Cengage Advantage Books: Fundamentals of Business Law Today 10th Edition by Roger LeRoy Miller

Exercise 12

FACTS Michael Sark operated a logging business as a sole proprietorship. To acquire equipment for the business, Sark and his wife, Paula, borrowed funds from Quality Car Truck Leasing, Inc. When his business encountered financial difficulties, Sark was unable to pay his creditors, including Quality. The Sarks sold their house (valued at $203,500) to their son, Michael, Jr., for one dollar, but they continued to live in it.
Three months later, Quality obtained a judgment in an Ohio state court against the Sarks for $150,481.85 and then filed a claim to set aside the transfer of the house to Michael, Jr., as a fraudulent conveyance. From a decision in Quality's favor, the Sarks appealed, arguing that they did not intend to defraud Quality and that they were not actually Quality's debtors.
ISSUE Were the Sarks debtors to Quality?
DECISION Yes. A state intermediate appellate court affirmed the lower court's judgment in Quality's favor.
REASON The court said, "Reasonable minds can come to only one conclusion, and that conclusion is adverse to the Sarks."
The Sarks "are clearly judgment debtors to Quality Leasing and … the judgment has not been satisfied." The reviewing court accepted the trial court's view that "Michael Senior and Paula made a transfer without the exchange of reasonably equivalent value and the debtor was engaged or was about to engage in a business transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction."
Under Ohio law, a creditor need not show that a transfer was made with the intent to defraud in order to prevail. "Thus, the Sarks cannot defeat summary judgment showing that they did not act with fraudulent intent when Michael Senior and Paula transferred the Property to Michael Junior." Further, the Sarks did not challenge the validity of the judgment against them nor did they show that the judgment had been satisfied. Consequently, there was no "genuine issue of material fact regarding whether Paula and Michael Senior are debtors to Quality Leasing."
FOR CRITICAL ANALYSIS -Economic Consideration What might the Sarks have done to avoid this dispute, as well as the loss of their home and their apparently declining business?