Summary of a Recent
Judicial Development in
Estate Planning & Taxation

Court Considers Contingent Assets in Calculating Insolvency of a Debtor

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Estate of Markert v. Markert, 898 N.E. 2d 715, 2008 WL 4445178 (Ill. App. Ct. 2008), the Illinois Court of Appeals held that a debtor was insolvent at the time he conveyed his real property to his children, and the conveyance was in violation of the Uniform Fraudulent Transfers Act.

Background

A debtor conveyed his interest in certain real property by quit-claim deed to his children without cash consideration, and in return the children orally agreed assume responsibility for the mortgage. Id. at *1. He had previously issued some notes to his parents, under which he owed over $5 million, but at the time of the conveyance to his children the statute of limitations would have barred any legal action on the notes. Id. at *2. When his parents passed away, the administrators of their estate set off his indebtedness against his share of the inheritance (the statute of limitations did not bar a setoff in this situation). Id. He then filed for Chapter 7 bankruptcy, and the trustee brought this action against him for violation of the Uniform Fraudulent Transfers Act (UFTA). Id. at *1-2.

Arguments

The trustee argued that the conveyance was a "fraud in law" under § 6(a) of the UFTA, because there was insufficient consideration and the debtor was insolvent at the time of the conveyance. Id. at *2.

The debtor argued that he was not insolvent at the time of the conveyance, and that he only became insolvent at the time that his inheritance was set off against his obligations to his parents' estate. Id. at *3.

Analysis and Holdings

The court distinguished the debtor's expected inheritance from a current asset, reasoning that the inheritance was contingent on a lack of setoff. Id. In case of a contingent asset, courts must consider the likelihood the contingency will occur; in this situation, the court found it unlikely that the administrators of an estate would ignore an outstanding debt as large as this one. Id. The court found no reason to conclude that "a hypothetical buyer in an arm's-length transaction would have been willing to pay anything for that contingent asset," and so the expected inheritance was worthless at the time the debtor conveyed his interest in the property to his children. Id. Because his debts exceeded his assets at the time of the conveyance, the debtor was insolvent at that time; therefore, the conveyance violated the UFTA. Id.

The case was decided on September 30, 2008.