Vol. 3 No. 2 1994 - Engel Reiman

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PRACTICE                                                                    Vol. 3 No. 2   1994
  WHEN IS A SUBSEQUENT CREDITOR NOT A SUBSEQUENT
                    CREDITOR?
by Barry S. Engel


                                  Introduction

  A long standing client of yours is a real estate developer. On his behalf you
recently negotiated a structured settlement with two banks to whom substantial
sums were owed which had been guaranteed by the client. The project was a
commercia! success until the real estate market in his region of the U.S. collapsed.
This had an impact on the project's annual revenues, which had an impact on the
project's fair market value. This, of course, caught the attention of the lenders
since the property secured the obligation due and owing each of them, and since
debt-service payments had become erratic. The lenders were further impacted
since the project's decline substantially affected your client's net worth.
  Under the settlement your client is released from the guarantees in exchange
for a principal prepayment and certain other concessions being made by the client
to the banks. Following the settlement your client has no pending or threatened
lawsuits, and his liabilities (actual as well as contingent) are nominal at best.
  Shortly after execution of the settlement the client schedules an appointment
with you. At the meeting the client explains how he is far from ready to retire
from the real estate development business, but that he is no longer prepared to
continue to put at risk the financial well being of his family. The client then
inquires whether you have had any experience with asset protection planning
which, quoting from a recent article, he describes as "the process of organizing
one's assets and affairs in advance so as to safeguard the assets from risks to
which they would otherwise be exposed.'1 You then learn from the client that he
has in mind transferring most of his current liquid assets (which represent
approximately 40% of his overall net worth) to an asset protection trust for the
benefit of his immediate family, solely for the purpose of isolating the subject
assets from future guarantees he may give and otherwise to protect the assets
from third party claimants with whom he may have to some day contend in the
ordinary course of events.
  You explain that you will need to undertake some research but you believe that
the threshold issue is whether a fraudulent transfer occurs when one transfers
property for the sole purpose of placing the property out of the reach of one's
future potential creditors when there are at the time of the transfer no pending,
threatened or expected lawsuits.

                              Subsequent Creditor

  You commence your research a few days later. You first determine that the
hallmark of a fraudulent transfer (and, thus, liable to be set aside) is a transfer
106                  Journal of International Trust and Corporate Planning                 [Vol. 3 No. 2



made with the intent to hinder, delay or defraud a current or a subsequent
 (sometimes "future") creditor, and that for this purpose the creditor need not be
a judgment creditor.1 Upon seeing the reference to "subsequent creditor," your
first inclination is to leave the library, return to your office, call your client and
advise that he not engage in any such fraudulent transfer activity. But the day is
young, the library is a vibrant place this particular morning and you have a vague
sense that the resolution of the issue is perhaps not so simple. You therefore
determine to continue your efforts and, as you do, it becomes apparent that
"subsequent" may not mean what you, at first blush, think it means.
   Early in your research you delineate present creditors from subsequent credi-
tors under fraudulent conveyance law. The former, you ascertain, means a person
with respect to whom the contract in question has been signed or the tort has
            T   ^^
occurred. Thus, the test for whether a particular claimant is a present creditor
under fraudulent conveyance law is a very easy and straightforward test to
employ. As your client is not attempting to defeat the claims of any present
creditors, you next focus on the definition of subsequent creditors to determine
whether the nameless, faceless, potential adversaries of the future who currently
strike fear in your client's heart are "subsequent creditors" under applicable
fraudulent conveyance law.
   You find that there is a relatively little authority to assist you in your quest to
define "subsequent creditor." As said long ago, "the absence of all authority on
the question of whether a transfer is voidable when made in anticipation of
liability for torts thereafter to be committed may well be accounted for by the
                                 T                                          t



rarity of the occurrence". Indeed, you discover that practically all of the reported
cases involve blatant fraudulent transfers in the present creditor setting, such as
where the transferor gifts his entire estate to his two year old daughter on the
Wednesday immediately following the automobile accident which happened on
the Tuesday which immediately followed the Monday on which the bank called
due all of the transferor's outstanding credit lines. However, given the authority
that does exist, you begin to see that while the reference in fraudulent conveyance
law to "subsequent creditors" is to a creditor whose claim did not exist at the time
of the transfer, it is not a reference to everyone who someday, somehow,
someway may be a creditor of the transferor. Rather, the reference to subsequent
creditors is a rather narrow reference, meaning only those persons against whom
the transferor harboured actual fraudulent intent at the time the transfers were
made. With regard to such persons, proof of actual intent to defraud must be of
a positive and convincing character.



