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Posted on August 13, 2022

Fraudulent Conveyance In An Illinois Divorce

Divorce is rarely a surprise. A person anticipating divorce will contemplate how their net worth will likely be reduced by half at the end of the divorce process. This potential loss of assets via divorce may induce a spouse to start transferring money and assets to third parties before the divorce is finalized. In theory, a divorce court cannot divide assets that neither party to the marriage no longer possess.

People are allowed to transfer property they own in Illinois.

“In Illinois…the owner of property has an absolute right to dispose of his property during his lifetime in any manner he sees fit, and he may do so even though the transfer is for the precise purpose of minimizing or defeating the statutory marital interests of the spouse in the property conveyed.” Johnson v. La Grange State Bank, 383 NE 2d 185 – Ill: Supreme Court 1978

While a party to an Illinois divorce CAN transfer their property to avoid division of assets, those transfers can be voided or set aside later by an Illinois divorce court.

“[C]ircumstances to give rise to a [fraudulent conveyance, allow for] setting aside the assignment [of the asset] as fraudulent” Till v. Till, 231 NE 2d 641 – Ill: Appellate Court, 1st Dist., 1st Div. 1967

Transfers before or during a divorce with the intent to deprive the other spouse of their rights to a marital property are a fraud.

“[F]raud against marital property is not to be condoned even though it occurs before dissolution.” Hofmann v. Hofmann (1983), 94 Ill.2d 205, 220, 446 N.E.2d 499.

Fraudulent transfers should be investigated by the defrauded spouse and brought to the Illinois divorce court’s attention.

Marital Property Is No Longer Divisible By An Illinois Divorce Court If The Marital Property Is Not Held By Either Spouse

At the end of an Illinois divorce an Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions” 750 ILCS 5/503(d)

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)

Property not held by a spouse…must be held by someone else. If so, an Illinois divorce court cannot award that property unless that third party is included in the divorce.

“Courts are not authorized in divorce proceedings to order disposition of property interests of third persons who are not parties to the proceeding.” In re Marriage of Simmons, 409 NE 2d 321 – Ill: Appellate Court, 1st Dist. 1980

Including Third Parties Into An Illinois Divorce

It is very easy to include these third parties into an Illinois divorce if the third party has in their possession what may be the couple’s marital property.

“The court may join additional parties necessary and proper for the exercise of its authority under this Act.” 750 ILCS 5/403(d)

There must be a reason to allege that the third party does not really own the property outright, separate and apart from the couple. Usually that reason is an alleged fraudulent conveyance.

Fraudulent Conveyance In An Illinois Divorce

A fraudulent conveyance is “[a] transfer of an interest in property for little or no consideration, made for the purpose of hindering or delaying a creditor by putting the property beyond the creditor’s reach.” Black’s Law Dictionary (11th ed. 2019)

There are two bases to undo or void a fraudulent conveyance in an Illinois divorce: common law relief and the Uniform Fraudulent Transfer Act.

A transfer of marital property to a third party will be presumed legitimate on its face. Fraud must be proven in an Illinois divorce court.

“[F]raud will not be presumed in this State and must be proved by clear and convincing evidence” Hofmann v. Hofmann, 446 NE 2d 499 – Ill: Supreme Court 1983

“[T]he transaction must be shown to be fraudulent, i.e., no actual transfer of ownership, by clear and convincing evidence.” Hofmann v. Hofmann, 446 NE 2d 499 – Ill: Supreme Court 1983

Alleging fraud requires specificity in the pleading or motion alleging fraud.

“A high standard of specificity is imposed on pleadings asserting fraud. The facts constituting the alleged fraud must be stated with sufficient specificity, particularity, and certainty to apprise the opposing party of what he is called upon to answer. The pleading must contain specific allegations of facts from which fraud is the necessary or probable inference, including what representations were made, when they were made, who made the misrepresentations and to whom they were made. Chatham Surgicore v. Health Care Service, 356 Ill. App. 3d 795, 803-4 (Ill. App. Ct. 2005)(citations and quotations omitted)

Fraudulent transfers, once proven, can be voided by an Illinois court.

