Jan Kay Estes v. Jeff Edward Titus

Michigan Supreme Court
Lansing, Michigan
Chief Justice: Justices:
Opinion Clifford W. Taylor Michael F. Cavanagh
Elizabeth A. Weaver
Marilyn Kelly
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
FILED JULY 2, 2008
JAN KAY ESTES, personal representative
of the estate of Douglas Duane Estes,
Plaintiff-Appellee,
v No. 133098
JEFF EDWARD TITUS,
Defendant-Appellee,
and
JULIE L. SWABASH, formerly known as
JULIE L. TITUS,
Appellant.
BEFORE THE ENTIRE BENCH
KELLY, J.
In this case of first impression, we are asked whether the Uniform
Fraudulent Transfer Act (UFTA)1 applies to a transfer of property made pursuant
to a property settlement agreement incorporated in a divorce judgment. We hold
1
MCL 566.31 et seq.
that it does apply and that a UFTA claim is not an impermissible collateral attack
on a divorce judgment. However, property owned as tenants by the entirety is not
subject to process by a creditor holding a claim against only one spouse. Such
property is not an “asset” under the UFTA. Therefore, its distribution in a divorce
judgment does not constitute a “transfer” for purposes of that act.
Because the trial court refused to apply the UFTA in this case, it never
addressed whether plaintiff stated a valid cause of action against Julie Swabash
under the act. Thus, the question whether plaintiff raised issues of fact concerning
Jeff Titus’s actual intent to defraud her was not properly before the Court of
Appeals. Hence, we vacate the portion of the Court of Appeals judgment that
discusses the factual sufficiency of plaintiff’s claim of a transfer made with an
actual intent to defraud. We affirm in part and vacate in part the judgment of the
Court of Appeals.
I. FACTS AND PROCEDURAL HISTORY
The relevant facts of this case are as follows. On September 23, 2002,
plaintiff Jan Estes filed a wrongful death action against defendant Jeff Titus, the
incarcerated murderer of plaintiff’s husband.2 Not long after, Titus’s wife, now
known as Julie Swabash, filed for divorce. A divorce judgment entered on March
2
Titus shot plaintiff’s husband and another hunter during deer hunting
season in 1990. The case was not solved until a decade later, and Titus was
convicted of premeditated murder and sentenced to a nonparolable term of life in
prison in 2002.
2
23, 2003, providing Swabash with nearly all the marital assets pursuant to the
parties’ property settlement agreement.3 The judgment explained that the property
distribution was unequal because Titus was serving a life sentence in prison and
was relieved of any child support obligation for the couple’s 17-year-old daughter.
On March 24, 2003, plaintiff sought to intervene in the divorce action. She
challenged the distribution of assets to which Titus was entitled in anticipation of
obtaining a recovery from him in her wrongful death action. The divorce court
denied the motion, and plaintiff did not appeal the denial. Instead, on January 20,
2005, after obtaining a wrongful death award, she moved under MCL 600.6128 to
join Swabash in the wrongful death action in an effort to collect the judgment.
Plaintiff contended that the Tituses’ property settlement had been a
fraudulent transfer within the meaning of the UFTA. The trial court held that it
lacked the authority to amend the judgment entered by the divorce court. It
declined to add Swabash as a party, dissolved the restraining order, and quashed
the discovery subpoena it had issued earlier. Plaintiff appealed.
Judge Markey, writing for the majority in the Court of Appeals, joined by
Judge White, held that the UFTA applied to property transfers in divorce cases.
The Court of Appeals majority went further, holding that plaintiff had sufficiently
3
The terms of the parties’ property settlement agreement were included in
the divorce judgment, but the agreement explicitly was not merged in the
judgment.
3
established a claim under the UFTA by demonstrating an actual intent to defraud.4
The Court remanded the matter to the trial court so that Swabash could be added
as a party defendant to the supplemental proceedings in the wrongful death case.5
Judge O’Connell dissented in part in the belief that the Court of Appeals majority
was allowing a collateral attack on the divorce judgment. We granted leave to
appeal.6
II. STANDARD OF REVIEW
This appeal presents jurisdictional issues, which we review de novo.7 The
interpretation of statutes and court rules is also a question of law subject to de
novo review,8 as is the application of legal doctrines, such as res judicata and
collateral estoppel.9
III. THE UFTA’S APPLICATION TO PROPERTY SETTLEMENTS IN DIVORCE CASES
In her appeal, Swabash argues that the Legislature did not intend to include
property distributions in divorce cases within the purview of the UFTA. We note
initially that the language of the act does not exempt from its reach property
4
See MCL 566.34(2).
5
Estes v Titus, 273 Mich App 356; 731 NW2d 119 (2006).
6
Estes v Titus, 478 Mich 864 (2007).
7
Lapeer Co Clerk v Lapeer Circuit Judges, 465 Mich 559, 566; 640 NW2d
567 (2002).
8
Cardinal Mooney High School v Michigan High School Athletic Ass’n,
437 Mich 75, 80; 467 NW2d 21 (1991).
9
Ghaffari v Turner Constr Co, 473 Mich 16, 19; 699 NW2d 687 (2005).
