Farstveet v. Rudolph

[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] *Page 183 Opinion [¶ 1] Ray Rudolph as Personal Representative of the Eileen Rudolph Estate, Ray Rudolph, and Della Rudolph, appeal from a December 16, 1999, judgment in favor of Keith Farstveet, Ryan Farstveet, and Rory Farstveet, determining that Eileen Rudolph fraudulently transferred real property to Della Rudolph. On February 16, 2000, Ray and Della Rudolph filed Chapter 13 bankruptcy, staying a sheriff's sale of the property. On April 11, 2000, the United States Bankruptcy Court for the District of North Dakota granted relief from the automatic stay, permitting this appeal to proceed. We affirm the judgment. I. [¶ 2] In March of 1994, the Farstveets purchased dairy cows from Eileen Rudolph. Unsatisfied with the cows, the Farstveets brought an action against Eileen for breach of contract, fraud, and breach of warranty for the sale of the cows. On April 30, 1998, judgment was entered in favor of the Farstveets against Eileen in the amount of $79,700. [¶ 3] On March 23, 1998, Eileen signed a promissory note and a mortgage on the subject property in the amount of $133,449 to her son, Ray, and his wife, Della, for bills they allegedly paid on her behalf. On that same day, Eileen transferred all of her interest in the subject property to Della by quit claim deed. In return, Ray and Della assumed the mortgage on the property to Farm Credit Services ("FCS") in the amount of $227,229.36. [¶ 4] The trial court found that although a large portion of the $133,449 debt was for equipment loan payments made by Ray and Della to Farmer's Merchants Bank ("FMB") on behalf of Eileen, a 1994 contract between Ray and Eileen gave Ray all of the equipment, machinery, and vehicles on the farm in exchange for Ray and Della assuming the equipment loan to FMB. Therefore, Eileen could not owe Ray for the loan payments on the equipment. In addition to this equipment loan, the trial court found the other farm expenses claimed to have been paid by Ray and Della highly questionable because Eileen had leased her land, sold her machinery, and was no longer farming. [¶ 5] The record establishes the subject property was appraised at $278,060, and FCS has a mortgage on the property in the amount of $227,229.36. [¶ 6] A portion of the subject property transferred from Eileen to Della included Eileen's homestead. In October of 1996, Eileen was admitted to a senior care facility in Valley City. Shortly after Eileen was admitted into the care facility, her grandson and his family moved into her house. Her grandson did not pay any rent. He did, however, pay the utility bills and for the general upkeep of the house. Eileen's assets were sold to pay her medical and *Page 184 other bills. Eileen never moved back to her house and passed away May 14, 1999, at the age of 77. Eileen's grandson continues to live in the house. [¶ 7] The trial court determined Eileen did not receive a reasonably equivalent value in exchange for the property she transferred to Della and she was insolvent at the time of the transfer. The trial court further determined Ray and Della were insiders and the consideration for the transfer of the property was an antecedent debt. The trial court concluded Eileen abandoned her homestead and Eileen made a fraudulent transfer of property to Della. The Rudolphs filed their Notice of Appeal on February 15, 2000. II. [¶ 8] The Rudolphs first contend that the trial court erred in concluding Eileen abandoned her homestead. Specifically, they argue her absence from her home was involuntary and her intention was to return. Thus, they argue because Eileen did not abandon her homestead any subsequent transfer of her homestead property cannot be set aside as fraudulent. We disagree. [¶ 9] The question of abandonment of a homestead is a question of fact. Falconer v. Farmers Union Oil Co., 260 N.W.2d 1, 2 (N.D. 1977). Whether there was abandonment of a homestead must be proved by clear and convincing evidence. Larson v. Cole,33 N.W.2d 325, 326 (N.D. 1948). Such a determination is made upon consideration of all the facts and circumstances presented. See 40 Am. Jur.2d Homestead § 173 at 397 (1999). A finding of fact is clearly erroneous under N.D.R.Civ.P. 52(a) only if induced by an erroneous view of the law, if there is no evidence to support it, or if, although