JIM D. PAPPAS, Bankruptcy Judge.
In this adversary proceeding, plaintiff R. Sam Hopkins, the chapter 7
The Court has considered the parties' briefs and arguments, as well as the applicable law. This Memorandum disposes of the motion. Fed. R. Bankr. P. 7052; 9014.
On January 13, 2012, Shawn
Defendant understood that Debtors' draws on the line of credit were to be loans and that Debtors would repay the amounts drawn when they could. Dkt. No. 33-3 at pp. 8-10. However, Defendant also acknowledged that, under the circumstances, he did not expect Debtors to repay the credit line. Dkt. No. 33-3 at p. 51. Defendant did not investigate what Debtors did with the money they got from the bank, nor did he monitor how much money Debtors were using. Dkt. No. 33-3 at pp. 8, 12. Importantly, there was no writing or document evidencing any agreement between Debtors and Defendant concerning the line of credit draws.
Defendant made no payments to Key Bank on the line of credit; when funds became available to them, Debtors would occasionally make a payment to Key Bank on the line of credit. Dkt. No. 33-3 at p. 12.
Following the accident, Shawn retained counsel and filed a lawsuit against the snowmobile manufacturer. On March 30, 2015, Shawn entered into an agreement settling that action. On April 16, 2015, he deposited $66,496, the net proceeds he received from the settlement, into his checking account at Citizens Community Bank ("CCB"). Dkt. Nos. 1 at ¶ 43; 6 at ¶ 3; 33-1 at p. 3. On April 27, 2015, Shawn wrote a check on the CCB account to Defendant for $22,248. Dkt. Nos. 1 at ¶ 44; 6 at ¶ 3. In a letter to Plaintiff, Shawn explained that the payment was intended to reimburse Defendant, in part, for the money he had made available to Debtors, as well as to help with his mother's medical bills, as she was seriously ill at that time. Dkt. Nos. 33-1 at p. 4; 33-2 at pp. 7-8.
On May 19, 2015, Shawn wrote another check on the CCB account for $15,185.89 to Key Bank as a payment on the line of credit. Dkt. No. 33-2 at p. 10. A week later, on May 26, 2015, Shawn withdrew $7,500 from the CCB account, and later made other cash withdrawals, because he admittedly was concerned that, given Debtors' financial challenges, the funds in his accounts would be seized. Dkt. No. 33-2 at pp. 9-10.
From mid-2014 going forward, Debtors began to feel the brunt of their financial woes. They defaulted on a promissory note owed to the Bank of Commerce, and later that year, several creditors foreclosed on Debtors' primary residence. In February 2015, Ireland Bank repossessed Debtors' trailer. In the spring of 2015, several creditors foreclosed on Debtors' farm and rental real properties. Suits were filed, and judgments were obtained, against them by, inter alia, the Bank of Commerce ($260,798.56), and D.L. Evans Bank ($240,008.42).
On January 14, 2016, Debtors filed a chapter 7 bankruptcy petition. In both their original and amended Statement of Financial Affairs ("SOFA"), Debtors failed to disclose the cash transfer to Defendant. BK Dkt. Nos. 1; 22. Instead, only a $6,000 payment to Defendant was disclosed, with a notation indicating that there was nothing further owed on the debt to Defendant. BK Dkt. Nos. 1, p. 66 at ¶ 7; 22, p. 3 at ¶ 7. Defendant has since returned this $6,000 to Plaintiff.
On November 18, 2016, Plaintiff commenced this adversary proceeding against Debtors and Defendant in a complaint containing eleven counts.
The second count addressed in Plaintiff's motion deals with Count Eight of the complaint, which seeks a declaration of the parties' rights in a tractor.
In approximately 2008, Debtors and Defendant jointly acquired a tractor. Defendant traded in a John Deere 4630 tractor he owned which was worth $24,500, and Debtors took out a loan for $21,125 with Ireland Bank, and together they purchased a John Deere 7800 tractor for $45,625. Dkt. No. 33-4 at p. 9. Debtors paid off the Ireland Bank loan on June 30, 2013. Id. at p. 17.
