Production Credit Ass'n of Midlands v. Shirley, 90-253

• Decision Date: 13 May 1992
• Docket Number: No. 90-253,90-253
• Citation: 485 N.W.2d 469
• Parties: 18 UCC Rep.Serv.2d 562 PRODUCTION CREDIT ASSOCIATION OF the MIDLANDS, f/k/a/ Clarinda Production Credit Association, Appellee, v. Bobby T. SHIRLEY, a/k/a Bob Shirley and Patricia Shirley, Appellants, and Taylor Enterprises, Inc., Lyle K. Taylor, and Georgia M. Taylor, Defendants.
• Court: Iowa Supreme Court

Page 469

485 N.W.2d 469

18 UCC Rep.Serv.2d 562

PRODUCTION CREDIT ASSOCIATION OF the MIDLANDS, f/k/a/ Clarinda Production Credit Association, Appellee, v. Bobby T. SHIRLEY, a/k/a Bob Shirley and Patricia Shirley, Appellants and Taylor Enterprises, Inc., Lyle K. Taylor, and Georgia M. Taylor, Defendants.

No. 90-253.

Supreme Court of Iowa.

May 13, 1992.

Vicki R. Danley, Sidney, for appellants.

Jerrold L. Strasheim and Timothy V. Haight of Baird, Holm, McEachen, Pedersen, Hamann and Strasheim, Omaha, Neb., for appellee.

Considered by McGIVERIN, C.J., and CARTER, NEUMAN, SNELL, and ANDREASEN, JJ.

McGIVERIN, Chief Justice.

Defendants Bob and Patricia Shirley appeal from a district court determination that they purchased certain corporate stock with actual intent to defraud plaintiff Production Credit Association of the Midlands. We affirm.

I. Background facts and proceedings. For many years prior to the present litigation, Lyle and Georgia Taylor conducted extensive farming and rental operations through their corporation, Taylor Enterprises, Inc. (TEI). Since late 1983, these operations have been financed by Citizens State Bank (Citizens) and plaintiff Production Credit Association of the Midlands (PCA).

Some time after 1983, TEI became unable to make payments on its several loans from Citizens and PCA. As a result, Citizens, TEI, and PCA commenced various foreclosure and damage actions against one another. Citizens eventually obtained a judgment against Taylors and TEI of over $1.0 million, and PCA obtained a judgment against the Taylors and TEI of over $1.7 million. PCA also prevailed in a damages action which Taylors had brought against PCA. See Taylor Enter. Inc. v. Clarinda Prod. Credit Ass'n, 447 N.W.2d 113 (Iowa 1989). Finally, Citizens and PCA settled certain claims of Citizens by entering into an agreement whereby PCA subordinated to Citizens its interests in various assets of the Taylors and TEI.

PCA obtained its $1.7 million judgment against the Taylors and TEI in September 1987. Roughly three months later, in December 1987, PCA commenced mandatory mediation proceedings with the Iowa Farmer-Creditor Mediation Service in an effort to settle the Taylors' monetary problems with PCA. See Iowa Code § 654A.6 (1987). Section 654A.6 stays a creditor such as PCA from initiating any proceedings to enforce its claims against agricultural property until the creditor obtains a mediation release. See Iowa Code § 654A.11. PCA received its mediation release on January 26, 1988.

In December 1987, during the period of time that PCA and the Taylors were engaged in settlement negotiations, Lyle indicated he could sell for the benefit of PCA the shares of Lyco, Inc., an Iowa corporation formed and operated by Lyle. During this time, however, without prior knowledge by PCA, Lyle sold to his nephew and his wife, defendants Bob and Patricia Shirley, all of the shares of Lyco for $90,000. Lyco consisted of two vacation homes in Arizona and Minnesota as well as some other items of personal property. Lyle apparently used the money he received from the sale to pay off a portion of Citizens' $1.02 million judgment. During the same period of time as the sale of Lyco, the Shirleys agreed to lease back to the Taylors Lyco's two vacation homes.

PCA thereafter commenced this equity action against Taylors, the Shirleys, and TEI to set aside the Lyco share transfer, contending that the transfer of the Lyco shares was made with intent to hinder, delay, or defraud PCA as a creditor of the Taylors and TEI. After trial, the district court found that the transfer of the shares was in fact fraudulent as to PCA and ordered the Shirleys to, among other things, transfer the shares and all rents from Lyco's vacation homes to PCA.

Following several adverse posttrial orders, Shirleys appealed. We transferred the case to the court of appeals, which thereafter affirmed the district court's ruling. See Iowa R.App.P. 401(a). We granted Shirleys' application for further review, and now affirm the decision of the court of appeals and the judgment of the district court. See Iowa R.App.P. 402.

In this equity action, our review is de novo. See Iowa R.App.P. 4. Although we give weight to the fact findings of the district court, especially when considering the credibility of witnesses, we are not bound by them. See Iowa R.App.P. 14(f)(7).

II. Evidence of fraudulent intent. On this appeal, the Shirleys contend that there is insufficient evidence to support the district court's finding that Bob and Patricia Shirley purchased the Lyco shares from the Taylors in order to participate in a scheme by Taylors to hinder, delay, or defraud PCA. Shirleys contend that Lyle Taylor properly transferred the shares to the Shirleys, using the proceeds thereof to reduce Citizens' $1.02 million judgment. We disagree.

