ROBERT J. KRESSEL, Bankruptcy Judge.
This adversary proceeding came on for trial on July 17, 2018 on the plaintiff's complaint seeking to avoid and recover transfers made to the defendant. Andrea M. Hauser appeared for the plaintiff. Alexander J. Beeby appeared for the defendant. This court has jurisdiction over this adversary proceeding pursuant to 28 U.S. §§ 157(b)(1) and 1334, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(H).
The trustee claims that the transfers made to the defendant from the joint accounts, the payments to the taxing authorities, the tax refunds deposited in the defendant's individual account and deposits made to the 529 accounts are voidable transfers as constructive fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) and intentional fraudulent transfers under 11 U.S.C. § 548(a)(1)(A).
The trustee seeks to avoid the transfers listed above pursuant to 11 U.S.C. § 548(a)(1)(B). That section provides in pertinent part that:
11 U.S.C. § 548(a)(1)(B).
To prevail on a claim under this section the trustee must prove, by a preponderance of the evidence, that the debtor was insolvent or became insolvent at the time of the transfer and that the payments were not made in exchange for reasonably equivalent value. Pummill v. Greensfelder, Hemker & Gale (In re Richards & Conover Steel, Co.), 267 B.R. 602, 612 (B.A.P. 8th Cir. 2001).
Section 548 requires a transfer of an "interest of the debtor in property." 11 U.S.C. §548(a)(1). The debtor must have an interest in the property transferred, meaning the transfer must affect property that would have been property of the estate but for the transfer. Begier v. IRS, 496 U.S. 53, 58 (1990) (this includes "property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings").
The parties agree that ownership interest of monies in a joint bank account is determined by Minnesota law. Minnesota statute provides in relevant parts that absent clear and convincing evidence to the contrary, "a joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit." Minn. Stat. §524.6-203(a) (2017). The parties also agree that both the debtor and the defendant had an ownership interest in half of the amount received from the refinance of the mortgage on their homestead, meaning $25,500 each. The joint tax refunds are proportioned based their respective withholding from paychecks, which were 68% by the defendant and 32% by the debtor, not including their payments of estimated taxes.
The trustee seeks to avoid the transfers to the 529 accounts. The debtor and the defendant initially funded these accounts for the benefit of their grandchildren when the defendant inherited some amount of money when his mother passed away. The later transfers to these accounts were from the defendant's portion of the funds in the joint account. I find the debtor's and the defendant's testimony regarding the 529 accounts credible. The debtor did not have any ownership interest in the funds used to fund the 529 accounts within the 2 years before the case was commenced. The trustee may not avoid these transfers.
For the year 2014, the Nolls' refunds totaled $45,181 including $9,037 from Minnesota and $36,146 from IRS. When allocating a joint tax refund between the spouses, it is in proportion to their respective tax withholdings. Carlson v. Moratzka (In re Carlson), 394 B.R. 491, 493 (B.A.P. 8th Cir. 2008). This analysis only applies to refunds that are strictly from amounts withheld from the parties' wages. The principle of In re Carlson is that a refund belongs to the parties in the ratio that they paid in. The debtor and the defendant paid estimated taxes of $34,000 in cash toward their 2014 taxes. Since the entire $34,000 was refunded, $17,000 or half was the debtor's property.
The balance of the refund or $11,181 was the result of withholding from their paychecks. Of the $11,181, 32% or $3,577.92 was due to withholding from the debtor's paycheck and was thus her property. Id. Adding that amount to $17,000 of the refund of the estimated taxes the debtor's interest in the refund was $20,577.92
The defendant transferred a total of $14,457.92 which he claims was the debtor's portion of the refunds from the 2014 taxes from his personal account to the joint account (consisting of $2,620.15 on April 28, $271.05 on April 29 and $11,566.72 on May 7, 2015). Since the debtor had an interest in $20,577.92, after the $14,457.92 transfer, there still remained a balance of $6,120 of the debtor's monies in the defendant's individual account. In another words, the debtor received transfers of $6,120 of the debtor's property from the state and the IRS, for which the debtor did not receive any value.
For the 2015 taxes, the defendant transferred $16,000 from his individual account to the joint checking account but on the same day, he transferred back $12,000. This left a total of $4,000 of his money in the joint checking account. The Nolls used $15,000 from the joint checking account to pay for their 2015 taxes. Out of this $15,000, the debtor had an interest in half or $7,500.
