In re Stacy, Bankruptcy No. 96 B 23596

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: GETTLEMAN
• Citation: In re Stacy, 223 B.R. 132 (N.D. Ill. 1998)
• Decision Date: 30 July 1998
• Docket Number: 98 C 0663,Adversary No. 97 A 1018.,Bankruptcy No. 96 B 23596
• Parties: In re Edwin STACY, Debtor. David R. BROWN, Trustee, Plaintiff, v. Edwin STACY and Marie Stacy, Defendants.

223 B.R. 132 (1998)

In re Edwin STACY, Debtor David R. BROWN, Trustee, Plaintiff, v. Edwin STACY and Marie Stacy, Defendants.

Bankruptcy Nos. 96 B 23596, 98 C 0663, Adversary No. 97 A 1018.

United States District Court, N.D. Illinois, Eastern Division.

July 30, 1998.

John V. Del Gaudio, Attorney at Law, Chicago, IL, for appellants.

Brian J. Wanca, Anderson & Wanca, Rolling Meadows, IL, for appellee.

MEMORANDUM OPINION AND ORDER

GETTLEMAN, District Judge.

Defendants Edwin and Marie Stacy appeal from an order of the Bankruptcy Court denying their motion to dismiss an adversary action brought against them by Edwin's Chapter 7 Trustee. For the reasons set forth below, the Bankruptcy Court order is reversed and the case is remanded for further proceedings.

BACKGROUND

On May 2, 1993, Days Inn of America, Inc. filed a breach of contract action against LLSW, Inc., and a breach of guaranty action against defendant Edwin Stacy and other individuals and the Circuit Court of DuPage County. While that action was pending, but after a judgment had been entered against the primary obligor LLSW, on November 21, 1994, Edwin and Marie transferred their residence in Hinsdale, Illinois from a land trust, in which they owned beneficial interest, to tenancy by the entirety. On September 16, 1996, Days Inn received a judgment against Edwin Stacy in the amount of $328,586.37, and was later awarded attorney's fees in the amount of $109,520.79.

Edwin Stacy filed a Chapter 13 action, which was converted into a Chapter 7 proceeding. In that action Edwin claimed the residence as exempt pursuant to 11 U.S.C. § 522(2b)(B) and the Illinois tenancy by entirety statute 735 ILCS 5/12-112 ("§ 12-112"). The Chapter 7 Trustee, David Brown, then filed an the adversary action against defendants seeking: 1) to avoid the transfer of the residence into tenancy by the entirety pursuant to 11 U.S.C. § 544(b) and the Illinois Uniform Fraudulent Transfer Act ("UFTA"), 740 ILCS 160/1 et seq.; and 2), based on that avoidance, a denial of Edwin's claim for exemption. Defendants moved to dismiss, arguing that the UFTA is inapplicable to transfers of property to tenancy by the entirety and that any claim that the transfer is avoidable must be analyzed under the standards prescribed by § 12-112. Judge Squires denied the motion to dismiss based on his opinion in a similar case, In re Gillissie, 215 B.R. 370 (Bkrtcy.N.D.Ill.1997).

Defendants filed a motion to appeal that order, which this court granted on April 3, 1998. At that time, the court ordered supplemental briefs on the difference in the standards to be applied under the UFTA and § 12-112, and why if defendants are correct, a simple amendment adding allegations of a violation under § 12-112 would not cure the alleged deficiencies in the complaint. All briefs have been filed and the appeal is ripe for resolution.

DISCUSSION

In 1989 Illinois passed a statute creating tenancy by the entirety as to homestead property owned by spouses. At the time defendants affected the transfer of the Hinsdale property from the land trust into tenancy by the entirety, § 12-112 provided:

All the lands, tenements, real estate, goods and chattels (except such as is by law declared to be exempt) of every person against whom any judgment has been or shall be hereafter entered in any court, for any debt, damages, costs, or other sum of money, shall be liable to be sold upon such judgment. Any real property, or any beneficial interest in a land trust, held in tenancy by the entirety shall not be liable to be sold upon judgment entered on or after October 1, 1990 against only one of the tenants. However, any income from such property shall be subject to garnishment as provided in Part 7 of this Article XII, whether judgment has been entered against one or both of the tenants.

