Nostalgia Network v. Lockwood, Bonnie M. ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-1428
THE NOSTALGIA NETWORK, INC.,
Plaintiff-Appellee,
v.
BONNIE M. LOCKWOOD,
Defendant-Appellant.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 00 C 2418—Charles R. Norgle, Sr., Judge.
____________
ARGUED SEPTEMBER 27, 2002—DECIDED NOVEMBER 6, 2002
____________
Before POSNER, RIPPLE, and MANION, Circuit Judges.
POSNER, Circuit Judge. Nostalgia Network filed this di-
versity 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.
2 No. 01-1428
The district court granted summary judgment for Nostal-
gia on the ground that Rayle had committed construc-
tive 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 evi-
dence 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 Indiana bank to himself and Lockwood as joint ten-
ants, and in February 1999 he had transferred his interest
as joint tenant, worth some $60,000, to Lockwood, who
thus became the sole owner of the account. She gave no
consideration for the transfer, or for checks that he en-
dorsed to her and that she deposited in the account be-
fore and after the California judgment. By September of
1999 he had transferred to the account, and thus to her,
a total of $343,000.
The following month, Nostalgia sued Rayle in an Indi-
ana 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 Indi-
ana court ruled that the money was Rayle’s—or that if it
was Lockwood’s that it had been “transferred to Ms. Lock-
wood merely for the purpose of avoiding creditors”—and
ordered it paid over to Nostalgia, which was done. Lock-
wood had not been named as a defendant in the Indi-
ana suit.
Nostalgia then brought the present suit in Illinois,
where Rayle and Lockwood live, seeking the difference
No. 01-1428 3
($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., 689
N.E.2d 374, 380 (Ill. App. 1997); Fire Police City County
Federal Credit Union v. Eagle, 771 N.E.2d 1188, 1191 and n. 3
(Ind. App. 2002). The usual motive for such transfers is
to hinder creditors, but that is difficult to prove and pro-
vided the transfer is indeed grauitous creditors are hurt
and the recipient, having paid nothing for what he re-
ceived, has no very appealing claim to keep the money. The
situation is different if there was consideration for the
transfer, that is, if it was not a gratuity but an exchange.
For if the transferor received equivalent value—in a bona
fide exchange, each party considers itself better off after
than before—his creditors are not hurt and the recipient
of the transfer, having paid for it, would be entitled to
compensation if it were rescinded; so in the end the cred-
itors wouldn’t benefit from the rescission.
The transfers that Rayle made to the account that, previ-
ously 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 credi-
tors, 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, may-
be most, of the money she got from Rayle to pay his per-
sonal and business expenses. To the extent that she did
4 No. 01-1428
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 credi-
tors. The sequence of transfers would not make the cred-
itors 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 the creditors he put the creditors
as a whole in exactly the position that they had occupied
on the eve of the first transfer, with an expected deficit
once more of $100,000 ($190,000, what the creditors are
owed after one of them is paid $10,000, minus $90,000,
the debtor’s assets after the two transfers). Of course
the creditors would prefer that he not spend anything on
his own consumption. But the point is only that unless
creditors are fooled or otherwise impeded (as they may
well be—and even if the creditors as a whole are not
made any worse off by the asset shuffle, particular cred-
itors, especially those who are secured or who otherwise
enjoy a higher priority than other creditors, may lose
a valuable entitlement because the debtor paid one of
those other creditors first), it makes no difference wheth-
er he spends the money out of his own pocket or someone
else’s pocket.
This said, we think the inquiry should stop at the first
stage of analysis, that is, should stop after it is deter-
mined that the transfer was not supported by considera-
tion. If it was gratuitous, the fact that some or for that mat-
ter all of it may later have seeped back to the debtor does
not legitimize the transfer. The statutes make this clear
No. 01-1428 5
(“value [given for a transfer] does not include an unper-
formed 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, 271 B.R. 281, 297-98, 303-04 (Bankr.
N.D. Ill. 2002); In re Mussa, 215 B.R. 158, 171-72 (Bankr. N.D.
Ill. 1997); 5 Collier on Bankruptcy ¶ 548.05[1][b], pp. 548-38
to 548-39 (15th ed. 2002). A compelling reason for stop-
ping at the first stage is that the seeping back of the trans-
ferred money or property to the transferor is strong
evidence of actual fraud by him. It is one thing to make
a gift; it is another to transfer money to someone whom
you expect to retransfer it to you; the inescapable implica-
tion is that you are parking your money in a place where
you hope your creditors won’t know to look. See 740
ILCS 160/5(b)(1),(2); In re Carlson, 263 F.3d 748, 749-50 (7th
Cir. 2001); In re Roti, supra, 271 B.R. at 297-99, 303; In re
Marshall, 198 B.R. 705, 708 (Bankr. N.D. Ohio 1996); In re
Stevens, 112 B.R. 175, 177 (Bankr. S.D. Tex. 1989). It didn’t
make any sense, in the absence of a desire to throw cred-
itors off the scent, for Rayle to give money to Lockwood
to give back to him for living expenses, rather than defray-
ing the expenses directly out of a bank account of his
own. For that matter, it didn’t make any sense for Rayle to
take his name off the formerly joint account with Lock-
wood when he intended to continue using the money in
it, albeit now it would technically be Lockwood’s money.
Creditors were (or at least one creditor was) hindered
quite literally because, as is apparent from the fact that
Nostalgia did not at first realize that the account was no
longer in Rayle’s name, making Lockwood the custodian
of the money required Nostalgia to find and sue another
person besides Rayle, namely Lockwood.
6 No. 01-1428
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 princi-
ples, at least so far as bears on this case.) Res judicata
itself (claim preclusion) is clearly inapplicable. Beavans v.
Groff, 5 N.E.2d 514, 516-17 (Ind. 1937); Giffin v. Edwards,
711 N.E.2d 35, 36-37 (Ind. App. 1999); Kirk v. Monroe
County Tire, 585 N.E.2d 1366, 1369 (Ind. App. 1992). Other-
wise a judgment creditor would be unable to use sepa-
rate proceedings to seize property of the debtor that
might be scattered all over the country, or for that matter
the world. What sense would that make? And anyway
Lockwood, having by cooperating in Rayle’s “parking”
scheme forced Nostalgia to bring a second suit, is equita-
bly estopped to plead res judicata in order to block that
suit. See Warner Cable Communications, Inc. v. City of Nice-
ville, 581 So. 2d 1352, 1355 (Fla. App. 1991).
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 im-
plicit 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 actu-
No. 01-1428 7
ally to divest himself of ownership of the money trans-
ferred. 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 Nos-
talgia. See Beavans v. Groff, supra, 5 N.E.2d at 516-17; Giffin
v. Edwards, supra, 711 N.E.2d at 36-37.
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., 716 N.E.2d 1007, 1010-11 (Ind. App. 1999); Wabash
Grain, Inc. v. Smith, 700 N.E.2d 234, 237-38 (Ind. App.
1998); DeVito v. Chicago Park District, 270 F.3d 532, 535 (7th
Cir. 2001). Lockwood argues that Nostalgia, having won
the Indiana suit by arguing that Rayle owned the bank
account, should not now be heard to argue that, no, it was
Lockwood who owned the account. What we have said
scotches this argument. The issue was never who owned
the account, but who owned the money in it, and Nos-
talgia has been consistent in arguing that Rayle did.
AFFIRMED.
A true Copy:
Teste:
_____________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—11-6-02