Nostalgia Network, Inc. v. Lockwood, 01-1428.

Citation315 F.3d 717
Decision Date06 November 2002
Docket NumberNo. 01-1428.,01-1428.
PartiesTHE NOSTALGIA NETWORK, INC., Plaintiff-Appellee, v. Bonnie M. LOCKWOOD, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)

Jonathan M. Cyrluk (argued), Stetler & Duffy, Chicago, IL, for Plaintiff-Appellee.

Jerome H. Torshen, Zoran Dragutinovich (argued), Torshen, Slobig, Genden, Dragutinovich & Axel, Chicago, IL, for Defendants-Appellant.

Before POSNER, RIPPLE, and MANION, Circuit Judges.

POSNER, Circuit Judge.

Nostalgia Network filed this diversity suit against Bonnie Lockwood to recover more than $300,000 that she had received from her boyfriend Merrick Scott Rayle, who owes Nostalgia millions. The suit claims that the transfer to Lockwood was fraudulent, and if so then under the Uniform Fraudulent Transfer Act, in force both in Illinois and Indiana (the two states that are candidates to furnish the rules of decision in this diversity suit), Nostalgia is entitled to get the money back from Lockwood. 740 ILCS 160/8; Ind.Code § 32-18-2-17. The district court granted summary judgment for Nostalgia on the ground that Rayle had committed constructive fraud ("fraud in law" as it is termed in the UFTA), and Lockwood appeals. The suit also charges actual fraud, "fraud in fact," but the judge did not rule on that charge; nor need we, though we note parenthetically that the evidence of actual fraud is overwhelming.

Rayle, a lawyer, provided legal services to Nostalgia in the early 1990s. Nostalgia sued him in California for legal malpractice in 1994, and in July of 1999 the court entered a default judgment against him for $3 million. Two years earlier he had transferred ownership of an account in an Indiana bank to himself and Lockwood as joint tenants, and in February 1999 he had transferred his interest as joint tenant, worth some $60,000, to Lockwood, who thus became the sole owner of the account. She gave no consideration for the transfer, or for checks that he endorsed to her and that she deposited in the account before and after the California judgment. By September of 1999 he had transferred to the account, and thus to her, a total of $343,000.

The following month, Nostalgia sued Rayle in an Indiana state court to enforce the California judgment, and it attached Lockwood's account (which Nostalgia at the time believed was still Rayle's account) in the Indiana bank. There was $36,000 left in the account and the Indiana court ruled that the money was Rayle's — or that if it was Lockwood's that it had been "transferred to Ms. Lockwood merely for the purpose of avoiding creditors" — and ordered it paid over to Nostalgia, which was done. Lockwood had not been named as a defendant in the Indiana suit.

Nostalgia then brought the present suit in Illinois, where Rayle and Lockwood live, seeking the difference ($307,000) between the amount that Rayle had transferred to Lockwood without consideration ($343,000) and the amount Nostalgia had recovered in the Indiana action ($36,000).

When a person transfers money or other property to another person without receiving anything in return, and the transferor is insolvent (or made insolvent by the transfer), the transfer is voidable even if there was no intent to hinder creditors. 740 ILCS 160/6(a); Ind.Code § 32-18-2-15; In re Liquidation of MedCare HMO, Inc., 294 Ill.App.3d 42, 228 Ill.Dec. 502, 689 N.E.2d 374, 380 (1997); Fire Police City County Federal Credit Union v. Eagle, 771 N.E.2d 1188, 1191 and n. 3 (Ind.App.2002). The usual motive for such transfers is to hinder creditors, but that is difficult to prove and provided the transfer is indeed gratuitous creditors are hurt and the recipient, having paid nothing for what he received, has no very appealing claim to keep the money. The situation is different if there was consideration for the transfer, that is, if it was not a gratuity but an exchange. For if the transferor received equivalent value — in a bona fide exchange, each party considers itself better off after than before — his creditors are not hurt and the recipient of the transfer, having paid for it, would be entitled to compensation if it were rescinded; so in the end the creditors wouldn't benefit from the rescission.

The transfers that Rayle made to the account that, previously his, then joint, became Lockwood's alone were gratuitous. Lockwood gave him nothing in return for the transfers — except a place to hide his assets from his creditors, such as Nostalgia; that is what makes this almost certainly a case of actual as well as constructive fraud.

But there is a complication: Lockwood used much, maybe most, of the money she got from Rayle to pay his personal and business expenses. To the extent that she did this, she actually helped the creditors and the transfers to the account were washes. To see this, imagine that Rayle has $100,000, owes his creditors $200,000, and one day transfers $10,000 to the account and the next day withdraws the $10,000 and uses it to pay one of his creditors. The sequence of transfers would not make the creditors as a whole worse off. It is true that when in our hypothetical sequence he transferred the money to the account, he took it out of the reach of the creditors, who now had an expected deficit not of $100,000 (the $200,000 that they were owed minus $100,000, his assets) but of $110,000 ($200,000 — $90,000). But when he retransferred it the next day to one of the creditors he put the creditors as a whole in exactly the position that they had occupied on the eve of the first transfer, with an expected deficit once more of $100,000 ($190,000, what the creditors are owed after one of them is paid $10,000, minus $90,000, the debtor's assets after the two transfers). Of course the creditors would prefer that he not spend anything on his own consumption. But the point is only that unless creditors are fooled or otherwise impeded (as they may well be — and even if the creditors as a whole are not made any worse off by the asset shuffle, particular creditors, especially those who are secured or who otherwise enjoy a higher priority than other creditors, may lose a valuable entitlement because the debtor paid one of those other creditors first), it makes no difference whether he spends the money out of his own pocket or someone else's pocket.

This said, we think the inquiry should stop at the first stage of analysis, that is, should stop after it is determined that the transfer was not supported by consideration. If it was gratuitous, the fact that some or for that...

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    ...Corp. (In re Consolidated Indus. Corp.), 292 B.R. 354, 360 (N.D.Ind.2002). 322 B.R. at 848-49. See also Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717, 719 (7th Cir.2002) ["when a person transfers money or property to another person without receiving anything in return, and the transfero......
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    ...credits from the case before it where the defendant was not “totally innocent of wrongdoing”). See Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717, 720 (7th Cir.2002) (finding with respect to a gratuitous transfer where there was evidence of actual fraud that “the fact that some or for th......
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    ...find no limitation on damages in the plain words of the fraudulent conveyance statutes. See, e.g., Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717, 720 (7th Cir.2002), where the Seventh Circuit affirmed the grant of full recovery to the creditor, holding it irrelevant “that some or for th......
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    ...fraudulent transaction. Joy Recovery, 286 B.R. at 77. Further, intent is not an element under § 160/6(a). Nostalgia NeUvork, Inc. v. Lockwood, 315 F.3d 717, 719 (7th Cir.2002). The UFTA provides that "a debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's......
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1 books & journal articles
  • Giving Back a Fraudulent Transfer: A Defense to Liability?
    • United States
    • American Bankruptcy Law Journal Vol. 94 No. 4, December 2020
    • December 22, 2020
    ...has considered the question") (9) Taunt v. Hurtado (In re Hurtado), 342 F.3d 528 (6th Cir. 2003); Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717 (7th Cir. (10) According to an Illinois court: A resulting trust is an "intent enforcing" trust; it arises by operation of law and the presumed......

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