4
transferred pursuant to divorce judgments. However, the definition of “asset” in
the UFTA does exempt some property held as tenants by the entirety.10 Hence, in
a UFTA action, marital property held by the entirety is exempt from the creditor of
only one spouse when the property is transferred pursuant to a divorce judgment.
But property transferred pursuant to a property settlement agreement incorporated
in a divorce judgment is subject to a UFTA action if it meets the definition of an
asset.
A. TRANSFER
We reject Swabash’s claim that the UFTA can never reach the transfer of
property in divorce actions. The UFTA defines “transfer” at MCL 556.31(l) as
“every mode, direct or indirect, absolute or conditional, voluntary or involuntary,
of disposing of or parting with an asset or an interest in an asset, and includes
payment of money, release, and creation of a lien or other encumbrance.”
A court may provide for the distribution of property in a divorce judgment,
and, when it enters, the judgment has the same effect as a deed or a bill of sale.11
10
MCL 566.31(b)(iii).
11
MCL 552.401 provides:
The circuit court of this state may include in any decree of
divorce or of separate maintenance entered in the circuit court
appropriate provisions awarding to a party all or a portion of the
property, either real or personal, owned by his or her spouse, as
appears to the court to be equitable under all the circumstances of
the case, if it appears from the evidence in the case that the party
contributed to the acquisition, improvement, or accumulation of the
(continued…)
5
A property settlement agreement incorporated in a divorce judgment disposes of
the parties’ interests in the marital property. As part of the judgment, it effectuates
a transfer for purposes of the UFTA when the divorce judgment enters.
We conclude that plaintiff may challenge the Tituses’ property settlement
agreement incorporated in the divorce judgment as a transfer within the purview
of the UFTA.
B. PROPERTY HELD AS TENANTS BY THE ENTIRETY
Swabash’s argument that the Legislature did not intend that the UFTA
reach property transferred in a divorce action pursuant to a property settlement
agreement is correct only with respect to some property held as tenants by the
entirety. Only spouses can hold property in that fashion.12
A UFTA action will not reach such property unless both spouses are
debtors on the claim that is the subject of the action. This is because a “transfer”
under the UFTA includes “disposing of or parting with an asset or an interest in an
asset.”13 “Asset” is defined in the act as including the “property of the debtor.”14
(…continued)
property. The decree, upon becoming final, shall have the same
force and effect as a quitclaim deed of the real estate, if any, or a bill
of sale of the personal property, if any, given by the party’s spouse
to the party.
12
“Husband and wife are the only persons who can be tenants by the
entireties.” Field v Steiner, 250 Mich 469, 477; 231 NW 109 (1930).
13
MCL 566.31(l).
14
MCL 566.31(b).
6
One important exception is “[a]n interest in property held in tenancy by the
entireties to the extent it is not subject to process by a creditor holding a claim
against only 1 tenant.”15 Property held as tenants by the entirety is exempt from
the claims of the creditors of only one spouse and is not an asset. Hence, a
distribution of such property in a divorce judgment is not a transfer for purposes of
the UFTA.
“A judgment lien does not attach to an interest in real property owned as
tenants by the entirety unless the underlying judgment is entered against both the
husband and wife.”16 The Legislature extended that same protection to “[a]ll
bonds, certificates of stock, mortgages, promissory notes, debentures, or other
evidences of indebtedness” held by a husband and wife.17 Thus, “[p]roperty
described in section 1 of 1927 PA 212, MCL 557.151, or real property, held
jointly by a husband and wife as a tenancy by the entirety is exempt from
execution under a judgment entered against only 1 spouse.”18
Therefore, real estate and the financial instruments described in MCL
557.151 held as tenants by the entirety cannot be the subject matter of a UFTA
claim if only one spouse is the debtor. This conclusion fits into the larger
statutory purpose of avoiding fraudulent transfers because it is difficult to
15
MCL 566.31(b)(iii).
16
MCL 600.2807(1).
17
MCL 557.151.
18
MCL 600.6023a.
7
comprehend how disposing of property that a creditor cannot reach could
“defraud” that creditor.
This rule applies when property held as tenants by the entirety is disposed
of in a divorce judgment, despite the fact that the divorce ends the tenancy by the
entirety.19 This is because the spouses hold the property as tenants by the entirety
until the marriage is dissolved. Under the UFTA, such property is not an asset,
and its distribution pursuant to the divorce judgment is not a transfer.
IV. UFTA RELIEF AND COLLATERAL ATTACKS ON DIVORCE JUDGMENTS
The dissenting judge in the Court of Appeals opined that plaintiff was
precluded from using this case to collaterally attack the Tituses’ divorce judgment.
According to the dissent, plaintiff’s proper remedy was to appeal the divorce
court’s denial of her motion to intervene in the divorce proceedings.20 The
dissent’s position is faulty because it presumes that the divorce court had the
authority to determine a creditor’s property rights within a divorce proceeding. If
that had been the case, plaintiff would have been required to appeal the divorce
court’s denial of her motion to intervene.
