DALE L. SOMERS, Chief Bankruptcy Judge.
Defendants Bank of the Flint Hills (the "Bank")
The motions to dismiss are brought pursuant to Bankruptcy Rule 7012,
Debtor David Arlen Krien filed a voluntary petition under Chapter 7 on August 9, 2017. The Trustee filed this adversary proceeding (the "Complaint") on July 31, 2019 against the Bank, the FHLB, and Colonial Savings, F.A.
The Trustee seeks to avoid as fraudulent Debtor's transfers to the Bank of a mortgage and a security agreement granted in January 2016 and a mortgage granted in June 2017. She also seeks damages for violations of the Truth in Lending Act, 15 U.S.C. §§ 1601-1667f ("TILA") and the Real Estate Settlement Procedures Act, 27 U.S.C. § 2601-2617 ("RESPA") in the 2016 transaction. According to the allegations of the Complaint, the mortgages and security agreement were granted to the Bank by Debtor with the intent to hinder and delay the collection of a judgment obtained by a third-party creditor, Kansas Pacific Investment, against the Debtor in a case in Barton County, Kansas District Court ("Barton County Case"). The FHLB is alleged to be the current holder of the June 2017 Mortgage which the Trustee seeks to avoid.
The complex factual allegations are stated in 122 paragraphs of the Complaint. They include events from 2012 through 2017 involving multiple financial transactions between the Debtor, the Bank, and third parties. Because the Motions to dismiss are based upon issues of law, the Court will address only those factual allegations directly relevant to the legal issues presented.
On August 9, 2013, Kansas Pacific Investments filed an amended petition in the Barton County Case seeking a judgment against Debtor related to loans to Debtor's limited liability companies. On January 11, 2013, Debtor and his wife created the Krien Trust, a self-settled, revocable trust, naming Debtor and his wife as co-trustees.
In October 2015, Debtor made inquiry to the Bank about a loan to finance the purchase of a home. Sometime before January 4, 2016, Debtor and his wife entered into a contract for the purchase of a residence located on Limestone Court, in Hays, Kansas for $310,000 (the "Hays Residence"). On January 7, 2016, Debtor, as trustee of the Krien Trust, signed a promissory note for $311,201.17 ("Home Loan"), prepared by the Bank. The loan proceeds were disbursed to a title company for purchase of the Hays Residence by the Krien Trust.
No consumer loan disclosures were provided to Debtor in connection with the Home Loan. The Home Loan states on its face that the purpose is "Agricultural." To secure the Home Loan, Debtor, as Trustee of the Krien Trust, executed a mortgage of farm ground located in Cheyenne County (the "Cheyenne County Mortgage"), previously valued at $142,800, and a security agreement granting the Bank a security interest in all deposit accounts, including a money market account with a balance of $197,000. The Trustee alleges that Debtor executed the Cheyenne County Mortgage and the Security Agreement with the intent to hinder, delay, or defraud Kansas Pacific Investments.
On October 12, 2016, Kansas Pacific Investments obtained a judgment against Debtor in the approximate of $1.4 million. Debtor signed a document entitled Resignation dated November 16, 2016, which states he terminates any interest and claim to the Krien Trust.
The Home Loan initially matured on March 10, 2016. As the result of several transactions involving the Bank, Debtor, Debtor's wife, Debtor's business associate, and Debtor's attorney, in 2017 the maturity of the Home Loan was extended and the note paid in part. On June 12, 2017 a homestead affidavit was executed stating that Debtor and his wife owned and occupied the Hays Residence as their homestead since January 8, 2016. On June 14, 2017, the title to the Hays Residence was transferred from the Krien Trust to Debtor and his wife individually.
On June 19, 2017, the Debtor and his wife signed a real estate mortgage (the "June 2017 Mortgage") of the Hays Residence in favor of the Bank securing a $147,000 note signed only by Debtor's wife. Approximately $61,000 of the loan proceeds were paid to the Bank to satisfy the Home Loan. In July 2017, property located in Cheyenne County, including the property which had been subject to the Cheyenne County Mortgage securing the Home Loan, was conveyed to Debtor's business associate, allegedly for less than its value. The Trustee alleges that Debtor's creditors were damaged by the June 2017 Mortgage as it permitted Debtor to complete the fraudulent transfer of the Cheyenne County Property to a business associate for less than reasonably equivalent value.
Debtor filed for relief under Chapter 7 on August 9, 2017 and claimed the Hays Residence as his exempt homestead. On April 26, 2018, the Trustee objected to some exemptions, including the homestead.
