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SOUTHEAST BANK OF BROWARD, FLORIDA, N.A. v. I. P. SARULLO ENTERPRISES

DECEMBER 20, 1989

SOUTHEAST BANK OF BROWARD, FLORIDA, N.A.
v.
I. P. SARULLO ENTERPRISES, INC., AND M. C. CLARK



BEFORE ROY NOBLE LEE, C.J., PRATHER AND ANDERSON, JJ.

PRATHER, JUSTICE, FOR THE COURT:

This action by a judgment creditor, Southeast Bank of Broward, Florida, N.A. (Bank), seeks to set aside a quitclaim deed as fraudulent. The legal title was held by a corporation, I. P. Sarullo, Enterprises, Inc., (IPS) and was conveyed by its president, Sonny Sarullo, to his wife, Martha Carol (M. C.) Clark. The Bank named as defendants the corporation and the wife in order to set aside the deed and subject the land to its judgment lien. The Chancery Court of Washington County held the conveyance fraudulent, and this Court affirms that holding, but reverses on the trial court's ordering reimbursement to the wife of certain payments made in connection with the property.

The Bank's appeal of the trial court's decision to this Court, assigns six (6) points as error. Several of these assigned errors are duplicative and are condensed into four (4) errors, which are as follows:

 (1) THE CONVEYANCE TO M.C. CLARK OF THE LAKE WASHINGTON PROPERTY WAS A FRAUDULENT CONVEYANCE, MADE WITH THE INTENT TO HINDER AND DEFRAUD CREDITORS.

 (2) THE CHANCELLOR ERRED WHEN HE ALLOWED REIMBURSEMENT TO M.C. CLARK FOR PAYMENTS SHE MADE ON THE LAKE WASHINGTON PROPERTY.

 (3) THE CHANCELLOR ERRED WHEN HE FOUND THAT THE PAYMENT OF THE SECOND MORTGAGE BY MRS. SARULLO'S TRUST FUND CONSTITUTED A GIFT TO APPELLEE M.C. CLARK.

 (4) THE CHANCELLOR ERRED WHEN HE REFUSED TO ALLOW THE ASSESSMENT OF PUNITIVE DAMAGES AGAINST IPS AND M.C. CLARK, INCLUDING ATTORNEY'S FEES.

 I.

 I.P. Sarullo Enterprises, Inc. (IPS) is a Mississippi corporation whose stock is wholly owned by Mrs. Frances Sarullo, the mother of Salvadore (Sonny) Sarullo, president of IPS. The company was engaged in the contracting and construction business, and at all times pertinent to this litigation, Sarullo was "in charge of the business."

 On November 1, 1977, IPS purchased a house and lot located on Lake Washington, in Washington County, approximately 35 miles South of Greenville, from Stanley Ingram for $50,000.00. Of this figure, $10,000.00 was paid by IPS, with the remainder due in four (4) equal installments payable each February 15th from 1978-1981, at 9% interest, and secured by a Deed of Trust in favor of the sellers. The house was initially insured by IPS for $60,000.00, and coverage was later increased to $70,000.00.

 On June 1, 1978, IPS was engaged in the construction business in Florida. On that day, IPS negotiated an unsecured $52,000.00 loan with the appellant Bank, with S. Sarullo personally guaranteeing the loan. When the note became due on September 1, 1978, the IPS corporation was insolvent and its developer in Florida was in bankruptcy. The appellee corporation has never denied its insolvency or the fact that the company's only asset was the Lake Washington property.

 Sarullo and Martha Carol Clark were married on October 6, 1978. By a quitclaim deed dated November 3, 1978 and signed by Sarullo as president, IPS conveyed the subject house and lot in question to "M.C. Clark" *fn1 for a consideration listed as "Ten Dollars ($10.00) cash and other good and valuable considerations."

 With the default in payment of its $52,000.00 loan to IPS the Bank filed suit in December, 1978, in Florida. On February 16, 1979, the quitclaim deed of the subject house and lot from IPS to M. C. Clark was recorded in Washington County. Thereafter, the Bank obtained a default judgment against IPS and Sarullo jointly and severally in the amount of $57,962.43 and a separate judgment against IPS for $1,427.47, all on March 2, 1979.

 Following the entry of the default judgment against IPS and Sarullo, Sarullo organized two other corporations with the aid of his wife, to enable him to "get back on my feet and try to get some business going again." One corporation, K.A.P.P. Company, Inc. (KAPP) was organized with M.C. Clark as the sole stockholder and a second corporation, styled M.C. Clark Company, Inc. (MCC) was formed, again with his wife as the only stockholder, which, being totally owned by a female, qualified for government construction contracts for minority businesses.

 Sarullo was the president for both of these corporations. He had the authority to hire and fire all employees and also determined their salaries. Clark was a schoolteacher before she married Sarullo and knew very little about the construction business. As a consequence, Sarullo determined which contracts the corporations would bid on, the amount of the bids, and had the primary responsibility for handling the day-to-day affairs of the companies, although his wife played a very small role in the business affairs of the corporations because, in his words, "she is required to."

 The Bank domesticated its March 2, 1979 Florida judgment in the Circuit Court of Washington County on April 9, 1980, obtaining a joint and several judgment against IPS and Sarullo for $68,404.06 and a separate judgment against IPS in the amount of $1,696.94. A July, 1980 garnishment netted $544.41, and no other amount had been collected on the outstanding judgment at the time of trial. The Bank then sought to turn to IPS's only asset at the time of this loan, which was the Lake Washington house and lot and filed on July 13, 1983 this chancery court action to set aside the IPS quitclaim deed to "M. C. Clark" as a fraudulent conveyance and subject the land to its judgment lien.

