Casey Nat. Bank v. Roan

• Citation: 282 Ill.App.3d 55,668 N.E.2d 608,218 Ill.Dec. 124
• Decision Date: 19 July 1996
• Docket Number: No. 4-95-0777,4-95-0777
• Parties: , 218 Ill.Dec. 124 The CASEY NATIONAL BANK, a National Banking Association, Plaintiff-Appellee, v. William R. ROAN, Rosalee Roan, Kathy Sue Logan, and Roger Roan, Defendants-Appellants.
• Court: United States Appellate Court of Illinois

Page 608

668 N.E.2d 608

282 Ill.App.3d 55, 218 Ill.Dec. 124

The CASEY NATIONAL BANK, a National Banking Association Plaintiff-Appellee, v. William R. ROAN, Rosalee Roan, Kathy Sue Logan, and Roger Roan, Defendants-Appellants.

No. 4-95-0777.

Appellate Court of Illinois Fourth District.

Argued May 14, 1996.

Decided July 19, 1996.

James F. Jarrett (argued), Schniederjon, Weber & Jarrett, Effingham, for defendants-appellants.

William A. Sunderman, Kristin L. Wilson (argued), Brainard, Bower & Kramer, Charleston, for plaintiff-appellee.

Justice McCULLOUGH delivered the opinion of the court:

Plaintiff brought an action seeking to set aside a transfer of property based on a fraudulent conveyance and to impose a judgment lien against the property. Defendants appeal, alleging the trial court erred in finding (1) a fraudulent conveyance of the property, and (2) that the property was subject to a lien based on a judgment which had been discharged in bankruptcy. We affirm.

On December 30, 1982, defendant, William Roan executed a promissory note for $65,000 in favor of plaintiff, Casey National Bank (Bank). Defendant Rosalee Roan had previously signed an agreement to be a responsible party on any and all notes executed by her husband William. The note was secured by a 1974 combine and other farm equipment and the combine was insured for actual cash value rather than replacement cost. The combine was destroyed by fire one month before the note became due on November 30, 1983. When the note fell due it was not paid and the Bank's vice president had several conversations with William regarding the need to refinance the loan by a suggested mortgage of William's unencumbered farmland. William then owned a one-half interest in 25 acres of unencumbered farmland known as the homestead and a one-half interest in 60 acres of unencumbered farmland in Clark County. Rosalee owned the other one-half interest in each of these parcels. In addition, they jointly owned an interest in 40 acres of farmland which was mortgaged to the Bank.

On February 29, 1984, the Bank sent William and Rosalee a letter informing them that the note was 90 days past due and the balance of $74,004.13 would have to be paid in full. On March 12, 1984, William informed the Bank's vice president that he would not sign a mortgage on his unencumbered land and he made no payment on the delinquency. The following day, William transferred his one-half interest in the 60-acre farmland to his daughter, defendant Kathy Sue Logan. On March 14, 1984, William transferred his one-half interest in the 25-acre homestead to his son, defendant Roger Roan.

On March 21, 1984, the Bank filed a complaint on the note in the circuit court of Clark County against both William and Rosalee in cause No. 84-L-9. During the course of these proceedings, on October 1, 1984, Rosalee transferred her one-half interest in both the 60-acre and 25-acre parcels to defendants Roger and Kathy. Judgment was entered in favor of the Bank on January 7, 1985, in the sum of $83,573.81 and recorded in the office of the recorder of deeds of Clark County on January 11, 1985. On April 15, 1985, the Bank filed its complaint in the instant action seeking to have the conveyances declared null and void as to it and its judgment imposed as a lien against the property.

On February 19, 1991, William and Rosalee filed a petition for chapter 7 bankruptcy listing as creditors holding security the Bank's judgment in case No. 84-L-9, and as an unsecured disputed claim the instant suit in equity. There were no other creditors listed. In July 1992 the bankruptcy court entered orders providing that the bankruptcy proceeding had no effect on the instant action pending in the circuit court and approving the trustee's report for distribution of $28,056.35 of the insurance proceeds to the Bank. On January 18, 1993, the bankruptcy court entered its final decree and discharge.