19
MCL 552.102 provides: “Every husband and wife owning real estate as
joint tenants or as tenants by entireties shall, upon being divorced, become tenants
in common of such real estate, unless the ownership thereof is otherwise
determined by the decree of divorce.”
20
Estes, 273 Mich App at 386-387 (O’Connell, P.J., dissenting).
8
A. THE EFFECT OF PLAINTIFF’S FAILURE TO APPEAL THE ORDER DENYING HER
MOTION TO INTERVENE
This Court has long recognized that the jurisdiction of a divorce court is
strictly statutory and limited to determining “the rights and obligations between
the husband and wife, to the exclusion of third parties . . . .”21 When fraud is
alleged, third parties can be joined in the divorce action only if they have
conspired with one spouse to defraud the other spouse of a property interest.22
In this case, plaintiff does not allege that one of the Tituses defrauded the
other. She alleges instead that the property distribution was fraudulent only with
respect to her, a third party to the divorce.
Plaintiff’s motion to intervene was based on MCR 2.209(A)(3), which
allows an intervention of right in cases in which the intervenor’s interests are not
adequately represented by the parties.23 The court rule would otherwise have
21
Yedinak v Yedinak, 383 Mich 409, 413; 175 NW2d 706 (1970). In
Yedinak, the divorce court allowed the defendant husband’s brothers to be joined
as parties in the divorce. It placed an equitable lien on the property to secure the
payment of money the husband was alleged to have orally promised to his
brothers. A majority of this Court reversed, reasoning that the creditor brothers
had an adequate remedy at law to secure a judgment against their debtor brother.
Id. at 414-415. The divorce court could not exercise its equitable powers in
contravention of its limited statutory authority. Id. at 415.
22
Berg v Berg, 336 Mich 284, 288; 57 NW2d 889 (1953).
23
MCR 2.209(A)(3) states that a person has the right to intervene
when the applicant claims an interest relating to the property or
transaction which is the subject of the action and is so situated that
the disposition of the action may as a practical matter impair or
(continued…)
9
applied in the divorce because neither of the Tituses adequately represented
plaintiff’s interest as a potential creditor. However, the rule did not apply because
the creditor sought to intervene in a divorce action in which the court did not have
statutory jurisdiction to decide the intervenor’s rights. Court rules cannot
establish, abrogate, or modify the substantive law.24
In Yedinak v Yedinak, we addressed this same issue in the context of the
court rules of permissive and necessary joinder. The majority in Yedinak found
that nothing in these rules gave the divorce courts “power to disregard statutory
provisions pertaining to divorce and to litigate the rights of others than the
husband and wife.”25 The same reasoning applies here. The divorce court
properly denied plaintiff’s motion to intervene in the divorce proceedings, and
plaintiff correctly concluded that an appeal from the denial order would have been
futile.
When it denied plaintiff’s motion to intervene, the divorce court opined that
the Tituses’ property settlement was not fraudulent because it achieved an
equitable division between the spouses. The judge opined:
(…continued)
impede the applicant’s ability to protect that interest, unless the
applicant’s interest is adequately represented by existing parties.
24
Shannon v Ottawa Circuit Judge, 245 Mich 220, 222-223; 222 NW 168(1928).
25
Yedinak, 383 Mich at 414.
10
The problem with the Intervenor/Petitioner’s position is that it
presumes fraud due to what may appear to be an uneven or
inequitable distribution of marital assets to the Divorce/Plaintiff. If
the husband were not incarcerated, and/or not incarcerated for a
significant period of time, then the argument of fraud may have
more weight. However, in the present case, it is very likely that had
the divorce case gone to trial, that this Court would have granted
most of the property to Ms. Titus simply based on the fact that her
husband will be incarcerated for a significant period of time.
Swabash argues that plaintiff’s failure to appeal the denial of plaintiff’s
motion caused the divorce court’s decision that no fraud existed to have the
preclusive effect of either res judicata or collateral estoppel. But these doctrines
are inapplicable here. The creditor’s right to relief under the UFTA was not raised
in plaintiff’s motion to intervene in the divorce proceeding, nor could it have been
granted if raised.
The doctrine of res judicata bars a subsequent action when “(1) the first
action was decided on the merits, (2) the matter contested in the second action was
or could have been resolved in the first, and (3) both actions involve the same
parties or their privies.”26 The doctrine bars all matters that with due diligence
should have been raised in the earlier action.27 Plaintiff did not raise her claim for
UFTA relief in her motion to intervene, nor was she required to do so, given that
the divorce court lacked the authority to consider it.
26
Dart v Dart, 460 Mich 573, 586; 597 NW2d 82 (1999).
27
Id.11
Collateral estoppel is also inapplicable. That doctrine requires that (1) a
question of fact essential to the judgment was actually litigated and determined by
a valid and final judgment, (2) the same parties had a full and fair opportunity to
litigate the issue, and (3) there was mutuality of estoppel.28 The essential issue in
the motion to intervene was whether a third party could be allowed to claim that
fraud was perpetrated against her in the divorce proceeding.
