apply fraudulent conveyance statutes to prevent debtors from shielding assets from creditors. The court's systematic analysis under three distinct statutory provisions demonstrates the breadth of these protections, covering both constructive fraud (where intent is irrelevant) and actual fraud (proven by intent). The decision reinforces the principle that courts will apply heightened scrutiny to intrafamily transfers made under suspicious circumstances, shifting the burden to the family member transferee to prove the legitimacy and fairness of the consideration. It establishes a clear precedent that unsubstantiated claims of antecedent debt or solvency will not overcome strong circumstantial evidence of an intent to defraud a known creditor.
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