On September 22, 2014, after Debtors' farm had been foreclosed, Defendant determined that the John Deere tractor was too large for his purposes, so he "directed Shawn Bridger to sell or trade the John Deere 7800 tractor for something smaller." Dkt. No. 33-4 at p. 9. Shawn contracted with Valley Implement and Irrigation in Preston, Idaho, and was able to negotiate the trade of the John Deere straight across for a New Holland Boomer 50 Tractor. Dkt. Nos. 33-2. at p. 64; 33-4 at p. 18. By Defendant's reckoning, considering the tractor he traded in to obtain the John Deere, and given Debtors' loan of $21,125 which they contributed to the original deal, Debtors own a 46% interest in the New Holland, while he owns 56%.
Previously, on August 30, 2013, Debtors had signed a promissory note and security agreement with Bank of Commerce in which they pledged all of their farm equipment as collateral for their loans. On January 22, 2015, the Bank of Commerce commenced a state court action against Debtors to foreclose on the real and personal property securing its note, and on May 5, 2015, the state court entered a decree that listed the Bank of Commerce as having a first position lien in the John Deere tractor; it ordered that the tractor be sold according to the security agreement. The Bank of Commerce thereafter reached an agreement with Valley Implement regarding the bank's interest in the John Deere, which had by that time been traded in for the New Holland.
Plaintiff's motion seeks a summary judgment against Debtors and Defendant on Count Eight, in which Plaintiff seeks turnover of the New Holland tractor pursuant to §§ 541(a) and 542(a), as well as the right to sell the tractor free and clear of Defendant's ownership interest under § 363(h). Alternatively, Count Eight alleges that the transfer of any ownership interest in the New Holland Tractor may be avoided as a fraudulent transfer pursuant to § 548(a)(1)(A) and (B), entitling Plaintiff to recover the tractor under § 550(a), or the value of Defendant's avoided interest in the tractor.
Civil Rule 56, made applicable to summary judgment motions in bankruptcy proceedings by Rule 7056, provides: "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Civil Rule 56(a). Once the moving party meets its initial burden, then the opponent must provide evidence establishing a genuine issue of material fact for trial. Civil Rule 56(c); DeVries v. Clark (In re Clark), 14.1 I.B.C.R. 6, 8 (Bankr. D. Idaho 2014); see also Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
The evidence and any inferences drawn therefrom, must be viewed in a light most favorable to the non-moving party. Thorian v. Baro Enterprises, LLC (In re Thorian), 387 B.R. 50, 61 (Bankr. D. Idaho 2008). It is not the Court's place to weigh evidence in resolving motions for summary judgment but, instead, to determine only whether a material factual dispute exists requiring trial. Id. (citing Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir. 1997)). A dispute is genuine if there is sufficient evidence for a reasonable finder of fact to hold in favor of the non-moving party, and a fact is material if it might affect the outcome of the proceeding. Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir. 2001); Boise City/Ada Cty. Housing Auth. v. O'Brien (In re O'Brien), 11.2 I.B.C.R. 75, 75 (Bankr. D. Idaho 2011).
Plaintiff contends he may avoid the transfer of the $22,248 to Defendant from Debtors under § 548(a) as a constructively fraudulent transfer because Debtors did not receive reasonably equivalent value for the transfer, or, alternatively, if the money was transferred to Defendant to repay a loan, as a preference under § 547(b).
