FRANK J. BAILEY, Bankruptcy Judge.
By his complaint in this adversary proceeding, the chapter 7 trustee, Joseph Braunstein (the "Trustee"), asserts a claim under 11 U.S.C. § 548(a)(1) for recovery of real property that the chapter 7 debtor, Robert Crawford ("Crawford"), conveyed to his former business associate, Mark Kamphaus ("Kamphaus"), which transfer the Trustee contends was constructively fraudulent. As an alternative basis for recovery of the property, the Trustee asserts that the transfer is a voidable preference under 11 U.S.C. § 547(b). The court held a trial at which three witnesses testified: the Debtor, Kamphaus, and Wesley Rickard, a licensed CPA who performed work relating to the taxation of an LLC that the Debtor and Kamphaus created. Following are the findings of fact and conclusions of law required by FED. R. BANKR P. 7052.
In August 2004, Crawford and Kamphaus entered into a business relationship with the intent of purchasing, developing, and selling real property for profit (the "Project"). In furtherance of the Project, Crawford and Kamphaus purchased and, by deed dated August 5, 2004, took title to three parcels of real property, located at 339, 343, and 349 Poplar Street in Boston (collectively the "Properties"), for total consideration of $350,000.00. As evidenced by the deed, Crawford and Kamphaus took title to the Properties as joint tenants in their individual capacities. Although they later formed a limited liability company, known as Kampford LLC, through which to conduct their business of developing the Properties, they took title to the Properties in their own names, as joint tenants, and never transferred title to the LLC. Regarding their respective roles in the Project, it was the Parties' understanding that Kamphaus, an investment banker, would provide the majority of the
In order to finance the purchase and development of the Properties, Crawford, Kamphaus, and Crawford's wife, Rosemarie Crawford ("Rosemarie"), borrowed $1,000,000 from Industrial Credit Union ("ICU") and, to secure this loan, granted ICU a mortgage on the Properties.
On June 23, 2005, the Parties executed an agreement, entitled Kampford LLC Operating Agreement, to govern a limited liability company they were thereby forming, to be known as Kampford, LLC ("Kampford"). They filed a certificate of organization for Kampford with the Massachusetts Secretary of State on July 12, 2005. According to Crawford's and Kamphaus's testimony, they established Kampford in order to keep track of the profits and losses and tax issues associated with their development of the Properties. Kampford never held title to any of the Properties, and the Deed by which Crawford and Kamphaus took title to the Properties made no mention of Kampford. The Kampford Operating Agreement provides in relevant part regarding Capital Accounts:
Paragraph 3.02 of the Operating Agreement sets forth the guidelines pertaining to the Parties' respective capital contributions to Kampford as follows:
The Operating Agreement names both Kamphaus and Crawford as managers of Kampford.
Regarding what was to occur upon the dissolution of Kampford, the Operating Agreement provides in paragraph 9.03:
The Agreement at paragraph 9.04 sets forth the provisions governing distributions upon liquidation as follows:
Kamphaus testified at trial, concerning his understanding of the aforementioned provisions of the Operating Agreement, that "the agreement said that if one member of the LLC had a negative capital account that all the assets would turn over to the other member with a positive capital account." Accordingly Kamphaus believed that the transfer of 339 Poplar Street, the subject of the Trustee's current avoidance action, occurred pursuant to the Operating Agreement.
Schedule A to the Operating Agreement states that Crawford and Kamphaus each held a 50% interest in Kampford. Notwithstanding paragraph 3.02(a), Schedule A does not indicate the amounts of Crawford's and Kamphaus's respective Capital Contributions. Based on the testimony of both Crawford and Kamphaus, the Court finds that Crawford and Kamphaus agreed to share profits and losses equally.
