Schaefer v. Schaefer, 08–2009.

• Decision Date: 30 March 2011
• Docket Number: No. 08–2009.,08–2009.
• Parties: Larry SCHAEFER and Elaine Schaefer, Husband and Wife, Appellees,v.Raymond SCHAEFER, Appellant.G.R.D. Investments, LLC, Appellant,v.Larry Schaefer and Elaine Schaefer, Husband and Wife, Appellees.
• Court: Iowa Supreme Court

795 N.W.2d 494

Larry SCHAEFER and Elaine Schaefer, Husband and Wife, Appellees,

v.Raymond SCHAEFER, Appellant.G.R.D. Investments, LLC, Appellant,

v.Larry Schaefer and Elaine Schaefer, Husband and Wife, Appellees.

No. 08–2009.

Supreme Court of Iowa.

Feb. 25, 2011.Rehearing Denied March 30, 2011.

Steven R. Bakke of Bakke Law Office, Forest City, for appellants.Peter C. Riley of Tom Riley Law Firm, P.L.C., Cedar Rapids, for appellees.CADY, Chief Justice.

In this quiet title action, we must decide whether, under Iowa law, a bankruptcy court's order voiding a debtor's transfer of real estate to a transferee automatically returns the property titles to the debtor. The district court found in favor of the Schaefers after the bankruptcy court voided the transfer of the property from the Schaefers to G.R.D. in favor of the trustee. We transferred the case to the court of appeals. The court of appeals reversed the district court, finding the property titles remained with G.R.D. after bankruptcy. On further review, we vacate the decision of the court of appeals and reverse the decision of the district court.

I. Background Facts and Proceedings.

Larry and Elaine Schaefer are husband and wife. They live in Cerro Gordo County where they own land and farm for a living. The Schaefers began to experience financial troubles after a $127,125 judgment was entered against Larry in 1998 for breach of a grain contract.

In January 2001, the Schaefers formed a limited liability company called G.R.D. Investments (G.R.D.). The Schaefers designated themselves managers and listed their sons, Raymond and Dean Schaefer, as members. As part of the employment agreement with G.R.D., the Schaefers agreed to convey all the real estate they owned, except their homestead, to G.R.D. In May 2003, the Schaefers satisfied the judgment from the 1998 contract dispute.

In October 2003, the Schaefers filed for Chapter 7 bankruptcy in the United States Bankruptcy Court for the Northern District of Iowa. The court's appointed trustee brought an adversary proceeding against the Schaefers in March 2004. The action challenged the 2001 property conveyances as fraudulent under 11 U.S.C. § 544(b)(1) (2000) and accompanying state law, Iowa Code chapter 684 (2003).

On September 21, 2005, the bankruptcy court entered an order finding the transfers to G.R.D. were “avoidable.” Following the order, G.R.D. and the Schaefers entered into a settlement agreement with the trustee for the value of the property conveyed to G.R.D.

In March 2006, the trustee moved to amend the court's order that found the transfers “avoidable.” The trustee asserted the order should have referred to the status of the transfers as “void.” In an order dated June 7, 2006, the court granted the trustee's motion and changed the order to declare the transfers were “void.” The final order stated the “debtors' transfers of real property to G.R.D. Investments, L.L.C. by quit claim deeds dated on or about January 16 and 17, 2001, are void under 11 U.S.C. § 544(b)(1).”

The trustee filed a “Satisfaction of Judgment,” dated March 22, 2006. The filing referenced the amended order entered on June 7, 2006. The trustee, however, did not liquidate the real estate for a cash distribution to creditors. Instead, the settlement money was paid to the trustee after the amended order was entered. The Schaefers were eventually granted a discharge from bankruptcy.

Following the bankruptcy, the Schaefers consulted with a certified public accountant regarding the potential income tax consequences of the order by the bankruptcy court that voided the transfers. The accountant interpreted the order to simply mean G.R.D. no longer owned the property. He recommended the Schaefers claim the property's income for that year as their own.

The Schaefers' son, Raymond, farmed the land and paid rent to the Schaefers. In 2007, Raymond failed to pay the Schaefers rent. In response, the Schaefers initiated an eviction action in district court in Cerro Gordo County. Raymond and G.R.D. responded to the lawsuit by filing an action to quiet title to the property in favor of G.R.D. The two actions were consolidated and heard by the district court on June 5, 2008.