Defendant filed an opposition to Plaintiff's motion, in which Debtors joined. Dkt. Nos. 37, 40. Debtors and Defendant contend that the $22,248 Debtors paid to Defendant came from the proceeds of Shawn's personal injury settlement, and that those funds were therefore exempt under Idaho Code § 11-604(1)(c), or at least, that there is a question of fact about whether the funds were exempt as reasonably necessary for their support. The exemption statute Defendant and Debtors invoke provides that "[a]n individual is entitled to exemption of the following property to the extent reasonably necessary for the support of him and his dependents: . . . (c) proceeds of insurance, a judgment, or a settlement. . . ." Since there is no dispute that Debtors received a large amount of funds from the settlement with the snowmobile manufacturer, nor that Debtors were struggling at the time to pay their living expenses as a result of the accident, it is plausible that the settlement funds were indeed exempt.
However, the same state exemption statute further provides that "[t]he exemption[] allowed by this section shall be lost immediately upon the commingling of any of the funds or amounts described in this section with any other funds." Idaho Code § 11-604(3). As relevant here, Shawn admitted that "[o]n April 16, 2015, I deposited the Net Settlement Proceeds into my checking account at Citizens Community Bank. . . . At that time there was a total of $5,804.94 in that account." Aff. of Shawn Bridger, Dkt. No. 39 at ¶ 4. This testimony is corroborated by the CCB account statement. Id. at p. 7.
Neither the parties, nor the Court, are aware of any case law interpreting Idaho Code § 11-604(3). While there are cases contrasting that provision with other exemption statutes containing no similar prohibition on commingling funds, none of those decisions actually applied the commingling provision directly. However, the absence of case law is of no moment. The statute unambiguously mandates that any exemptions arising under Idaho Code § 11-604 "shall be lost immediately upon the commingling . . . with any other funds". Idaho Code § 11-604(3) (emphasis supplied). Because the Idaho Legislature has clearly spoken, this Court is not free to disregard its directive. Accordingly, even assuming Debtors are able to trace the funds used to pay Defendant through their bank accounts, the exempt status of those funds was lost immediately when they were deposited and commingled with Debtors' other funds in the CCB account. Because the funds were no longer exempt when paid by Debtors to Defendant, they are subject to reach by Plaintiff, assuming he can establish the other elements for avoidance.
In this respect, Plaintiff contends that he may avoid the transfer of the $22,248 to Defendant as a constructively fraudulent transfer because, Plaintiff argues, Debtors were insolvent when they paid Defendant, and they did not receive reasonably equivalent value in return for that payment.
Section 548(a)(1)(B) provides, in relevant part:
To avoid a transfer under this provision, Plaintiff must demonstrate that 1) there was a transfer of Debtors' property within two years of the filing of their bankruptcy petition, 2) that Debtors received less than reasonably equivalent value in exchange for the transfer, and 3) that Debtors were insolvent on the date of the transfer, or the transfer caused them to become insolvent. Gugino v. Rowley (In re Floyd), 540 B.R. 747, 758 (Bankr. D. Idaho 2015) (citing Jordan v. Kroneberger (In re Jordan), 392 B.R. 428, 440 (Bankr. D. Idaho 2008)). Plaintiff bears the burden of proving all § 548(a)(1)(B) elements. Crawforth v. Wheeler (In re Wheeler), 444 B.R. 598, 605 (Bankr. D. Idaho 2011); Murietta v. Fehrs (In re Fehrs), 391 B.R. 53, 73 (Bankr. D. Idaho 2008).
Here, there is no question that the $22,248 in settlement funds were Debtors' property, nor that the money was transferred to Defendant via check. The first § 548(a) avoidance requirement is therefore met. The third element is also not in question because Debtors were clearly experiencing financial distress and had been receiving Defendant's financial assistance for several years; they had already endured a number of foreclosures, and there were large money judgments pending against them. Indeed, according to Debtors' SOFA in the bankruptcy case, their obligations included a $450,000 foreclosure deficiency judgment in favor of D.L. Evans Bank entered in December 2014, and a $225,000 foreclosure deficiency judgment in favor of D.L. Evans bank entered in April 2015 — the same month the transfer was made. As of the date of the bankruptcy filing, which occurred only a few months after the transfer, Debtors listed $54,440.32 in assets and $2,208,443.28 in liabilities. On this record, the Court concludes there is no factual dispute that Debtors were insolvent at the time of the transfer to Defendant.
