Ex-Wife Who Was Fraudulently Transferred Millions Of Dollars Can’t Get Relief From Paying Her Ex-Husband’s Creditors, But She Doesn’t Have To Pay Punitive Damages Awarded Against Him

The Eleventh Circuit published a fraudulent-transfer decision in Alliant Tax Credit 31, Inc. v. Murphy, 2019 WL 2121297 (11th Cir. May 15, 2019). With appeals from both sides, the court tediously worked its way through numerous issues on appeal. Most of these involved state law questions, but the court in an opinion by Judge Tjoflat shed some light on mootness and assessing diversity jurisdiction in complicated cases.

The defendant husband had transferred millions of dollars to his wife in a divorce settlement, making him judgment proof when other creditors sued him for debts he incurred on loans for building low-income housing units that were never completed. So the creditors argued that he had fraudulently transferred his assets to his ex-wife, and the jury agreed, awarding the creditors over $10 million in damages. After the wife fully satisfied the judgment, the creditors moved for prejudgment interest, which the district court denied.

In addressing cross-appeals, the court began by addressing two jurisdictional bars: mootness and subject-matter jurisdiction. First, given full satisfaction of the judgment, were the appeals moot? No, the court decided, this case “continues to breathe life” because the parties hadn’t mutually intended a final settlement of all claims (citing McGowan v. King, Inc., 616 F.2d 745, 747 (5th Cir. 1980). Satisfying the judgment was “the effective equivalent of posting a supersedeas bond.”

The defendants also argued that the court lacked diversity jurisdiction. The plaintiffs were a mixture of limited-liability companies and limited partnerships, whose members and partners were natural persons, other limited-liability companies and partnerships, corporations, banks, and trusts. Alliant submitted affidavits, declarations, and authenticated documents establishing citizenship, initially claiming citizenship solely in Florida, but then conceding citizenship in California, Delaware, the District of Columbia, Illinois, Nebraska, New York, Ohio, and Texas. So the (district) court (preliminarily addressing this issue on remand) requested further documentation in the form of drivers’ licenses (for natural persons), annual reports and governance documents (for corporations), agreements (for limited partnerships and limited-liability companies), articles of association (for banks), and organizational documents (for trusts) and found complete diversity of citizenship.

This was a mixed question of law and fact. A traditional trust holds the citizenship of its trustee, not, as the defendants argued, its beneficiaries. Applying the law of the state where the trusts were formed (Wisconsin), the two trusts at issue were traditional trusts.

Next on diversity jurisdiction, the defendants argued that the district court erred in admitting affidavits of three persons holding leadership positions with five of the plaintiffs because they failed to lay a foundation without stating that only they could change the memberships of the respective entities. Reviewing for abuse of discretion, the court affirmed. The relevant question for foundation purposes was whether the affiants had personal knowledge, and the defendant’s argument went only to the weight of the affidavits. Under deferential standards, the Eleventh Circuit easily dismissed the defendants’ arguments concerning authentication, additional discovery, and that Alliant simply could not be trusted for having misrepresented its citizenship in the past.

The defendants also argued that the district court was required to abstain from exercising diversity jurisdiction because of the domestic-relations exception. But the court couldn’t find a single case where this exception had applied to suits involving third parties (outside of divorce, alimony, or child-custody decrees). In other words, though some of the underlying litigation involved parties domestically related, the parties in this suit were not so related.

The court rejected the defendants’ argument that the divorce decree collaterally estopped Alliant from arguing it established fraudulent transfers. Of course, Alliant was not a party to that proceeding and thus could not be estopped. For this same reason, the Rooker-Feldman doctrine did not apply. Alliant could not be seeking to effectively review a state court action in federal court when it had not been party to the state court action.

The court decided other state law issues regarding judgment creditors, burden of proof, punitive damages, and prejudgment interest. The ex-wife did win reversal on one point: the district court erred in requiring her to pay her exhusband’s punitive-damage judgment out of her pocket. This judgment did not arise from the transfer itself, which was predicated on Alliant’s already existing claim.

Posted by Keith Emanuel.

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