“The transfer of an interest in property may be set aside as fraudulent if it tends to hinder or defeat the rights of the grantor’s creditors” Kardynalski v. Fisher, 482 NE 2d 117 – Ill: Appellate Court, 2nd Dist. 1985

There are two ways to prove that a transfer was fraudulent: there was no (or insufficient) consideration or the circumstances show the intent of the transfer (even with adequate consideration) was to defraud someone who had an interest in the property.

“Fraudulent conveyances fall into two categories. A conveyance may be fraudulent in law if the transfer is made for no consideration or for inadequate consideration, or fraudulent in fact if consideration was given but the transfer was made with the intent to defraud creditors.” Kardynalski v. Fisher, 482 NE 2d 117 – Ill: Appellate Court, 2nd Dist. 1985

Fraudulent Conveyance With No Consideration In An Illinois Divorce

Consideration is “[something] (such as an act, a forbearance, or a return promise) bargained for and received by a promissor from a promise” Black’s Law Dictionary (11th ed. 2019)

So, just giving something away for nothing in return is a “transfer made for no consideration.” No further investigation is needed…the transfer was probably fraudulent.

Transfers without consideration are usually characterized as a gift.

“The burden [is] upon…the one questioning the creation of a gift, to overcome the presumption of donative intent by clear, convincing, unequivocal, and unmistakable evidence” In re Marriage of Agostinelli, 620 NE 2d 1215 – Ill: Appellate Court, 1st Dist., 1st Div. 1993

It should not be too hard to determine if a transfer was fraudulent or a gift based on what the property is and what who the recipient is.

Giving a house to a child in need of a home may be a perfectly reasonable gift.

Giving a house to a cousin…probably a fraudulent transfer.

Giving that same cousin a nice watch on his birthday? Probably a reasonable gift.

Giving that same cousin $20,000 cash on a Tuesday and saying “hold onto this for me?” Probably a fraudulent transfer.

Fraudulent Conveyance With Consideration In An Illinois Divorce

The bargained-for-exchange has to make sense in order for the transfer NOT to be fraudulent.

“The general rule is that a transferee is chargeable with acquiescence in a fraudulently intended transfer where he is in possession of facts and circumstances which are not reconcilable with ordinary business integrity or would otherwise put a prudent person on inquiry.” Hofmann v. Hofmann, 446 NE 2d 499 – Ill: Supreme Court 1983

For example, selling a new car to your buddy for $ 500 is “not reconcilable with ordinary business integrity” and “would put a prudent person on inquiry.” Whereas, selling the same car at a steep but reasonable discount to a stranger would be perfectly normal and not a fraud.

“[A] transaction is a sham and tantamount to fraud when it is colorable or illusory. An illusory transfer is one which takes back all that it gives, and a colorable transfer is one which appears to be absolute on its face but which, because of a secret or tacit understanding between the transferor and transferee, is not an actual transfer because the parties intended ownership to be retained by the transferor. A transfer is a fraud on marital rights when the transferor in reality has no intent to convey any present interest in the property, but, in fact, intends to retain complete ownership.” Hofmann v. Hofmann, 446 NE 2d 499 – Ill: Supreme Court 1983 (citations omitted)  

An illusory transfer is one in which “the donor retains so much control that there is no good-faith intent to relinquish the transferred property.” Black’s Law Dictionary (11th ed. 2019)

A colorable transaction is “[a] sham transaction having the appearance of authenticity” Black’s Law Dictionary (11th ed. 2019)

The distinction between the two terms is that illusory transfers are not deceitful but do not actually transfer completely whereas colorable transfers may be complete yet subject to a deceitful, secret agreement.