Finally, to obtain a summary judgment, Plaintiff must establish, beyond dispute, that Debtors did not receive reasonably equivalent value for the transfer of the $22,248 to Defendant. The Court employs a two-step process to determine whether "reasonably equivalent value" was received. First, the Court must determine what Debtors received in exchange for the transfer. Hopkins v. Crystal 2G Ranch, Inc. (In re Crystal), 513 B.R. 413, 419 (Bankr. D. Idaho 2014) (citing Rainsdon v. Kirtland (In re Kirtland), 12.1 IBCR 9, 12 (Bankr. D. Idaho 2012)); see also In re Jordan, 392 B.R. at 441. Next, Plaintiff must prove that the value received was not reasonably equivalent to what Debtors gave in exchange. Id.
On this point, recall, at the time of the transfer to Defendant, Shawn indicated that the money was to repay his father for the use of the line of credit, and to help cover his mother's medical expenses. For purposes of § 548(a), "value" is defined to mean "property, or satisfaction or securing of a present or antecedent debt of the debtor." § 548(d)(2). Whether a fair economic exchange has occurred is determined by the Court's analysis of "all the circumstances surrounding the transfer in question." In re Jordan, 392 B.R. at 441.
While the Court appreciates that some sort of "value" was received by Debtors in exchange for the cash payment, it was not the type of value that may be reliably measured in a bankruptcy case. Although there was no writing requiring him to do so, and Defendant had no realistic hopes that it would occur, Debtor chose to repay Defendant for some of the funds that had been gifted to him and to help pay for some of his mother's medical expenses. While the payment from Debtors to Defendant may have been a good and compassionate gesture, the Court and Plaintiff are bound by the strictures of the Bankruptcy Code. That being said, the Court must look to the value Debtors received, if any, from the perspective of Debtors' creditors. In re Fehrs, 391 B.R. at 74 (citing Frontier Bank v. Brown (In re N. Merch., Inc.), 371 F.3d 1056, 1059 (9th Cir. 2004) (the "primary focus . . . is on the net effect of the transaction on the debtor's estate and the funds available to the unsecured creditors.")). "The common thread expressed in the case law instructs that the Court must have a quantifiable basis for its valuation, although the information available to the Court need not be precise." In re Floyd, 540 B.R. at 758 (quoting Gugino v. Ortega (In re Pierce), 428 B.R. 524, 528-29 (Bankr. D. Idaho 2010)). "The economic value must be real and quantifiable." Hasse v. Rainsdon (In re Pringle), 495 B.R. 447, 463 (9th Cir. BAP 2013).
From the perspective of their creditors, Debtors gave cash to Defendant, but Debtors received no corresponding real, quantifiable economic value in return. The difficulty for Defendant and Debtors here is that, while there is some history of Defendant occasionally advancing funds to Debtors, and Debtors eventually repaying him, there is simply nothing legally binding about their arrangement. This was likewise true concerning the advances Defendant authorized Debtors to take on the credit line following Shawn's unfortunate accident. While, arguably, it may have been understood that Debtors would repay Defendant if and when they could, there was no writing to evidence the arrangement, and no definite agreed-upon payment terms, no default terms, and no specified remedy for any default. Instead, the record demonstrates that, in all aspects, Defendant's help extended to Debtors was a parent's loving and generous gift. As commendable as the parties' actions may have been, their lack of formality has consequences in this bankruptcy case. Simply put, the undisputed facts indicate that no value was received by Debtors to offset the $22,248 payment. As a result, the Code dictates that a constructively fraudulent, and avoidable, transfer occurred.
The Court determines that it should also grant Plaintiff a summary judgment for turnover of the tractor, as well as Plaintiff's right to sell the tractor free and clear of Defendant's interest.