 /.   38 ALR3d 597, Fraudulent Conveyance - Future Tort, Section 2.
 2.   37 AmJur2d, Fraudulent Conveyance, Section 137.
 3.   Bi>idv.Dean,48WEq. 193,21 A 618 (1891).
 4.   Supra, note 1.
 5.   Speer v.Stewart, 3 Wash2d 334.100 P2d404 (1940); Wiggins v. Shaw, 99 Wash40S, 169 P 853 (1918); supra,
      note 1. See also the other cases discussed herein.
August 1994]                       When is a subsequent creditor                                          107
                                    not a subsequent creditor?


  Thus, you find that in the words of one authority:
       "[I]f a transfer is made with actual intent to defraud subsequent creditors,
       the transfer will be set aside, even though the transferor may have been
       solvent at the time the conveyance was made.... But if the property was
       conveyed without actual fraudulent intention, the subsequent creditor may
       not question the transaction, although the conveyance may have been made
       voluntarily or without consideration."6
  As you continue your research you see that Eurovest Ltd, v. Segal!1 illustrates
the requirement that actual fraudulent intent be shown with respect to subsequent
creditors. The Eurovest court quotes other authority and states that:
       "[t]o constitute a fraudulent conveyance there must be a creditor to be
       defrauded, a debtor intending fraud, and a conveyance of property which
       is applicable by law to the payment of the debt due. It is immaterial whether
       the actual fraudulent intent related to -existing creditors or was directed
       exclusively against subsequent creditors. However, where1 the creditor is
       not in existence at the time of the conveyance, there must be evidence
       establishing actual fraudulent Intent by one who seeks to have the transfer
       set aside," (citations omitted; emphasis added).8
   Does a transfer fall to the level of a fraudulent transfer if it was made for the
sole purpose of removing the property from the reach of some currently unident-
ifiable person who someday, somehow, someway may become a creditor of the
transferor? Does one who engages in such a transfer harbour the requisite actual
fraudulent intent?
   A number of cases and other authority assist you in ultimately answering these
questions in the negative. For example, one authority you locate states quite
succinctly that "it is necessary for a future creditor to establish a causal link
between the fraudulent disposition and the injury suffered...that in order for there
to be a 'future creditor' to whom the grantor and grantee may be liable, the
creditor must be reasonably foreseeable." For example, in Leopold v. Turtle™
the court notes that other courts in Pennsylvania have construed the term "future
creditor" to include a creditor whose claim is "reasonably foreseen as arising in
the immediate future," and concludes that "a 'future creditor 1 does not exist
 unless a conveying party can reasonably foresee incurring the costs of a claim or
judgment at the time of the conveyance."
   Similarly, you see that in First National Bank In Kearney v. Bunn, the Nebraska
Supreme Court held that:


 6.  37 AmJur2d, Fraudulent Conveyances. Section 139.
 7.  528S2d482(l988).
 8.  Supra, note 7, ai pages 483 to 484.
 9.  Alces, The Law of Fraudulent Dispositions. Para. 5.0411 I|ti] (Warren. Gnrhani and Lamnni. 1994 C'umulalivf
     Supplement No. I ) .
 10. 549 A2d 151 (Pa. Super. 1988). at page 1.14.
108                  Journal of International Trust and Corporate Planning   [Vol. 3 No. 2



        "[a] different standard is applied to creditors whose debts are in existence
        at the time of conveyance, as opposed to subsequent creditors. A creditor
        whose debts did not exist at the date of a voluntary conveyance by the
        debtor cannot attack such conveyance for fraud unless he pleads and
        proves that the same was made to defraud subsequent creditors whose
        debts were in contemplation at the time." (emphasis added)"
  An excellent example of a subsequent creditor fact pattern presents itself in
Watson v Harris. " This case involves an individual who, pursuant to a plan, to
                          1 ^   P-T-.