there is some evidence to support it, on the entire evidence the court is left with a firm conviction that a mistake has been made. Wachter v. Gratech Co., Ltd., 2000 ND 62, ¶17, 608 N.W.2d 279. [¶ 10] Abandonment of a homestead is generally a waiver of the homestead exemption. See 40 Am. Jur.2d Homestead § 173 at 397. Our homestead exemption is set out at N.D.C.C § 47-18-01, and is defined as follows: The homestead of any person, whether married or unmarried, residing in this state shall consist of the land upon which the claimant resides, and the dwelling house on that land in which the homestead claimant resides, with all its appurtenances, and all other improvements on the land, the total not to exceed $80,000 in value, over and above liens or encumbrances or both. The homestead shall be exempt from judgment lien and from execution or for sale, except as otherwise provided in this chapter. In no case shall the homestead embrace different lots or tracts of land unless they are contiguous. [¶ 11] Homestead rights are a creature of statute and, it seems, peculiar to America. See 40 Am. Jur.2d Homestead § 2 at 251. Historically, homestead laws were established on considerations of public policy, their purpose being to protect the family to the end that it may not be without a home or opportunity for self-support. See Swingle v. Swingle,162 N.W. 912, 915 (N.D. 1917); see also In re Lippert, 113 B.R. 576, 578 (Bkrtcy.D.N.D. 1990) (stating strong public policy supports the statutory provisions providing for the homestead exemption). More specifically, the precise intent of the homestead provisions is to place designated homestead property out of the reach of creditors while it is occupied as a home, or as otherwise stated, to secure a debtor and his family essential shelter from creditors. See 40 Am. Jur.2d Homestead § 4 at 253-54. While recognizing that the purpose of the exemption is to guarantee the family a place to live, it has also been stated that the right to claim the homestead exemption is not without limits. Id. at 254-55. [¶ 12] If the debtor abandons her homestead rights, the property becomes *Page 185 subject to execution, levy, and sale to satisfy a judgment. Farmers State Bank v. Slaubaugh, 366 N.W.2d 804, 808 (N.D. 1985). In Slaubaugh, this Court outlined the law concerning the abandonment of a homestead as it was first enunciated in Larson v. Cole: 1. The law does not favor the abandonment of the homestead and the statutes must be liberally construed for the protection thereof. 2. When a homestead status of property has been established, the burden of proving its abandonment, by the clear and convincing preponderance of the evidence, is on the party who alleges such abandonment. 3. To constitute an abandonment of homestead rights removal from the premises must concur with an intention to discontinue their use as a home. Slaubaugh, 366 N.W.2d at 808. [¶ 13] The dominant element of abandonment is intent.Slaubaugh, 366 N.W.2d at 808. "To find abandonment, the trial court must determine that the debtor has voluntarily departed from the homestead property and left without the intent to return and occupy it as a home." Id. (citations omitted). A debtor's subjective intent is not a reliable indicator; thus, a trial court will often look to the debtor's conduct to determine the objective intent. Id. In cases regarding the abandonment of the homestead where intent is the vital question at issue, the findings of the trial court who saw and heard the witnesses must be given appreciable weight. Larson, 33 N.W.2d at 331. [¶ 14] The Farstveets argue Eileen abandoned her homestead once she moved off the property, sold her assets, and conveyed the property to her daughter-in-law, Della. We have stated that physical absence in itself does not constitute abandonment, but is evidence to be taken into consideration in determining abandonment. Nelson v. Griggs County, 219 N.W. 225, 226 (N.D. 1928). However, in order for the homestead exemption to be lost any physical absence from the home must be voluntary. Larson,33 N.W.2d at 329. This Court has long recognized that involuntary or compulsory absences from the home have never per se constituted relinquishment of the homestead rights. See Larson,33 N.W.2d at 329-30 (finding defendant's departure from the homestead for purposes of serving in the army