FEDERMAN, Bankruptcy Judge.
Kip M. Kaler, as Bankruptcy Trustee for Debtors Grant A. Kendall and Andrea L. Kendall, appeals from the Judgment of the Bankruptcy Court
In 2008, the Kendalls realized that they were in financial trouble. They considered filing for bankruptcy protection at that time, but feared it would cause problems in assisting their children obtaining college loans. They initially consulted a nonprofit organization known as "The Village" for credit counseling, but that organization proposed a plan which would have required a $748 monthly payment, a payment they could not afford.
According to a "Program Worksheet" dated February 13, 2008, prepared by Able, Able proposed a monthly payment of $135 for sixty months to settle the debts with the Kendalls' creditors and to pay Able's fees. Phase 1 of the program offered by Able included a $675 retainer fee paid over the first five months of the plan, at $135 per month. Phase 2 included an additional service fee to be paid at $61.04 per month for 27 months. Phase 2 also provided for the Kendalls to start a savings account and to contribute $73.96 which would be used to pay the creditors. Phase 3 then provided for the Kendalls to contribute $135 per month to the savings account to pay creditors, apparently without a third component to the service fee. In sum, the plan provided for the Kendalls to pay their creditors a total of $5,776.86 on debts totaling $22,125.15. Able's total service fee for the program was $2,323.14.
Andrea Kendall wrote a notation on the Program Worksheet stating that the Kendalls thought they could pay $200 per month toward the program. She also indicated that there were two creditors missing from the list of creditors, which they wanted to be included in the program. Based on that, Able sent the Kendalls a new Program Worksheet. Under the program proposed there, the Kendalls were to pay $200 per month for sixty months. Phase 1 included an $800 retainer fee, paid over the first four months of the program, at $200 each. Phase 2 included a service fee of $100.93 per month for 24 months and provided for the Kendalls to contribute $99.07 per month to a savings account to pay creditors. Phase 3 called for the Kendalls to pay $200 per month into the savings account to pay creditors. Under this plan, the Kendalls would pay their creditors an estimated $8,777.72 on debts totaling $26,852.32, and would pay Able a total service fee of $3,222.28.
The Kendalls signed an authorization for Able to automatically withdraw funds from their checking account each month to cover the service fees. Through the automatic withdrawals, they made payments of $200 each on February 25, March 25, April 25, and May 25, 2008. On June 25, 2008, the automatic withdrawal payment decreased to $100.93. As is apparent, these automatic withdrawals covered only the service fees to Able. The Kendalls were supposed to, on their own, put the suggested amounts into a savings account to fund the settlements Able reached with creditors on the Kendalls' behalf.
The Kendalls did open a savings account and, over the next four to six months, they deposited $300 into it. After that, the Kendalls did not have the funds to continue depositing into the savings account. According to Andrea Kendall, Able never asked whether they had set up the savings account or checked on the progress in their funding it, although she testified she
The Kendalls were advised by Able about a possible settlement with one of the creditors whereby the Kendalls could settle that debt for a payment of $1,002.78 due on or before May 3, 2008. They did not have the funds the pay that settlement. Meanwhile, the Kendalls also attempted to talk to some of their creditors on their own, but the creditors told them they could not talk to them because they were enrolled in Able's program.
On June 16, 2008, after receiving a summons and complaint related to one of their credit card debts, Andrea Kendall sent Able a letter inquiring as to whether the creditor had refused to participate in the program. She testified that Able told her that it had contacted the creditor and that the Kendalls might need to seek legal counsel. Ultimately, the credit card company obtained two judgments against the Kendalls, and their wages were garnished in the fall of 2008.
By early 2009, the Kendalls' financial circumstances had deteriorated further. Among other things, a child support payment of $600 was added to their monthly obligations. On March 25, 2009, the Kendalls signed a notice of cancellation of the agreement with Able. Able sent them an acknowledgment of the termination from the program, indicating that the Kendalls had paid Able service fees totaling $1,708.37. They filed a Chapter 7 bankruptcy petition on April 3, 2009.
The Chapter 7 Trustee then filed an adversary complaint against Able, seeking to recover the $1,708.37 in service fees as a fraudulent transfer under the Bankruptcy Code's constructive fraud provision, § 548(a)(1)(B).
We review findings of fact for clear error, and legal conclusions de novo.
Section 548(a)(1)(B) of the Bankruptcy Code provides, in relevant part:
Because there was no dispute that the transfers fell within two years of the filing of the Kendalls' bankruptcy petition, and that the Kendalls were insolvent at the time of the transfers, the only issues were whether the Kendalls received value, and if so, whether the services provided by Able were reasonably equivalent to the $1,708.37 in fees paid.