According to Kampford's 2005 tax return, the LLC incurred a loss in 2005 of $2,522. In addition, notwithstanding that the properties were owned jointly by Crawford and Kamphaus in their individual capacities, Kampford's 2005 tax return lists the Properties as assets of the LLC. On Schedule K-1 to his 2005 federal income tax return, concerning his interest in Kampford, Crawford indicated that he contributed $25,000 in capital to Kampford during 2005, approximately 5.35% of Kampford's total capital, and incurred a loss of $1,261, half of the total loss that Kampford incurred in 2005. On Kamphaus's 2005 Schedule K-1, concerning his interest in Kampford, Kamphaus indicated that he contributed $420,975 in capital during the year, approximately 94.65% of Kampford's total capital, and that he incurred a loss of $1,261, half of the total loss that Kampford incurred in 2005.
According to Kampford's 2006 tax return, the LLC earned ordinary business income in 2006 of $49,014. This income was derived entirely from the sale of 349 Poplar Street, Kampford's only sale that year. Kampford's 2006 tax return again erroneously lists the remaining two Properties as assets of the LLC. Schedule K-1 to Crawford's 2006 federal income tax return, concerning his interest in Kampford, indicates that the beginning balance of his capital account in 2006 was $23,739, and that this balance increased during 2006 by $24,507, half of what Kampford earned on the sale of 349 Poplar Street. The same Schedule K-1 also indicates that Kampford made a distribution to him in 2006 of $25,000. Kamphaus's 2006 Schedule K-1, concerning his interest in Kampford, indicates that his beginning capital account in 2006 was $419,714 and that it increased by $24,507, half of what Kampford earned on the sale of 349 Poplar Street. Kamphaus's 2006 Schedule K-1 also shows a distribution from Kampford to him of $59,500.
On July 24, 2007, Cape Cod Lumber recorded in the Suffolk County Registry of Deeds a writ of attachment against Crawford's assets. This attachment was obtained in litigation unrelated to the Project or to Kamphaus, but it nonetheless encumbered the two remaining Properties, 343 Poplar Street and 339 Poplar Street. In order to prevent any hindrance to the progress of the Project, Kamphaus paid off the Cape Cod Lumber lien, the amount of which both Kamphaus and Crawford testified was approximately $49,000, and, on September 28, 2007, Cape Cod Lumber duly recorded a discharge of its real estate attachment. On account of Kamphaus's satisfaction of Crawford's obligation to Cape Cod Lumber, Crawford became obligated to Kamphaus or Kampford in the amount of the payment. Kamphaus and Crawford treated the obligation as a debt of Crawford to the LLC.
In September of 2007, Crawford and Kamphaus, as joint tenants, sold and conveyed title to the second of the three Properties, 343 Poplar Street, for the sale price of $554,900. Of this sum, Kamphaus used
Schedule K-1 to Crawford's 2007 federal income tax return, concerning his interest in Kampford, indicates that the beginning balance of his capital account in 2007 was $23,246 and that this balance decreased in 2007 by $9,058, about half of Kampford's loss for 2007. The same Schedule K-1 also shows a distribution from Kampford to Crawford during 2007 of $476. Kamphaus's 2007 Schedule K-1, concerning his interest in Kampford, indicates that the beginning balance of his capital account in 2007 was $384,721, that he contributed additional capital during the year of $204,708, and that the total was reduced by $9,059, about half of Kampford's 2007 loss, for an ending balance of $580,370. This schedule shows no distribution from Kampford to Kamphaus during 2007.
For reasons unspecified, Crawford stopped work on the Project towards the end of 2007. When he did so, the house at 339 Poplar Street was not in salable condition. It required additional work, such as landscaping and electrical, which, at some unspecified time between Crawford's stopping work and the date of the trial in 2010, Kamphaus oversaw and spent approximately $6,500 of his personal funds to complete. At the time of the trial, the home at 339 Poplar Street was vacant and listed for sale.
By a deed dated April 1, 2008, Crawford and Kamphaus, as joint tenants, conveyed the real property at 339 Poplar Street to Kamphaus for the stated consideration of one dollar "and other good valuable consideration paid." (It is this transfer that the Trustee seeks by this adversary proceeding to avoid.) By this conveyance, Crawford transferred his interest in the subject property to Kamphaus. It is undisputed that 339 Poplar Street was unencumbered at the time of its transfer.
