LEASE EQUITIES FUND INC V CHARTERS INC
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STATE OF MICHIGAN
COURT OF APPEALS
LEASE EQUITIES FUND, INC.,
UNPUBLISHED
August 17, 2001
Plaintiff-Appellant,
V
No. 219086
Oakland Circuit Court
LC No. 93-461464-CK
CHARTERS, INC., d/b/a JET US, SCOTT
TRAVEL, INC., and JOHN L. ADAMS, a/k/a
LARRY ADAMS,
Defendants,
and
LEHMAN & VALENTINO, P.C. and SCOTT
ADAMS,
Intervening Defendants-Appellees,
and
M-59 ASSOCIATES, SCOTT WERTHMAN,
AND MICHAEL BAKALUKAS,
Garnishee Defendants.
Before: K.F. Kelly, P.J., and Smolenski and Meter, JJ.
PER CURIAM.
Plaintiff appeals by right from an order upholding a June 1994 stock transfer, involving a
restaurant and bar business known as M-59 Associates, from John Adams (Adams) to his son
Scott Adams (Scott). Plaintiff, whom Adams owed money and who sought garnishment, had
argued that Adams made the transfer fraudulently, with the intent to hinder creditors. We affirm.
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Plaintiff first argues that the trial court erred in determining that Adams had no intent to
defraud within the meaning of MCL 566.17 (which was in effect at the time of the conveyance
but was repealed by 1998 PA 434). This statute stated:
Every conveyance made and every obligation incurred with actual intent,
as distinguished from intent presumed in law, to hinder, delay, or defraud either
present or future creditors, is fraudulent as to both present and future creditors.
[MCL 566.17, repealed by 1998 PA 434.]
We review findings of fact made by a trial court in an action where a fraudulent
conveyance is claimed, including findings on solvency, for clear error. See, e.g., Regan v
Carrigan, 194 Mich App 35, 37-38; 486 NW2d 57 (1992). Clear error exists if the reviewing
court is left with a definite and firm conviction that a mistake occurred. Massey v Mandell, 462
Mich 375, 379; 614 NW2d 70 (2000).
Determining actual intent to defraud under MCL 566.17 requires consideration of the
circumstances surrounding the transaction. Bentley v Caille, 289 Mich 74, 77-78; 286 NW 163
(1939). “Surrounding circumstances which usually accompany an intent to hinder, delay or
defraud creditors and from which fraud may be inferred are called ‘badges of fraud.’” Id.
Badges of fraud include “lack of consideration for the conveyance; a close relationship between
transferor and transferee; pendency or threat of litigation; financial difficulties of the transferor;
and retention of the possession, control, or benefit of the property by the transferor.” ColemanNichols v Tixon Corp, 203 Mich App 645, 659-660; 513 NW2d 441 (1994). Evidence of a secret
or hurried transaction, not conducted in the usual mode of doing business, is also an indicator of
fraud, US v Leggett, 292 F2d 423, 427 (CA 6, 1961), and if a conveyance renders a debtor
insolvent, intent to defraud may be inferred. Regan, supra at 39. Moreover, transactions
between family members that adversely affect creditors must be closely scrutinized and require a
full explanation when accompanied by other badges of fraud. Bentley, supra at 79. We must
also keep in mind that
. . . [b]adges of fraud are not conclusive, but are more or less strong or weak
according to their nature and the number concurring in the same case, and may be
overcome by evidence establishing the bona fides of the transaction. However, a
concurrence of several badges will always make out a strong case. 27 C.J. p. 483.
[Bentley, supra at 78, quoting Timmer v Pietrzyk, 272 Mich 238, 242; 261 NW
313 (1935).]
Finally, we note that the burden of showing fraud is on the person alleging it. Goldberg v
Goldberg, 295 Mich 380, 384; 295 NW194 (1940). Fraud will not be presumed but must be
proven. Rossman v Hutchinson, 289 Mich 577, 594; 286 NW 835 (1939). The party seeking to
have a conveyance set aside must prove fraud by clear and convincing evidence. US v Rode, 749
F Supp 1483, 1493 (WD Mich, 1990), aff’d 943 F2d 53.
