FRAUDULENT TRANSFERS AND TENANCY BY THE ENTIRETY
by Christopher Beck, ATG Senior Law Clerk

In 1997, the Illinois legislature passed an amendment to the Code of Civil Procedure, which created an exception to the protections normally provided to those holding property as tenants by entirety. 735 ILCS 5/12-112 (Smith-Hurd Supp. 1998). Before the amendment, the Illinois appellate courts were divided on the issue of the Uniform Fraudulent Transfer Act (UFTA)(740 ILCS 160/1 et seq (West 1994)) and its application to transfers of title into tenancy by the entirety. The second district appellate court had held in E. J. McKernan Co. v. Gregory, 268 Ill App 3d 383, 205 Ill Dec 763, 643 NE2d 1370 (Ill App 2nd D 1994) that the UFTA did not apply to transfers into tenancy by the entirety, stating that "it simply cannot be fraudulent to engage in conduct that is specifically and unambiguously sanctioned by statute." An appellate court in the first district declined to follow the holding in McKernan. In In re Marriage of Del Giudice, 287 Ill App 3d 215, 678 NE2d 47, 222 Ill Dec 640 (Ill App 1st D 1997), the court held that a transfer of title into tenancy by the entirety could be held subject to the UFTA, reasoning that "the purpose of the Uniform Fraudulent Transfer Act is to invalidate otherwise sanctioned transactions made with a fraudulent intent."

The Illinois legislature attempted to resolve this split among the appellate courts with the 1997 amendment. The amendment stated that the protections afforded by tenancy by the entirety would not be available when "the property was transferred into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the transferor's ability to pay those debts as they become due." While the amendment resolved the division between the courts over whether a transfer into tenancy by the entirety could be fraudulent, the amendment, as can be seen by the recent decision of the second district in Harris Bank St. Charles v. Weber, 298 Ill App 3d 1072, 700 NE2d 722 (Ill App 2nd D 1998), may have raised more questions than it resolved.

The facts of Harris Bank are as follows. Junior mortgagees had loaned money to mortgagors in exchange for security interests in certain real property and in the assets of a corporation, of which the mortgagors were the primary shareholders. Several years later, the assets of the corporation were liquidated at auction and the holder of the senior mortgage began foreclosure proceedings against the real property. After the judgment of foreclosure and sale was entered, but prior to the sale of the property, the mortgagor got married and transferred title of his home into tenancy by the entirety. The proceeds of the foreclosure sale were insufficient to satisfy the debt owed to the junior mortgagees, and a deficiency judgment was entered in their favor. A sheriff's sale of the mortgagor's home was scheduled to satisfy the judgment. A few days before the scheduled sale, the mortgagor filed a motion to strike the sale, claiming that the sale of his home was prohibited because it had been transferred into a tenancy by the entirety and was thereby shielded from a judgment against only one of the tenants. The junior mortgagee argued that the transfer should not shield the home on the basis that the transfer was fraudulent. Following the appellate court's holding in E. J. McKernan, the trial court granted defendant's motion and struck the sale. The junior mortgagees appealed.

The decision of the trial court was affirmed in part, reversed in part, and remanded. While noting that the trial court was correct in following the previous decision of the court, the appellate court reanalyzed the case in light of the 1997 amendment. Because the holding in E. J. McKernan was in direct conflict with the 1997 amendment, the court held that the appellate court's decision in E. J. McKernan was no longer valid, mandating reversal of the trial court. Furthermore, the Harris Bank court went on to hold that the decision of the first district's appellate court in In re Marriage of Del Giudice was also invalid.

The appellate court in Del Giudice had held that transfers into tenancy by the entirety were subject to the UFTA. The court in Harris Bank decided that such a holding was inconsistent with the 1997 amendment, as the amendment did not refer to the UFTA, and instead concluded that the legislature did not intend for the UFTA to apply to such transfers. The Harris Bank court remanded the case to the trial court to consider the intent of the mortgagor in the transfer, and to decide whether the transfer was fraudulent under the language of the amendment, apart from the provisions of the UFTA. In a concurring opinion, Justice Hutchinson, while agreeing with the disposition of the case, stated that he would have remanded the case with instructions that the trial court look at the "badges of fraud" listed in the UFTA as a starting point for determining whether the transfer was made with a the sole intent of avoiding the payment of debts.

The appellate court in Harris Bank correctly held that the 1997 amendment would allow for the possibility that a transfer of title into tenancy by the entirety could be considered fraudulent. Relying on the language of the statute and legislative history, the Harris Bank court went on to hold that fraudulent transfers into tenancy by the entirety would not be measured by the same standards as those found in the UFTA. Because this was the first state case to fully consider the implications of the 1997 amendment, the court had an opportunity to provide some guidance on the scope of the amendment. Justice Hutchinson pointed out this fact in his concurrence to the case, stating that the appellate court had an obligation to provide some instruction to the trial court on remand because the amendment is not clear and is ambiguous on its face. If the court was correct in holding that the legislature did not intend that transfers of title into tenancy by the entirety be subject to the standards of the UFTA, it left unanswered which factors should be considered when deciding whether a transfer into tenancy in the entirety was made with the "sole intent" of avoiding the payment of debts.

The fact that different standards exist between transfers into tenancy by the entirety and other transfers subject to the UFTA leads to differing conclusions. First, the legislature may have wanted transfers into tenancy by the entirety subjected to a stricter standard than other transfers. This conclusion does not seem plausible given the special protection that is meant to be applied to a tenancy by the entirety. Conversely, the legislature might have wanted transfers into tenancy by the entirety held to a less critical standard than the standards that other transfers are held to under the UFTA. This seems to be the intention of the legislature, but leads to the somewhat odd conclusion that some transfers that would be considered fraudulent under the UFTA would still be protected under the tenancy by the entirety provision.

How future cases involving this amendment are decided will likely turn on how courts interpret the requirement that the transfer into tenancy by the entirety was made with the "sole intent" of avoiding the payment of debts. The phrase "sole intent" is not used elsewhere in the statutes, and there are no prior decisions that courts will be able to draw from to interpret the meaning. While on its face the phrase seems quite clear, it will have to be interpreted in the context of cases where a creditor and a debtor are disputing whether certain facts can constitute "sole intent." The UFTA contains certain "badges of fraud" that if present can be used as evidence of a fraudulent intent. If the holding in Harris Bank is strictly followed and courts are to determine a transferor's intent without looking to the UFTA, it is not clear what factors courts should consider to determine whether "sole intent" is present. The concurrence in Harris Bank argued that the timing of the transfer and the "badges of fraud" under the UFTA should be used as a starting point when looking at a transferor's intent. Whether future courts will adopt such an approach or set forth some different standard remains to be seen.

Future cases will also likely lead to some balance between the interests of protecting the marital home furthered by the tenancy by the entirety provision and the public policy against fraudulent transfers. Given the legislative history, it is unclear how the standard should be defined. By distinguishing transfers into tenancy by the entirety from the UFTA, the legislature, in giving such transfers a favored status, has distanced such transfers from some of the certainty that standards under the UFTA have historically provided. The legislature, in seeking to resolve the division among the courts, may have made this area of the law more convoluted by not giving any clear guidance as to how "sole intent" is to be determined. While there will be cases with obvious decisions, absent more defined standards, this issue may cause continued difficulty for deciding some cases. Future decisions of the Illinois courts or the Illinois legislature will be needed in order for transferors to determine with certainty those transfers that could be considered fraudulent under the 1997 amendment.

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