AUDREY R. EVANS, Bankruptcy Judge.
Now before the Court is the Complaint to Recover Fraudulent Transfer ("
At the trial of this matter, held on December 2, 2010, the parties provided the Court with stipulated facts and exhibits.
The Plaintiff, James C. Luker, is the Chapter 7 Trustee in the Debtors' bankruptcy case. Mr. Luker testified at the trial. In his testimony, Mr. Luker explained that he became aware of the transfer of the property interest from the Debtors' SOFA, and that he questioned the Debtors about the transfer at the 341 meeting and through written inquiries. Mr. Luker testified that when he asked the Debtors why they had transferred the property, Steven responded that "he was attempting to obtain a loan from the bank in connection with his farming operation and he was fearful that he would be required to mortgage this property, and he did not wish to do so ... and so, his stated reason was to avoid having to mortgage it to the bank."
Mr. Luker provided the Court with his estimation of the value of the Subject Property. He based this valuation on his review of the county tax records, his own personal experience with similar properties, and his belief that the property could
Steven Eubanks also testified at the trial. Steven testified that he has made his living as a farmer since 1999. He explained that his wife, Jeania, works for the Farm Services Agency, that his father was a farmer, and that the Debtors consider themselves to be a farming family. He explained that in his line of work some years are better than others, and that in the past he has had to restructure losses from a bad crop into the next year's loan in order to continue his farming operations. Steven testified that 2006 was a particularly difficult year due to a medical problem that required that he be hospitalized for eight days, and because of damages to his crops from a chemical spray that had drifted onto his and many other farmers' crops.
Steven testified that on January 19, 2007, he had a meeting with his crop loan officer at Kennett National Bank ("
Steven testified that at the time the Debtors transferred their interest in the subject property he had every intention of continuing his farming operations, and stated specifically that he had no intent to delay or defraud anyone by transferring the property. He explained that, as far as he was concerned, his father was still the owner of the property and that he would not gain his rights to it until his father's death. Steven testified that his reason for making the conveyance was because his father asked him if he would do so. Further, when asked by the Court to explain in his own words why he transferred the property on the day that he did, his testimony was as follows:
Steven also testified that he specifically recalled the exact date that the Bank called to tell him they would not refinance his crop loan because it was Valentine's Day, February 14, 2007, and he was going to have to give his wife that news. When asked why the Bank had decided not to refinance his loan, Steven testified that the Bank had told him "that they weren't going to be able to process my loan ... that it was just not enough for their Bank to go ahead, but that there might be other alternatives to getting funding." Steven testified that this was the point at which he communicated to the Bank that he would not be able to continue farming. Specifically, he told the Bank that he was going to call an auctioneer and they would have a sale to try to pay off the loan.
On March 15, 2007, Steven sold the majority of his farming equipment at an auction for $251,475. In addition, the Debtors' SOFA shows that a piece of farming equipment, referred to as a 6 Row Cotton Picker, sold for $109,501, and a vehicle sold for $21,000, after being either surrendered or repossessed in 2007. In total, the Debtors' 2007 tax return indicates that $442,303 in property was sold by the Debtors during 2007. The Debtors bankruptcy schedules, filed October 25, 2007, place a value of $141,649 on the property they had remaining at the time of filing.
When asked about the value of the Subject Property, Steven replied that he was not able to provide an estimation of the value. He explained that he had never considered the Subject Property to be his, and had never considered it an asset. When asked why the property was not included as collateral on his crop loan, Steven replied that it was not a part of the farm property and was not an income producing property.
Finally, Steven also testified that he only learned of the Beneficiary Deed filed by his mother, Inga, through these proceedings, and that he had no knowledge of it prior to that time.
The only other witness at the trial was William Mowrer. Mr. Mowrer was the loan officer at Kennett National Bank. KNB had handled the Debtors' crop loan since 1999, and Mr. Mowrer had personally handled the loan since 2004. Mr. Mowrer testified that the purpose of the January 19, 2007 meeting was to see if they could restructure the 2006 loan deficiency in order to roll it into a loan for 2007. Steven testified that the Bank had previously rolled his crop loan deficiency from one year into the loan for the following year. Mr. Mowrer testified that, during the meeting, he indicated to Steven that it would be difficult for the Bank to refinance the loan; however, he testified that he was not the person who would ultimately make that decision. Further, although Mr. Mowrer stated at trial that he believed the asset values on the balance sheet to be high, he also stated that Steven never tried to mislead him in any way. Additionally, Mr. Mowrer testified that Steven fully cooperated with the Bank in the sale, including bringing in buyers for the merchandise.