murder his girl friend, delivered real property deeds to his step-daughter and her
husband with an actual, express fraudulent intent to deprive the intended victim's
heirs of their lawful claims arising out of the murder which occurred some 48
hours subsequent to the conveyances.
  The Watson court states that the unusual case of a conveyance first being made
and then an intentional tort being committed is analogous to the situation of a
person who first conveys away his property before entering into a "hazardous"
business undertaking, wherein it is generally held that a person whose claim
subsequently arises may reach the transferred property. A case you locate to
this effect is Hemphlll Co. v. Davis Knit. Co..14 The Hemphill court quotes the
rule in Pennsylvania as follows:
        "a transfer void as to existing creditors is not necessarily void as to
        subsequent creditors; it is bad only as to those it was intended to defraud.
        If the transaction is not fraudulent as to existing creditors...subsequent
        creditors can avoid the sale only under special circumstances, as for
        instance, by showing that it was made with a view to incurring liability,
        or to provide against the contingencies of a hazardous business, which can
        give rise to their debts...."15
  Two questions arise from the Pennsylvania rule. First, as your client expects that
he will in the future be required to again sign as a guarantor, does this fall within the
meaning of "with a view to incurring liability"? The answer is no, for you find that
as stated in Schofield v. Cleveland Trust Co., intended creditors such as lenders
extend credit on the basis of what one has, not what one once had.
  The second question that arises from the Pennsylvania rule is whether the
"hazardous business" net will catch your client. You conclude that while real
estate development may be said to have its risks, it certainly does not fall within
the common meaning of hazardous. If the case was otherwise, most business
people and professionals could be said to be engaging in hazardous endeavours.
As this is not the case, you determine that merely because a transferor has or is


 //. 241 N.W.2d 127 (1976), at page 129.
 12. 435 SW2d 667. 3H ALR3d 582 [1968. Mo.).
 /.i. Supra, note 1., at page 603.
 14. 114 Pa. Superior 0.95.
 /.*>. Supru, nine 14.. al page 98.
 1ft. 21 N.E.2d 119 (1939). al page 122.
August 1994]                       When is a subsequent creditor                109
                                    not a subsequent creditor?


aware of the risks attendant to the transferor's business or profession does not
mean that transfers made as a result of concerns therewith are fraudulent. This
determination is supported by Palumbo v. Palumbo, Here, the plaintiff (Pa-
lumbo) had become entangled as a defendant in an earlier negligence suit.
Following the filing of that earlier suit, and at the suggestion of his attorney,
Palumbo conveyed two parcels of real estate to his wife subject to the express
understanding that a reconveyance would be made to him by his wife upon his
request. The transfers were made with the intention to hinder, delay or defraud
the plaintiff in the earlier suit in the event his claim against Palumbo was
successful. The negligence suit subsequently settled without (he payment of any
money by Palumbo. Palumbo then found it necessary to sue his wife to compel
a return of the properly.
   The Palumbo court states "[t]he general rule...that when a conveyance is made
with intent to defraud creditors the courts will refuse, because of the transferor's
'unclean hands, 1 to order specific performance of the transferee's agreement to
                    1 ft
reconvey....". The court, however, qualifies the application of the general rule
by stating that what is required to bring the doctrine of clean hands into play is
a claim of substance by the creditor. The court then lists a number of situations
in which a claim of substance would be lacking. Included in this list is "a transfer
made prior to embarking upon a business in order lo keep property free of claims
that may arise out of ihc business." 20
   You next contrast the result in Watson v Harris with Wiggins v Slitiw" where
(he defendant's conveyance of real property to her mother was not unwound as
a conveyance in fraud of a subsequent creditor, as the plaintiff had failed lo
prevail on her claim that the defendant intended at the time of the transfer to later
defame the plaintiff.
   One case you find particularly compelling is thai of ilarlhert v. Shackleto/i.'
In this case, Dr. Shackleton was notified in 1983 lhal his malpractice insurance
was to be cancelled. Thereafter, he confined his practice to less risky areas of
medicine and proceeded to transfer assets to his spouse. An aci of malpractice
allegedly occurred in the treatment of Hurlbert in 1984. Hurlbert sued in 19X5,
and final judgment was recorded in 1986 against Dr. Shackleton.
   During a deposition. Dr. Shackleton stated that he transferred assets "because
 [he] wasn't able to get malpractice insurance, and [he] wanted to cover all the
 ,      ,,24
 bases.
   In 1990 the propriety of the 1983 transfers was before the court. The trial court
found in favour of Dr. Shackleton. On appeal, ihc court agreed that Hurlbert was




                 te 12.
 22. supra, n<
 23. 560 S2d !276(Ci. App. Ha., f-irsi District).
 24. Supra, note 23. al page 127K.
110                 Journal of International Trust and Corporate Planning   [Vol. 3 No. 2