Finding in favor of Able, the Bankruptcy Court concluded that the Kendalls received reasonably equivalent value in exchange for the service fees. The Trustee asserts this was error because (i) the contract between the Kendalls and Able was illegal under North Dakota statute and, therefore, void and (ii) the value of the fees was not reasonably equivalent to the services provided because there was no possibility that the Kendalls would avoid bankruptcy by participating in the program.
As to the first argument, namely, that the contract was illegal under North Dakota law, the Trustee points to § 13-06-02 of the North Dakota Century Code, which provides that "[a]ny person who engages in the business of debt adjusting, unless exempted under the provision of section 13-06-03, is guilty of a class A misdemeanor."
The Trustee's argument turns on the interpretation of this statute which is, undeniably, internally inconsistent: The first sentence of the statute defines "debt adjusting" to mean contracts under which the debtor pays money to the debt adjuster who then, for consideration, pays the money out to creditors pursuant to a plan. That sentence would not apply to Able's activities here because it did not agree to make payments to creditors. However, the statute then provides that the term "debt adjusting" includes those types of contracts where the debt adjuster pays the debtor's money out to creditors, or contracts to merely compromise debts, such as the one in this case. So, while the first sentence suggests that the statute would not apply to Able, the second sentence suggests that it would.
The Bankruptcy Court concluded that the first sentence controlled, such that the prohibition against debt adjusting applies only to contracts whereby the debt adjuster handles the debtor's money and pays it out to creditors. Merely negotiating or compromising debts on behalf of a debtor for a fee is, therefore, permissible. As a
The Trustee's argument here focuses on general canons of statutory interpretation and what he asserts is the presumed legislative intent.
The mere fact that a contract is void, unenforceable, or illegal does not require a finding that there was no reasonably equivalent value given for purposes of § 548(a)(1)(B). As one Court has said, "there is nothing in the plain language of [§ 548] ... suggesting an illegality exception to the `reasonably equivalent value' requirement."
In addition, § 13-06-02 is a regulatory statute which provides only criminal penalties for its violation. It provides no civil remedy. Perhaps the Kendalls could have avoided the contract or even sought damages against Able on some ground in state court, but the only remedy provided under the statute on which the Trustee relies is criminal in nature. In any event, the Trustee cannot rely on § 13-06-02 as a basis for constructive fraud under § 548(a)(1)(B).
Having concluded that the contract's alleged illegality does not preclude a finding of reasonably equivalent value, we turn to whether the Bankruptcy Court erred in concluding that the value of Able's services was reasonably equivalent to the $1,708.37 the Kendalls paid for them. The question of whether the Kendalls received reasonably equivalent value for the fees is a factual determination which we reverse only if clearly erroneous.
The Trustee bore the burden of proving, by a preponderance of the evidence, that the exchange was not for reasonably equivalent value.
The Bankruptcy Court found that the Program Worksheets clearly indicated what the cost of participation in the program would be to the Kendalls. The service agreement states that Able makes no guarantees about the outcome of its services, and Andrea Kendall testified that she knew it was their responsibility to contribute to the savings account to fund any settlements Able reached with the creditors. In other words, as the Bankruptcy Court said, the Kendalls knew the cost, the requirements, and the risk of the program, and decided it was worth it. The Court found that it was an arm's length transaction between a willing buyer and willing seller, was entered into in good faith and for fair market value. None of these findings was clearly erroneous.
The Trustee asserts that the Bankruptcy Court ignored the fact that the stated purpose of the program was to avoid bankruptcy and that it should have been apparent, even at the time they entered into it, that that purpose was impossible, given the Kendalls' monthly shortfall of $158. He also asserts that Able and Irwin did not verify the numbers the Kendalls gave them. However, Andrea Kendall stated on her program papers that they believed they could make a payment of $200 per month, despite the shortfall, and Grant Kendall testified that he thought they could pay the $200 through belt tightening. It is not necessarily incredible for debtors to believe they can tighten their belts to make desired payments; indeed, debtors in Chapter 13 bankruptcy cases or those seeking to reaffirm debts frequently say, and do, just that.
Finally, the Trustee asserts that success in the program was impossible because the creditors would not accept the nominal payments to be made over a 60-month period. However, although there was evidence that some of the creditors were rejecting offers of settlement, there was no actual evidence that Able could not have ultimately negotiated workable amounts with the creditors as a whole— indeed, Able was still in the process of negotiating with many of the creditors when the Kendalls withdrew from the program. And, as stated, the program had no guarantees. At the time the Kendalls entered the program, there was no way of
Based on the foregoing, we conclude that the Bankruptcy Court did not clearly err in finding that the Kendalls received reasonably equivalent value for the fees they paid to Able. Accordingly, the Judgment is AFFIRMED.