The Trustee seeks to set aside the transfer of a property interest in real property made by the Debtors to Inga Eubanks. The Bankruptcy Code empowers a trustee to avoid certain pre-petition transfers. One such power is found in 11 U.S.C. § 548, which allows the trustee to
The primary purpose of fraudulent transfer law is to avoid transactions that "unfairly or improperly deplete a debtor's assets or that unfairly or improperly dilute the claims against those assets." In re S.W. Bach & Co., 435 B.R. 866, 875 (Bankr.S.D.N.Y.2010) (citations omitted). Transfers that are deemed fraudulent and capable of being avoided fall into two distinct categories of transactions—those made by means of actual fraud,
A trustee may avoid a pre-petition transfer of assets if the transfer was made within two years prior to the filing of the bankruptcy case, and was made with the "actual intent to hinder, delay, or defraud" any past or future creditor. 11 U.S.C. § 548(a)(1)(A). The "actual intent" required under this provision can be inferred from circumstantial evidence. In re Brown, 265 B.R. at 172; In re Sherman, 67 F.3d 1348, 1353 (8th Cir.1995); In re Carter, 203 B.R. 697, 706 (Bankr.W.D.Mo. 1996). Allowing circumstantial evidence to meet the burden of proof in such cases is often necessary because direct evidence is generally constrained by the nature of the allegations. In re Houston, 385 B.R. 268, 271-72 (Bankr.N.D.Iowa 2008). Indeed, some circumstances are presented to the courts with such repetition that they are characterized as "badges of fraud." Id.; see also In re Baugh, 60 B.R. 102, 104 (Bankr.E.D.Ark.1986).
The existence of a single "badge of fraud" is generally insufficient to establish fraudulent intent for purposes of proving actual fraud. Kelly v. Armstrong, 206 F.3d 794, 798 (8th Cir.2000). On the other hand, where a "confluence"
Courts within the Eighth Circuit often point to the following factors in determining whether a debtor acted with an intent to hinder, delay or defraud:
In re Richmond, 429 B.R. 263, 305 (Bankr. E.D.Ark.2010); see also In re Schroff, 156 B.R. 250, 254 (Bankr.W.D.Mo.1993); In re Rodgers, 315 B.R. 522, 531 (Bankr.D.N.D. 2004).
The Court finds that a confluence of the "badges of fraud" are present in this case. Specifically, the Court points to the
In contrast, however, some of the circumstances that are generally considered badges of fraud must be re-characterized on the facts of this case as badges of honesty. Particularly, the Debtors disclosed the transaction in their SOFA, answered questions about the transaction at the 341 meeting, and provided information to the trustee in response to his written inquiries. Additionally, it is evident that the transferred property interest was not a substantial portion of the Debtors' assets. Even accepting the Plaintiff's estimated value for the property of approximately $1,000 per acre, the Debtors' interest in the property would be worth only about $27,000,
Furthermore, the Debtors were able to present convincing evidence of a legitimate supervening purpose for the transaction. Steven testified that he did not intend to hinder, delay, or defraud his creditors in making this transfer. While the Court recognizes the self-serving nature of such statements, it is within the Court's prerogative to decide if a witness is credible. The Court took note that Steven's testimony exemplified a strong personal character and a commitment to full disclosure. Additionally, in delivering his testimony, Steven abstained from any attempt
More specifically, Steven testified that he received this property interest from his father, and would not have considered it his property so long as his father was alive. While this notion may be legally incorrect, the Court found it to be an honest statement of his perception of the situation, which is relevant to the Court's determination of whether actual fraud existed. Further, Steven testified that the catalyst for the transfer was his father's request that he transfer it. He also testified that he transferred the interest because, in planning to continue farming in the future, he realized that he did not want to receive the property when his father's life estate ceased. Steven testified that he was concerned that if he received ownership of the property that he might mortgage it in order to continue his farming operations. In his own words, Steven explained that "when [a farmer] gets his back against the wall, he'll do just about anything he can to keep on farming," and that he did not want the property to come to him because he wanted to "do it on his own."
The Court concludes from this testimony that the Debtors' intended purpose in transferring their remainder interest in the Subject Property was not to prevent their creditors from obtaining that interest. Instead, the purpose of the transfer was to comply with Wendell Eubanks' request that they transfer the property interest back to him, and to prevent themselves from obtaining a fee ownership interest in the Subject Property that they might mortgage, at some point in the future, in order to continue their farming operations. Therefore, the Court finds that despite the presence of several badges of fraud, there was a legitimate supervening purpose for the transfer and no actual fraud existed.
A trustee may avoid a transfer as fraudulent if the debtor received a less than reasonably equivalent value in exchange for the transferred property, and at the time of the transfer the debtor:
11 U.S.C. § 548(a)(1)(B). In the constructive fraud context, no finding with regard to the state of mind of the transferor is necessary. In re Hatten, 279 B.R. 710, 735 (Bankr.D.Del.2002). In fact, some courts have branded the term "constructive fraud" a misnomer, as it implies a state of mind without requiring that a state of mind exist. In re Northgate Computer Systems, Inc., 240 B.R. 328, 365 n. 54 (Bankr.D.Minn.1999) ("Given the intent-neutrality of the statutory elements, it is a misnomer and unnecessarily inflammatory to tag such transactions with the word `fraudulent.' Nonetheless, the title of § 548 does so.").