not a present creditor; however, the court reversed and remanded for a finding
on whether Dr. Shackleton harboured actual fraudulent intent at the time he made
the transfers and accordingly whether the plaintiff was a subsequent creditor
within the meaning of Florida fraudulent conveyance law, an issue on which the
appellate court noted the trial court did not specifically rule. Noting that Hurlbert
was not an existing judgment creditor when Dr. Shackleton engaged in the
transfers, the appellate court stated it was incumbent upon Hurlbert to show that
she was a subsequent creditor, which required her proving that Dr. Shackleton
harboured actual fraudulent intent at the time of the transfers.25
   Having read this case a number of times, you reason that if Dr. Shackleton's
transfers were per se fraudulent since they were made by him in an attempt "to
cover all the bases" when he was not able to obtain a policy of malpractice
insurance, then on appeal the court would simply not have remanded the matter
for a finding as to whether Dr. Shackleton harboured actual fraudulent intent;
rather, it would have reversed the lower court and held in favour of the plaintiff.
   A dissenting opinion in Hurlbert highlights the difficulty of a creditor prevail-
ing under such facts, and by so doing highlights the difference between a
subsequent creditor (who is entitled to protection under applicable fraudulent
conveyance law) and a future potential creditor (who is not so entitled to
protection). Judge Barfield states in his dissent that he would have affirmed the
trial court's decision "without comment", and wrote in his dissent:
        "I cannot conceive of any result being reached by the trial judge that would
        afford this judgment creditor any relief upon remand. The trial judge is
        unequivocal in his conclusion that this creditor was not contemplated by the
        law against fraudulent transfers. How could the trial judge now conclude that
        Dr. Shackleton had the actual intent to defraud this unknown, unintended
        victim of a future negligent act, or anyone else similarly situated?
        In the instant case, future victims of Dr. Shackleton's medical malpractice
        were not identifiable individually or as a class, since the record contains
        no evidence that Dr. Shackleton intended to commit malpractice or sus-
        pected that he would be guilty of malpractice.
        The record in this case indicates that the medical malpractice insurance
        crisis struck Dr. Shackleton, and as a prudent move he saw to protect his
        assets from future unforeseen adversity wrought by a medical mistake.
        That is not legal fraud.
        I would have affirmed the judgment without comment."26
  In your review of the Hurlbert case you note that subsequent thereto Florida
adopted its version of the Uniform Fraudulent Transfer Act ("UFTA"), a model


 25. Supra, note 23, a! page 1280.
 26. Supra, note 23, al pages 1280 to 1281.
August 1994]                      When is a subsequent creditor                  111
                                   not a subsequent creditor?

act promulgated by the National Conference of Commissioners on Uniform State
Laws in 1984. The UFTA has to date been adopted by almost half of the States.
It is the more modem version of model fraudulent conveyance law promulgated
in 1918 by the same body and known as the Uniform Fraudulent Conveyance
Act ("UFCA"). The question which next arises is whether the result of the
Hurlbert case would have been any different had it been decided under either the
UFCA or the UFTA.
   Section 7 of the UFCA, and Section 4(1) of the UFTA both provide that
transfers made with the intent to hinder, delay or defraud present or subsequent
creditors are fraudulent transfers. In these sections the UFCA and the UFTA
embody classic fraudulent conveyance principles, with the definitions of "present
creditor" and "subsequent creditor" being consistent with the cases you have
reviewed to this point. The Hurlbert holding would not be impacted by the
application of either of these sections.
   The Hurlbert decision may, however, but not necessarily, be impacted by the
application of the concept of "constructive fraud" as it appears in both the UFCA
and the UFTA. Constructive fraud is different from actual fraud. Constructive
fraud is fraud that exists regardless of intent. Thus, under the UFCA and the
UFTA, regardless of one's intent transfers will be constructively fraudulent if
the transfers: (i) were made at a time when the transferor was insolvent or the
transfers rendered the transferor insolvent;" (ii) were made by one who is
engaged in or is about to engage in a business or transaction for which the
property remaining in his hands after the conveyance is unreasonably small;2H or
(iii) were made by one who intends to incur or believes that he will incur debts
                           29
beyond his ability to pay.
   Applying the concept of constructive fraud may or may not, you determine,
change the holding in the Hurlbert case, depending on the facts and circum-
stances of the case. In other words, if Dr. Shackleton was insolvent or was
rendered insolvent as a result of the transfers, and calculated as of the date of the
transfers, then the transfers would have been constructively fraudulent. The
transfers would also have been constructively fraudulent if the post-transfer
property remaining in Dr. Shackleton's hands was unreasonably small given the
nature of his practice (which is a question of fact with respect to which little
guidance is provided under the uniform acts or related case law). If Dr. Shack-
leton intended to incur or believed that he would incur debts beyond his ability
to pay, then the transfer would also have been constructively fraudulent. With
respect to this last mentioned basis, it is important to note that while Dr.
Shackleton had a concern with liability exposure given that he had lost his
malpractice insurance, there is nothing which indicates that Dr. Shackleton either


