Opinion
No. CV05 401 28 72
August 20, 2009
MEMORANDUM OF DECISION
This matter was tried to the court on December 9, 2008. The plaintiffs, Constance Hamrah and Anthony Campagna, III, filed a two-count complaint against the defendants, Dorothy Jeanne Emerson (hereinafter Dorothy), Trustee of the Survivor's Trust created under the William C. Emerson and Dorothy J. Emerson Family Trust Agreement of January 23, 2001, and Kathryn Hettenbaugh (hereinafter Kathryn). Constance Hamrah and Anthony Campagna, III are brother and sister and siblings of Kathryn. Dorothy is Kathryn's cousin.
The plaintiffs allege in count one that Dorothy was the transferee of real property that was fraudulently conveyed to her by Kathryn and that she was complicit with Kathryn in a conspiracy designed to prevent the plaintiffs from securing payment of an indebtedness Kathryn owed to them.
In the second count, the plaintiffs allege that Kathryn fraudulently conveyed without consideration, her condominium residence at 785A North Trail, Stratford, CT, to her cousin Dorothy, and retained a life use therein, divesting ownership in herself, thereby preventing the plaintiffs from securing payment of her indebtedness to them.
The plaintiffs are seeking to have the conveyance set aside and declared null and void as to them. Their prayer for relief also asks for damages, legal fees and interest.
The salient facts are as follows: the plaintiffs obtained a judgment in the Superior Court of the State of California, County of San Jose, against Kathryn for mismanagement of a Family Trust for which she was acting in the capacity of trustee. The plaintiffs, as well as Kathryn, were beneficiaries under that trust. The judgment, after trial, was in the amount of $635,985 plus $4,587 to Anthony Campagna, III, individually. The trial was held from March 16, 2005 through April 22, 2005. An oral tentative decision was announced on May 26, 2005 and the Statement of Decision was issued on August 22, 2005.
The defendant, Kathryn, attended the California trial and testified therein. Dorothy, with whom Kathryn resided in California during the trial, also attended the proceedings on at least one occasion.
Sometime toward the end of April 2005, after the trial ended, but before the tentative decision was announced, Peter O'Connell, Kathryn's Connecticut attorney, prepared a Quitclaim deed at her request transferring title of her Stratford condominium residence to Dorothy and retaining a Life Use to herself. The document was sent to Kathryn in California and after some minor adjustments, it was dated, signed and returned to Attorney O'Connell for recording.
The deed was recorded in the Stratford Land Records on April 29, 2005. It recited no consideration on the deed other than the standard "one dollar and other valuable considerations," and no conveyance tax was paid at that time. The deed conveyed title to Dorothy J. Emerson as Trustee of the Survivor's Trust created under the William E. Emerson and Dorothy J. Emerson Family Trust Agreement January 2, 2001, with the grantor, Kathryn, retaining a Life Use in the premises.
The subject of consideration for the transfer was discussed over the phone with Attorney O'Connell, but the testimony was unclear as to whether that discussion occurred before or after the preparation and recording of the deed, or whether one or both of the defendants discussed it with the attorney. In any event, a fair market value of $276,000 was arrived at and Attorney O'Connell retrieved the original Quitclaim deed at the Town Clerk's office and inserted the consideration, re-recorded the deed on May 5, 2005, and paid the Commissioner of Revenue Service charge of $1,375 and the conveyance tax of $687, reflecting a purchase price of $276,000. The parties agreed in court at trial, that this was a fair market value of the property at the time of transfer.
A third corrective deed was also prepared by Mr. O'Connell which was substantially the same, except to correct an address and the name of William E. Emerson to William C. Emerson. This deed was recorded on July 5, 2005. At some point, shortly after the May 5, 2005 re-recording, Dorothy transferred to Kathryn, the sum of $276,000.
Testimony was also elicited from Kathryn that revealed that during the period of time stretching from May 5 to May 17, 2005, after receiving the $276,000 from Dorothy, she made a number of disbursements from that money (which had been deposited in her UBS account), which virtually depleted the account. Some of the disbursements were made in California and some after she returned to Connecticut.
The plaintiffs claim that these disbursements were made to deplete the monetary account of Kathryn so as to prevent the plaintiffs from satisfying any claim or judgment against them. They point to the fact that within a two-week period after the receipt of the $276,000 from Dorothy, Kathryn returned approximately $36,500 to Dorothy. Despite the fact that a Life Use was retained by her, she had a lease drawn up whereby she paid a years rent in advance in the amount of $28,000 to Dorothy as landlord. She also provided a security deposit of $5,000. There does not appear to be any evidence that any other rental has been paid to the time of trial, although Kathryn was still residing there.
