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Chancery Court Orders Restitution to Victim Under Uniform Fraudulent Transfer Act

By Francis G. X. Pileggi, Esq.

August v. August, (Del. Ch., C.A. No. 3180-VCS, February 20, 2009).

Kevin Brady, a highly respected Delaware litigator,  prepared the following review of the case

In a bankruptcy and creditors' rights case with a fact pattern that is more likely to resemble an episode of 'CSI' or '24,' Vice Chancellor Strine, in a 37-page post-trial opinion ordered restitution to a pro se plaintiff, from the plaintiff's former mother-in-law, in the amount of $40,950 plus interest. In this case, Jennifer August, creditor plaintiff, sought restitution from her former mother-in-law, Sally Elder, who was the recipient of a fraudulently transferred house but who subsequently voided the transfer only after the house had lost substantial value as a result of, among other things, vandalism and the recent downturn in the real estate market. This post-trial decision by Vice Chancellor Strine presents the facts in great detail and while they make for a very interesting read, they are too long and convoluted to recite here. The main facts extracted from the opinion are set forth below:

The plaintiff, Jennifer August, is the former wife of defendant David August; they were divorced in July, 2003. In February 2007, an insolvent David August fled from the United States to Israel amid mounting child support and alimony debts owed to Jennifer August. Once in Israel, David August quitclaimed his house in Delaware to his mother, defendant Sally Eder, who resides in Michigan. Eder then began maintaining the property by making interest-only mortgage payments of approximately $1,000 a month and paying for utilities and landscaping. At David August's direction, Eder also listed the proerty for sale in April 2007 and in July 2007, Eder entered into a sales contract with a purchaser for $315,000. After closing costs and satisfaction of the senior mortgage held on the property by Washington Mutual Bank (the 'WaMu Mortgage'), the sale would have yielded proceeds of approximately $50,000. However, Eder was unable to close this sale because Jennifer August had placed a lis pendens on the property in connection with a judgment lien she held to satisfy David August's unpaid support obligations.

While a number of David August's representatives tried to persuade Jennifer August to lift the lis pendens so that the sale could go through, based in part on her belief that these offers were an attempt to force her to extinguish valid claims, Jennifer August refused to lift her lis pendens, thereby blocking the sale by preventing Eder from conveying clear title. Jennifer August then initiated this suit in August 2007 seeking a variety of remedies for the allegedly fraudulent transfer of the property from David August to Eder. In October 2007, Eder quitclaimed the property back to David August. Also in October 2007, Jennifer August learned that the property had been mysteriously stripped of its major appliances, including crucial elements of the HVAC system. The vandalism and theft substantially lowered the value of the property. In March 2008, after repeated failures by David August to appear in these proceedings in the Delaware Court of Chancery, a default judgment was entered against him, effectively deeming the transfer of the Property from him to Eder a fraudulent one. This default judgment allowed Jennifer August to exercise all rights of ownership over the Property to maximize her recovery. But, by this time Jennifer August was unable to find a purchaser who was willing to buy the Property for enough to satisfy the outstanding WaMu Mortgage balance. Jennifer August was thus unable to recover any money from the Property. Jennifer August continued to seek full restitution for the fraudulent transfer of the Property from Eder under the broad remedies of Delaware's Uniform Fraudulent Transfer Act.
In the post-trial opinion, Vice Chancellor Strine awarded Jennifer August $40,950 plus pre-judgment and post-judgment interest from Eder, which represented the net amount of equity in the property at the time David August quitclaimed the house to Eder.
 

Full post as published by Delaware Corporate and Commercial Litigation Blog on February 28, 2009 (boomark / email).