Graham v. HenryGraham v. Henry
This is а fight over farmland. The trial court set aside a lease between contract vendees and their parents and restored the land to the contract vendors. The court based its ruling on a finding that the lease was a shаm perpetrated to avoid the effect of a pending contract forfeiture. On our de novo review we reach the same conclusion and affirm.
The facts are largely undisputed. In 1979, plaintiffs William and Velda Graham sold ninety-four acres of farmland on contract to Allen and Cindy Henry. The Hen-rys failed to make the installment payment due December 1, 1987, and the Grahams initiated forfeiture proceedings.
The Grahams subsequently learnеd that a contract for the sale of agricultural land may not be forfeited until the creditor engages in mediation and obtains a release from a mediator.
See
The day following the mediation session, the Henrys executed an agrеement with their parents, defendants Edwin and Ruth Henry, to lease the ground that the Grahams were trying to forfeit. For many years the family had farmed the ground together without benefit of a legal document. This time they negotiated a reasonable rent and the “senior” Henrys issued the “junior” Henrys a check for $8400. On Monday, February 22 at 8:05 a.m., the Henrys recorded their lease at the Warren County Courthouse. No one told the Grahams.
Although everyone expectеd a mediation release in February, the release was not issued until August 29, 1988.
See generally Graham I,
Meanwhile, defendants Edwin and Ruth Henry remained in possession of the land under their lease with their children. The deadline for termination of farm tenancies, September 1, came and went without action by the Grahams because they held no pos-sessory interest in the property until the forfeiture was completed. The Henrys, therefore, asserted the right to retain possession of the land through the 1989 crop year and until March 1, 1990. Because the Grahams had recеived neither contract payments nor rent for the 1988 crop year, they commenced this equitable action in December 1988 to terminate the Henrys’ lease. The case was tried to the court in January 1989.
The district court found that the farm tenancy created by the Henrys in February 1988 was “a sham perpetrated on the Grahams to prevent them from exercising their rights in regards to the property.” The court characterized as a “canard” Edwin Henry’s testimony that he leased the farm from his son to help his cash flow situation, and the court lamented that the delayed mediation release had merely facilitated the “hoax.” In the court’s view, the “real” рurpose of the lease “was to disguise reality with paperwork.” The court voided the lease, concluding that equity compelled the restoration of the farm to the Grahams. It is from this ruling that Henrys have appeаled.
Henrys assert that the continuity of a farm tenancy is protected despite an intervening forfeiture of the vendee/lessor’s interest if the contract vendor fails to give the notice of termination of farm tenаncy by September 1.
See
Even appellants concede, however, that reliance on
Ganzer
presumes the validity of the lease. Here the trial court invalidated the lease based on its finding that the document was an agreement without substance designed solely to place the property outside the lawful reach of a creditor. On an appeal from a judgment in equity, we are not bound by the trial court’s findings.
This court has applied the doctrine to leases as well as absolute conveyances of title.
See Webber v. King,
To determine whether a conveyanсe is fraudulent we look for certain badges or indicia of fraud such as inadequacy of consideration, insolvency of the transferor, and pendency or threat of third-party creditor litigation.
Rouse v. Rouse,
In addition to these recognized indi-cia of fraud, courts also examine transactions for secrecy or concealment, departure from the usual method of business, the reservation of benefit to the transferor, and the retention by the debtor of possession of the property. 37 Am.Jur.2d § 10, аt 701-02. While a single badge of fraud may in some instances suffice to set aside a transaction, customarily a combination of circumstances is necessary to warrant an inference of fraud.
Id.
at 702. Proof of fraud must be еstablished by clear and convincing evidence.
Webber,
These hallmarks of fraud are readily apparent in the record before us. Although the adequacy of consideration for the lease is not strictly challenged, two factors cast a cloud on even this element of the transaction: the fact that the exchange of cash departed from the Henrys’ usual business practice of farming together as a team without remuneration, and the fact that the payment was made from father to son. Both facts strongly suggest that the writing and cashing of the check were done to give the outward appearance of an arm’s length transaction rаther than to consummate one that truly was.
The insolvency of Allen and Cindy Henry may be inferred from circumstantial evidence if not direct proof. The record reveals that at the time the lease was executed, the Henrys’ contract with the Grahams was over $15,000 in arrears, including unpaid real estate taxes for 1986 and 1987. Allen testified that he was compelled to lease the acreage “to someone” in order to generate capital for legal fees and rent due on other farm ground. In the words of Edwin Henry, “[Allen] had to have some money to operate. He couldn’t do it.” We infer from this evidence that Allen and Cindy Henry were insolvent, that is, the sum of thеir debts was greater than their accumulated assets at fair valuation.
Most telling, however, is the timing of the lease in relation to the pending contract forfeiture. On February 20, all parties were operating on the belief that a mediation release would be forthcoming without delay and the forfeiture would be concluded thirty days thereafter. With planting season just around the corner, Henrys wasted no time in securing a farm tenancy that, under Ganzer, could arguably be protected even if the property were forfeited. The beauty of the Henrys’ plan, from their point of view, was that no one but the Grahams would be inconvenienced. It was business as usual as far as the Henrys were concerned. Allen Henry made that clear when he described how he and his father and uncle worked together: “I work every bit of ground that’s theirs аnd mine, the same with them, they work every bit of ground that’s theirs and mine.” Moreover, he acknowledged, in jointly farming the 700 acres that include the acreage in dispute, they used “the same machinery, the same rotation, the same everything.”
It is this identity of operation between the lessor and the lessee that led the trial court to conclude that the lease between the Henrys was a mere pretense to avoid the effect of Grahams’ imminent contract forfeiture. In essence, vendees Allen and Cindy Henry were attempting to use their parents as “straw” tenants in an effort to extend their possessory interest in the land beyond that afforded them as defaulting vеndees under the forfeiture statute. Their scheme, though technically legal, must not be rewarded. As this court noted over fifty years ago when striking down a similar lease negotiated by a mortgagor to deprive a receiver of rents:
Concededly appellants had a perfect right to enter into a valid lease at the time in question, but we are constrained to hold, under the facts revealed by this record, that good faith in the casе at bar was lacking and that the contract of tenancy was a mere pretense and, in fact, had no validity, for it was created with the intent to deceive, defraud, and cover up so that the receiver could not obtain possession of the ‘rents, issues, profits, and income.’
Webber v. King,
In summary, we are in agreement with the factual findings made by the trial court and the legal conclusions applied to redress the inequity revealed by those findings. The trial court properly invalidated the Henrys’ lease and restored rightful possession of the ground to the Grahams. We affirm.
AFFIRMED.