 27. UFCA Section 4; UFTA Section 5.
 28. UFCA Section 5; UFTA Section 4(a)(2)(i).
 29. UFCA Section 6; UFTA Section 4(a)(2){ii).
 12            Journal of International Trust and Corporate Planning    [Vol. 3 No. 2



intended to incur an indebtedness to the plaintiff, or that he believed that he would
in fact incur an indebtedness to the plaintiff.
  As you continue your research you see that the Hurlberi case is one of several
cases that further narrows the meaning of "subsequent creditor" by requiring a
showing that the actual fraudulent intent was specifically aimed at the particular
subsequent creditor. Another case to this effect is Roland v. U.S., wherein the
court slates thai "a subsequent creditor could reach a grantor's interest in property
conveyed to others if that transfer was made with intent to defraud that particular
creditor.'11
                                                             IT
  Your research leads to another case, Klein v. Klein.'" This case involved a
Buffalo, New York police officer who with his wife purchased a farm in the
country as their family residence. Both parties "were anxious that the property
be preserved," although at the time of the delivery of the deed there was "no
silualion which would cause the police officer to avoid any current liability."
However, as a police officer he was concerned lhal "at some future time, [he
might] be sued for false arrest or some other act in connection with his duties in
the enforcement oi the law...." For this reason, it was agreed by both parties that
"the deed should be taken in the name of the wife, with the understanding that
when [the officer] retired on a pension the property would be deeded by the...wife
to the [officer] and herself, as tenants by the entirety."The court noted that "[t]he
contingency which was provided for has come into being and the [officer] is now
retired on a pension, and the dangers of his office as a police officer are now
passed." The parties, however, had then separated, and the husband brought an
action to compel his wife to fulfil her "oral promise to convey the property to
plaintiff and herself, as tenants by the entirety...."
  The court noted that equity would nol compel a return of property if the grantor
gave the original deed lo hinder and delay his creditors. Finding that such was
clearly not the case the court, in holding for the officer, stated:
      "There is no element of fraud in this case, nor are we concerned with
      statutes and decisions relating to fraud.... There has been found no auth-
      ority that an action such as this must fail for the reason that the grantor,
      who was without creditors, feared for future dangers, real or imaginative.
      Surely his hands were as clean as any one who ever came into equity. What
      he did amounted to no more than insurance against a possible disaster.""
  The last line of the quoted paragraph gels your attention, for it is evident to you
lhat your client is similarly interested in "insurance against a possible disaster,"
and Vhat he certainly does not have an intention to defraud those who may,
someday, be his creditors.



                                                                               140.
August 1994]                        When is a subsequent creditor                  113
                                     not a subsequent creditor?

