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A Debtor’s Prepetition Transfer of a Farm was Fraudulent Because No Reasonably Equivalent Value was Received in Return

Zeddun v. Griswold (In re Wierzbicki), No. 16-1334, 2016 U.S. App. LEXIS 13688 (7th Cir. July 27, 2016)

Debtor Laura Wierzbicki owned a 40-acre farm in Wisconsin, where she lived for a time with her three minor children and their father, Defendant Greg Griswold. Wierzbicki and Griswold lived and worked together on the farm, where they also operated a business salvaging boats. Sometime before 2009, their personal and business relationships soured and Griswold sued Wierzbicki in state court for unjust enrichment and collateral estoppel. Wierzbicki apparently wanted an end to the litigation and she accepted Griswold’s promise to drop the rest of the litigation if she gave up the farm. They arrived at an agreement wherein, Wierzbicki gave Griswold a quitclaim deed to the farm and in exchange received Griswold’s promise to abandon the litigation and to assume about $149,000 in liabilities secured by the property.

Fourteen months later, Wierzbicki filed for Chapter 7 bankruptcy and the Trustee brought an adversary proceeding in bankruptcy court against Griswold to avoid the alleged transfer of farm as fraudulent. The Trustee asserted that the transfer of the farm was constructively fraudulent and thus avoidable because Wierzbicki was insolvent at the time of the transfer and that she had not received reasonably equivalent value in exchange for the property. Griswold argued that his promises to Wierzbicki provided reasonably equivalent value and that the farm’s value to Wierzbicki at the time of the transfer was essentially nothing because of various encumbrances.

After a trial, the Bankruptcy Judge Martin avoided the transfer, concluding that Griswold had exchanged nothing of value for the farm. The District Court affirmed. On appeal, Griswold argued that the Bankruptcy Court overvalued Wierzbicki’s interest in the property at the time of the transfer by not taking into account a lis pendens that he had filed in relation to the property. He also alleged that he provided reasonable equivalent value and the alleged transfer was not fraudulent pursuant to Sec. 548 of the bankruptcy code.

The Seventh Circuit opined that in determining whether a debtor received reasonably equivalent value, courts consider all the circumstances of the transfer, including the fair market value of what was transferred and received, whether the transaction took place at arm’s length, and the good faith of the transferee. In the case at bar, the transaction between Wierzbicki and Griswold was not at arm’s length, and Wierzbicki’s testimony that the main reason she agreed to give Griswold the farm was to stop the frivolous litigation which suggested that Griswold was not negotiating in good faith. The Court also rejected Griswold’s lis pendens argument because under Wisconsin law, a lis pendens simply alerts third parties to judicial proceedings involving real estate and does not create an encumbrance on the property.

Finally, the Court affirmed the bankruptcy court’s judgment and held that since Wierzbicki gave up a $300,000 farm in which she had $151,000 equity in exchange for very little value, the bankruptcy court’s finding that Wierzbicki did not receive reasonably equivalent value was correct and certainly was not clearly erroneous and the Debtor’s alleged prepetition transfer of a farm to the defendant was a fraudulent transfer subject to avoidance.