The precise value of 339 Poplar at the time of the transfer is unclear. The evidence of value is from three sources. First, in its 2007 federal income tax return, Kampford valued the property as of the end of 2007 at $536,321, but the court has no evidence as to the manner in which Kampford determined this value. Second, according to an appraisal prepared by appraiser Marc S. Safner for First Federal Bank as of July 21, 2006, the property, which the appraisal notes was then "nearing completion," had a fair market value of $600,000, but this value was expressly "subject to completion." Neither the appraisal itself nor other evidence indicates precisely how far from completion the property was at that time. And third, at trial in 2010, Kamphaus, who at that time remained the owner of the property and had been marketing it for some time, stated that he initially marketed the property for the asking price of $539,000 but, as of the time of trial, had reduced the asking price to $499,000. On the basis of this evidence, and figuring in the substantial weakening in the real estate market that occurred after the transfer, in the second half of 2008, on account of the credit crisis of that time, the Court is persuaded that the value used by Kampford in its tax
At the time of the transfer, Crawford was indebted to Kamphaus and the LLC for four distinct obligations. First, he was obligated to the LLC or to Crawford in the principal amount of $49,000 for the funds advanced by Kamphaus to pay off Crawford's debt to Cape Cod Lumber. Second, he was obligated to the LLC in the principal amount of $9,000 for funds he borrowed on the LLC's line of credit for his personal use. Third, he was obligated to Kamphaus or the LLC, or perhaps both, for breach of his obligation under the Kampford Operating Agreement to complete his contracting and construction obligations on 339 Poplar. The precise amount of this obligation is unclear, but the evidence indicates that Kamphaus hired others to complete Crawford's obligations for $6,500; to this I add $2,000 for Kamphaus's own time and effort, for a total estimated obligation of $8,500.
Fourth, and most significantly, he was obligated under the Kampford Operating Agreement, upon sale of 339 Poplar and dissolution of the LLC, to transfer the proceeds from the sale of his 50 percent interest in the property to Kamphaus to the extent necessary to effectuate the distribution required by Operating Agreement.
What, if anything, did Crawford receive in exchange for the transfer of his interest in the property? Kamphaus testified about his understanding of the April 1, 2008 transfer, stating that the "other good valuable consideration paid" included Kamphaus's forgiveness of any liability of Crawford, either to him directly or to Kampford, for (i) Crawford's leaving the Project without completing the construction for which he was responsible and (ii) the approximately $58,000 aforementioned debt that Crawford owed to Kampford for Kamphaus's satisfaction of the Cape Cod Lumber lien and Crawford's personal use of the Kampford credit account. Kamphaus
According to Kampford's 2008 tax return, the LLC incurred a total loss of $66,917, which includes a $58,917 loss on account of writing off the "Due From Partner" current asset as a bad debt and an $8,000 unspecified additional loss. Crawford's 2008 Schedule K-1 tax statement concerning his interest in Kampford, indicates that his beginning capital account balance in 2008 was $13,712 and that it decreased by $12,855. Crawford's 2008 K-1 also shows a distribution from Kampford to him personally of $857, which left his ending capital account at $0. Kamphaus's 2008 Schedule K-1 tax statement, concerning his interest in Kampford, indicates that his beginning capital account balance in 2008 was $580,370, that he contributed additional capital of $3,050 during the year, and that his capital account decreased by $68,532 over the course of the year. Kamphaus's 2008 K-1 shows a distribution from Kampford to him personally of $514,888, which left his ending capital account at $0. According to the testimony of Kampford's accountant, Kamphaus's tax basis in 339 Poplar Street is $514,888.