“When the characterization of a transfer of marital assets is questioned by a spouse, fraud is properly assessed by referring to the donative intent of the settlor. An illusory transfer is one which takes back all that it gives, and a colorable transfer is one which appears absolute on its face, but due to some secret or tacit understanding between the transferee and the transferor, it is not a transfer because the parties intended ownership be retained by the transferor. Whether the conveyance at issue was fraudulent depends upon all the circumstances surrounding the transfer.” In re Marriage of Frederick, 578 NE 2d 612 – Ill: Appellate Court, 2nd Dist. 1991 (citations omitted)

Most illusory transfers take the form of placing marital property into a trust. Revocable trusts can be illusory transfers based on the circumstances.

“It can be argued that “the power to revoke, terminate, amend or modify the trust at anytime and had use of the property as long as he wanted to show the illusory nature of the transfer. However, these features do not necessarily render the trust inoperative. The facts surrounding the transfer show that the trust, while ostensibly valid, is in actuality a sham transaction to defraud respondent’s marital rights.” In re Marriage of Frederick, 578 NE 2d 612 – Ill: Appellate Court, 2nd Dist. 1991 (citations omitted)

Fraudulent Conveyance vs. Debt In An Illinois Divorce

If an allegedly fraudulent conveyance is made to a third party but there is sufficient consideration to establish that the transfer of assets was in consideration for a debt now owed to the divorcing party, then the debt can still be collected from the third-party via a judgment certifying that the debtor owes the divorcing creditor followed by a citation to discovery assets.

“A judgment creditor, or his or her successor in interest when that interest is made to appear of record, is entitled to prosecute citations to discover assets for the purposes of examining the judgment debtor or any other person to discover assets or income of the debtor not exempt from the enforcement of the judgment, a deduction order or garnishment, and of compelling the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment.” 735 ILCS 5/2-1402(a)

“Section 2-1402 of the Code of Civil Procedure allows a judgment creditor to begin supplementary proceedings against a third party to discover assets belonging to the judgment debtor that the third party may have in its possession. What constitutes an “asset belonging to the judgment debtor” is to be liberally construed.” Door Properties, LLC v. Nahlawi, 188 NE 3d 806 – Ill: Appellate Court, 1st Dist., 3rd Div. 2020 (citations and quotations omitted)

A citation to discovery assets a whole new form, served upon the third party who has the assets that is still in the divorce case.

These citations to discovery assets must be done in a very particular way. “A supplementary proceeding authorized by section 2-1402 of the Code of Civil Procedure may be commenced at any time with respect to a judgment which is subject to enforcement. The proceeding may be against the judgment debtor or any third party the judgment creditor believes has property of or is indebted to the judgment debtor.” Ill. Sup. Ct. R. 277

Citations to recover assets from a third party is rarely used in divorce, in my experience. It is easier to make the third party an actual party to the divorce to both establish and collect the debt (also ascarier, thus, more forceful method), therefore, most divorce practitioners simply ask leave to include the third-party.

Dissipation Of Assets In Lieu Of Voiding A Fraudulent Conveyance

Undoing a fraudulent transfer only makes sense in an Illinois divorce if there are no other assets of equivalent value to allocate to make up for the now-missing asset.

If there are sufficient assets to make up for the fraudulent conveyance, the other party can just request that the court consider the fraudulent conveyance to be a dissipation of assets.

When the remaining, current marital assets are allocated between the divorcing parties, an Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors, including:

the dissipation by each party of the marital property” 750 ILCS 5/503(d)(2)

“Dissipation is defined as the use of marital property for one spouse’s sole benefit for a purpose unrelated to the marriage at a time when the marriage is undergoing an irreconcilable breakdown.” In re Marriage of Tietz, 605 NE 2d 670 – Ill: Appellate Court, 4th Dist. 1992

A fraudulent conveyance probably looks a lot like “the use of marital property…for a purpose unrelated to the marriage.”

