Surrogate Court Deems Attempted Lifetime Transfer a Fraudulent Conveyance

In Schwartz v. Bourque, 2017 N.Y. slip op. 31621(U) (Sur. Court, Nassau County, June 14, 2017), the  Court vacated a deed transferring the decedent’s interest in real property to her granddaughter, as a fraudulent conveyance, where the same real property was the subject of a preexisting contract to make a testamentary disposition in favor of the decedent’s daughter.

Contracts to make a testamentary disposition arise in a number of circumstances, most notably in prenuptial and postnuptial agreements. If the parties’ intent is that the transferor be permitted during his lifetime to dispose of his interest in the property subject to the contract to make a testamentary disposition, it’s imperative that such intent be included in the contract.

Subsequent Deed Was Fraudulent Conveyance

The decedent in Schwartz, Dorothy Wintersaler, lived in her home with her daughter, Brenda. After the death of Dorothy’s husband in 1970, Brenda assumed responsibility for the carrying charges on the home. In 1978, Dorothy and Brenda entered into an agreement providing that Brenda and her husband would pay all of the carrying charges on the property and, in exchange, Brenda and her husband would be permitted to reside in the property for as long as they desire and Dorothy would devise the property to Brenda in her will.

Thereafter, in 1984, Dorothy and Brenda entered into a second agreement providing that in consideration of Brenda’s past payment of the carrying charges and her promise to continue making such payments, Dorothy would convey one-half of her interest in the property to Brenda. Contemporaneously with the execution of the 1984 agreement, Dorothy executed and recorded a deed transferring the property from her name, individually, to Dorothy and Brenda as joint tenants with right of survivorship.

In 2012, Dorothy executed a subsequent deed whereby she purported to transfer her remaining one-half interest in the property to her granddaughter, Christine, thereby severing the joint tenancy between herself and Brenda.

The Court determined that the 1978 agreement wasn’t superseded by the 1984 agreement. Since under the 1978 agreement Dorothy was contractually obligated to devise her interest in the subject property to Brenda, Dorothy’s attempt to circumvent that obligation by deeding her interest in the property to Christine was a fraudulent conveyance.

New York Governing Law

Section 276 of the New York Debtor and Creditor Law states:

“Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.”

Whereas, a transfer is made without consideration, a rebuttable presumption of fraudulent conveyance arises. In this case, Christine was unable to rebut that presumption.

Therefore, every conveyance made and every obligation incurred without fair consideration when the person making the conveyance or entering into the obligation intends or believes that he will incur debts beyond his ability to pay as they mature, is fraudulent as to both present and future creditors.

Proving Fraudulent Intent

New York courts have recognized the difficulty in proving actual fraudulent intent and have, thus, permitted reliance on “badges of fraud,” including (i) a close relationship between the parties to the transfer, (ii) inadequate or no consideration, (iii) the transferor’s knowledge of the creditor’s claim, and (iv) the transferor’s retention of the property after the conveyance. In Schwartz, the Court noted that Dorothy’s fraudulent intent was “readily inferable” since Dorothy and Christine had a close family relationship, the conveyance was made with no consideration; Dorothy was aware of Brenda’s claim when she made the transfer and Dorothy continued to reside in the property following the transfer.