GARY SPRAKER, Bankruptcy Judge.
The debtor, Jessica Giroux, objects to proof of claim 5 (Claim) under 11 U.S.C. § 502(d), alleging that certain pre-petition payments made to the claimants, Philip and Rebekah Johnston, constitute fraudulent and preferential transfers that have not been repaid. For the reasons set forth below, the court will sustain Jessica's objection in part and deny it in part.
Brad Giroux (Jessica's husband) and co-claimant Philip Johnston were partners in Alaska Fishing Adventures, LLC (AFA), operating a fishing lodge on the Nushagak River in Alaska.
On March 7, 2018, Jessica commenced this chapter 13 bankruptcy case. Her schedules and statements revealed that she is employed as a doTERRA sales representative.
On July 26, 2018, Jessica filed her objection to the Claim (Objection).
Jessica argues that all payments attributed to Brad's judgment debt are avoidable under § 548 as constructive fraudulent transfers because the benefit for those payments flowed solely to Brad. Jessica contends that she did not receive any benefit from the payments. In the Objection, Jessica argues that these payments were allocated on a pro-rata basis between her and her husband's liability. She further posits that all payments applied to the joint portion of the judgment are avoidable under § 547 as preferential transfers because the proceeds of those payments, after avoidance by a hypothetical chapter 7 trustee, would flow to the Internal Revenue Service. Jessica alleges that the Johnstons have not repaid the pre-petition payments, and accordingly, requests that the Claim be disallowed in its entirety under § 502(d).
The Johnstons filed their response to the Objection on August 27, 2018.
The court held its initial hearing on the Objection on August 29, 2018. At that hearing, the parties agreed to enter into settlement discussions before the Hon. Trish Brown.
Jessica testified that over several months she transferred funds from the Essential Adventures, LLC's business bank account to her joint personal account with Brad. Jessica would deposit Essential Adventure checks made payable to herself into the account and then obtain a cashier's check for payment to the Johnstons. Four of the five checks Jessica deposited into the joint checking account were immediately followed by payments to Philip Johnston that same day. The fifth payment was made after two deposits; the first of which was made two days prior to payment and the second was made the day of the payment. The payments to Phillip Johnston were made by cashier's check drawn from the joint account. The cashier's checks referenced "Bradley Giroux."
After hearing argument from the parties at the October 15, 2018 hearing, the court took this matter under advisement. For the reasons set forth below, the court will grant Jessica's motion in part, and will temporarily disallow the Johnstons' proof of claim pending payment of the preferential transfers they received pre-petition.
Section 502(a) provides that "[a] claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest . . . objects." A party in interest may rebut the resulting presumption of allowance by presenting evidence "with probative value equal to that of the proof of claim to rebut the claim. If the objecting party successfully rebuts the presumption, the claimant bears the burden of proof to show by a preponderance of the evidence that its claim is valid, and the `ultimate burden of persuasion remains at all times upon the claimant.'"
Under § 502(d), this court's initial inquiry is whether the Johnstons are transferees of avoidable transfers.
Under § 547(b), "a trustee may avoid any transfer of an interest of the debtor in property (1) to or for the benefit of a creditor; (2) for or on account of an antecedent debt owed by the debtor before such transfer was made; (3) made while the debtor was insolvent; (4) made (A) on or within 90 days before the date of the filing of the petition; . . . and (5) that enable[d] such creditor to receive more than such creditor would receive if (A) the case were a case under chapter 7 of this title; (B) the transfer had not been made; and (C) such creditor received payment of such debt to the extent provided by the provisions of this title."
First, this court must determine whether the funds received by the Johnstons constitute "transfers of an interest of the debtor in property." The Bankruptcy Code defines a "transfer" extremely broadly to include "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with — (i) property; or (ii) an interest in property."
Next, by virtue of filing their proof of claim in the debtor's case, the Johnstons concede that they are creditors of the debtor. The accounting attached to the Claim reflects that the Johnstons received payments on their claim. The debt for which the payments were made was an antecedent debt: the third amended state court judgment against Brad and Jessica was entered on September 11, 2017.
The final factor to be examined is § 547(b)(3), which requires that the debtor be insolvent at the time the debtor made the transfer. Section 547(f) provides that "the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of filing the petition."
At the hearing on October 15, 2018, Jessica's counsel clarified on the record that Jessica alleges the portions of the pre-petition payments made to the Johnstons which were allocated to Brad's sole liability on the state court judgment are avoidable constructive fraudulent transfers. Section 548(a)(1)(B), which defines constructive fraudulent transfers, provides in pertinent part:
As with preferential transfers under § 547, "[t]o avoid a constructive fraudulent transfer, [Jessica] must prove each and every one of the elements of § 548(a)(1)(B) by a preponderance of the evidence."
As discussed above, because the source of the money transferred to the Johnstons was Jessica's income from her doTERRA business and the transfer was made from a joint bank account, the transfers constitute an interest of the debtor in property. Those transfers were made on or after November 20, 2017, well within two years of the March 7, 2018 petition date.
Regarding reasonably equivalent value, a portion of each payment was allocated to Jessica's joint liability under the state court judgment. This was certainly value within the terms of the statute.
Jessica testified at the October 15, 2018 hearing that the payments were made to the Johnstons to stall their collection efforts while the parties attempted to negotiate a settlement. This suggests that Jessica may have received reasonably equivalent value for the transfers made: in exchange for the money given to the Johnstons, Jessica received the benefit of the Johnstons' forbearance of their collection efforts against her. This benefit was disclosed in her Statement of Financial Affairs at item 18, where she described receipt of the Johnstons' forbearance of judgment collection as a "property or payments received or debts paid in exchange" for the payments made to them.
Jessica did not address this issue in her Objection. At the hearing on the Objection her counsel stated only that he did not believe that Jessica received a reasonably equivalent value for the transfers. Counsel's belief does not provide an evidentiary basis upon which this court could find that Jessica demonstrated, by a preponderance of the evidence, that she did not receive reasonably equivalent value for the pre-petition monetary transfers made to the Johnstons.
Finally, to satisfy the requirements for constructive fraudulent transfer, the payments in question must have been made while Jessica was insolvent, or they must have rendered her insolvent. Unlike § 547, § 548 does not contain a presumption of insolvency. "For purposes of 11 U.S.C. § 548(a)(1)(B)(ii)(I), insolvency is determined using a `balance sheet test,' meaning the debtor's liabilities exceed its assets at fair valuation."
Jessica has not persuaded this court: (1) that she did not receive reasonably equivalent value for the transfers made to the Johnstons, or (2) that she was insolvent at the time those transfers were made. For these reasons, this court cannot conclude that the transfers in question were constructively fraudulent under § 548(a)(1)(B).
Having determined that the Johnstons are the transferees of avoidable transfers under § 547, the court must disallow the entirety of the Johnstons' claim. However, under § 502(d), "[o]nce a claimant's liability has been determined, the claimant must be provided with a reasonable opportunity to turn over the property to the debtor's estate in compliance with [§] 502(d) before the claims may be disallowed."
The Johnstons received pre-petition monetary transfers from Jessica, and those transfers were preferential under § 547. The Johnstons' receipt of preferential transfers avoidable under § 550 mandates the disallowance of their proof of claim. The court will enter a separate order temporarily disallowing the Claim, which may be reinstated upon the filing of evidence demonstrating that the Johnstons have repaid the amounts owed to Jessica on account of the preferential transfers they received pre-petition.