   Although Klein does not involve an attempt by a third party creditor to unwind
a transfer of property, you conclude that the application of Klein in the fraudulent
conveyance context is clear, for: (i) legal title to property was taken in other than
the names of the true or beneficial owners; (ii) this was done for the express
purpose of protecting the property from the transferor's future potential creditors:
(iii) if this was fraudulent as to persons potentially injured, the transferor would
not have had clean hands and therefore would not have prevailed; (iv) the
transferor prevailed, and as such there was no fraud upon persons who may have
been potentially injured by him.
   A similar case that catches your attention is Pagano v. Pagano; which
involves an equitable action by a number of family members against another
family member to compel the latter to convey to them an interest in a farm and
a residence which were titled in the name of the latter with the understanding that
he would hold the property for the benefit of the family members. In finding for
the plaintiffs, the court states as follows:
        "The contention that plaintiffs do not come into court with clean hands
        and that, therefore, this court should not aid them has been examined and
        is rejected. It is clear that the contract and deed were taken in the name of
        the defendant because of the advice of a reputable attorney. A conference
        was had in which the attorney and all members of the family participated.
        It was then decided that the defendant was the best person to hold the title
        because he was the one member of the family who was not then engaged
        in business ventures. There was no actual intent then present to impede or
        defraud creditors. It is true that the parties did have in mind the uncertainty
        of their business ventures and that they did desire to keep this property as
        a family asset free from business entanglements. However, it does not
        appear that any of them had any intent to evade responsibility for their
        business obligations. There was absent any fraudulent intent. Therefore,
        these plaintiffs may not be said to have unclean hands barring them from
        the help of this court to remedy the fraud being perpetrated upon them by
        the defendant.""
  A technical paper you next discover reviews the case of Tledmann v. Tied-
mann^ which marks a distinction between transfers to defraud creditors and
transfers made for the benefit of one's family. In Tiedmann, an event occurred
and Mr. Tiedmann was concerned that he might get sued. He transferred the
family home into the name of his spouse, "and in so doing denuded himself of
all property, save the horses and truck." Mrs. Tiedmann verbally agreed that she
would reconvey the home to the plaintiff at any time he so desired. Through the
course of subsequent events, Mr. Tiedmann had to sue his spouse to recover his


 34. 139 N.Y.S.2d 219 (1955).
 35. Supra, noie 34. at page 223.
 36. 115 N.Y.Misc. 462 11921).
114                 Journal of International Trust and Corporate Planning      [Vol. 3 No. 2


interest in the property. In overcoming Mrs. Tiedmann's defense that Mr.
Tiedmann was attempting to defraud his creditors at the time of the transfer of
the family home, the court states that:
        "[i]n the instant case there is no evidence that the plaintiff was endeavou-
        ring to defraud his creditors.... The plaintiff was obsessed by a fear and
        that does not place him, in my judgment, in the category of debtors seeking
        to avoid their just debts. On the contrary, the plaintiff's motive was a good
        one - the establishment of a home for his family, with the right, however,
        if necessary at a later time to have the property reconveyed to him."37
  You conclude that the Tiedmann case involves a present creditor situation, for
the event which motivated the transfer had earlier occurred. Nevertheless, the
court distinguishes between a transfer made to defraud creditors, and a transfer
made for the benefit of the family. Thus, even in a present creditor situation it
was in this case determined that actual fraudulent intent was absent. It is therefore
becoming all the more clear to you that transfers to an asset protection trust settled
for the benefit of one's family would not involve actual fraudulent intent as to
one's subsequent creditors, even when the transfers are motivated by a desire to
protect the subject property from one's future potential creditors.
  It is true that asset protection planning may result in a future potential creditor
being unpaid. But this, you conclude, does not necessarily mean that transfers
made in the course thereof are made with actual fraudulent intent as to subsequent
creditors. You read that:
        "[t]he maxim that a man must be just before he is generous is one that is
        applied to a debtor in favour of his creditors; but [there is] no policy of
        law that is opposed to a wealthy man being generous, merely because the
        property which his generosity induces him to give might at some time be
                                         •jo
        needed to pay a future creditor."

                                     The Position in England

  The same technical paper which reviews the Tiedmann case also discusses the
English case of Re Buttenvorth?9 This case involves Mr. Charles Butterworth,
a baker who lived in Manchester, England. In August of i 878 he settled a trust
for his wife and children, and a month later he purchased a grocery business.
  The settlement of trust was funded with practically all of Mr. Butterworth's
assets, leaving him with what he claimed to be £92 in assets and £58 in liabilities.
Evidence later developed in court revealed that Mr. Butterworth's actual lia-
bilities exceeded the true value of his assets immediately following his transfers
to the settlement, and as such he was insolvent as a result of the transfers.


 .17. .V/</jra. ruite 36. al page 466.
 .W. Ct'i't't! v. Luni'asti'i'Rank, Supreme Court of Ohio. March Term, 1852.
 .19. (1882) ] 9 C h D 5 8 8 .
August 1994]                         When is a subsequent creditor                        115
                                      not a subsequent creditor?