To have an Illinois divorce court award you equivalent value due to a dissipation claim, you would not need to prove fraud, illusory, colorable or otherwise.

Money is fungible. Six of one is half a dozen of the other. Just get divorced and get what should be yours.

The Uniform Fraudulent Transfer Act In An Illinois Divorce

The common law fraudulent conveyance described above will probably be sufficient to set aside fraudulent transfers in a pending, pre-decree Illinois divorce action. The Uniform Fraudulent Transfer act can also be invoked to undo a fraudulent transfer in an Illinois divorce.

“The Uniform Fraudulent Transfer Act was enacted to enable a creditor to defeat a debtor’s transfer of assets to which the creditor was entitled. [The purpose of the Act is] “to invalidate otherwise sanctioned transactions made with fraudulent intent.” Northwestern Memorial Hospital v. Sharif, 2014 IL App (1st) 133008, ¶ 16. (internal quotation marks omitted)

“[A] creditor…may obtain:(1) avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim” 740 ILCS 160/8(a)

The types of transfers that will be deemed fraudulent under the Uniform Fraudulent Transfer Act will be based on the intent of the debtor during the transfer.

“A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:(1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation” 740 ILCS 160/5(a)

The Uniform Fraudulent Transfer Act largely mirrors the requirements to void a transfer that the common law elements require, except the specificity of the statute is clearer (as always).

The specificity of the statute creates a problem, though. The Uniform Fraudulent Transfer Act can only be invoked by “creditors” against “debtors.” Until a court has allocated marital and non-marital property to each spouse, neither spouse owes either spouse anything. Therefore, there is no creditor/debtor relationship until after an Illinois divorce is finalized.

“To state a claim under that section [of the Uniform Fraudulent Transfer Act], a plaintiff must allege the existence of both a creditor/debtor relationship and a claim.” Reidy v. Reidy, Ill: Appellate Court, 1st Dist., 6th Div. 2021

“”Creditor” means a person who has a claim, including a claim for past-due child support.” 740 ILCS 160/2(d)

“”Debtor” means a person who is liable on a claim.” 740 ILCS 160/2(f)

“”Claim” means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” 740 ILCS 160/2(c)

Until the parties’ rights and obligations have been adjudicated, there are no creditors, debtors or claims.

“[U]ntil a final determination is made by the trial court regarding the division of the disputed personal property pursuant to the petition for dissolution of marriage, respondent can claim no clear, ascertainable legal right to the exclusive possession of that property. At the present time, each party has an equal possessory right.” In re Marriage of Sherwin, 123 Ill. App. 3d 748, 753 (Ill. App. Ct. 1984)

After a divorce, when the Judgment of Dissolution of Marriage and the incorporated Marital Settlement Agreement have been entered and established, the Uniform Fraudulent Transfer Act can be invoked and the Act’s specific terms can make voiding a transaction all the more simple.

If You Can’t Get The Fraudulent Transfer Back

If the formerly marital property is deemed to remain with the third-party, you have the option of letting that third-party know that your spouse can NEVER ask for that property back from the third party.

“[T]he law will not permit a party to deliberately place his property out of his control for a fraudulent purpose and then, through the intervention of a court of equity, regain title after his fraudulent purpose has been accomplished. Rather, the court will leave the parties as it finds them.” Gunn v. Sobucki, 837 NE 2d 865 – Ill: Supreme Court 2005

In an Illinois divorce, old saying “two is company but three is a crowd” is especially applicable. Get your property back from the third party and finish off your divorce with just you and your spouse…and all of the marital property. To learn more, contact my Chicago, Illinois family law firm to discuss all of your options with an experienced Illinois divorce attorney.  

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Russell Knight

Russell D. Knight has been practicing family law as a Chicago divorce lawyer since 2006. Russell D. Knight amicably resolves tough cases while remaining a strong advocate for his client’s interests.

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