Whether the UFTA, 740 ILCS 160/5, which provides in relevant part that "a transfer made . . . 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 . . . (1) with actual intent to hinder, delay or defraud any creditor of a debtor . . .," applied to the original version of 12-112 is unclear and became the subject of differing judicial opinions. In E.J. McKernan Co. v. Gregory, 268 Ill.App.3d 383, 390, 205 Ill.Dec. 763, 643 N.E.2d 1370 (2d Dist. 1994), the defendant transferred title to his home from joint tenancy with his wife to tenancy in the entirety after a judgment had been entered against him and sale proceedings had begun. The defendant moved to restrain the sale, which the trial court denied. On appeal, the court attempted to reconcile the UFTA and 12-112, which appeared to be conflicting statutes. In concluding that the UFTA did not apply, the court held:

We conclude that the Transfer Act and the tenancy by the entirety statutes contain no conflicts. The Transfer Act forbids transfers made with the `actual intent\' to hinder, delay, or defraud. However, intent is irrelevant in a tenancy by the entirety conveyance because it simply cannot be fraudulent to engage in conduct that is specifically and unambiguously sanctioned by statute. A plain reading of the tenancy by the entirety statutes makes it clear that no mental state is required to use the tenancy\'s protection. There are no limitations or qualifications on the use of the tenancy, other than that the real property be held by a married couple during coverture and that the property be the couple\'s `homestead..\' Additionally, the statute provides that only those judgments entered against the debtor on or after October 1, 1990, are subject to the exemption. The defendant has met all of the statutory requirements.

Almost three years later, on March 14, 1997, the First District of the Appellate Court in In re Marriage of Del Giudice, 287 Ill.App.3d 215, 218, 222 Ill.Dec. 640, 678 N.E.2d 47 (1st Dist.1997), a case with similar facts, disagreed with McKernan, stating:

We respectfully disagree with the McKernan court. We find the purpose of the Uniform Transfer Act is to invalidate otherwise sanctioned transactions made with a fraudulent intent. Courts have found that other transactions, which were otherwise lawful, violated the Transfer Act. (citation omitted). For example, in Johnson v. Marshal Marshall & Hushart Huschart Machinery Co., 66 Ill.App.3d 766, 23 Ill.Dec. 505, 384 N.E.2d 141 (1978), this court found that transfers made for the purpose of shielding assets from creditors which are sanctioned by statute, such as the transfer of a individual\'s assets to a limited liability corporation, can constitute a fraudulent conveyance if the property is transferred after a judgment is rendered against the individual. (citation omitted). Similarly, we find that even though the tenancy by the entirety statute permits married couples to convey marital property to that estate, such transfers may still be fraudulent. We acknowledge that the legislature found it appropriate to enable married couples to shield their marital home from the creditors of one spouse. However, there is no indication from either the plain language of the statute nor the legislative history that the legislature intended to include fraudulent conduct within the scope of the afforded protections.

As a result of this conflict, and in particular the result in McKernan, in 1997 the legislature amended § 12-112 to provide as follows:

all the lands, tenements, real estate, goods and chattels (except as is by law declared to be exempt) of every person against whom any judgment has been or shall be hereafter entered in any court, for any debt, damages, costs, or other sum of money, shall be liable to be sold upon such judgment. Any real property, or any beneficial interest in a land trust, held in tenancy by the entirety shall not be liable to be sold upon judgment entered on or after October 1, 1990 against only one of the tenants, except if the property was transferred into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor\'s ability to pay those debts as they become due. (emphasis supplied indicating the amended language).

On December 15, 1997, four months after the August 22, 1997, effective date of the amendment, Judge Squires decided Gillissie, the case upon which he relied in denying defendants' motion to dismiss. In Gillissie, the debtor and his spouse transferred their home from joint tenancy into tenancy by the entirety after a demand had been made upon the debtor and a lawsuit threatened if payment was not made within ten days. After the debtor filed a Chapter 7 petition, the trustee objected to the debtor's claim of exemption and filed an adversary proceeding to avoid the transfer and sell the property. The parties stipulated that the primary intent of the debtor in transferring the property was to protect his home from creditors. Judge Squires, after reviewing the decisions in McKernan and Del Giudice and the recent amendment, concluded that Del Giudice was the better approach and that the UFTA applied. He found that some transfers were avoidable and some were not depending upon the facts and circumstances. This view "appears to comport with the recent amendment to § 12-112, which obviously was intended to carve an exception to the limited protection otherwise afforded by that section — those transfers made with the sole intent to avoid the payment of existing debts then beyond the transferor's ability to pay as they become due." Gillissie, 215 B.R. at 378. Judge Squires then rejected the debtor's argument that the UFTA did not apply because there is no reference to it in the tenancy by the entirety act, concluding that the legislative history of the amendment indicates that the UFTA was considered. He then applied the actual fraud standard of the UFTA and, after examining the indicators of fraud set...