Fraudulent Transfer - Munson v. Rinke, 1-08-2998, Illinois Appellate Court November 20, 2009

Plaintiffs, Lester and Judith Munson, brought a fraudulent transfer action against the Defendants, Susan Rinke and her husband James P. Whitmer, alleging constructive fraud. The Munsons obtained a judgement against Rinke for $38,000 and Rinke appealed.

The fraudulent transfer case arose out of a previous lawsuit between Whitmer and the Munsons that was also filed in State Court. In 1994, the Munsons sought sanctions against Whitmer. The motion was denied. On November 27, 2002, the Illinois Appellate Court reversed the denial of sanctions and ordered the trial court to determine the correct amount of sanctions against Whitmer.

On February 13, 2003, Whitmer transferred the title of two cars from himself to his wife, Rinke. Rinke wrote two checks to Whitner in the amount of $29,000 for the two vehicles. At around the same time she withdrew $36,550.37 from her IRA to cover the checks. Whitner then wrote Rinke a check for $36,551, which Rinke used to purchase an annuity. (Thus, Ms. Rinke was not out of pocket for the purchase of the two cars. When the transaction concluded she paid $0 for the cars). Whitmer obtained the $36,551 by borrowing from his home equity line of credit. Whitmer and Rinke then executed a promissory note under which Rinke was to pay Whitner back the $36,551 without interest. Rinke never paid Whitmer back, but, instead made payments to satisfy Whitmer's home equity loan.

In August 2003, the trial court awarded the Munsons sanctions in the amount of $173,253.14 against Whitmer.

In October 2003, Whitmer filed a Chapter 11 bankruptcy petition. The Munsons intervened in the bankruptcy proceeding and obtained a declaration that the sanctions award of $173,253.14 was nondischargeable.

In February 2006, the Munsons filed a complaint for the avoidance of the transfers of the two vehicles on the ground that the transfers constituted actual fraud or constructive fraud.

After trial, the Court held that the transfers amounted to constructive fraud and entered judgment against Whitmer and Rinke.

Rinke appealed on the ground that the fraudulent transfer action was barred by the bankruptcy proceeding. The Court found that, although the bankruptcy trustee had the right to pursue the fraudulent transfer action and chose not to do so, that decision did not bar the fraudulent transfer action. Once the bankruptcy ended the Munsons had the right to proceed on the fraudulent transfer claim, which the bankruptcy court found to be nondischargeable.

Finally, the Court found that there was sufficient evidence to support the finding of constructive fraud under Section 5(a)(2) because there was evidence that the debtor made the transfer "'without receiving a reasonable equivalent value in exchange for the transfer,'" and the debtor "'intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.". 740 ILCS 160/5(a)(2). The Court noted that the transactions occurred shortly after it became apparent that sanctions would be awarded and that Rinke had no real out of pocket cost for buying two cars. Thus, Whitmer ended up with more debt and received nothing for the cars.

The case illustrates that any transfers of property when an adverse lawsuit is pending are suspect.

Edward X. Clinton, Jr.
Copyright 2009