TERRY L. MYERS, CHIEF U. S. BANKRUPTCY JUDGE
The chapter 7 trustee, Jeremy Gugino ("Trustee"), filed a complaint commencing this adversary proceeding.
According to Debtor's testimony, Investors Property Management, Inc., ("IPM") was an Idaho corporation formed in 2002. Debtor was an owner of IPM, along with his sons Taylor Miller and Steven Miller. In 2009, Debtor sold his interests in IPM to his sons effective December 31, 2009.
Following the sale and resignation, Taylor Miller ran IPM along with a bookkeeper and a few other employees. Debtor also worked on his own separate business affairs at the IPM office suite for a period of time and, in 2010, paid IPM "rent" for a small office. Debtor testified his post-2009 work was either as an individual or, at some point, in connection with Miller Real Estate Services, LLC (at times in this Decision, "MRES"), a limited liability company for which he was the sole member and manager. There is no evidence establishing that after the resignation in January 2010, Debtor worked as an employee of IPM or served any role with IPM.
IPM was engaged in the property management and maintenance business. For a number of years prior to July 2007, the Kersteins used IPM as the property manager for several of their real estate investment properties. IPM found and dealt with tenants, took and held security deposits, paid the expenses associated with the properties including maintenance and repair, and accounted for the cash in and out through monthly statements. On July 31, 2007, the Kersteins entered into a new, written management agreement with IPM. Ex. 102.
Debtor acknowledged in his testimony that, up to his resignation in January 2010, he was the "point person" in the IPM property management business, including in its dealings with the Kersteins. Mr. Kerstein testified that he had been referred to Debtor's business by a previous property manager who was retiring. He stated he placed trust in individuals, not their corporations, and he relied on that former property manager's representations about Debtor's honesty. He felt he was working with Debtor, even though the contract was with IPM.
Mr. Kerstein testified that, at some ill-defined point, the statements received from IPM triggered concerns on his part. It appeared the properties were not performing, and the revenues from the rentals were dropping. And it seemed that bills
Mr. Kerstein received a letter from IPM on September 13, 2010, detailing multiple outstanding "back charges" allegedly due to IPM. IPM asserted the total account balance was a "negative" $148,224.38 (meaning the Kersteins owed IPM that amount). Ex. 205.
In May 2011, the Kersteins filed suit in Idaho state court against IPM, Debtor, and Taylor Miller. Ex. 201. They asserted claims for breach of contract, breach of implied covenants of good faith and fair dealing, fraud,
In May 2012, following mediation, the disputes among all parties were settled.
The agreement called for payment by certified check the following day. The Kersteins received a May 11, 2012 cashier's check for the settlement amount. Ex. 111. The funds for the settlement were generated in the following fashion.
A $40,000 check dated May 9, 2012, was issued and made payable to Debtor personally. That check was drawn, by Debtor, on a Key Bank account in the name of "Miller Commercial Real Estate," which was a "dba" of Debtor. Exs. 107, 108.
Debtor deposited this check in a Wells Fargo Bank account. That account was a business checking account in the name of "Miller Real Estate Services, LLC," Debtor's limited liability company. Ex. 109.
After the $50,000 settlement payment was made, Debtor drew $15,000 from the Miller Commercial Real Estate Key Bank account. The check was dated May 30, 2012, and it was deposited in the MRES Wells Fargo account the same day. Exs. 107-109.
Debtor testified that even though he felt he had no personal liability to the Kersteins, especially after resigning in early 2010, his attorneys advised him differently.
Debtor and his wife filed for joint chapter 7 relief about a year and a half later. In answering question 10 on their statement of financial affairs, which calls for identification of all transfers within two years of the October 30, 2013 petition date, Debtors did not disclose the $50,000 paid on May 11, 2012 in settlement of the Kersteins' lawsuit. Ex. 101.
Debtor also indicated that their liabilities were about the same at both points. The amount of debt at bankruptcy was approximately $708,000.
Trustee's action is brought under § 548(a)(1)(B).
This Court summarized:
Jordan v. Kroneberger (In re Jordan), 392 B.R. 428, 440 (Bankr.D.Idaho 2008) (citing Krommenhoek v. Natural Res. Recovery, Inc. (In re Treasure Valley Opportunities, Inc.), 166 B.R. 701, 703 (Bankr.D.Idaho 1994)). Trustee bears the burden of establishing all the § 548(a)(1)(B) elements.
Insolvency is defined in § 101(32)(A) as a "financial condition such that the sum of such [debtor]'s debts is greater than all of such [debtor]'s property, at a fair valuation[.]" A "balance sheet" standard applies in § 548(a) litigation. See Sampson v. Western Capital Partners, LLC (In re Blixseth), 514 B.R. 871, 880-81 (D.Mont.2014) (citing In re Koubourlis, 869 F.2d 1319, 1321 (9th Cir. 1989)).
As shown by the evidence outlined above, Trustee met his burden of proving Debtors' insolvency on May 11, 2012, the date of the challenged transfer.
The Code broadly defines transfer in § 101(54) as every "mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with — (i) property, or (ii) with an interest in property."
Trustee's complaint puts at issue the cashier's check of $50,000 received by the Kersteins on May 11, 2012. In doing so, Trustee focused on the May 9 $40,000 check and the May 30 $15,000 check. Neither of these checks was tendered or transferred to the Kersteins. Indeed, the $15,000 check was written on the Key Bank account and deposited in the Wells Fargo account on May 30, almost three weeks after the cashier's check was delivered to the Kersteins on May 11.