  Mr. Butterworth sold the grocery business for about what he had paid approxi-
mately six months after he purchased it, and although he lost money in the grocery
business all debts incurred in connection with the business were ultimately paid.
Mr. Butlerworth continued with his bakery business. Approximately two years
following the sale of the grocery business Mr. Butterworth filed a bankruptcy
petition in the County Court, wherein the County Court Judge set aside the
settlement of trust as being fraudulent under the Statute of Elizabeth. The County
Court Judge gave no opinion whether the settlement of trust was liable to be set
aside under the 91 st section of the Bankruptcy Act.
  This decision of the County Court Judge was reversed by the Chief Judge in
Bankruptcy. Bacon C.J. noted that "[n]o debt that was in existence at the date of
the settlement, is in existence now, or has been in existence for years past. There
is no suggestion of fraud; and the learned [County Court] Judge has found
explicitly that the requirements of the 91st section [of the Bankruptcy Act] have
been complied with, and that section has no application in this case....There is no
evidence in the case to justify the inference that this settlement was fraudu-
lent....There is no fact from which I can infer a disposition to injure creditors.1'41
Bacon C.J. continued by distinguishing cases relied upon by the trustees in
bankruptcy as involving a settlor who "was up to his head in speculation",42 and
a settlor who "was over head and ears in debt".43
  The trustees in bankruptcy appealed and, in the Court of Appeal, Jessel M.R.
determined that the settlor was indeed insolvent following his transfers, and given
his insolvency the settlement was void under the 91 st section of the Bankruptcy
Act. It was on this basis that the decision in Butterworth ultimately turned.
However, Jessel M. R., states, obiter, as follows:
         "As regards the other point [of whether the trust was fraudulent under the
         statute of Elizabeth] it is not absolutely necessary to decide it, but I think
         that the County Court Judge was right. The principle of Mackay v.
         Douglas, and that line of cases, is this, that a man is not entitled to go into
         a hazardous business and immediately before doing so settle all his
         property voluntarily, the object being this: 'If I succeed in business, I make
         a fortune for myself. If I fail, I leave my creditors unpaid. They will bear
         the loss.' That is the very thing which the statute of Elizabeth was meant
         to prevent....When he went into business as a grocer he was going into a
         business which it appears he did not understand. But, as I have said before,
         it is not really necessary to decide this point, because I am clearly of [the]
         opinion that the [settlement] is void under the 91st section of the Bank-
         ruptcy Act." (emphasis added).44


 40.   Supra, note 39, at page 591.
 41.   Supra, note 39, at page 594.
 42.   Set Mackayv. Douglas (\X12)US. 14 Eq 106.
 43.   Supra, note 39, at pages 594 to 595: and see Tav/or r. Cocnen (1876) 1 Ch U 636.
 44.   Supra, note 39, at pages 598 to 599.
116                 Journal of International Trust and Corporate Planning                        [Vol. 3 No. 2


  From an American point of view you do not find Butterworth to be particularly
troublesome, given the authority previously reviewed by you, given that the case
turned on Mr. Butterworth's insolvency, and given that Jessel M.R.'s obiter
dictum was, in his own words, unnecessary to the ultimate decision. Moreover,
from a policy point of view you could see how a modern result would be different
since Jessel M.R.'s gratuitous comments were made just a few years after
England had developed modern company legislation granting limited liability.
Nevertheless, out of academic curiosity you review the modern version of the
provisions of English insolvency law as described in the same technical paper.
  Section 423 of the Insolvency Act 1986 applies to transactions "defrauding
creditors". Section 423(3) imposes conditions about which the court must be
satisfied before any order may be made. The transaction must have been entered
into for either the purposes of putting assets beyond the reach of a person who is
making, or may at some time make, a claim against the transferor or otherwise
prejudicing the interests of such a person in relation to the claim which he is
making or may make. The "may make" provisions make it clear that a transaction
may be set aside even if at the time of the transaction there are no creditors. The
question then becomes whether the "may make" provisions are to be broadly
construed to mean any person who somehow, someday or someway may become
one's creditor or whether, as under American law, the provisions are to be much
more narrowly construed. At least one English author, you discover, is of the
view that the latter is the case.45

  Barry S. Engel is a principal in Engel & Rudman P.C. of Denver, Colorado.
He received his law degree (with honours) from the University of California,
Hastings College of Law, in 1979 and his Bachelor of Science degree in business
(with an accounting emphasis, magna cum laude) From the University of
Colorado at Boulder in 1976. Mr. Engel is President and a Fellow of the Offshore
Institute and is a member of the International Law Association and the Interna-
tional, American and Color ado Bar Associations. Telephone: [I] (303) 7411111
Telefax: [1] (303) 694 4028




 45. Newsome, Dti I Entrust Ytm With My Property'.1, Offshore Investment, Issue 47, June 1994.

				
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