On November 18, 2008 (the "Petition Date"), Crawford and his wife, Rosemarie Crawford, filed a joint voluntary petition for relief under Chapter 7 of the Bankruptcy Code, thereby commencing the present bankruptcy case, and Joseph Braunstein was appointed the chapter 7 trustee. Crawford listed unencumbered assets on his bankruptcy schedules of $19,573.00, unsecured debts of $151,861.00, and deficiency claims on secured debts of approximately $124,000 more.
The Trustee seeks to avoid the transfer of 339 Poplar under 11 U.S.C. § 548(a)(1) as a fraudulent transfer and, in the alternative, under 11 U.S.C. § 547(b) as a preferential transfer. To the extent that a transfer is avoided under either § 547 or § 548 of the Bankruptcy Code, § 550(a) allows the trustee to "recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property," from, amongst others, the "initial transferee." 11 U.S.C. § 550(a). Kamphaus concedes that he is the initial transferee of 339 Poplar Street.
Section 548(a)(1) of the Bankruptcy Code provides in relevant part:
11 U.S.C. § 548(a)(1). Here the Trustee, as the party seeking to avoid the transfer at issue, "bears the burden of proof on each element of entitlement to avoidance" and must discharge that burden "by a preponderance of the evidence." Burdick v. Lee, 256 B.R. 837, 839-40 (D.Mass.2001) (citing McColley v. Jacobs (In re North American Dealer Group, Inc.), 62 B.R. 423, 428 (Bankr.E.D.N.Y.1986); Talbot v. Warner (In re Warner), 65 B.R. 512, 518-19 (Bankr.S.D.Ohio 1986)). The Trustee here must prove the following distinct elements: (i) that the transfer in question was of an interest of the debtor in property; (ii) that the transfer occurred on or within 2 years of the date of the filing of the petition; (iii) that the debtor received less than a reasonably equivalent value in exchange for the transfer; and (iv) that the debtor was insolvent on the date that such transfer was made or became insolvent as a result of the transfer. It is undisputed and obvious that the April 1, 2008 transfer at issue occurred within two years of November 18, 2008, the date Debtor filed his petition. The remaining three issues are in dispute.
The first requirement of § 548(a)(1)(B)—and of § 547(b), the Trustee's alternate basis for relief, to which this analysis is equally pertinent—is that the transfer in question be a transfer "of an interest of the debtor in property." 11 U.S.C. §§ 548(a) and 547(b). Here, the undisputed evidence shows that the debtor, Crawford, owned an interest in 339 Poplar as a joint tenant, and that, by the joint deed of April 1, 2008, he and Kamphaus transferred this interest to Kamphaus. Standing alone, this evidence would satisfy the requirement that the interest transferred be "an interest of the debtor in property," and Kamphaus does not contend otherwise. Kamphaus maintains, however, that this evidence does not stand alone and that the circumstances in which Crawford held his ostensible interest in 339 Poplar require a determination that, at the time of the transfer, Crawford owned only bare record title and no economic interest in the property. Though the precise contours of his argument are unclear, Crawford appears to be arguing (1) that under applicable state law, the
Kamphaus cites no authority for the proposition that the interests of joint tenants can be unequal, and the Court is aware of none. Black letter law dictates that in order to create a joint tenancy, four unities must exist, among them the unity of interest, requiring that joint tenants have identical interests as to amount. Knapp v. Windsor, 60 Mass. 156 (1850) (joint tenants have the land by one joint title, from which derive the properties of a joint estate, among them unity of interest); Cross v. Cross, 324 Mass. 186, 189, 85 N.E.2d 325 (1949) ("If Thomas and William had taken as joint tenants, and nothing had been said as to the aliquot portion of their interests, they would have been equally entitled."); 14C Howard J. Alperin, MASSACHUSETTS PRACTICE SERIES, Summary of Basic Law § 15.28 (2010) (at common law, in order to create a joint tenancy, it is necessary that four unities exist, including the unity of interest, meaning that all joint tenants hold identical interests as to amount); BLACK'S LAW DICTIONARY (9th ed. 2009) (defining a joint tenancy as "[a] tenancy with two or more co-owners who take identical interests simultaneously by the same instrument and with the same right of possession"). For this reason, I reject Kamphaus's argument that Crawford had no interest of economic significance. As a joint tenant, his interest was equal in amount to Kamphaus's and therefore a one-half interest.