As of May 6, 2015, there was a balance of $9,072.74 in the joint checking account. After accounting for the $4,000 of the defendant's funds that remained in the joint account after the $12,000 transfer on May 7, 2015, we start with a balance of $5,072.74 in the joint checking account. Absence clear evidence, the debtor and the defendant have an equal share of ownership interest in the $5,072.74. The debtor's half interest was therefore $2,536.37.
The 2015 refund from IRS was $7,306. Out of this, the debtor had an ownership interest of 32%, representing her contribution, which was $2,337.92. However, the Nolls did not receive any of the refunds from the IRS because those funds went to satisfy her business tax obligations.
The 2015 refund from the state was $1,543.54. The debtor has an ownership interest of 32% based on her contribution which amounts to $493.93. The defendant has an ownership interest of the remaining balance of 1,049.61
The constructive fraudulent transfer claim requires that the debtor be insolvent at the time of the transfers. Insolvency is a financial condition such that the sum of the debtor's debts is greater than all of her property, excluding exempt property, at a fair valuation. 11 U.S.C. § 101(32)(A). The record is clear that the debtor was insolvent at the time the transfers and the defendant does not argue otherwise.
The issue of whether a transfer was made for reasonably equivalent value is a question of fact. Jacoway v. Anderson (In re Ozark Rest. Equip. Co.), 850 F.2d 342, 344 (8th Cir.1988). In order for the plaintiff to prevail on his claim, he must show that the transfers were not transferred for reasonably equivalent value. Id. This requires an analysis of whether (1) value was given; (2) it was given in exchange for the transfer; and (3) what was transferred was reasonably equivalent to what was received. Meeks v. Don Howard Charitable Remainder Trust (In re Southern Health Care of Ark., Inc.), 309 B.R. 314, 319 (B.A.P. 8th Cir. 2004).
The Bankruptcy Code defines "value" as "property in satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor." 11 U.S.C. § 548(d)(2)(A) "A transfer is in exchange for value if one is the quid pro quo of another." In re Richards, 267 B.R. at 612.
Importantly, when evaluating a transfer for reasonable equivalency under section 548(a)(1)(B)(i), a court must examine the entire situation. In re Ozark Rest, 850 F.2d at 344-345. There is no bright line rule used to determine when reasonably equivalent value is given. Id. (indicating that a determination of reasonably equivalent value is based on a "totality of the circumstances"); Barber v. Golden Seed Co. Inc., 129 F.3d 382, 387 (7th Cir.1997) (stating that the standard for reasonable equivalence should depend on all the facts of each case). A determination of reasonably equivalent value is "fundamentally one of common sense, measured against market reality." Leonard v. Mylex Corp. (In re Northgate Computer Sys., Inc.), 240 B.R. 328, 365 (Bankr. D. Minn. 1999).
For the 2014 tax refunds, a balance of $6,120 remained in the defendant's account. Later transfers to the debtor's account were not "on account of the transaction." See In re Richards, 267 B.R. at 612; Karen v. JNG Corporation (In re Lindell), 334 B.R. 249, 254 (Bankr. D. Minn. 2005). In fact, the defendant did not understand that there was $6,120 of the debtor's money remaining in his account. Therefore, his subsequent transfers cannot be considered transfers on account of or in exchange for his receipt of that amount. Id. The debtor did not receive reasonably equivalent value. Therefore, in considering the totality of the circumstances, $6,120 was transferred to the defendant for no consideration. The plaintiff may avoid that amount.
Other than the 2014 tax refunds, each time there was a transfer of the debtor's property to the defendant, he transferred that same amount to the debtor. Additionally, for the 2015 tax refunds, the majority of the payments were used to satisfy the debtor's business tax liability. The debtor received a reasonably equivalent value for the transfers made for the 2015 taxes. The defendant is entitled to his portion of the 2015 tax refund of $1,049.61. The balance of $493.93 is property of the estate.