Once the divorce court decided that it had no jurisdiction to grant the
motion to intervene, it could not reach the merits of plaintiff’s claim. Thus,
plaintiff had no opportunity to litigate the issue of fraud. Because no hearing was
held on this issue, it cannot be said that the issue was fully and fairly litigated.
Moreover, the issue whether relief under the UFTA was available, the only issue
relevant to this appeal, was not even raised in the motion to intervene.
Consequently, the divorce court did not resolve the issue whether the Tituses’
property distribution was inequitable with respect to plaintiff under the UFTA.
In summary, we hold that plaintiff’s failure to appeal the order denying her
motion to intervene in the Tituses’ divorce had no preclusive effect on her claim
for relief under the UFTA.
B. THE LIMITED NATURE OF UFTA RELIEF
The Court of Appeals correctly concluded that MCR 2.613(B) prevented
the trial court in the wrongful death case from setting aside or voiding the divorce
28
Storey v Meijer, Inc, 431 Mich 368, 373 n 3; 429 NW2d 169 (1988).
12
judgment entered by the family division of the circuit court.29 It accurately noted,
as well, that MCR 2.613(B) does not prevent a court such as the court in the
wrongful death case from granting relief under the UFTA.30 The dissenting judge
concluded that the Court of Appeals in effect allowed plaintiff to “recover any
‘marital assets’ by way of a collateral attack on a valid divorce judgment.”31
The UFTA specifically provides for avoiding a fraudulent transfer or
attaching a particular fraudulently transferred asset.32 Relief under the UFTA
29
MCR 2.613(B) states:
A judgment or order may be set aside or vacated, and a
proceeding under a judgment or order may be stayed, only by the
judge who entered the judgment or order, unless that judge is absent
or unable to act. If the judge who entered the judgment or order is
absent or unable to act, an order vacating or setting aside the
judgment or order or staying proceedings under the judgment or
order may be entered by a judge otherwise empowered to rule in the
matter.
30
Estes, 273 Mich App at 367-369.
31
Id. at 386 (O’Connell, P.J., dissenting).
32
MCL 566.37 provides:
(1) In an action for relief against a transfer or obligation under
this act, a creditor, subject to the limitations in [MCL 566.38], may
obtain 1 or more of the following:
(a) Avoidance of the transfer or obligation to the extent
necessary to satisfy the creditor’s claim.
(b) An attachment against the asset transferred or other
property of the transferee to the extent authorized under section 4001
of the revised judicature act of 1961, 1961 PA 236, MCL 600.4001,
and applicable court rules.
(continued…)
13
determines only the creditor’s right to fraudulently transferred property.33 The
court in a UFTA action would transfer directly to the creditor any property interest
that would have been awarded to the debtor in the divorce action but for the
parties’ fraud. Hence, the relief granted would not affect the validity of the
divorce judgment or provisions of the judgment such as child custody.
C. UFTA RELIEF DISTINGUISHED FROM A COLLATERAL ATTACK
ON THE VALIDITY OF THE DIVORCE JUDGMENT
Relief under the UFTA should be distinguished from a collateral attack on
the validity of the divorce judgment itself. Challenges to the validity of a divorce
typically are premised on alleged violations of the various statutory requirements
(…continued)
(c) Subject to applicable principles of equity and in
accordance with applicable court rules and statutes, 1 or more of the
following:
(i) An injunction against further disposition by the debtor or a
transferee, or both, of the asset transferred or of other property.
(ii) Appointment of a receiver to take charge of the asset
transferred or of other property of the transferee.
(iii) Any other relief the court determines appropriate.
(2) If a creditor has obtained a judgment on a claim against
the debtor, the creditor, if the court so orders, may levy execution on
the asset transferred or its proceeds.
33
See Ocwen Fed Bank, FSB v Int’l Christian Music Ministry, 472 Mich
923 (2005).
14
for divorce, such as the residency requirement and the waiting period.34 These are
jurisdictional requirements.35 Judgments may be attacked both directly and
collaterally for lack of jurisdiction. However, this Court has been loath to
invalidate divorce judgments on the urgings of third parties when neither spouse
challenged the validity of the divorce in a direct appeal.36 Furthermore, the Court
has refused to invalidate divorces on the basis of third-party allegations of
nonjurisdictional irregularities in the divorce proceedings.37
This line of cases is distinguishable from the instant case because relief
under the UFTA does not invalidate the divorce judgment itself. Furthermore, an
independent action for relief under the UFTA is not premised on any irregularity
34
In Couyoumjian v Anspach, 360 Mich 371, 374-375, 386; 103 NW2d
587 (1960), the plaintiffs alleged that the defendant attorney had misrepresented
his client’s residence in a divorce proceeding. In that proceeding, the court
awarded the client property that the client’s husband had earlier conveyed to
plaintiffs. In Jackson City Bank & Trust Co v Fredrick, 271 Mich 538; 260 NW
908 (1935), the estate of the defendant’s second husband attempted to set aside
real property conveyances by the second husband to the defendant and him as
tenants by the entirety. The plaintiff claimed that the defendant’s divorce from her
first husband was invalid because the court entered the divorce judgment before
the applicable waiting period had expired.