The Trustee alleges that she is entitled to judgment against the Bank and FHLB under § 544, § 548(a)(1)(A), and K.S.A. 33-204(a)(1) avoiding the June 2017 Mortgage as a fraudulent transfer done with intent to hinder, delay or defraud a creditor. The Defendants
Section 544(a)(2) grants a trustee the rights of a creditor with an execution against a debtor that is returned unsatisfied at the time of commencement of the bankruptcy case. Under this subsection, the trustee may invoke the remedies provided by state law to such a creditor.
In this case, when seeking to avoid the June 2017 Mortgage under § 544(a)(2), the Trustee relies on the Kansas Uniform Fraudulent Transfer Act, codified at K.S.A. 33-201 et. seq. For purposes of that Act, "transfer" is defined as "every mode, direct or indirect . . . of disposing or parting with an asset or an interest in an asset."
The Defendants contend that because Debtor claims the Hays Residence as his exempt homestead, the Trustee cannot avoid the June 2017 Mortgage of Debtor's interest as a matter of law. The Court agrees that to avoid the June 2017 Mortgage, the Trustee, as an element of her claim, must prove that the asset transferred was not exempt under nonbankruptcy law. This burden is placed on the Trustee by the definitions of asset and transfer in K.S.A. 33-201.
Debtor filed a list of property he claimed as exempt; it includes the Hays Residence as his Kansas exempt homestead. Section 522(l) provides, "[u]nless a party in interest objects, the property claimed as exempt on such list is exempt." Even though Debtor's claim of exemption was filed long before the adversary proceedings and the Trustee was fully aware of the exemption claim, the Complaint does not allege that the Hays Residence is not exempt under Kansas law, therefore failing to include a necessary element of avoidance under § 544(a)(2).
In response to the Defendants' argument, the Trustee argues that the claim should not be dismissed because she filed a motion objecting to Debtor's homestead exemption in the underlying Chapter 7 case.
The Court finds that the Trustee's argument fails. The basis for her objection to Debtor's homestead exemption in the underlying case is federal bankruptcy law, specifically § 522(o), which limits an exempt homestead interest based upon fraudulent conduct, and § 522(p), which places a monetary limit on a homestead interest acquired during the 1,215 day period before filing. Under the Kansas Uniform Fraudulent Conveyance Act, conveyances of assets that are exempt under nonbankruptcy law cannot be avoided. The Trustee has never alleged that the Hays Residence is not exempt under Kansas law, and the time period to object to the exemption under state law has expired.
The Court finds that Count I fails to state a claim for relief against the Defendants for avoidance of the June 2017 Mortgage under § 544(a)2).
The Defendants contend Count I fails to state a claim upon which relief may be granted for avoidance of the June 2017 Mortgage under § 548 because the Trustee has failed to allege with particularity the value of the property transferred. According to the Defendants, to state a claim under § 548(a)(1)(A) for avoidance of a fraudulent transfer of property made with actual intent to hinder, delay, or defraud a creditor, the complaint must allege with particularity "the amount of the transfer (or if the transfer was property rather than money, the property transferred and the value)." In her Complaint, the Trustee identifies the property transferred, Debtor's interest in the Hays Residence, and states that the appraised value in June 2017 was $340,000. The Defendants argue that the Complaint is deficient because it does not value Debtor's portion of the value of the whole property.
When arguing that a Complaint must not only identify the property interest transferred but also its value, the Defendants rely on Rajala v. Husch Blackwell, LLP (In re Generation Resources Holding Co.
The Court declines to find the Complaint deficient because the it does not allege the value of the lien transferred by the Debtor. Section 548 provides no basis for requiring the allegation of the value of the transferred property. Case law does not uniformly hold that the value of property transferred is an essential element.
This Court finds that a complaint under § 558(a)(1)(A) must identify the property allegedly transferred.
The Court denies the Defendants' motions to dismiss the § 548(a)(1)(A) claim on this basis.
In addition to adopting the Bank's arguments, the FHLB argues that the Complaint fails to state a claim against it for avoidance of the 2017 Mortgage because it acquired its interest in the Hays Residence by transfer from the Bank, not Debtor. The Trustee does not refute this position.
As the FHLB points out, § 544 provides for avoidance of a "transfer of property of the debtor or an obligation incurred by the debtor" and § 548(A)(1)(A) provides for avoidance of "an interest of the debtor in property or any obligation . . . incurred by the debtor." The common element of both sections is transfer of property of the debtor. Nothing is transferred by the debtor when the original lender transfers a mortgage given to it by a debtor to a subsequent holder of the secured note. Therefore there is no transfer of property by a debtor to the subsequent holder that can be avoided under § 544 and § 548(a)(1)(A).