In the instant case, several badges of fraud were present. Scott gave no consideration for
the stock and it is uncontested that the stock was a gift. Further, there was a close, family
relationship between the grantor and grantee. These factors alone do not establish fraud. See
Linke v Goodrich, 30 Mich App 228, 230; 186 NW2d 5 (1971). Another badge of fraud existed,
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however, because litigation was pending that had a possible consequence of requiring Adams to
pay a large judgment to plaintiff. Nevertheless, we cannot say that the trial court clearly erred in
concluding that the evidence did not show an actual intent to hinder or defraud creditors. Indeed,
as discussed more thoroughly below, there was evidence that although Adams was in no position
to repay plaintiff in a lump sum, he was sufficiently solvent to make monthly payments under a
forbearance agreement. Further, the evidence supported a finding that the stock was given to
Scott as a bona fide gift because Scott was suffering financial repercussions from the demise of
his former business. Moreover, the transaction was not secret or hurried, it was disclosed to a
public body (the Liquor Control Commission), and testimony showed that Adams did not retain
control over the stock after giving it to Scott. Finally, evidence presented at the evidentiary
hearing demonstrated that Adams was in possession of numerous other assets, worth greater
amounts than the stock in question, and he did not convert, convey, or diminish the value of
those items to the detriment of any of his creditors, including plaintiff. Accordingly, considering
the circumstances surrounding the transaction, see Bentley, supra at 77-78, the trial court did not
clearly err in finding that there was no actual intent to hinder, delay, or defraud creditors. See
Regan, supra at 37-38. We are simply not left with a definite and firm conviction that a mistake
occurred. See Massey, supra at 379.
Next, plaintiff argues that the trial court erred in determining that no constructive fraud
occurred under former MCL 566.14 (which was in effect at the time of the conveyance but was
repealed by 1998 PA 434). Under this statute, a conveyance made “by a person who is or will be
thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the
conveyance is made . . . without a fair consideration.” MCL 566.14, repealed by 1998 PA 434.
Essentially, plaintiff contends that the trial court erred in determining that Adams was solvent at
the time of the stock transfer. We disagree.
We first note that the parties disagree regarding which of them bore the burden of
establishing Adams’ solvency or insolvency. We conclude that we need not resolve this
disagreement, because even assuming, arguendo, that defendants-appellees bore the burden of
establishing Adams’ solvency, they adequately met their burden.
In Foodland Distributors v Al-Naimi, 220 Mich App 453, 479; 559 NW2d 379 (1996),
this Court, quoting In re Otis & Edwards, PC, 115 Bankr 900, 911 (ED Mich, 1990), stated that
“‘[f]or the court to hold that a fraudulent conveyance [has occurred] the court must find
insolvency based upon the value of the assets and the liabilities as they existed prior to or as a
result of the challenged transfer’” (emphasis in Otis). “‘In other words, either just before or just
after the transfer, the debtor must have been unable to make ultimate payment of then-existing
obligations from then-existing assets.” Foodland, supra at 479, quoting Otis, supra at 911.
MCL 566.12(1) defines insolvency as follows:
A person is insolvent when the present fair salable value of his assets is
less than the amount that will be required to pay his probable liability on his
existing debts as they become absolute and matured. [Emphasis added.]
Thus, although MCL 566.11 defines “debt” as “any legal liability, whether matured or
unmatured, liquidated or unliquidated, absolute, fixed or contingent,” determining solvency
requires contemplation of debts as they become absolute and matured.
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MCL 566.11 defines assets as follows:
[P]roperty not exempt from liability for [the debtor’s] debts. To the extent
that any property is liable for any debts of the debtor, such property shall be
included in his assets.
Any property having value, including good will, is an asset under the statute if it has value. SCD
Chemical Distributors, Inc v Medley, 203 Mich App 374, 378-379; 512 NW2d 86 (1994).
In sum, our courts recognize that if a debtor’s existing assets were sufficient to meet his
existing obligations, i.e., his absolute and matured debts, just before and just after the challenged
conveyance, he was solvent. Accordingly, we reject plaintiff’s argument that Adams’ entire debt
owed to plaintiff and his entire debt owed to Michael Fugle should have been considered as
liabilities when determining solvency. There was evidence of a forbearance agreement in place
that required payments on Adams’ debt to plaintiff in the amount of $6,667 per month. The
entire amount, almost $500,000, was not due at the time of the stock transfer. Similarly, there
was no evidence that the entire amount Adams owed to Fugle was due and payable at the time of
the transfer. Rather, Adams owed Fugle approximately $1,000 per month on that loan. The
monthly payments, as each became due and owing, were the then-existing obligations of Adams.
The entire debts were not. Thus, the trial did not clearly err in finding that the entire obligations
were not liabilities for purposes of determining the solvency of Adams.