 The only witnesses presented at trial were Sarullo, Patsy Woody, a vice-president of the Bank, two real estate appraisers, and Stan Ingram. Perhaps the most crucial potential witness, M.C. Clark, never testified.

 At the trial, which was held on April 10, 1986, John Wise, called as an expert witness for the appellees, placed the value of the house in November 1978 (the time of the transfer from IPS to M.C. Clark) at $38,000 to $40,000, a $10-12,000 decrease in value from the purchase price paid only a year earlier. Joan Nye, the Bank's expert witness, called in rebuttal, challenged the accuracy of Wise's figures. In its written opinion, the trial court chose not to rely on Wise's calculations. *fn2

 Following the presentation of evidence by each side, the trial court found that no real consideration was paid for the quitclaim deed by M.C. Clark, that no debts had been assumed for the transfer, and that the probable value of the property "substantially exceeded" the amounts actually paid for it, both at the time of the transfer, and those payments later made by KAPP and MCC on Clark's "behalf." As a consequence, the court found that the transfer of the property from IPS to Clark was clearly a fraudulent conveyance within the meaning of 15-3-3, M.C.A. Ann. (1972 and Supp. 1989), and should therefore be set aside, with the property in question being subjected to the lien of the Bank's joint and several judgment against IPS and S. Sarullo individually for $68,404.06, plus interest.

 However, the Court also found that Clark should be reimbursed for the $34,404.50 paid by MCC and KAPP on the Deed of Trust covering the Lake Washington property. Finally, the trial court found that the $10,000.00 payment from Mrs. Sarullo's trust fund, covering the second Deed of Trust, constituted a "gift" to Clark, and should therefore also be paid to her out of the judicial sale of the house.

 Concerning the Bank's claim for punitive damages and attorney's fees, the trial court denied this claim, holding that the actions of Clark were not so gross or malicious so as to justify the awarding of such damages and/or fees. No specific mention was made of IPS's actions. Following this decision, the Bank perfected its appeal to this Court.

 II.

 WAS THE CONVEYANCE TO M.C. CLARK OF THE LAKE WASHINGTON PROPERTY A FRAUDULENT CONVEYANCE, MADE WITH THE INTENT TO HINDER AND

 DEFRAUD CREDITORS?

 Since this question has already been answered in the affirmative by the trial court and is not challenged by cross-appeal of the appellees and is amply supported by the evidence, it does not necessitate a lengthy discussion. However, a consideration of the correctness of the trial court's holding on this point is necessary to address the other assignments.

 Appellant asserts that the conveyance in question was a "voluntary conveyance," without consideration, but with the participation of M. C. Clark, and that under Mississippi law such a voluntary conveyance is presumed to be fraudulent as to creditors. Barbee v. Pigott, 507 So. 2d 77 (Miss. 1987); Morgan v. Sauls, 413 So. 2d 370 (Miss. 1982); Hudson v. Allen, 313 So. 2d 401 (Miss. 1975).

 It has been held that "transactions between husband and wife will be viewed with suspicion and, to prevent fraud as to creditors, they will be closely scrutinized to see that they are fair and honest." Fidelity & Deposit Co. of Maryland v. Lovell, 108 F. Supp. 360, 365 (S.D. Miss. 1952) (quoting 37 C.J.S., Fraudulent Conveyances, 252, p. 1085). Other cases have gone further, holding that when a voluntary conveyance is made between husband and wife, without consideration, it is presumptively fraudulent. First National Bank in Kearney v. Bunn, 195 Neb. 829, 241 N.W.2d 127, 128 (1976); Miami National Bank v. Willens, 410 Pa. 505, 190 A.2d 438, 439 (1963); Bank of Atkins v. Teague, 205 Ark. 38, 166 S.W.2d 1017, 1018-19 (1942).

 When examining a conveyance to determine if it is fraudulent, a court searches for certain "badges of fraud," or suspicious circumstances, which usually accompany a fraudulent conveyance. Reed v. Lavecchia, 187 Miss. 413, 193 So. 439 (1940). In the case sub judice, there are numerous badges of fraud present:

 (1) Inadequacy of consideration - The recited consideration in the quitclaim deed was "$10.00 and other good and valuable considerations" for a piece of property worth at the very least $38,000 to $40,000, with the actual value possibly being greater. Dehmer v. Temple, 44 B.R. 992, 996 (S.D. Miss. 1984); Oury v. Annotti, 113 R.I. 506, 324 A.2d 325, 327 n.2 (1974); Waukesha County Department of Social Services v. Loper, 53 Wis. 2d 713, 193 N.W.2d 679, 682 (1972). See also, 37 C.J.S. 81. The trial court found no real consideration.

 (2) Transfer in anticipation of possible future litigation - The transfer took place after the debtor-creditor relationship arose and after IPS had defaulted on the $52,000 loan it had received from the Bank. "The usual case of a claim of fraudulent conveyance as to a subsequent tort claimant arises where the tort is committed, then a conveyance is made with intent to avoid a possible later judgment." Bank of Josephine v. Hopson, 516 S.W.2d 339, 341-42 (Ky. App. 1974); Watson v. Harris, 435 S.W.2d 667, 672 (Mo. 1968). Morgan v. Sauls, supra. See also, 37 C.J.S. 82. No doubt IPS anticipated litigation on the defaulted loan.

 (3) Length of delay in recording the deed - The deed was dated November 3, 1978 but was not recorded until February 16, 1979. See 37 C.J.S. 85. The Bank filed suit in December, 1978.

 (4) Secrecy - The conveyance was made to "M. C. Clark" rather than "Martha Carol Clark" or "Martha Carol Clark Sarullo." During Sarullo's testimony at trial, he referred to his wife as "Martha Carol" or "Carol" ...


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