35
Stamadianos v Stamadianos, 425 Mich 1, 6-7; 385 NW2d 604 (1986).
36
Jackson City Bank, 271 Mich at 544, 548.
37
In Pettiford v Zoellner, 45 Mich 358, 361; 8 NW 57 (1881), the
decedent’s child by a prior marriage sought to eject the decedent’s widow from the
couple’s residence. The Court refused to invalidate the couple’s divorces from
their former spouses on the basis of allegations of irregularities in the affidavits
supporting service by publication.
15
in the divorce proceedings. It is premised on the divorce court’s lack of statutory
authority to conduct a UFTA analysis within the divorce proceeding.
D. UFTA RELIEF DISTINGUISHED FROM A COLLATERAL ATTACK ON A LIFE
INSURANCE PROVISION IN THE DIVORCE JUDGMENT
The decision on which the Court of Appeals dissent relied when stating that
divorce judgments are not generally subject to third-party collateral attacks38
derived from a different line of cases. Those cases dealt specifically with life
insurance provisions in divorce judgments.
Prominent among them is Kasper v Metro Life Ins Co.39 Kasper involved a
dispute over life insurance proceeds between the decedent’s father and the
decedent’s ex-wife as guardian of the couple’s son. The ex-wife contended that,
under the divorce judgment, the couple’s son was to be the designated beneficiary
of the decedent’s life insurance policy. After the divorce judgment was entered,
the decedent had named the decedent’s father as the policy’s beneficiary. The
father argued that the divorce court had no jurisdiction to adjudicate the rights of
the couple’s son, a third party, within the divorce proceeding. We held that,
although the divorce court could not make a third party the beneficiary of a life
insurance policy, it could ratify the parties’ agreement to that effect.40 Thus, it was
38
White v Michigan Life Ins Co, 43 Mich App 653; 204 NW2d 772 (1972).
39
Kasper v Metro Life Ins Co, 412 Mich 232; 313 NW2d 904 (1981).
40
Id. at 254-255.
16
not the divorce court but the parties to the divorce who decided their son’s right to
receive life insurance proceeds under the policy.
In denying the right of the decedent’s father to claim the proceeds as a
later-designated beneficiary in Kasper, we noted that the court’s authority to
enforce the spouses’ agreement was “predicated upon our settled rule that one who
has partaken of the fruits of a divorce decree cannot be heard to question the
jurisdiction of the court which rendered it.”41 We also quoted the following
passage from the Court of Appeals decision in Krueger v Krueger, which dealt
with the life insurance provision in a divorce judgment:
It is also important to note that the person challenging the
divorce judgment and the underlying agreement was not a party to it.
Under the circumstances it would be improper to allow this divorce
settlement to be collaterally attacked after the husband has accepted
all the benefits which he could obtain under it, but relieving him of
his obligation.[42]
The proposition that a third party cannot collaterally attack a divorce
judgment also occurred in earlier Court of Appeals cases dealing with life
insurance provisions in divorce judgments. One of these, White v Michigan Life
Ins Co, is the case cited in the Court of Appeals dissent.43 Viewed in context, the
41
Id. at 255.
42
Krueger v Krueger, 88 Mich App 722, 725-726; 278 NW2d 514 (1979).
43
White was decided under an earlier version of MCL 552.101, which, at
the time, provided that an insurance policy was payable to the decedent’s estate
“unless otherwise ordered” in the divorce judgment. The Court of Appeals
interpreted this provision as giving authority to the divorce court to order the
husband to name the couple’s children as the principal beneficiaries of his
(continued…)
17
prohibition against third-party attacks on life insurance provisions in divorce
judgments is based on the premise that they are an improper means of challenging
the provisions’ validity. The spouse who was ordered, or who promised, to
designate a certain beneficiary was a party to the divorce proceedings. That
spouse could have challenged the validity of the judgment’s life insurance
provision on direct appeal. A third-party collateral attack on the provision would
be inappropriate for that reason.
This line of cases should be distinguished from cases involving a creditor’s
right to relief under the UFTA. A creditor is not a party to a divorce proceeding
and cannot directly appeal a divorce judgment. A creditor’s right to relief under
the UFTA is not affected by the fact that the debtor can appeal the property
distribution in the divorce judgment. If a debtor agrees to a transfer of
substantially all the marital assets in order to defraud a creditor, he or she cannot
(…continued)
insurance policy. The husband did not do so. At his death, his second wife was
the sole beneficiary of his life insurance policies. The Court of Appeals stated the
general proposition that a “divorce judgment may not be collaterally attacked.”
White, 43 Mich App at 657. It then interpreted the divorce judgment to conclude
that the second wife was entitled to insurance proceeds only to the extent that the
decedent purchased additional insurance after the divorce. Id. at 658.
