Nostalgia Network filed this diversity suit against Bonnie Lockwood to recover more than $300,000 that she had received from her boyfriend Merrick Scott Rayle, who owes Nostalgia millions. The suit claims that the transfer to Lockwood was fraudulent, and if so then under the Uniform Fraudulent Transfer Act, in force both in Illinois and Indiana (the two states that are candidates to furnish the rules of decision in this diversity suit), Nostalgia is entitled to get the money back from Lockwood. 740 ILCS 160/8; Ind.Code § 32-18-2-17. The district court granted summary judgment for Nostalgia on the ground that Rayle had committed constructive fraud (“fraud in law” as it is termed in the UFTA), and Lockwood appeals. The suit also charges actual fraud, “fraud in fact,” but the judge did not rule on that charge; nor need we, though we note parenthetically that the evidence of actual fraud is overwhelming.
Rayle, a lawyer, provided legal services to Nostalgia in the early 1990s. Nostalgia sued him in California for legal malpractice in 1994, and in July of 1999 the court entered a default judgment against him for $3 million. Two years earlier he had transferred ownership of an account in an
The following month, Nostalgia sued Rayle in an Indiana state court to enforce the California judgment, and it attached Lockwood’s account (which Nostalgia at the time believed was still Rayle’s account) in the Indiana bank. There was $36,000 left in the account and the Indiana court ruled that the money was Rayle’s — or that if it was Lockwood’s that it had been “transferred to Ms. Lockwood merely for the purpose of avoiding creditors”- — and ordered it paid over to Nostalgia, which was done. Lockwood had not been named as a defendant in the Indiana suit.
Nostalgia then brought the present suit in Illinois, where Rayle and Lockwood live, seeking the difference ($307,000) between the amount that Rayle had transferred to Lockwood without consideration ($343,000) and the amount Nostalgia had recovered in the Indiana action ($36,000).
When a person transfers money or other property to another person without receiving anything in return, and the transferor is insolvent (or made insolvent by the transfer), the transfer is voidable even if there was no intent to hinder creditors. 740 ILCS 160/6(a); Ind.Code § 32-18-2-15;
In re Liquidation of MedCare HMO, Inc.,
The transfers that Rayle made to the account that, previously his, then joint, became Lockwood’s alone were gratuitous. Lockwood gave him nothing in return for the transfers — except a place to hide his assets from his creditors, such as Nostalgia; that is what makes this almost certainly a case of actual as well as constructive fraud.
But there is a complication: Lockwood used much, maybe most, of the money she got from Rayle to pay his personal and business expenses. To the extent that she did this, she actually helped the creditors and the transfers to the account were washes. To see this, imagine that Rayle has $100,000, owes his creditors $200,000, and one day transfers $10,000 to the account and the next day withdraws the $10,000 and uses it to pay one of his creditors. The sequence of transfers would not make the creditors as a whole worse off. It is true that when in our hypothetical sequence he transferred the money to the account, he took it out of the reach of the creditors, who now had an expected deficit not of $100,000 (the $200,000 that they were owed minus $100,000, his assets) but of $110,000 ($200,000 — $90,000). But when he retransferred it the next day to one of
This said, we think the inquiry should stop at the first stage of analysis, that is, should stop after it is determined that the transfer was not supported by consideration. If it was gratuitous, the fact that some or for that matter all of it may later have seeped back to the debtor does not legitimize the transfer. The statutes make this clear (“value [given for a transfer] does not include an unperformed promise made otherwise than in the ordinary course of the promisor’s business to furnish support to the debtor or another person,” 740 ILCS 160/4(a); see also Ind.Code § 32-18-2-13(a)), as does the case law, though it is sparse. See
In re Roti,
Lockwood further argues, however, that the suit is barred by Indiana’s principles of res judicata because of the judgment in Nostalgia’s action to seize the balance in the account. (Indiana’s preclusion principles govern here because the judgment was entered by an Indiana court; but there is nothing unique or unusual about its principles, at least so far as bears on this case.) Res judicata itself (claim preclusion) is clearly inapplicable.
Beavans v. Groff,
But might not the doctrine of collateral estoppel apply if as Lockwood argues the Indiana state court determined that Rayle was the owner of the account? For if he was the owner, doesn’t this mean that in transferring money to the account either directly or by endorsing checks to Lockwood for deposit in the account he was transferring the money to himself rather than to Lockwood, and so she was not the recipient of a fraudulent transfer? The court did not say, however, that Rayle was the owner of the
account;
it said that he was the owner of the
money
in the account. That ruling, far from being inconsistent with the ruling of the district court in the present case, is implicit in it. When a court deems a transfer fraudulent and orders the transferee to cough it up, it is ruling that the transfer is ineffectual; that the transferor failed actually to divest himself of ownership of the money transferred. The money in Lockwood’s account thus was really Rayle’s. He was the equitable owner, she merely the holder
of
bare legal title — and the current equitable owner of Rayle’s assets, in succession to Rayle, is his creditor Nostalgia. See
Beavans v. Groff, supra,
Lockwood’s final appeal is to the doctrine of judicial estoppel, which forbids a party who has prevailed on one ground in a litigation to repudiate that ground in seeking additional relief in a subsequent suit. See
United Rural Electric Membership Corp. v. Indiana Michigan Power Co.,
Affirmed.