As noted, the Key Bank account was in the name of Miller Commercial Real Estate, a "dba" for Debtor. The Key Bank funds were, therefore, Debtors' personal funds. The $40,000 May 9 check from that account was deposited in the MRES Wells Fargo account. The $40,000 was commingled in the MRES account with other LLC funds. After several transactions, the cashier's check was issued out of the MRES Wells Fargo account and used in the May 11 settlement with the Kersteins.
Trustee gives superficial attention to the fact that the funds transferred to the Kersteins came out of this LLC account. In briefing (and in mistakenly arguing that the intervening entity was IPM), Trustee emphasized the sequence: that the $40,000 (and the later $15,000) originated in Debtors' account, was transferred to the entity, and the entity "[a]lmost immediately" issued the cashier's check to the Kersteins. This overview ignores the timing of the transactions.
MRES had substantial funds in its business checking account on May 9, 2012. There was a pre-existing $35,570.94 balance when the $40,000 check was deposited. And later the same day an additional $12,301.84 was deposited. While Trustee emphasizes that $40,000 came from Debtor's account, the prior balance and the other deposits totaling $47,872.78 was not shown to have a similar source. And other MRES banking activity occurred after the $40,000 deposit and before the $50,000 cashier's check was issued.
Funds (i.e., $40,000) went from Debtor (via check on the Key Bank "dba" account) to Miller Real Estate Services, LLC (via deposit into the Wells Fargo account) on May 9. The transferor (Debtor) and the transferee (MRES) were separate entities, and Trustee presented no evidence to the contrary. The MRES account not only had an outstanding balance, but other funds went into, and came out of, that account. And, because the $15,000 check was drawn and deposited weeks later, some portion of the $50,000 that was used to acquire the cashier's check clearly was not traceable or attributable to any transfer from Debtor's Key Bank account.
A transfer clearly occurred from Debtor to MRES. However, MRES was the transferor of the $50,000 to the Kersteins at issue in this action.
The Kersteins raise this issue, i.e., that they were not the "initial" transferees, as well as arguments regarding limitations on a trustee's power of recovery under § 550(a) and (b) from immediate or mediate transferees. Trustee's position is that the transfer to MRES "was for the benefit of" the Kersteins and thus Trustee pursues recovery from them on that basis under the language of § 550(a)(1), and not as the "initial" transferee under such section, nor as immediate or subsequent transferees under § 550(a)(2). That approach, however, neglects the fact that at least some part of the $50,000 sought by Trustee in this proceeding was not shown to have originated in a transfer from Debtor at all. By May 11, Debtor had transferred only $40,000 from the Key Bank account to the MRES Wells Fargo account. Moreover, given the other funds in, and activity in, that MRES Wells Fargo account, Trustee did not prove what portion of the $40,000 was used "for the benefit" of the Kersteins.
The Court, however, sees no reason to belabor the analysis here, because Trustee must establish all elements of the cause of action, and he has failed to do so.
Jordan discusses at length the element of reasonable equivalence. 392 B.R. at 441-47. "The key to th[e] matter is determining the value received by Debtors in exchange for the [property or] interest they transferred to Defendant." Id. at 441. Thus, here, the key is determining what Debtor received in return for a maximum of $40,000 transferred on May 9 which, Trustee asserts, was "for the benefit of" the Kersteins.
Jordan holds that indirect benefits as well as direct benefits may constitute value if sufficiently concrete and identifiable. Id. at 442. In evaluating what was exchanged in a quid pro quo transaction, "[r]easonable equivalence can clearly
The Kersteins' state court complaint generally alleged damages under each of the four causes of action "in excess of $25,000, the exact amount of which will be proven at trial." Debtor testified that the Kersteins "settled a $140,000 claim for $50,000," and that IPM waived a $130,000 claim asserted against the Kersteins.
The settlement here, like most, was not an outright victory for either side. It was the result of mediated resolution of ongoing litigation. There was nothing to suggest the settlement was anything other than an arms-length resolution of contested factual and legal issues.
Trustee argues that, at least in his view, Debtor's exposure in the state court lawsuit was minimal and, thus, the settlement of the litigation cannot support the reasonableness of the transfer. He focuses on the fact that, as of January 2010, Debtor had resigned from IPM and the disputes with the Kersteins arose thereafter.
This focus ignores the genesis of the Kersteins' claims, and those of IPM against the Kersteins, which substantially related to times when Debtor was the owner and "point man" for IPM. The alleged misuse of tenant security deposits were not shown to relate to solely post-December 2009 lessees or funds. Nor were the assertions of fraud in financial reporting and the treatment of property maintenance and expenses similarly limited in time. The breach of fiduciary duty claims and fraud claims against Debtor were pending as of the mediation. Even if Trustee, from his blinkered perspective, feels the Kersteins' complaints against Debtor lacked heft, they were not without some foundation, and they were interrelated to the claims against Taylor Miller and IPM. Moreover, the Kersteins sought to have all the state court defendants held jointly and severally liable. And those defendants incurred substantial fees in defense.
Jordan noted the applicability of the analysis of the court in Schaps v. Just Enough Corp. (In re Pinto Trucking Service, Inc.), 93 B.R. 379 (Bankr.E.D.Pa. 1988). See 392 B.R. at 443. Schap noted:
93 B.R. at 389 (citations omitted).
Trustee bore the burden of proving that, if Debtors were deemed to have made a transfer to or "for the benefit of" the Kersteins, Debtors did not receive reasonably equivalent value. The many-hued factors affecting a determination of value and of reasonable equivalence are set out at length in Jordan. Applying those factors and principles to the evidence here, the Court concludes Trustee did not carry his burden on this element.
Trustee failed to meet the burden of establishing all elements required to avoid the subject transfer under § 548. Judgment will be entered for the defendants Chester and JoAnn Kerstein.