An earlier case decided under the same version of the statute also relied on
the proposition that “the validity of an unappealed decree of divorce may not be
attacked by third parties except for lack of jurisdiction.” Binben v Continental
Cas Co, 9 Mich App 97, 100-101; 155 NW2d 883 (1967). The Court concluded
that the decedent’s second wife was not entitled to life insurance proceeds under
the clear language of the divorce judgment. The judgment had ordered the
decedent to name his minor children as his beneficiaries.
18
be expected to appeal that transfer. Neither can a creditor appeal in such a case.
Given that a creditor is precluded from intervening in a divorce proceeding, the
only way in which the creditor can raise a UFTA claim is in a separate action. 44 A
creditor’s request for relief under the UFTA in a separate proceeding is not an
impermissible collateral attack on the divorce judgment.
The Court of Appeals correctly concluded that Swabash should be joined in
the wrongful death action. She is both a “person claiming adversely to the
judgment debtor” in that action under MCL 600.6128(2) and a necessary party to
plaintiff’s claim for UFTA relief under MCR 2.205(A).45
V. CONCLUSION
44
We note that courts in other states have allowed UFTA relief under a
fraud exception to the prohibition against collateral attacks on judgments. In
Greeninger v Cromwell, 140 Or App 241, 246; 915 P2d 479 (1996), the court
reasoned that a fraudulent transfer under the UFTA constitutes extrinsic fraud
because it is collateral to the merits of the case. The court held that an attack on
such a transfer fell under the extrinsic fraud exception to collateral attacks on
judgments. In Dowell v Dennis, 998 P2d 206, 212 (Okla Civ App, 1999), the
court relied on select sections of Corpus Juris Secundum to hold that a third party
whose interests have accrued beforehand may attack a divorce judgment on the
ground of fraud “regardless of whether such attack is labeled ‘collateral’ or
‘direct.’” We take no position on the validity of this alternative approach. Rather,
we conclude that a creditor’s claim under the UFTA is not an impermissible
collateral attack on a divorce judgment because (1) the divorce court has no
jurisdiction to determine the rights of a creditor and (2) a creditor cannot appeal a
divorce judgment.
45
Estes, 273 Mich App at 383-386.
19
We hold that the UFTA applies to the transfer of property in a divorce
judgment that incorporates a property settlement agreement. Property that is held
as tenants by the entirety is not subject to process by a creditor holding a claim
against only one spouse. Such property is not an “asset” under the UFTA.
Therefore, the distribution of such property in a divorce judgment is not a
“transfer” for purposes of the UFTA.
Because the validity of the UFTA claim in this case was not properly
before the Court of Appeals, we vacate that portion of the Court’s judgment
discussing the badges of fraud listed in MCL 566.34(2).
The trial court should have granted plaintiff’s motion to join Swabash in
the supplemental proceedings to the wrongful death action. Swabash is a person
claiming adversely to the judgment debtor, Titus, under MCL 600.6128(2) and a
necessary party to plaintiff’s claim for UFTA relief under MCR 2.205(A).
Plaintiff’s claim for relief under the UFTA brought in the wrongful death
action does not constitute a collateral attack on the divorce judgment. The relief
plaintiff sought in the wrongful death action could not vacate the divorce
judgment. It could only affect plaintiff’s right to property fraudulently transferred
to Swabash pursuant to the judgment. It could allow avoidance of a fraudulent
transfer or attachment of a fraudulently transferred asset.
We also hold that the divorce court properly denied plaintiff’s motion to
intervene in the Tituses’ divorce action. An appeal of that denial would have been
20
futile. Plaintiff was a third party to the action. A third party can be joined in a
divorce action when fraud is alleged only if he or she has conspired with one
spouse to defraud the other of a property interest. That did not occur here. The
divorce court’s determination was of the equities between the spouses. The court
did not consider whether the transfer of assets envisioned in the property
settlement agreement constituted a fraudulent transfer with respect to creditors.
We affirm the judgment of the Court of Appeals in part, vacate it in part,
and remand the case to the trial court for further proceedings in conformity with
this opinion.
Marilyn Kelly
Clifford W. Taylor
Michael F. Cavanagh
Elizabeth A. Weaver
Maura D. Corrigan
Robert P. Young, Jr.
Stephen J. Markman
21
STATE OF MICHIGAN
SUPREME COURT
JAN KAY ESTES, personal representative
of the estate of Douglas Duane Estes,
Plaintiff-Appellee,
v No. 133098
JEFF EDWARD TITUS,
Defendant-Appellee,
and
JULIE L. SWABASH, formerly known as
JULIE L. TITUS,
Appellant.
KELLY, J. (concurring).
I write separately to address the concern expressed during this appeal that
our decision will leave a great many divorce judgments subject to attack by
creditors, thus robbing them of finality. I believe the concern is unfounded. As I
will explain, relatively few creditors will be incentivized to bring actions under the
Uniform Fraudulent Transfer Act (UFTA) against newly divorced individuals as a
result of the Court’s opinion in this case. This is because of the difficulty creditors
will encounter in surviving a motion for summary disposition.