was involuntary); Meidinger v.Security State Bank of Medina, 213 N.W. 850, 851 (N.D. 1927) (finding that plaintiff's departure from his house because of his physical condition was an absolute necessity, and not a voluntary act); Grotberg v. First National Bank of Valley City, 210 N.W. 21,24 (N.D. 1926) (finding that plaintiff did not abandon her homestead when she and her family left it to seek treatment for her mental illness); Swingle, 162 N.W. at 915 (finding that when a husband forced his wife to leave their homestead through violence, threats, abuse, and fear, her absence from the homestead did not constitute an abandonment as a matter of law). It is absence from the home coupled with the clear intention to abandon the homestead that is sufficient proof of abandonment. Larson, 33 N.W.2d at 329. [¶ 15] The undisputed evidence shows that in October of 1996, after Eileen began experiencing difficulty with the prosthesis in her knees, she left her farmstead and admitted herself into a hospital in Valley City. Later, she developed an infection in her knees, whereby the prosthesis came loose. Because Eileen needed assistance walking, she was then moved to the senior health care facility in Valley City, where she remained until her death on May 14, 1999. Eileen lived on her farmstead at all times prior to her being admitted into the senior care facility. Whether Eileen left her homestead voluntarily or involuntarily is a question of fact. The trial court did not make explicit findings as to this issue. However, even assuming Eileen's absence from her home was involuntary, we conclude *Page 186 the transfer by quit claim deed of her homestead is sufficient evidence of abandonment. [¶ 16] On the issue of abandonment, courts have stated that there is no more convincing proof that abandonment has occurred than the sale of the homestead. In re Cole, 205 B.R. 382, 385 (Bkrtcy.E.D.Tex. 1997); In re Michael, 49 F.3d 499, 501 (9th Cir. 1995) (stating there can be no homestead exemption if there is no homestead property); In re Levy, 185 B.R. 378, 387 (Bkrtcy.S.D.Fla. 1995) (stating as a general rule, homestead rights are extinguished by a conveyance of the premises by the homestead claimant). Upon the conveyance of the disputed premises, a homestead claimant relinquishes any homestead rights.See 40 Am. Jur.2d Homestead § 179 at 401. [¶ 17] On March 23, 1998, Eileen transferred all of her real property by quit claim deed, including her homestead to Della. Eileen received no monies in return for the transfer of the property.1 Upon executing the quit claim deed Eileen no longer had any homestead rights. Therefore, the trial court's finding of abandonment of the homestead was not clearly erroneous. III. [¶ 18] The Rudolphs next contend the transfer of property from Eileen to Della was not a fraudulent transfer. Specifically, they argue Eileen had a right to prefer a creditor who was a family member over any other creditor who was not related to her. They further argue the antecedent debt given in exchange for the transfer of property from Eileen to Della constitutes fair consideration. We disagree. [¶ 19] In 1985, the State Legislature repealed the Uniform Fraudulent Conveyance Act, N.D.C.C. § 13-02, and replaced it with the Uniform Fraudulent Transfer Act. See 1985 N.D. Sess. Laws ch. 186, §§ 1-10. The purpose of the Uniform Fraudulent Transfer Act, much like the Uniform Fraudulent Conveyance Act, is "to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors." UFTA § 3, cmt (2). The Uniform Act in its entirety can be found at North Dakota Century Code chapters 13-02.1-01 to 13-02.1-10. In construing a statute derived from a uniform act, we seek "to effectuate its general purpose to make uniform the law of those states which enact it." N.D.C.C. § 1-02-13. Special deference is, therefore, given to decisions of other jurisdictions interpreting the uniform act.Jahner v. Jacob, 515 N.W.2d 183, 184 (N.D. 1994). [¶ 20] Under the revised Act, fraudulent transfers are broadly separated into two classifications: actual fraud and constructive fraud. See N.D.C.C. §§ 13-02.1-04 and 13-02.1-05. A fraudulent transfer may be attacked under either theory. Actual or intentional fraud requires a showing of intent while constructive fraud requires a showing of inadequate consideration coupled with insolvency. See In re Janz, 140 