A. The general rule is that, in the absence of statutory regulation, debtors such as Taylors and TEI may lawfully prefer one or more of their creditors to others in applying their assets to the discharge or securing of their obligations. See Rouse v. Rouse, 174 N.W.2d 660, 668 (Iowa 1970) (creditor may take security for debt due, even though he is aware that the purpose of the debtor is to hinder or defeat other creditors); Central Shoe Co. v. Rashid, 203 Iowa 1103, 1106, 212 N.W. 559, 561 (1927); 37 Am.Jur.2d Fraudulent Conveyances §§ 87, 89, at 770, 772 (1968); 37 C.J.S. Fraudulent Conveyances § 235, 245, at 1058, 1076-77 (1943). It is generally immaterial that other creditors such as PCA may by the preference be delayed or wholly prevented from obtaining payment, since this is the natural result of the preferential transfer. See 37 Am.Jur.2d Fraudulent Conveyances §§ 87, 89, at 771-72 (1968).

Furthermore, a debtor's intent to hinder, delay, or defraud other creditors does not alone invalidate a preferential transfer. See Monona County v. Schoenherr, 251 Iowa 1301, 1306, 105 N.W.2d 91, 94 (1960); 37 Am.Jur.2d Fraudulent Conveyances §§ 87, 89, at 771-72 (1968). However, transferees such as Shirleys may not lawfully take a conveyance in order to further the plans of the debtor to hinder, delay, or defraud other creditors; the acceptance of a conveyance under such circumstances amounts to a participation in the debtor's fraud. See Rouse, 174 N.W.2d at 668; Hatheway v. Hanson, 230 Iowa 386, 394, 297 N.W. 824, 827 (1941); First Nat'l Bank v. Currier, 218 Iowa 1041, 1044-45, 256 N.W. 734, 736 (1934); Central Shoe, 203 Iowa at 1106, 212 N.W. at 561; 37 Am.Jur.2d Fraudulent Conveyances § 89, at 773 (1968). Thus, in order for a non-preferred creditor such as PCA to invalidate a transfer such as that from Taylors to Shirleys, the creditor has the burden of showing by clear and convincing evidence the transferee's intentional participation therein. See Rouse, 174 N.W.2d at 668; Monona County, 251 Iowa at 1306, 105 N.W.2d at 94; Terre Haute Brewing Co. v. Linder, 233 Iowa 359, 366, 7 N.W.2d 16, 20 (1943); Pike v. Coon, 217 Iowa 1068, 1071, 252 N.W. 888, 890 (1934).

B. As a general rule, an intentionally fraudulent conveyance is any "transaction by means of which the owner of real or personal property has sought to place the land or goods beyond the reach of his creditors, or which operates to the prejudice of their legal or equitable rights." Graham v. Henry, 456 N.W.2d 364, 366 (Iowa 1990). However, because fraud is not committed openly, direct evidence of it is rarely obtainable; fraud may, and usually must be proved by circumstantial evidence. Rouse, 174 N.W.2d at 667. Thus, to determine whether a conveyance is fraudulent, we look for certain badges or indicia of fraud such as inadequacy of consideration, insolvency of the transferor, and pendency or threat of third-party creditor litigation. Graham, 456 N.W.2d at 366; Rouse, 174 N.W.2d at 667-68.

We must also examine the transaction for secrecy or concealment, departure from the usual method of business, any reservation of benefit to the transferor, and the retention by the debtor of possession of the property. Graham, 456 N.W.2d at 366. Whereas the circumstances of a bona-fide transaction are ordinarily consistent with each other, a fraudulent transaction "naturally begets stilted, contradictory, and incredible evidence." Rouse, 174 N.W.2d at 667. And although a "blood relationship" is not per se a badge of fraud, it may strengthen the inference arising from the circumstances, requiring strict proof of consideration and fairness of the transaction. Graham, 456 N.W.2d at 366; Rouse, 174 N.W.2d at 667. All of the circumstances of any given transaction must ordinarily be considered together. Rouse, 174 N.W.2d at 667. Thus, each case of this character must be decided upon facts peculiar to it alone. Id. at 667. Furthermore, fraud is not presumed and must be established by clear and convincing evidence. Graham, 456 N.W.2d at 366; Rouse, 174 N.W.2d at 667.

Based upon our de novo review of the record, we conclude that PCA has demonstrated by clear and convincing evidence that the Shirleys intentionally participated in a scheme by Taylors to defraud plaintiff PCA.

1. General business background. As stated above, defendant Bob Shirley is Lyle Taylor's nephew. For many years, they have had extensive business dealings with one another. Bob owned and operated Shirley Ag Service, Inc., a fertilizer and trucking business which conducted tens of thousands of dollars in business each year with Lyle and TEI. Bob was also the manager, treasurer, and a stockholder of Percival Grain, Inc., which customarily bought large portions of Lyle and TEI's grain crop. In addition, Bob was engaged in a farming business through BTR Farms Partnership. Bob and BTR over the years had been major tenants of Lyle and TEI, renting up to 1500 acres of farm land from TEI.

Bob was also aware of Lyle and TEI's financial problems with Citizens and PCA. At trial, Bob admitted that he knew Lyle was having financial difficulties with PCA;...