There is no question in this case that the Debtors received a less than reasonably equivalent value in exchange for the transfer of their property interest. The parties stipulated that no valuable consideration was given by Inga in exchange for the property interest. As such, the first requirement of constructive fraud,
The first theory of constructive fraud applicable to the circumstances of this case asks whether the Debtors were insolvent at the time of, or as a result of, the transfer. 11 U.S.C. § 548(a)(1)(B)(ii)(I). The Bankruptcy Code defines the term insolvent as follows:
11 U.S.C. § 101(32)(A). Many courts have referred to this type of insolvency as "balance sheet" insolvency. See Universal Church v. Geltzer, 463 F.3d 218, 226 (2d Cir.2006), cert. denied, 549 U.S. 1113, 127 S.Ct. 961, 166 L.Ed.2d 706 (2007). The basic requirement of this form of insolvency is that a debtor's assets exceeded her liabilities on the date that the transfer in question took place. Id. The rationale behind the requirement that a debtor be found insolvent in order to prove constructive fraud is that "[a]s long as creditors are not disadvantaged by the low sale price (because the debtor otherwise is sufficiently liquid to cover his debts), then the debtor is free to sell (or, more specifically, undersell) his property for whatever price he likes." In re Seitz, 400 B.R. 707, 720 (Bankr.E.D.Mo.2008).
In this case, the Court finds that the Debtors were insolvent at the time of the transfer. The Court makes this determination after considering two very different calculations of solvency derived from the exhibits and testimony provided at trial. The first calculation was simply derived from the Bank's balance sheet created by Steven and his loan officer during their meeting on January 19, 2007. This balance sheet reflected a value of the Debtors' total assets in the amount of $1,147,313, and total liabilities in the amount of $1,049,407. Based on these figures, the Debtors had a net worth of $97.906. If these figures alone were considered, the Court would have no trouble concluding that the Debtors were solvent on the date of the transfer.
However, a second calculation derived from the record provides a very different picture. This second calculation takes into consideration the Debtors' 2007 tax return and the Debtors' bankruptcy schedules. In their 2007 tax return, the Debtors claim to have sold property in the amount of $442,303.
The reality of the Debtors' financial condition at the time of the transfer lies somewhere between these two calculations. A convincing argument can be made on behalf of both. The balance sheet was created just six days prior to the transfer. It was created by a bank loan officer who owed a duty to his employer to see that these numbers were accurate. Indeed, the balance sheet form instructs the preparer to "[l]ist all assets at fair market value." On the other hand, the second calculation was based largely on actual sale prices, and was created using figures supplied by the Debtors' 2007 tax return and bankruptcy filings.
However, there are also legitimate grounds causing concern about the accuracy of both of these value calculations. Mr. Mowrer, the bank loan officer, testified that he believed the value figures on the balance sheet were too high, and it is true that many of the items listed on the balance sheet sold at the auction for an amount considerably less than their stated value. With regard to the second calculation, the Court must take the liquidation and foreclosure nature of the sales into account in evaluating the value of the properties sold.
While the possible flaws in these two calculations prevent the Court from arriving at a precise determination of the value of the Debtors' assets on the date of the transfer, the evidence provided was sufficient to convince the Court that the value stated on the Bank's balance sheet was overstated by an amount in excess of the $97,906 net worth provided therein. As a result, the Court finds that the Debtors were insolvent on the date of the transfer, and that the constructive fraud requirement of insolvency, found at 11 U.S.C. § 548(a)(1)(B)(ii)(I), is met. Because the Plaintiff needs to prove only one of the four alternate provisions found in 11 U.S.C. § 548(a)(1)(B)(ii)(I)-(IV), the Court does not need to address the Plaintiff's allegations that the Debtors had an unreasonably small amount of capital to continue their business operations (11 U.S.C. § 548(a)(1)(B)(ii)(II)), or that the Debtors intended to incur debts beyond their ability to pay (11 U.S.C. § 548(a)(1)(B)(ii)(III)).
Therefore, having found that the Debtors received less than a reasonably equivalent value in exchange for the transfer, thus satisfying the first requirement of constructive fraud under 11 U.S.C. § 548(a)(1)(B)(i), and that the Debtors were insolvent on the date of the transfer, thus satisfying the second requirement for constructive fraud under 11 U.S.C. § 548(a)(1)(B)(ii)(I), the Court finds that constructive fraud existed under the facts and circumstances of this case.
The Plaintiff is entitled to judgment in his favor. The January 25, 2007 transfer of the Debtors' property interest to Inga Eubanks was a constructively fraudulent transfer in violation of 11 U.S.C. § 548(a)(1)(B). The trustee may pursue its rights to recover the property interest
The majority of these factors are duplicates of the factors provided in the text, supra. All others will be discussed to the extent they are relevant.