Kathryn also, on May 10, 2005, drew a check to Dorothy in the amount of $8,500 which she claimed was for rental for the time she stayed at Dorothy's California home. Dorothy, at her deposition, testified that she never asked for rent nor was a payment necessary. Plaintiffs' exhibit 12 lists numerous payments made by Kathryn to various individuals, most of which she claimed were repayments of personal loans. No promissory notes or other evidence of the existence of these loans was presented in evidence. With the exception of one Albert Fernandez, whose deposition was taken, no witnesses were presented to verify the legitimacy of these claimed loans. In Mr. Fernandez's case, Kathryn testified that she repaid a loan of $9,000 to him by check dated May 9, 2005. Mr. Fernandez testified that, in fact, he cashed the check on her behalf and returned the entire amount over to her. This certainly calls into question the credibility of Kathryn.
In addition to the above, plaintiff's Exhibit 12 reflects payments of $11,500 to a Dee Varholak; Mary Jean Hubbell ($50,000); and Lilianne Plough ($25,000) which were labeled as loans. As indicated, no notes or other indicia of indebtedness was produced regarding these items. In addition, a payment of $5,260 was made to Dorothy's housekeeper by Kathryn. The check reflected this as a repayment of a loan but Kathryn claimed it was in the nature of a thank you gift for her services while Kathryn stayed at Dorothy's home. There was another check to Dorothy on May 9, 2005 in the amount of $8,500 which was marked as rental, but Kathryn claimed she mislabeled it as it was for personal use and she had Dorothy cash it for her at the check cashing business that Dorothy and her husband operated. In addition, checks totaling some $85,136 were drawn for Kathryn's personal use and included some $8,500 for clothing, and a prepayment on a leased car in the amount of $25,236.
The plaintiffs claim that these disbursements constitute a conscious and intentional depletion of her assets, and consist of questionable gifts; repayment of unsubstantiated loans; return of substantial sums to Dorothy; and extravagant outlays for her personal use, rendering her for all intents and purposes, insolvent.
The defendants claim that the conveyance was made for a fair and substantial consideration of $276,000 and that the plaintiffs stipulated to this at trial. The plaintiffs contend as the court interprets their position, that while $276,000 represents the fair market value of the property, they are not conceding that consideration was paid for the transfer. They challenge the fact that this was an arm's length transaction and stress the fact that the original deed recited "no consideration," which was only corrected days later and after further reflection.
The defendants contend that since a fair consideration was paid for the property, there can be no finding of fraud, actual or constructive. Further they contend that since no final judgment was entered in the California case or even a tentative decision issued, prior to Kathryn's disbursements of the proceeds, there can be no finding of constructive fraud. They also contend that there is no clear and unequivocal evidence of any fraudulent intent or complicity on the part of Dorothy and therefore there can be no finding of actual fraud.
As the parties discussed the tentative decision of the California court during the trial and in their post-trial briefs, the court will touch briefly on that issue.
CA Rules of Court, rule 3.1590 provides in part that: "(a) On the trial of a question of fact by the court, the court must announce its tentative decision by an oral statement, entered in the minutes, or by a written statement filed with the clerk . . . (b) The tentative decision does not constitute a judgment and is not binding on the court . . . (h) The court must, within 10 days after expiration of the time for filing objections to the proposed judgment, or if a hearing is held, within 10 days after the hearing, sign and file its judgment. The judgment so filed constitutes the decision on which judgment is to be entered . . ."
In the statement of decision from California Judge Gallagher, this rule is referred to as Rule 232. California changed the numbering system of its court rules in 2007. While the text of this rule changed slightly in 2007, the import is the same.
As provided by CA Rules of Court, rule 3.1590, California judges are required to issue a tentative decision in a case, and then the parties are given a period to object and suggest modifications. The tentative decision issued by the judge is not binding, and the court can change its decision. Moreover, as a general rule, a tentative decision and statement of decision are not appealable, unless they are entered as judgments. Alan v. American Honda Motor, 40 Cal.4th 894, 901, 152 P.3d 1109 55 Cal.Rptr.3d 534 (2007). Consequently, CA Rules of Court, rule 3.1590 provides that a tentative decision is, as its name suggests, a judge's nonbinding initial determination regarding the issues raised in the case. While a tentative decision certainly provides the parties with the court's inclination on how it will rule, a tentative decision can be changed and has no true legal effect until it is entered as a judgment. Nevertheless, if a California court wants to changes its tentative decision, it has to notify the parties, and, therefore, litigants would become aware if a tentative decision has been modified. Without such notice, it is reasonable to assume that the court will issue a final judgment along the lines of its tentative decision.
