Aug. 20, 2018 – A state appeals court recently clarified the elements necessary to succeed on a fraudulent transfer claim in Wisconsin, concluding the judgment creditor in the case failed to prove a transfer was made to an insider for an antecedent debt.
Carol and Terrance Beck (the Becks) obtained a default judgment, under an unpaid promissory note, against Oshkosh-based BidRX, which hosts an online marketplace for prescription drugs. The circuit court awarded the Becks about $108,000.
To collect, the Becks filed a non-earnings garnishment action, naming BidRX as the debtor. The action also named, as garnishees, Fiscal Intermediary Third Party Funds Services LLC and BMO Harris Bank, which held BidRX money now owed to the Becks.
In a reply to BidRX’s answer, the Becks added fraudulent transfer as a grounds for judgment in their favor, alleging that BidRX created Fiscal Intermediary after the original lawsuit was commenced and any money transferred to its fund was fraudulent.
The circuit court held a trial on the garnishment action. Evidence included more than 300 bank records from BMO Harris accounts. Four of the accounts were assigned to BidRX. The fifth was assigned to Fiscal Intermediary. The Becks argued that the records showed post-lawsuit transfers between BidRX and Fiscal Intermediary.
Under the Uniform Fraudulent Transfers Act (UFTA), Wis. Stat. section 242.05(2), a fraudulent transfer occurs if the creditor’s claim arose “before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time and the insider had reasonable cause to believe that the debtor was insolvent.”
The circuit court ruled that Fiscal Intermediary was an insider of BidRX and fraudulently transferred close to $36,000. Thus, the court granted a garnishment judgment in that amount. BidRX and Fiscal Intermediary appealed the circuit court’s judgment.
In Beck v. BidRX LLC, 2017AP2043 (Aug. 15, 2018), a three-judge panel for the District II Court of Appeals reversed, concluding the Becks produced no evidence that the transfers were made for an antecedent debt, which is required under UFTA.
“[T]he fact of a transfer to an insider is not enough; it is the preferential payment of prior debts to insiders to which the statute is addressed,” wrote Judge Brian Hagedorn.
“Proving that the transfers were made to satisfy an antecedent debt is an integral part of the preferential transfer concept,’ Hagedorn wrote. “[T]he person attacking the transfer must show that the debtor is improperly preferring inside creditors over others.”
The appeals court said the trial court record was devoid of any evidence that showed BidRX transferred money into the BMO Harris accounts to satisfy a prior debt.
The panel also overturned the circuit court’s judgment, in the garnishment action, against BidRX for about $2,000 because BidRX was not named as a garnishee.
“We fail to see how the circuit court could enter a judgment against BidRX; the trial was about recovering property being held by Fiscal and BMO Harris,” Hagedorn wrote.
