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 DEEDS; REFORMATION: A Case of Ultimate Chutzpah

Buyer Beware

DIRT DEVELOPMENT for Wednesday, February 10, 2010
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law
Orange, California

DEEDS; REFORMATION:  A Case of Ultimate Chutzpah. Court denies request of incarcerated Father to reform deed of farmland to Son and Daughter to reflect a life estate in Father; Father had unclean hands because sole purpose of transfer was to evade government acting as creditor.

Hardy v. Hardy, 910 N.E.2d 851 (Ind. Ct. App. 2009)

Hardy is interesting because it demonstrates the brazen way in which a person clearly undeserving of equitable relief audaciously asked for it anyway, and then took his outlandish request up on appeal. It is a reassuring case because the party requesting equitable relief lost.

In this case, a Father owned approximately 80 acres of farmland in Indiana. This property included his residence. Father apparently faced an assortment of criminal charges related to both tax evasion and methamphetamines. On October 15, 2004, Father "purposefully conveyed seventy acres of his farmland to his Son and Daughter as joint tenants with right of survivorship." The court noted that the probable reason for the conveyance was the possibility that Father would soon be convicted of crimes that would lead to forfeiture of his land, significant fines in two states, a federal tax lien on property, and incarceration. In other words, the conveyance was meant to deprive state and federal governments, in their capacity as creditors, of assets that might satisfy the respective fines and debts.

In fact, Father was convicted and sent to the Big House in June of 2005 (actually, two Big Houses - first in Oklahoma and then Indiana, consecutively.)

At the time Father conveyed the property to Son and Daughter, Daughter was seventeen years old and a minor. Son was aware of the transfer, but neither Father nor Son told Daughter. She did not become aware of the conveyance in which she was granted a joint tenancy interest in the property until December of 2005, when Son demanded that she sign a quit claim deed of to two acres of her interest in the property to Son and Son's then wife. Son explained that he wanted to build a house on the property and according to the trial record (repeated in appellate opinion) Daughter "didn't really understand that [she] was a co-owner of [the land]." At her brother's insistence, Daughter signed the deed, which was recorded December 9, 2005. Apparently, Father was part of the deal. The opinion indicates that he promised to give Daughter $4000 for execution of the deed, but he failed to do so. This left Daughter with a joint tenancy interest in approximately 68 acres.

During years 2005 to 2008, while Father was behind bars, Son served as Father's "attorney in fact." Pursuant to Father's instructions, Son leased some of the land and earned lease rental income. Neither Father nor Son told Daughter about the lease income.
Daughter eventually became a bit more proactive and asked her sibling and Father about her interest in the farmland that she had not given to her brother by the earlier quit claim deed. Not surprisingly, both Father and Son ignored her inquires. This led to Daughter's decision to file a complaint seeking partition and sale of the real estate, as well as an accounting of all profits and income generated by the property.

Son responded in his answer that, rather than partitioning the property, the court should instead "reform the deed to reflect the intent of the parties including [Father] and [to] impose a constructive trust to protect the interests of Father, Son, and Daughter." By court order, both Son and Father were joined as party defendants in the action brought by Daughter.

Discovery revealed that Father had forged Daughter's signature on the lease agreements to the property. Father claimed that Daughter gave him permission to forge her signature, which Daughter denied.

The family dynamic was pretty toxic. Mother testified at trial that Father had conveyed the property with the intention of creating a life estate in Father, and remainder in Son and Daughter, thus giving Father a right to lease the property and to retain the rental income from such leases. Thus, mother, Father and Son were aligned against Daughter.

Father was not beyond making internally inconsistent arguments. On the one hand, he alleged that the conveyance was real but technically wrong [he really intended to create a life estate with remainder in Son and Daughter], but also argued that the court should exercise its equitable power and create a constructive trust to reconvey the property back to him. The court noted that this demand "would have defeated Father's intent in making the conveyance to begin with."

The trial court had awarded partition by sale, as the land could not be divided "without damage to the owners, Son and Daughter." The Daughter received cash representing her share of lease rentals on an accounting. Finally, the trial court held that the Father had no interest in the property after the conveyance: no life estate, and certainly no right to a constructive trust for purpose of reconveyance of the property back to him.

The appeals court found no reason to dispute the trial court's findings of fact, and affirmed the trial court's award of partition and accounting revenues.

There are really two issues here: the demand of Father and Son that the court reform the deed, and Father's argument that the court imply a life estate.

As the court noted, the ability of a court to reform a deed rests in the court's equitable powers. This is therefore a wonderful case for reviewing the basic doctrine that a party asking a court to act in equity must have clean hands, and that a party seeking equitable relief must affirmatively "do equity."

It is possible that a court might award equitable relief to a party in court notwithstanding the fact that the party asking for equitable relief has committed wrongdoing. The point, as the court noted, is that "the alleged wrongdoing must have an immediate and necessary relation to the matter being litigated." In this case, Father and Son engaged in a conveyance to hinder, delay and defraud Father's creditors. The wrongdoing -thwarting efforts of the government to take the asset - is directly connected to the conveyance to Daughter. The behaviour of Father was clearly intentional. Son was similarly denied equitable relief - he was "complicit" in his Father's scheme.

Furthermore, Father and Son had an obligation to "do right" by Daughter. To this end, dealing with her in such a poor fashion, especially when she was initially a minor, hiding the true nature of the transaction, taking lease rentals without telling her, intimidating her into executing a quit claim deed,  failing to answer questions, all suggest that Father and Son were not acting fairly towards her. As the court pointed out, Father only claimed he meant to reserve a life estate after Daughter learned she owned an interest in the property and began to demand her share of rental income. Then, and only then, did Father ask a court to act in its equitable power to reform the deed.

Father requested reformation of the deed and an implied trust, arguing that it had been his intent to reserve a life estate. The court stated "The record is clear as to Father's primary motivation for the initial conveyance. ... Father and Son both testified that Father effected the conveyance in order to place his property beyond the reach of his creditors - specifically, to evade government efforts to seize or lien his land."

Reporter's Comment 1: The only party who really knew the intention of Father when he conveyed the property was Father, and there is every reason to believe he would have answered a question on intent in the manner most suitable to a beneficial result. But for the testimony of mother on Father's behalf, this reason alone might have been enough to defeat Father's request for reformation. (Mother had reason to testify in Father's favour; presumably revenues from tenants would flow to mother as well as to Father.)

Reporter's Comment 2: The interesting questions have to do fraudulent conveyance law, but these are not directly before the court. If Daughter was unaware of the conveyance in the first place, if she did not rely to her detriment on it, and paid no consideration, one might ask if government creditors ought to be entitled to place the property in constructive trust in order to reach it. It seems to the reporter that government creditors might still be in the game.

Comment 3: We often say that to receive equity one must do equity. But it is hard to find a case in which a party who has so clearly failed to act in an appropriate manner would so brazenly ask for the court's equitable assistance.

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. The same is true of all commentary provided by contributors to the DIRT list. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.

Parties posting messages to DIRT are posting to a source that is readily accessible by members of the general public, and should take that fact into account in evaluating confidentiality issues.

DIRT is a service of the American Bar Association Section on Real Property, Probate & Trust Law and the University of Missouri, Kansas City, School of Law. Daily Developments are copyrighted by Patrick A. Randolph, Jr., Professor of Law, UMKC School of Law, but Professor Randolph grants permission for copying or distribution of Daily Developments for educational purposes, including professional continuing education, provided that no charge is imposed for such distribution and that appropriate credit is given to Professor Randolph, any substitute reporters, DIRT, and its sponsors.

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