In December 1993, defendants filed a motion for summary judgment in the circuit court asserting, in essence, that the bankruptcy court's compromise and discharge of the underlying claim barred the current action. The circuit court denied the motion for summary judgment making the following relevant findings: (1) the Bank's judgment, which was recorded in January 1985, became a lien on all real estate of the defendants; (2) the transfers of the subject property occurred in March 1984 and October 1984; (3) pursuant to section 506(d) of the Bankruptcy Code (Code) (11 U.S.C. § 506(d) (1988)), the Bank's lien passed through the bankruptcy case unaffected; (4) pursuant to section 524 of the Code (11 U.S.C. § 524 (1988)) a discharge operates as an injunction against the continuation of an action to collect a debt as a personal liability of the debtor but does not enjoin the in rem enforcement of a valid lien; (5) pursuant to section 727(a)(2) of the Code (11 U.S.C. § 727(a)(2) (1988)), the bankruptcy court may deny a discharge where the debtor, with intent to hinder, delay, or defraud a creditor, has transferred property of the debtor within one year prior to the filing of the petition; and (6) the bankruptcy court's order by its own language provided that there was no affect on the pending circuit court case.

On May 10, 1995, the circuit court entered a memorandum opinion finding that (1) the conveyances by William and Rosalee to their children were made without valuable consideration immediately following the Bank's request for refinancing of the indebtedness in lieu of filing suit; (2) Roger and Kathy were aware of their parents' financial problems; (3) William and Rosalee were insolvent or became so as the result of the transfers of real property; and (4) the conveyances made by William and Rosalee would be set aside as between the parties to the proceedings. On May 24, 1995, an order was entered incorporating those findings and final judgment was entered in favor of plaintiff providing that the conveyances were null and void as to the Bank and subject to a judgment lien arising by virtue of the judgment recorded in January 1985. The court also denied the defendants' subsequent motion for reconsideration.

Section 4 of the statute relating to frauds provides:

"Every gift, grant, conveyance, assignment or transfer of, or charge upon any estate, real or personal, * * * made with the intent to disturb, delay, hinder or defraud creditors or other persons, * * * shall be void as against such creditors, purchasers and other persons." Ill.Rev.Stat.1985, ch. 59, par. 4.

Illinois courts have divided fraudulent conveyance cases into the categories of fraud in fact and fraud in law. Proof of fraud in fact requires a showing of an actual intent to hinder creditors, while fraud in law presumes a fraudulent intent when a voluntary transfer is made for no or inadequate consideration and directly impairs the rights of creditors. Reagan v. Baird, 140 Ill.App.3d 58, 64-65, 94 Ill.Dec. 151, 156-57, 487 N.E.2d 1028, 1033-34 (1985); Anderson v. Ferris, 128 Ill.App.3d 149, 152-53, 83 Ill.Dec. 392, 395, 470 N.E.2d 518, 521 (1984). Fraud in law requires proof of (1) a voluntary transfer for inadequate consideration, (2) an existing indebtedness against the donor, and (3) retention by the donor of insufficient property to satisfy the indebtedness. Mills v. Susanka, 394 Ill. 439, 448, 68 N.E.2d 904, 908-09 (1946); Effingham State Bank v. Blades, 139 Ill.App.3d 259, 263, 93 Ill.Dec. 764, 768, 487 N.E.2d 431, 435 (1985).

Defendants argue that the court erred in finding a fraudulent conveyance occurred because the Bank failed to prove William and Rosalee transferred the land with the intent to defraud it and failed to prove William and Rosalee were insolvent as a result of the transfer. While the Bank was not required to show intent if it proved the elements for fraud in law, there was nevertheless considerable evidence demonstrating fraudulent intent. William knew for over three months prior to the transfers that his promissory note was delinquent and the Bank was pressing him to refinance the loan by mortgaging his interest in the two parcels of farmland. In the two days following the Bank's final demand for payment or refinancing in lieu of filing a lawsuit, William transferred all his interest in the unencumbered property to his children for a de minimis consideration of $10 on each of the deeds. Rosalee transferred all her interest in the unencumbered property to her children for similar consideration during the course of the court proceedings instituted by the Bank to obtain judgment on the note. As to the issue of William's and Rosalee's solvency at the time of transfer, defendants cite testimony of the Bank's vice president that the insurance policy on the combine was sufficient for the Bank and William's testimony that he believed the policy was sufficient to pay the Bank in full. However, defendants produced no evidence that the insurance proceeds were sufficient to pay the entire indebtedness on the note. In fact, the proceeds from that policy paid into the bankruptcy court were no more than $35,000, from which expenses and fees were deducted. None of the parties dispute that following the transfer, William and Rosalee retained only personal property of little value. The fact that William and Rosalee testified the transfers were made only for purposes of estate planning does not establish that the trial court's finding the conveyances were fraudulent as to the Bank was against the manifest weight of the evidence. The Bank produced sufficient evidence to show fraud in law--a voluntary transfer for inadequate consideration, an existing indebtedness of the donors, and retention by the donors of insufficient property to satisfy the indebtedness--and the circuit court's judgment setting aside the conveyance as to the Bank was not against the manifest weight of the evidence.

However, a finding that the conveyances were fraudulent does not address the...