The district court ultimately made two rulings in this case. On August 13, 2008, the court entered a ruling finding G.R.D. to be the owner of the property. It reasoned that, under Iowa fraudulent conveyance law, the bankruptcy court's decision to void the transfers to G.R.D. as fraudulent did not alter the relative property rights of G.R.D. and the Schaefers as parties to the transaction. The court found the rights of the parties were not altered when the judgment granted to the bankruptcy court was satisfied without selling the property. The court determined the Schaefers were entitled to immediate possession of their forty-acre homestead, but title to the nonexempt land conveyed to G.R.D. prior to bankruptcy remained with G.R.D.

The Schaefers filed a motion for enlargement of findings claiming the ruling was “based on a misunderstanding of the relationship between a trustee's avoidance rights under bankruptcy law[ ] and applicable state law on the rights of creditors to avoid transfers.” In response, the district court modified its ruling in an order dated November 12, 2008. In its modified order, the court concluded the bankruptcy trustee acquired all of the Schaefers' real estate once the bankruptcy court entered the judgment that voided the transfer of the land to G.R.D. by operation of law. Accordingly, the court held the real estate had been returned to the Schaefers, like all undistributed property of the estate, at the conclusion of the bankruptcy case. Thus, the court reversed its prior holding and quieted title to all the disputed real estate in favor of the Schaefers.

G.R.D. and Raymond Schaefer appealed. We transferred the case to the court of appeals, and the court of appeals reversed the district court. In its decision, the court found “the bankruptcy court's amended June 7, 2006 order did not by itself transfer title to the properties to the trustee and/or that the satisfaction of judgment had the effect of releasing that order.” Additionally, the court took judicial notice of the actual date the trustee filed the satisfaction of judgment pertaining to the voided transfer as “early 2007.” The court ultimately decided G.R.D. owned the property under two separate holdings. First, it held the judgment was not itself sufficient to transfer title to the properties and the trustee would have had to obtain title to the properties to include them in the estate. Second, the court determined the satisfaction of judgment filed after the bankruptcy court's judgment released the judgment. The court concluded that a judgment voiding transfers as fraudulent is effectively a judgment making the transfers “voidable” not void. Additionally, the court recognized the trustee did not distribute the remaining properties or proceeds to the debtors at the conclusion of the bankruptcy as is customarily required for undistributed property of the estate.

The Schaefers requested, and we granted, further review.

II. Standard of Review.

Forcible entry and detainer and quiet title claims are actions in equity. Iowa Code § 648.15 (classifying forcible entry and detainer actions as equitable); id. § 649.6 (classifying quiet title action as equitable). As a result, our review of the district court's decisions is de novo. Iowa R.App. P. 6.907. We give weight to the district court's factual findings, but are not bound by them. City of Okoboji v. Okoboji Barz, Inc., 746 N.W.2d 56, 59 (Iowa 2008).

III. Analysis.

We begin our analysis of the issues on review by recognizing they require us to interpret the bankruptcy court's judgment and the effect of a voided transfer for the benefit of creditors on state law property rights. As a result, we briefly review the applicable framework of this analysis.

A fraudulent conveyance is “[a] transfer made or obligation incurred by a debtor ... if the debtor made the transfer or incurred the obligation ... [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor ... [or] [w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation.” Iowa Code § 684.4(1)( a )–( b ). Creditors have the right to set a fraudulent conveyance aside and collect the proceeds to satisfy the debt owed. 37 Am.Jur.2d Fraudulent Conveyances and Transfers § 1, at 520 (2001) [hereinafter Fraudulent Conveyances and Transfers ]. A creditor seeking to set aside a conveyance must show prejudice, even if the transferor's fraudulent intent is evident. C. Mac Chambers Co. v. Iowa Tae Kwon Do Acad., Inc., 412 N.W.2d 593, 596 (Iowa 1987).

Generally, fraudulent conveyance law operates to make the conveyance at issue voidable at the option of a qualifying injured creditor. See Iowa Code § 684.7 (providing creditors with a cause of action and various remedies against the debtor and transferee); § 684.8(2) (“[T]o the extent a transfer is voidable in an action by a creditor under section 684.7 ..., the creditor may recover judgment for the value of the asset transferred ....”); see also Fraudulent Conveyances and Transfers § 89, at 598 (noting the rule is generally accepted among courts). Moreover, our fraudulent conveyance law voids the transaction as between the creditors of the transferor and the transferee, but does not render the conveyance void as between the transferor and the transferee. See Iowa Code § 684.4(1) (stating a “transfer made or obligation incurred by a debtor is fraudulent as to a creditor ” (emphasis added)); see also id. § 684.5 (providing present creditors with cause of action against certain transferees). This rule prevents the transferor from recovering the title fraudulently conveyed to a third party because “a fraudulent transferor should not be allowed to benefit from his own misdeed.” Jessen v. Jessen, 41...