Difficulties for creditors will exist on several fronts. First, to maintain a
UFTA action, creditors must identify one or more property interests that qualify as
“assets” under the act. As the unanimous opinion describes, property held as
tenants by the entirety when the judgment is entered is not an asset under the
UFTA unless the creditors’ judgment covers both divorced individuals. Normally
that property will include real estate, stocks, bonds, and promissory notes, among
others. Hence, much of the marital estate will not be subject to a UFTA action.
A second difficulty creditors will encounter is stating a prima facie case
alleging a transfer made with an actual intent to defraud. To state such a case,
creditors must allege at least one badge of fraud under MCL 556.34(2). In the
instant case, the creditor alleged several, including (1) that before the transfer was
made, the debtor had been threatened with suit, (2) that the transfer the debtor
made was of substantially all his assets, and (3) that the debtor become insolvent
after the transfer.
By contrast, regarding most divorce cases, the only badge of actual fraud
that might plausibly be alleged is that the transfer took place while the parties were
“insiders” under the act.1 In my opinion, this allegation will not survive a motion
1
Creditors might also seek to avoid the dismissal of their UFTA actions by
alleging only that the property distribution under a divorce judgment was not for a
reasonably equivalent value. This refers to factor h under the act, MCL
566.34(2)(h). The lack of a reasonably equivalent value may be indicative of both
actual and constructive fraud. MCL 566.34(1)(a) and (2), MCL 566.34(1)(b), and
MCL 566.35(1). But I do not believe that UFTA actions will succeed in altering
(continued…)
2
for summary disposition. For the UFTA to apply, the transferee must be an
insider when the transfer occurs. Although a husband and wife are insiders while
married, they normally cease to have that status when the divorce judgment is
entered. And it is only when the judgment is entered that the transfer of property
takes place, assuming, of course, that the individuals do not exchange the property
beforehand.
A more thorough analysis follows.
AUTOMATIC INSIDER STATUS UNDER THE MICHIGAN UFTA
The UFTA’s definition of “insider” includes a relative of the debtor.2 The
definition of “relative,” in turn, includes a spouse.3 Consequently, spouses are
automatic insiders under the UFTA.
(…continued)
many property distributions on the basis of this factor alone. The courts have not
developed standards for determining what constitutes a reasonably equivalent
value in divorce cases. Clearly, many intangible or indirect benefits are involved
in the property distributions in these cases. It is usually very difficult to show that
the value of the consideration received by the debtor was not reasonably
equivalent to the value of the asset transferred. Until standards are developed,
creditors will be hard-pressed to demonstrate actual fraud using this factor by
itself. Moreover, most property settlements are unlike the one in this case, in
which the debtor agreed that Julie Swabash should have virtually all the marital
property.
2
MCL 566.31(g) states in relevant part:
“Insider” includes all of the following:
(i) If the debtor is an individual, all of the following:
(A) A relative of the debtor or of a general partner of the
debtor.
3
A transfer to an insider is one of the relevant factors for determining
whether the transfer was made with an actual intent to defraud a creditor.4 MCL
566.34(2), which supplies a list of such factors, states that any one may be
considered to establish the intent to defraud.5 Because insider status alone can
(…continued)
3
MCL 566.31(k) states: “‘Relative’ means an individual related by
consanguinity within the third degree as determined by the common law, a spouse,
or an individual related to a spouse within the third degree as so determined, and
includes an individual in an adoptive relationship within the third degree.”
4
MCL 566.34(1) states in relevant part:
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor, whether the creditor’s claim arose before
or after the transfer was made or the obligation was incurred, if the
debtor made the transfer or incurred the obligation . . . .
(a) With actual intent to hinder, delay, or defraud any creditor
of the debtor.
The term “insider” also appears in MCL 566.35(2), the UFTA provision
that deals with preferential transfers:
A transfer made by a debtor is fraudulent as to a creditor
whose claim arose before the transfer was made if the transfer was
made to an insider for an antecedent debt, the debtor was insolvent
at that time, and the insider had reasonable cause to believe that the
debtor was insolvent.
In the instant case, plaintiff did not argue that this provision applies to a
transfer of property in a divorce. The division of property in a divorce in
Michigan is based on “equitable factors.” Sparks v Sparks, 440 Mich 141, 159;
485 NW2d 893 (1992), citing Johnson v Johnson, 346 Mich 418, 431; 78 NW2d
216 (1956). Thus, it is doubtful that the preferential-transfer provision of the
UFTA, based as it is on a creditor-debtor model, can be applied to the typical
distribution of property in divorce.
5
MCL 566.34(2) provides:
(continued…)
4
automatically establish fraudulent intent, if all newly divorced spouses were
automatic insiders under the UFTA, creditors could jeopardize the finality of
many divorce judgments. I agree with the argument of the Family Law Section of
the State Bar of Michigan in its brief amicus curiae that this could not have been
the Legislature’s intent.
(…continued)
In determining actual intent under subsection (1)(a),
consideration may be given, among other factors, to whether 1 or
more of the following occurred:
(a) The transfer or obligation was to an insider.
(b) The debtor retained possession or control of the property
transferred after the transfer.
(c) The transfer or obligation was disclosed or concealed.
(d) Before the transfer was made or obligation was incurred,
the debtor had been sued or threatened with suit.