Apparently because it is undisputed that Debtors own some interest in it, Defendant has conceded that Plaintiff has the "right to take possession of and sell the New Holland Tractor". Dkt. No. 37 at p. 7. The Court agrees that, under § 541(a), the tractor is property of the bankruptcy estate, and that under § 542(a), anyone in possession of the tractor is required to turn it over to the trustee.
In addition, under § 363(h), even assuming Defendant holds some interest in the tractor, Plaintiff "may sell both the estate's interest, . . . and the interest of any co-owner in property in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety" so long as certain conditions are met. Those § 363(h) conditions are indeed satisfied in this case.
First, partition of the property must be impracticable, which, given the nature of this asset, is certainly the case here — no one suggests that the tractor can be physically divided.
Second, the sale of only the estate's undivided interest in the tractor will realize significantly less than the sale of the entire property. The Court concludes that this requirement is also met as it would seem virtually certain that Plaintiff could not liquidate Debtors' undivided interest in the tractor for a price even remotely equivalent to that which could be obtained for full, unrestricted ownership of the tractor.
Next, Plaintiff must prove that the benefit of a sale to the estate outweighs any detriment to the interests of the co-owner. Here, the benefit to the estate of a sale is represented by the cash proceeds of the sale. However, the detriment to a co-owner of a sale may implicate nonfinancial considerations. Hopkins v. Wright (In re Labbee), 550 B.R. 854, 859 (Bankr. D. Idaho 2016). Because Debtor and Defendant paid $31,000 for the tractor when they jointly acquired it, and even though it likely depreciated in the intervening years, Plaintiff plausibly estimates that the New Holland tractor will likely generate several thousand dollars to the estate if sold. That outcome must be contrasted with any potential detriment of the sale to Defendant. The testimony in this record is consistent that all of the tractors over the years, including the New Holland, have generally been located at Debtors' home and used primarily for their benefit. Moreover, Debtors have shared the unfortunate news with the Court that Defendant suffers from Parkinson's disease, and therefore will likely be unable to use the tractor going forward. While admittedly based on inferences from the evidence in the record, the Court comfortably concludes that there is no genuine issue of material fact that the benefit of selling the tractor to the estate outweighs Defendant's interest in it.
Finally, under § 363(h)(4), Plaintiff must demonstrate that the tractor is not used for energy production purposes, a proposition that is not contradicted by anything in the record and otherwise seems evident.
Because Plaintiff has, without genuine factual dispute, established all of the elements under § 363(h), Plaintiff may sell the New Holland tractor free and clear of Defendant's interest in it.
Defendant requests that the Court adjudge that he owns a 56% undivided interest in the New Holland tractor before it authorizes the Plaintiff to sell it. However, the record does not support that request. Instead, fact issues remain concerning quantification of the parties' relative ownership interests in the tractor, as shown by Defendant's own statements, who at one time suggested that he owns 90% of the tractor. Moreover, there is other evidence in the record that Debtors may have made some payments on one of the predecessor tractors, perhaps the John Deere. If so, Debtors' ownership interest could potentially be greater than 44%. At this juncture, while the Court will grant summary judgment as to Plaintiff's right to take possession of the New Holland tractor and to sell it, unless the parties agree otherwise, further proceedings are necessary to determine the disposition of any sale proceeds.
The $22,248 transfer from Shawn to Defendant is avoidable as a constructively fraudulent transfer under § 548(a)(1)(B), and Plaintiff is entitled to summary judgment on Count Four of his complaint.
Plaintiff is entitled to turnover of the New Holland tractor under § 542(a), and he may sell it under § 363(h) free and clear of Defendant's interest. Thus summary judgment will also be granted to Plaintiff on Count Eight. No ruling will be made at this time concerning the parties' relative rights to any sale proceeds.
The disposition of all other issues raised in this action will require further proceedings. A separate order will be entered.