B.R. 256, 258 (Bkrtcy.D.N.D. 1991), aff'd, 980 F.2d 734 (8th Cir. 1992). Questions regarding a constructive fraudulent transfer are questions of fact that will not be set aside on appeal unless clearly erroneous. [¶ 21] One of the innovations of the Uniform Fraudulent Transfer Act is its adoption of the preferential transfer concept.See Prairie Lakes Health Care System v. Wookey, 1998 SD 99, ¶ 14,583 N.W.2d 405. *Page 187 It also has been described "as constructive fraud or fraud in law."Id. It is found at N.D.C.C. § 13-02.1-05(2) and states in relevant part: 2. A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent. [¶ 22] Section 13-02.1-05(2), "renders a preferential transfer — i.e., a transfer by an insolvent debtor for or on account of an antecedent debt — to an insider vulnerable as a fraudulent transfer when the insider had reasonable cause to believe that the debtor was insolvent." UFTA § 5, cmt. (2). While it has been held that debtors generally may prefer one creditor over another in applying assets to discharge their obligations, § 13-02.1-05(2), curtails this privilege if the debtor is insolvent at the time and the preference is to an insider. Wookey, 1998 SD 99, ¶ 14, 583 N.W.2d 405. The premise behind § 13-02.1-05(2), "is that an insolvent debtor is obligated to pay debts to creditors not related to him before paying those who are insiders." UFTA, Prefatory Note. The drafters of the revised Act intended this provision to be an attempt at diminishing the sometimes unfair advantages insiders possess when they are familiar with the debtor's financial status. Wookey,1998 SD 99, ¶ 14, 583 N.W.2d 405. [¶ 23] Constructive fraudulent transfers are established conclusively, without regard to the actual intent of the parties, when they concur as provided in N.D.C.C. § 13-02.1-05. UFTA § 4, cmt. (5). "To void a transfer under this section the following elements must be established: (1) The creditor's claim arose before the transfer; (2) the transfer was made to an insider; (3) the transfer was made for an antecedent debt; (4) the debtor was insolvent at the time; and (5) the insider had reasonable cause to believe the debtor was insolvent." Wookey, 1998 SD 99, ¶ 15,583 N.W.2d 405. [¶ 24] The evidence before the trial court establishes each element. First, the Farstveets' claim arose before Eileen transferred her property to Della. In 1998, the Farstveets brought an action against Eileen over the sale of certain cows. This action was commenced before Eileen transferred all of her real property to Della. Second, the transfer of property from Eileen to Della was a transfer made to an insider. Della was Eileen's daughter-in-law; therefore, she is considered an insider as defined by N.D.C.C. § 13-02.1-01(7)(a). Third, the transfer was made in consideration of an antecedent debt. Ray and Della allegedly paid a number of bills on Eileen's behalf including farm expenses and loan payments. These payments constituted the consideration for the transfer of real property from Eileen to Della. Fourth, Eileen was insolvent at the time she transferred the subject property to Della. Once Eileen transferred all of her real property to Della she was without any assets. And, finally Della had reasonable cause to believe Eileen was insolvent because her husband, Ray, testified that at the time Eileen transferred her property to Della, he and Della had sold all of Eileen's assets. Therefore, under N.D.C.C. § 13-02.1-05(2), the trial court's finding that Eileen's transfer of the subject property was fraudulent was not clearly erroneous. Accordingly, the judgment of the trial court is affirmed. [¶ 25] MARY MUEHLEN MARING WILLIAM A. NEUMANN DALE V. SANDSTROM CAROL RONNING KAPSNER GERALD W. VANDEWALLE, C.J. *Page 477 Footnotes [1] Had Eileen received proceeds from Della in exchange for the transfer of the property, a homestead exemption would have continued to exist in those proceeds. See generally N.D.C.C. § 47-18-16 (stating that the proceeds of the sale beyond the amount necessary to satisfy a lien, and not exceeding the amount of the homestead exemption, shall be entitled to the same protection against legal process as the law gives to the homestead). Thus, because Eileen owned no homestead property nor received any proceeds in exchange for the transfer of her homestead property, her exemption was extinguished.