(e) The transfer was of substantially all of the debtor’s assets.
(f) The debtor absconded.
(g) The debtor removed or concealed assets.
(h) The value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or the
amount of the obligation incurred.
(i) The debtor was insolvent or became insolvent shortly after
the transfer was made or the obligation was incurred.
(j) The transfer occurred shortly before or shortly after a
substantial debt was incurred.
(k) The debtor transferred the essential assets of the business
to a lienor who transferred the assets to an insider of the debtor.
5
It is interesting to note that the application of the badges of fraud listed in
the Michigan UFTA differs from that allowed in other states’ versions of the
UFTA. For example, the UFTA as adopted in New Jersey, Oregon, and Illinois
does not expressly allow the use of only one factor to establish the intent to
defraud.6 Not surprisingly, in these states, courts require a “confluence” of factors
indicating an actual intent to defraud.7
As a practical matter, a creditor will normally allege multiple badges of
fraud to establish an actual intent to defraud under the Michigan version of the
UFTA as well. Multiple factors were present in Szkrybalo v Szkrybalo, in which
the Court of Appeals originally rejected the creditor’s claim on the ground that it
was based solely on insider status.8 We remanded the case to the Court of Appeals
to review several other badges of fraud alleged under MCL 566.34(2), specifically
6
See NJ Stat Ann 25:2-26; Or Rev Stat 95.230(2); 740 Ill Comp Stat
160/5(b). The language these statutes share in common states: “In determining
actual intent . . . , consideration may be given, among other factors to whether
[various factors are present].” In contrast, MCL 566.34(2) provides: “In
determining actual intent . . . , consideration may be given, among other factors,
to whether 1 or more of the following occurred. . . .”
7
See In re Hill, 342 BR 183, 199 (Bankr D NJ, 2006); see also In re
Knippen, 355 BR 710, 732-733 (Bankr ND Ill, 2006) (citing cases for the
proposition that in sufficient number, e.g., seven, the factors give rise to a
presumption of fraud); Morris v Nance, 132 Or App 216, 223; 888 P2d 571 (1994)
(reasoning that some factors can be used to infer fraudulent intent, while others
can be used to infer the lack of such intent).
8
Szkrybalo v Szkrybalo, unpublished opinion per curiam of the Court of
Appeals, issued September 21, 2006 (Docket No. 269125).
6
under subdivisions c, d, h, g, and j.9 On remand, the Court of Appeals ruled for
the plaintiff. The plaintiff raised a genuine issue of material fact regarding
whether the debtor-husband had made a transfer to his wife during the marriage
with an actual intent to defraud his creditors. 10
In this case, plaintiff did not base her cause of action solely on the
allegation that Jeff Titus made fraudulent transfers to an insider. On remand, the
trial court can consider the other badges she alleged, those in subdivisions d, e,
and f, in determining whether any transfer was made with an actual intent to
defraud plaintiff. Thus, in this case, whether a transfer was made to an insider is
not dispositive. However, because our UFTA allows a creditor to allege a single
factor, it is important to know whether a divorce judgment may be attacked solely
on the ground that spouses are automatic insiders.
NEWLY DIVORCED INDIVIDUALS ARE NOT AUTOMATIC
INSIDERS UNDER THE UFTA
In determining whether a transfer under the UFTA was to an automatic
insider, it is necessary to consider the parties’ status at the time of the transfer.
9
Szkrybalo v Szkrybalo, 477 Mich 1086 (2007).
10
Szkrybalo v Szkrybalo (On Remand), unpublished opinion per curiam of
the Court of Appeals, issued May 31, 2007 (Docket No. 269125).
7
Under MCL 552.401, the transfer of property interests in a divorce judgment
occurs when the judgment is entered.11 It is also at that time that the marriage is
dissolved. The simultaneity of the two events makes it impossible for the parties
to be still married at the time the transfer occurs. Because the spousal relationship
evaporates at the same moment that the transfer occurs, the parties to the divorce
are not automatic insiders under the UFTA.
A question arises about what importance to accord to the parties’ status
during the negotiation of the property settlement agreement incorporated into the
divorce judgment. Virtually every property settlement agreement is negotiated
while the parties are still married. However, the UFTA is concerned with the
transferee’s status at the time of transfer, not while the terms of the transfer are
being negotiated.12 The settlement agreement in itself is not a transfer. It is a
conditional promise to transfer that has no effect until the divorce judgment is
entered.
CONCLUSION
I believe that the great majority of divorce judgments will not be subjected
to a UFTA action. A creditor will encounter difficulty sustaining a UFTA action
11
MCL 552.401 provides in relevant part: “The [divorce] decree, upon
becoming final, shall have the same force and effect as a quitclaim deed of the real
estate, if any, or a bill of sale of the personal property, if any, given by the party’s
spouse to the party.”
12
MCL 566.34(2)(a).
8
against a newly divorced individual (1) if the property that the creditor seeks was
held as tenants by the entirety at the time of divorce or (2) if automatic insider
status is the creditor’s only available basis for alleging fraud.
Marilyn Kelly
9