In the alternative, Kamphaus argues that 339 Poplar may be viewed as having been held "as a joint venture" between himself and Crawford. The Court rejects this possible view of the matter as inconsistent with two facts: that Kamphaus and Crawford chose to define their business relationship by forming a limited liability company, not a joint venture; and that they arranged for title to the property to be held not by a separate business entity, whether the LLC or a joint venture, but by themselves as joint tenants. They neither formed a joint venture nor intended to do so.
The Trustee must prove that the debtor "was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation." 11 U.S.C. § 548(a)(1)(B)(ii)(I). The Bankruptcy Code defines "insolvent" as a "financial condition such that the sum of [an] entity's debts is greater than all of such entity's property, at a fair valuation." 11 U.S.C. § 101(32)(A). The Trustee proved Crawford's insolvency on April 1, 2008 by retrojection. Under the principle of retrojection, "where a debtor is shown to be insolvent at a date later than the date of the questioned transfer, and it is shown that the debtor's financial condition did not change during the interim period, insolvency at the prior time may be inferred from the actual insolvency at the later date." In re Arrowhead Gardens, Inc., 32 B.R. 296, 301 (Bankr.D.Mass.1983) (citing Hassan v. Middlesex County National Bank, 333 F.2d 838 (1st Cir.1964); Braunstein v. Massachusetts Bank & Trust Company, 443 F.2d 1281 (1st Cir.1971)).
Crawford indicated in the schedules of assets and liabilities that he filed in his bankruptcy case that, as of November 18, 2008, the Petition Date, he had unencumbered assets of $19,573.00, unsecured debts of $151,861.00, and deficiency claims on secured debts of approximately $124,000.00 more. No evidence was adduced to controvert this evidence of insolvency. Therefore, as of November 18, 2008, the Petition Date, Crawford was plainly insolvent. The allegedly fraudulent transfer occurred on April 1, 2008. Crawford testified that his financial condition was substantially the same from the date of the transfer at issue until he filed his petition. Kamphaus presented no evidence concerning a significant change in Crawford's assets or liabilities during the relevant period. The only change in evidence was the transfer itself, which effected a transfer of value of $268,160.50 and satisfied additional debt (to Kampford and/or Kamphaus), not reflected in the schedules, of reasonably equivalent value. Accordingly, the Court finds that Trustee has proven by a preponderance of the evidence that Crawford was insolvent on April 1, 2008, before the transfer was made, and that if he was not already insolvent when he made the transfer, he was at least rendered insolvent by the transfer.
The Trustee must also prove that Crawford received "less than a reasonably equivalent value" in exchange for the transfer. In examining whether the Debtor received "reasonably equivalent value," "that value must pass a measurement test" under which the Court "must examine all aspects of the transaction in order to measure carefully the value of all of its benefits and burdens to the debtor, direct or indirect." In re New Commonwealth Pub. Co., 118 B.R. 155, 163 (Bankr.D.Mass. 1990). The Court must determine the value of the asset transferred and the value of any consideration the debtor received in return; the Trustee must prove that the latter was less than "reasonably equivalent" to the former. For purposes of § 548, "value means property, or satisfaction or securing of a present or antecedent debt of the debtor." 11 U.S.C. § 548(d)(2)(A). "Debt" is defined as "liability on a claim," 11 U.S.C. § 101(12), and "claim" in turn is defined as "right to payment, whether or not such right is
The Court found above that, at the time of the transfer, the property had a fair market value of $536,321 and was unencumbered. The Court has further held that Crawford had a one-half interest in the property. Accordingly, the value of his transferred interest was $268,160.50. As I found above, this transfer was made in satisfaction and settlement of Crawford's various obligations to Kamphaus and the LLC, which obligations totaled $322,271.48: $8,500 for Crawford's leaving the project prematurely; $58,000 for his obligations to the LLC; and $255,771.48 for 95.38 percent of the value of his one-half interest in 339 Poplar. In return for transfer of $268,160.50 Crawford received value of $322,271.48. Therefore, he received reasonably equivalent value—in fact, more than reasonably equivalent value—and therefore the Trustee has not carried his burden of proof on this element and cannot prevail on his count under § 548(a)(1)(B). The Court therefore turns to his alternative count under § 547(b).