With regard to additional debts, there was evidence that Scott Travel’s balance sheet
showed stockholder loans to Adams in the amount of approximately $97,000. However, Adams
testified that this money was essentially taken as income and that it was due “on demand.” Given
that Adams owned one hundred percent of Scott Travel and thus could control the repayment
schedule of this money, the trial court did not clearly err in implicitly determining that this debt
was not absolute and matured and therefore did not have to be considered for purposes of
determining Adams’ insolvency. Testimony at the evidentiary hearing also revealed that Adams
had total expenses of between $4,000 to $5,000 per month, not including the forbearance
payments to plaintiff but including payments on the Fugle debt. Under the forbearance
agreement, Adams owed plaintiff $6,667 per month. Thus, the evidence supported a finding that
Adams’ total then-existing debt per month was approximately $11,667.
With regard to assets, the evidence showed that when the transfer was made, Adams had
a house in White Lake, Michigan; one hundred percent ownership in Scott Travel; fifty percent
ownership in Airmotive Investments; twenty five percent ownership in M-59 Associates; and a
car. Neither party contests the trial court’s valuation of Adams’ automobile at $5,000 or Adams’
M-59 stock at $50,000. The valuation of Adams’ home at $70,000 was low based on the
evidence. However, we cannot conclude that this value was clearly erroneous.1 The trial court’s
valuation of Adams’ interest in Airmotive Investments and in a Cessna Airplane was, however,
clearly erroneous. Airmotive had an airplane, which was valued at $110,000. Adams testified
that there was a lien on the airplane of $40,000 to $50,000 in 1994, making its net value
1
We note that plaintiff does not object to Adams’ home being considered a $70,000 asset.
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approximately $60,000 to $70,000. Airmotive’s other assets were minor and no value was
assigned to them. Further, Adams did not testify about the value of his Airmotive stock apart
from the airplane, which was basically the only asset. Given that Adams only owned fifty
percent of Airmotive’s stock, the most his investment was worth was $35,000. The trial court
valued Adams’ interest in Airmotive at $70,000 and his interest in the airplane at $80,000. This
was erroneous. Nevertheless, Adams’ assets were at least $125,000, considering only his home,
his M-59 stock, and his automobile. Subtracting the amount that Adams testified would have
been due under the forbearance agreement from December 1993 through May 1994 ($40,002)
would leave total assets of $84,998.
Despite the trial court’s error in valuing the Airmotive assets, the trial court’s ultimate
finding that Adams was solvent during the relevant “snapshot” time – just before the transfer and
immediately thereafter, see Foodland, supra at 479 – was not clearly erroneous based on the
above evidence. Indeed, the fair, salable value of Adams’ assets, without even considering
Airmotive or Scott Travel and subtracting the amount due under the forbearance agreement as
testified to by Adams, was $84,998. In addition, Adams had income of approximately $65,000
in 1994.2 Adams’ existing assets were sufficient to allow him to meet his existing obligations of
approximately $11,667 for the months preceding and following the stock transfer. Moreover,
Adams testified that at the time of the transfer, he could pay his debts through the resources he
had available and the transfer of ninety-nine shares of M-59 Associates stock did not eliminate
his ability to pay. Because we are not left with a definite and firm conclusion that a mistake
occurred, we cannot conclude that the trial court clearly erred in finding that Adams was solvent
before and after the challenged stock transfer. See Regan, supra at 37-38, and Massey, supra at
379.
Additionally, we reject plaintiff’s argument that in evaluating Adams’ solvency, the trial
court improperly relied on MCL 566.16, a statute not pleaded by plaintiff. The trial court ruled
that a case for fraudulent conveyance could not be made under MCL 566.14. The trial court also
found that MCL 566.16 possibly applied to the facts of the case but that it, too, could not support
setting aside the conveyance. We find no impropriety with this ruling.
As its last argument, plaintiff contends that the trial court improperly considered the
forbearance agreement when determining issues related to the stock transfer. Plaintiff argues that
because Adams had been barred from utilizing the forbearance agreement as an affirmative
defense in the primary case, he should not have been allowed to invoke it in the instant, postjudgment, garnishment proceedings. However, Scott, who was defending against plaintiff’s
efforts to set aside the stock transfer, offered the forbearance agreement when defending the
2
We note that plaintiff argues that the trial court should not have considered Adams’ income in
evaluating Adams’ solvency. We disagree. As previously discussed, an asset is something that
has value. Adams offered evidence of his income in 1994. This income was an asset when the
transfer was made. It was relevant to a determination of whether he could meet his then-existing
obligations out of his then-existing assets, which is the applicable test.
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stock transfer. He had not been precluded from offering the forbearance agreement for any
purpose at any time and, indeed, was not a party to the original suit. Plaintiff’s argument with
regard to the forbearance agreement has no merit.
Affirmed.
/s/ Kirsten Frank Kelly
/s/ Michael R. Smolenski
/s/ Patrick M. Meter
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