The importance of the California case as it affects the timing of Kathryn's conveyance of her property and disbursement of its proceeds, lies not in the fact that a decision, tentative or final, was not in place at such time, but in the fact that there was a trial and that it progressed for a period of some 27 days and concluded less than a week before the Quitclaim transference was made. The proceeds of $276,000 were dispersed of within a period of some 12 days, from May 5, to May 17, 2005 and within less than a month of the conclusion of the California trial and only days before the tentative-decision was announced. It is not difficult for the court to draw an inference that Kathryn's actions were motivated by her concerns over receiving an unfavorable decision from the California court.
Under Connecticut law, a plaintiff may maintain an action for fraudulent conveyance under either the common law or the Uniform Fraudulent Transfer Act. Whether a claim is brought under the common law or the applicable statute, General Statutes § 52-552e, the elements are the same. As noted by the Connecticut Supreme Court, "although the statute provides a broader range of remedies than the common law . . . the Uniform Fraudulent Transfer Act is largely an adoption and clarification of the standards of the common law of [fraudulent conveyances] . . ." Certain Underwrites at Lloyd's London v. Cooperman, 289 Conn. 383, 395, 957 A.2d 836 (2008). Since the differences between the statutory and common-law remedies are subtle, and the plaintiff's memorandum of law dwells primarily on the statute, the court will focus on the statutory remedy provided by § 52-552e.
General Statute § 52-552e provides: "(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, if the creditor's claim arose before the transfer was made or the obligation was incurred and if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor (A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (B) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
"(b) In determining actual intent under subdivision (1) of subsection (a) of this section, consideration may be given, among other factors, to whether: (1) the transfer or obligation was to an insider, (2) the debtor retained possession or control of the property transferred after the transfer, (3) the transfer or obligation was disclosed or concealed, (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit, (5) the transfer was of substantially all the debtor's assets, (6) the debtor absconded, (7) the debtor removed or concealed assets, (8) 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, (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred, (10) the transfer occurred shortly before or shortly after a substantial debt was incurred, and (11) the debtor transferred the essential assets of the business to a honor who transferred the assets to an insider of the debtor."
The "definitions" section of the Uniform Fraudulent Transfer Act provides the definitions that are to be used in determining the scope of the statute. A "Debtor" is defined as "a person who is liable on a claim." General Statutes § 52-552b(6). "Creditor" is defined as "a person who has a claim." General Statutes § 52-552b(4). Finally, "claim" is defined as "a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, un-matured, undisputed, legal, equitable, secured or unsecured." General Statutes § 52-552b(3). Consequently, a creditor can recover under this statute for a claim that has not yet been adjudicated. The operative standard is whether the creditor has a "right to payment."
"The party seeking to set aside a conveyance as fraudulent bears the burden of proving either: (1) that the conveyance was made without substantial consideration and rendered the transferor unable to meet his obligations; or (2) that the conveyance was made with a fraudulent intent in which the grantee participated . . . The party seeking to set aside the conveyance need not satisfy both alternatives . . . The determination of the question of fraudulent intent is clearly an issue of fact which must often be inferred from surrounding circumstances . . . Such a fact is, then, not ordinarily proven by direct evidence, but rather, by inference from other facts proven — the indicia or badges of fraud." Shawmut Bank v. Brooks Development Corp., 46 Conn.App. 399, 405-06, CT Page 13909 699 A.2d 283 (1997).
"Under this statute, a person wishing to avoid an alleged fraudulent conveyance has the burden of proving either constructive fraud or actual fraud . . . To prove constructive fraud, a plaintiff must show that the conveyance was made without substantial consideration and that the conveyance rendered the transferor unable to meet an obligation to the plaintiff . . . Actual fraud requires a showing that the conveyance was made with a fraudulent intent and that the transferee of the property participated in the fraud . . . In either instance, fraud must be proven by clear and convincing evidence." Gaudia v. Gaudio, 23 Conn.App. 287, 307, 580 A.2d 1212, cert. denied, 217 Conn. 803, 584 A.2d 471 (1990). The requirement that a fraudulent conveyance be proved by clear and convincing evidence applies to intra-family transfers. Tyers v. Coma, 214 Conn. 8, 11, 570 A.2d 186 (1990). Although the plaintiffs bear the burden of showing the transferor's intent to commit actual or constructive fraud, "[t]he plain language in § 52-552e addresses the fraudulent intent of the debtor and makes no mention of the fraudulent intent of the transferee." Wiesleman v. Hoeniger, 103 Conn.App. 591, 599, 903 A.2d 768, cert. denied, 284 Conn. 930, 934 A.2d 245 (2007). As a result, a court may find that a fraudulent conveyance occurred even if there is insufficient evidence to determine the transferee's knowledge and intent regarding the subject transaction.