The plaintiff also seeks to avoid the transfers stated above under 11 U.S.C. § 548(a)(1)(A) and Minn. Stat. §§513.44(a)(1) and 513.44(b). To prevail on the bankruptcy claim, the plaintiff must prove that the debtor made the transfers with actual intent to hinder, delay, or defraud any entity to which she was indebted. 11 U.S.C. § 548(a)(1)(A). Similarly under Minnesota statute, a transfer is avoidable as to a creditor if the transfer was made with the intent to hinder, delay or defraud any creditor of the debtor. Minn. Stat. § 513.44(a)(1) (2017).
In general "because proof of actual intent to hinder, delay or defraud creditors may rarely be established by direct evidence, courts infer fraudulent intent from the circumstances surrounding the transfer." Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1353 (8th Cir.1995) (citing Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir.1991). Courts have often adopted eleven badges of fraud codified by states. Kelly v. Armstrong, 141 F.3d 799, 802 (8th Cir.1998). "Once a trustee establishes a confluence of several badges of fraud, the trustee is entitled to a presumption of fraudulent intent." Id. Minnesota's Uniform Fraudulent Transfer Act lists the following badges of fraud to consider in determining actual intent.
Minn.Stat. § 513.44(b) (2017).
The transfers were to an insider. The defendant is the debtor's husband. See 11 U.S.C. § 101(31)(A). Before and during the transfers, the debtor was insolvent. She was sued for substantially large amount debt that she was personally responsible for. The debtor and the defendant testified that they intended to separate the defendant's monies based on his contribution in a separate bank account for the purpose of taking his money out of the reach of creditors and the bankruptcy trustee. Based on the evidence clearly that was true. The scheme was carefully devised and executed to prevent the defendant's property from being caught up in the debtor's bankruptcy case, not to keep the debtor's property out of the reach of the debtor's creditors.
The debtor received reasonably equivalent value for most of the transfers. With the exception of a portion of the 2014 refund, an amount equal to her interest was transferred back to her each time the defendants received a transfer. Only a misunderstanding of In re Carlson kept this from happening in the case of the 2014 refund. The joint funds were used to satisfy only her obligation. The debtor received value for these transfers. The debtor and the defendant did not conceal or try to conceal the transfers. In fact, the debtor and the defendant were acting under the advice of their accountant and attorneys. The plaintiff failed to establish a presumption of fraudulent intent to hinder, delay or defraud creditors. The plaintiff may not avoid the transfers based on actual fraud.
Similar to the constructive fraud claim under the Bankruptcy Code, Minnesota statute also requires the plaintiff to establish that the debtor made a transfer to a creditor without the debtor receiving reasonably equivalent value in exchange for that transfer and the debtor was insolvent. Minn. Stat. § 513.45 (2017). Similar to the bankruptcy constructive fraudulent claim stated above, the plaintiff may avoid transfer to the extent of $6,120.00
The plaintiff seeks recovery of the value of the property transferred pursuant to 11 U.S.C. § 550. Section 550 provides from whom the trustee may recover property whose transfer is avoided pursuant to 11 U.S.C. § 548. Section 550(a) allows the trustee to recover from any initial transferee or any immediate transferee of the initial transferee the property transferred or the value of that property. 11 U.S.C. § 550(a)(1) and (2); Sherman v. Third National Bank (In re Sherman), 67 F.3d 1348, 1356 (8th Cir.1995). Because the plaintiff may avoid the transfers under section 548, the plaintiff may recover $6,120.00 under section 550.
The plaintiff seeks to avoid the transfers into the defendant's account as an insider preference because he is the spouse of the debtor. Transfer between family members is presumed fraudulent transactions. Neubauer v. Cloutier, 122 N.W.2d 623, 628 n.4 (Minn. 1963). However, a showing of a clear proof that the parties acted with impartiality and fairness will overcome this presumption. Snyder Electric Co. v. Fleming, 305 N.W.2d 863, 867 (Minn. 1981).
The evidence presented shows that the debtor and the defendant reasonably relied on the advice of their accountant to pay their taxes. Additionally, the possibility of high capital gains and the other business tax obligations showed the transfers were made fairly and for legitimate purpose. I do not find insider preference in these transactions.
For the reasons stated above, I conclude that the plaintiff has meet his burden under 11 U.S.C. § 548(a)(1)(B) and may avoid the transfers to the defendant of $6,120. He is also entitled to $493.93 of the 2015 state tax refund.
THEREFORE, IT IS ORDERED:
LET JUDGMENT BE ENTERED ACCORDINGLY.
