A creditor may set aside a debtor’s post-judgment transfer of homestead property even where the debtor’s spouse acted in good faith and was not aware of the judgment against her spouse, according to a recent appellate decision in Illinois.

In LaSalle Bank N.A. v. DeCarlo, 2003 WL 149893 (Jan. 17, 2003), the Appellate Court of the Second District of the Illinois held that the intent of the debtor, not his wife, controlled whether the creditor could reach the property in question.

The creditor in LaSalle, Freightforce International, Inc. ("Freightforce"), obtained an $81,242 judgment against Richard DeCarlo and his company, Freight Force Overseas, Inc. LaSalle Bank N.A. ("LaSalle Bank") succeeded to Freightforce’s interest in the judgment. Richard and Elaine DeCarlo had owned their residence as joint tenants since 1977. At the time of the transfer, they reportedly had $200,000 of equity in the property. Within days of the Appellate Court’s affirmance of the judgment, Richard transferred the title to his home, into a tenancy by the entirety.

LaSalle filed a motion to set aside the transfer pursuant to section 12-112 of the Illinois Code of Civil Procedure, which provides that property held in tenancy by the entirety cannot be pursued upon judgment against only one of the tenants, except if the property was transferred into tenancy by the entirety with the sole intent to avoid payment of debts existing at the time of the transfer beyond the transferor’s ability to pay those debts as they become due."

At trial, Richard claimed that, although excluding his residential property he owned less than $4,000 of assets at the time of the transfer, he did not transfer the property solely to defeat collection efforts. He testified that he made the transfer on advice from a family attorney, who had suggested that he make the transfer for estate-planning purposes. Elaine testified that she was not aware of the judgment against Richard or credit problems at the time of the transfer.

The trial court held that only Richard’s intent was relevant as to whether the transfer was fraudulent under Section 12-112. The trial court found that Richard’s claims concerning the transfer were "vague, inarticulate, specious and totally incredible," and concluded that the transfer of the title to Richard’s residence into tenancy by the entirety "was made with the sole intent to avoid the payment of debts existing at the time of transfer beyond [Richard’s] ability to pay those debts as they became due." The court set aside Richard’s transfer into tenancy by the entirety as fraudulent and in derogation of LaSalle Bank’s rights.

Richard and Elaine appealed, claiming that the Elaine’s intent was just as relevant "because, in enacting section 12-112, the legislature clearly intended to protect the property of married couples from judgment creditors and, more specifically, to protect the unsuspecting wife from the improper actions of her spouse." The Second District of the Illinois Appellate Court disagreed, noting that by creating an exception whereby creditors could force the sale of such property to satisfy a judgment, "the legislature unambiguously expressed its intent to allow a creditor to break through the veil of protection when the transfer into tenancy by the entirety is made to avoid the payment of debts which existed at the time of the transfer beyond the transferor’s ability to pay those debts as they become due. Because the exception is clearly directed to avoiding the payment of debts existing at the time of the transfer, we believe that the legislature intended that the focus is on the debtor’s intent in transferring the property."

The LaSalle Court also alluded to the legislative history with respect to the 1997 amendment, noting that the Amendment was intended to balance the legislature’s concern about protecting unsuspecting husbands or wives who found themselves in a position of losing the family residence because of a spouse’s inappropriate action concerning equity in the residence with the rights of creditors by setting forth an instance where a creditor could avoid a transfer of property into a tenancy by the entirety.

The Court further held that the "sole intent" standard of section 12-112 applies to the debtor, not the debtor’s spouse. As such, while the trial court found Elaine’s testimony, that she lacked knowledge of the underlying judgment, to be credible, the LaSalle Court agreed with the trial court that the ignorance of one spouse should not shield a transfer made to avoid the payment of a legal obligation. The Court noted that if Defendants’ misinterpretation of the statute were to prevail, a debtor would be permitted, "however fraudulent his or her intent, to shield a transfer of an asset behind an uninformed spouse." Ignoring the innocent intent of Richard’s spouse, the Court affirmed the trial court’s order setting aside the conveyance of the DeCarlo residence.

While LaSalle relies upon Illinois statutory law, it represents a positive recent development for creditors seeking to thwart fraudulent post-judgment transfers by debtors.