A fraudulent transfer is a transfer of assets to another for the purpose of defeating the claim of a creditor. In the recent case of Heritage Props. v. Walt & Lee Keenihan Foundation, 2019 Ark. 371, 2019 Ark. LEXIS 362 (Ark. 2019), the Arkansas Supreme Court granted an Arkansas estate creditor of a deceased person standing to directly pursue the alleged transferee of a fraudulent transfer – in this case a pay-on-death account that named the transferee as the recipient of the account upon the death of the Decedent.
The Decedent created a brokerage account at Ameriprise with $500,000. She designated the Walt & Lee Keenihan Foundation as the transfer-on-death recipient of the account at her death. At her death, about 18 months after the account was opened, the account had grown to approximately $1.1 million. A creditor, Heritage, filed claims against the Decedent’s estate totaling approximately $850,000. The Decedent’s probate estate was insolvent, making the $1.1 million allegedly fraudulently transferred from the Ameriprise account to the Foundation an enticing target for Heritage.
Heritage filed its action against the Foundation in an Arkansas circuit court, not in probate court. The circuit court dismissed the Arkansas estate creditor’s claim based on jurisdiction, standing, and the lack of sufficient evidence to establish its claim.
Arkansas Circuit Courts Have Jurisdiction Over All Matters Not Otherwise Assigned Pursuant to Constitution
The Arkansas Supreme Court rejected the lack of jurisdiction determination by the circuit court, explaining that circuit courts are courts of general jurisdiction as a result of an amendment to the Arkansas Constitution (citations omitted):
As a consequence of Amendment 80, courts that were formerly chancery and circuit courts are now referred to as circuit courts. Because Amendment 80 states that circuit courts assume the jurisdiction of chancery courts, circuit courts simply have added to their already existing jurisdiction as a court of law the equitable jurisdiction which chancery courts held prior to adoption of the Amendment. In other words, no new or expanded jurisdiction beyond that formerly existing in the chancery and circuit courts was created through Amendment 80. Rather, circuit court jurisdiction now includes all matters previously cognizable by circuit, chancery, probate, and juvenile court.
Transfer on Death Accounts Do Not Enter the Probate Estate
In further clarifying that the circuit court has jurisdiction over Heritage’s claim, the Arkansas Supreme Court explained the nature of transfer on death accounts (citations omitted):
A TOD resulting from a registration in beneficiary form “is effective by reason of the contract regarding the registration between the owner and the registering entity and this chapter and is not testamentary.” Ark. Code Ann. § 28-14-109(a). Pursuant to section 28-14-107, TOD accounts are payable to the beneficiary or beneficiaries upon the death of the owner; they do not become assets of the owner’s estate unless no designated beneficiary survives the death of the owner.
In the present case, the Foundation, as the beneficiary of the TOD account, received the money on transfer. Stated differently, the transfer did not become an asset of the Estate and passed directly from the TOD account to the Foundation. Accordingly, we disagree with the circuit court’s finding regarding the exclusivity of the probate court’s jurisdiction. Pursuant to Amendment 80 and the fact that the money transferred from the TOD account did not become part of the Estate, the circuit court clearly had jurisdiction in the present case.
An Estate Creditor Has Standing To Pursue a Fraudulent Transferee
Normally, only the probate estate would have standing to pursue claims against third parties. The Arkansas Supreme Court, however, held that an Arkansas estate creditor does have standing to directly pursue a fraudulent transferee for return of a fraudulent transfer:
We acknowledge that the procedures forth in Arkansas Code Annotated sections 28-49-109 and 28-48-103 allow for the personal representative or a special administrator to pursue claims. However, Arkansas Code Annotated section 28-14-109, which is also contained within the probate code, governs nontestamentary transfers on death:
(a) A transfer on death resulting from a registration in beneficiary form is effective by reason of the contract regarding the registration between the owner and the registering entity and this chapter and is not testamentary.
(b) This chapter does not limit the rights of creditors of security owners against beneficiaries and other transferees under other laws of this state.
Ark. Code Ann. § 28-14-109
Thus, with regard to a TOD, our probate code makes clear that it does not limit the right of creditors against beneficiaries and other transferees. In fact, the statute plainly allows creditors to pursue their claims against transferees under other laws of this state. Clearly, the Act is encompassed within the meaning of “other laws of this state.” In sum, while there are procedures within the probate code that would allow for the challenge of an alleged fraudulent conveyance, Arkansas law provides that a creditor may also pursue its claim under the Act.
It makes sense that an Arkansas estate creditor have standing to pursue a claim to bring fraudulently transferred assets back into the estate, because this would make funds available to pay the creditor.
Is Evidence of Actual Intent Necessary to Prove a Fraudulent Conveyance?
No, evidence of actual fraudulent intent is not required to establish a fraudulent transfer in Arkansas. As explained by the Court:
As Heritage correctly points out, it is not necessary to prove actual intent under either section 4-59-204 or section 4-59-205. While section 4-59-204(a)(1) does require that the debtor intend to defraud his or her creditors, section 4-59-204(a)(2)(ii) does not require actual intent. Instead, the standard under that provision is whether the debtor made the transfer without receiving a reasonably equivalent value in exchange for the transfer and the debtor intended to incur, or “believed or reasonably should have believed that he or she would incur debts beyond his or her ability to pay as they became due.” Ark. Code Ann. § 4-59-204(a)(2)(ii).
In other words, here, there are two ways to set aside the transfer: (1) demonstrate Leta’s intent; or (2) demonstrate that Leta made the transfer without receiving a reasonably equivalent value in exchange for the transfer, and Leta intended to incur, or believed or reasonably should have believed that she would incur, debts beyond her ability to pay as they became due. Pursuant to section 4-59-205(a), the creditor may prove that the “debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.”
Here, based on the record, the circuit court failed to consider Heritage’s argument pursuant to section 4-59-204(a)(2)(ii) or section 4-59-205(a). As stated above, these provisions do not require Heritage to demonstrate Leta’s actual intent. Heritage presented proof that the IRS had a claim for tax deficiencies dating back to 2005, that Leta had multiple creditors, and that her Estate was likely insolvent. The evidence, considered in the light most favorable to Heritage, raises a factual issue precluding summary judgment as to whether Leta reasonably should have believed that she would incur debts beyond her ability to pay. Given our discussion above and our standard of review, we hold that the circuit court erred in granting the Foundation’s motion for summary judgment. Therefore, we reverse the order of summary judgment for the Foundation and remand the case for trial.
4-59-204. Transfers fraudulent as to present and future creditors.
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.
(b) In determining actual intent under subdivision (a)(1) of this section, consideration may be given, among other factors, as to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.