Therefore, under the Uniform Fraudulent Transfer Act, the plaintiffs can obtain a recovery from any individual against whom they have a claim which is defined as "a right to payment, whether or not it is reduced to judgment." There are two alternative methods of demonstrating a fraudulent conveyance. First, the plaintiffs can establish actual fraud. Intent to defraud can be shown by circumstantial evidence, including the "badges of fraud" outlined in § 52-552f(b). Conversely, the plaintiffs can establish constructive fraud, where a conveyance occurs without substantial consideration and the conveyance left the defendant without sufficient assets to meet her financial obligations. Under either approach, the standard of proof is clear and convincing evidence, which also applies to transfers between families.
In this case, the plaintiffs contend that actual intent to commit fraud has been established because Kathryn quickly depleted all of the proceeds from the money she received from Dorothy on the transfer of her condominium residence in Stratford. The money that she received was substantially paid back to Dorothy for rent she wasn't obligated to pay as a Life User, as well as being given over to other parties as gifts or to pay off alleged loans. As indicated earlier, there appears to be no Connecticut case precisely on point that has held that a systematic depletion of sale proceeds is per se evidence of actual intent to defraud. Nevertheless, this type of proof is relevant and highly probative as it has a bearing on many of the "badges of fraud" found in C.G.S. § 52-552e(b). Specifically, the transfer was made to an "insider," as Dorothy was Kathryn's cousin with whom she had a close relationship. Kathryn, by virtue of the Life Use she retained in the premises, and in fact was still residing therein at the time of this trial, indicates that she retained possession or control over the property. A claim existed in the nature of the California lawsuit, before the property transfer and the disposal of the proceeds. Since the condominium appeared to be Kathryn's only true asset, its transfer and the depletion of the proceeds constituted a transfer of substantially all of her assets and was a removal of her assets as that is contemplated in the statute. Further, these actions on Kathryn's part rendered her insolvent and unable to pay existing debts. As argued by the plaintiffs, the timing of these transfers indicates that it was Kathryn's intent to divest herself of her assets before the California judgment was rendered and to keep those assets out of the reach of her creditors.
The court can find that there is clear and convincing evidence that Kathryn transferred her property to Dorothy and disposed of the proceeds with the actual intent of defrauding, hindering and delaying the plaintiffs from seeking or obtaining satisfaction of their claim against her.
As related to the role of Dorothy in this matter, it appears to the court that although a payment of $276,000 was made by Dorothy to Kathryn as purported consideration for the transfer, this was not truly an arm's length transaction.
The issue of the transfer of the property came up only days after the completion of the California trial. Despite her protestations to the contrary in her deposition, the court is satisfied that Dorothy was fully aware of the nature of the case and the expectation of an unfavorable outcome against Kathryn. The initial Quitclaim deed was prepared the same day that Kathryn broached the subject with her and was entered into without any thought about consideration, which subject only came up days later, prompting the necessity of filing a corrective deed.
Dorothy testified that she wanted to help Kathryn and she was comfortable with the Life Use retained by Kathryn. She fully expected to return the property to Kathryn when Kathryn was in a better financial position. And she received back, almost immediately, substantial sums from Kathryn from the $276,000 she paid to Kathryn. This was clearly intended to be only a temporary accommodation. The property was only being held in Dorothy's name as security for the advance that she made to Kathryn. This transaction was not made for investment; not for use as a vacation home or for retirement purposes. In fact, no rental other than the initial prepayment of one year's rental made on May 12, 2005, has been collected or requested by Dorothy. There is also no evidence that Dorothy ever intended to reside there on a permanent or even a temporary basis. While she may have been motivated with good intentions to protect her cousin, Kathryn, by doing so, she in fact was engaging in a fraud against Kathryn's creditors.
Therefore the court finds by clear and convincing evidence that Dorothy was complicit in aiding Kathryn in the disposal of her property for the purpose of shielding Kathryn's assets from the plaintiffs.
Since the burden of proof is the heightened standard of clear and convincing evidence, and since some plausible argument can be made that the payment of $276,000 constituted fair consideration for the property, the court finds that the evidence does not meet that burden so as to make a finding of constructive fraud.
The court therefore, finds the issues as to actual fraud in favor of the plaintiffs, Constance Hamrah and Anthony Campagna, III, and against the defendants, Dorothy Jeanne Emerson, as trustee and Kathryn Hettenbaugh and orders as follows;
1. The conveyance of the property at 785A North Trail, Stratford, Connecticut, is set aside and declared null and void as to the plaintiffs;
2. The plaintiffs shall be entitled to an attachment on the property; and
3. The defendants are enjoined from further encumbering or disposing of the property.
As no evidence was forthcoming at the trial, no award for damages, interest or attorneys fees are awarded.