A Trustee may avoid transfers made by a debtor that are deemed preferential pursuant to § 547(b) of the Bankruptcy Code. Section 547(b) in relevant part defines a preferential transfer as a follows:
11 U.S.C. § 547(b). In an action seeking to avoid a preferential transfer, "the trustee has the burden of proving by a preponderance of the evidence each of the elements prescribed in § 547(b)." In re First Software Corp., 107 B.R. 417, 420-21(D.Mass.1989) (citing In re Utility Stationery Stores, Inc., 12 B.R. 170 (Bankr. N.D.Ill.1981); Constructora Maza, Inc. v. Banco de Ponce, 616 F.2d 573, 576 (1st Cir.1980)).
The Court has already determined, in its rulings above on the count under § 548(a), that the transfer satisfies the first four requirements of § 547(b). First, the transfer was a transfer of an interest of the debtor in property. Second, the transfer was made to and for the benefit of Kamphaus, who was a creditor of Crawford. Third, the transfer was made for or on account of an antecedent debt, one Crawford owed before the payment was made. And fourth, Crawford was insolvent at the time of the transfer. As to each of these elements, I rely on the discussion above, without need to reiterate.
The next element, set forth in § 547(b)(4), is a requirement that the transfer have occurred within the applicable statutory look-back period. Here the
The last element, set forth in § 547(b)(5), requires a showing that the transfer enabled the creditor to receive more than he would have received in a chapter 7 liquidation had the transfer not been made. The Court found above that the transfer enabled Kamphaus to receive value of $268,160.50 on total debt of approximately of $322,271.48, a dividend of 83.2 percent. Had the transfer not been made, the trustee would have (1) liquidated the property for its fair market value of $536,321, (2) paid from this an estimated $26,000 broker's fee, (3) distributed half the net proceeds to Kamphaus for his one-half interest in the property, (4) from the balance paid further administrative expenses for his own commission and his accounting and legal fees, including the costs of prosecuting a complaint under 11 U.S.C. § 363(h), all of which I conservatively estimate at $30,000, and then (5) distributed the balance, approximately $225,160.50, on a pro rata basis in satisfaction of unsecured claims aggregating $598,132 [including listed unsecured claims of $151,861.00, deficiency claims on secured debts of approximately $124,000, and the debts to Kamphaus and/or the LLC of $322,271], for a dividend to Kamphaus of $121,315.68, or 37.6 percent of the amount of his claim. The Trustee has carried his burden on this element.
Section 550(e)(1) of the Bankruptcy Code creates an equitable lien in favor of certain good faith transferees of property that a trustee recovers in an avoidance action. Kamphaus asserts that, if the transfer to him is avoidable, he nonetheless holds such a lien on the interest the Trustee recovers. Section 550(e)(1) provides as follows:
11 U.S.C. § 550(e)(1). In his posttrial brief,
This argument cannot succeed because the "improvements" on which Kamphaus relies—the contribution of capital and the satisfaction of a mortgage encumbering 339 Poplar—were made before, not after, Crawford's 2008 transfer of his interest in 339 Poplar Street. By the express language of the statute, a lien under § 550(e)(1) must arise from improvements made after the avoided transfer. Kamphaus has therefore failed to establish that he holds a lien in any amount under § 550(e)(1).
On the basis of the foregoing considerations, the Court will avoid the transfer under § 547(b), deny relief under § 548(a) to the Trustee, and deny any lien rights under § 550(e)(1) to Kamphaus. A separate judgment will enter accordingly.