It this case it is undisputed the FHLB acquired the 2017 note and the 2017 Mortgage from the Bank. Debtor made no transfer of property to the FHLB and the Trustee has no avoidance or fraudulent transfer claim against the FHLB. For this reason, Count I of the Complaint is dismissed in its entirety against the FHLB.
The Trustee seeks to avoid the Cheyenne County Mortgage and the Security Agreement given to the Bank to secure the Home Loan in January 2016 as fraudulent transfers done with the intent to hinder, delay, or defraud Debtor's creditor. The Bank moves to dismiss Count II contending that there was no transfer of any property of Debtor because the security documents were executed by Debtor as trustee of the Krien Trust, not individually. The Trustee responds that under Kansas law, Debtor as trustee and beneficiary of a revocable self settled trust had an interest in the property transferred for the purpose of the avoidance claims.
Sections 544 and 548(a)(1)(A) provide a trustee with the power to recover property of a debtor transferred by the debtor prepetition. Both sections look to state law to determine if the debtor had a property interest in the asset at issue.
The Court therefore holds that Debtor had an interest in the Cheyenne County real property transferred to the Bank by the 2016 Cheyenne County Mortgage and in the personal property transferred to the Bank by the Security Agreement, even though the Krien Trustee was the title holder immediately before the transfers. The fact that Debtor's wife was also a beneficiary of the Krien Trust may give rise to questions about the extent of Debtor's equitable interest, but it does not defeat the fact that Debtor had such an interest. Contrary to the Bank's argument, the Court finds that the necessary elements of a § 548 claim are adequately alleged.
The Court denies the Bank's motion to dismiss Count II.
Count III alleges that the Bank falsified the purpose of the $311,000 Home Loan to avoid compliance with consumer lending laws and took real property as collateral for a consumer loan without compliance TILA,
The relief sought by the Trustee is wide ranging. Paragraph 185 of the Complaint states:
Regulation Z implements the TILA. The Trustee alleges violation of Regulation Z, 12 C.F.R. § 1026.19(e)(1) and (f)(1), which require two sets of disclosures in closed-end consumer credit transactions secured by real property. Claims for damages under the TILA must be brought "within one year from the date of the violation."
The Trustee argues that the case was nevertheless timely filed because there were extensions/modifications of the Home Loan on March 22, 2016, October 4, 2016, and February 27, 2017.
The Court concludes that the Trustee's claim for damages for violation of Regulation Z is barred by the one year statute of limitations.
The Bank also argues that the Trustee cannot recover under the TILA because the TILA does not apply to loans to a trust. The Bank relies on 15 U.S.C. § 1603(1), which states that the act does apply to "credit transactions . . . to organizations" and 15 U.S.C. § 1602(d), which states that the term "organization means a corporation, government . . ., trust, estate, partnership or association."
In response, the Trustee points out that although the statutes and Regulation Z
The Court grants the Bank's motion to dismiss Count III.
Dismissal of Count IV as to the Bank is dependent upon whether the Trustee may avoid any transfers under Counts I and II. As found above, the Court finds that Count I fails to state a claim against the Bank under § 544(a)(2) as to the June 2017 Mortgage. However, the Court declines to dismiss the § 548(a)(2)(a) avoidance claim as to the June 2017 Mortgage and the § 544(a)(2) and the § 548(a)(1)(A) claims as to the Cheyenne County Mortgage and the Security Agreement. Since these avoidance claims remain, the Trustee's Complaint states claims for relief against the Bank under §§ 550 and 551.
As discussed above, the Court finds that Count I fails to allege a claim against the FHLB on which the Trustee can be granted relief. The FHLB is not a defendant in Count II, the second avoidance count. Since there are no viable avoidance claims against the FHLB, it cannot be liable as a transferee of an avoided transfer under § 550(a)(1).
However, the FHLB is the transferee from the Bank of the June 2017 Mortgage, and Count I of the Complaint Trustee states a claim against the Bank under § 548 for avoidance of that transfer. The Trustee therefore has a potential claim under § 550(a)(2) against the FHLB as a subsequent transferee of an avoided transfer.
The FHLB nevertheless moves to dismiss. Section 550(b)(1) provides that the trustee cannot recover from a subsequent transferee, such as the FHLB, "that takes for value, including satisfaction or securing of a present or antecedent debt, in good faith, and without knowledge of the voidability of the transfer avoided." According to the FHLB, the Complaint is deficient because it does not allege the absence of value, the lack of good faith, and knowledge of the voidability of the 2017 Mortgage. The Court rejects this argument. Subsection 550(b)(1) "provides an affirmative defense, and the transferee relying on the defense has the burden of proof."
The Motions are granted in part and denied in part. The motions to dismiss Count I, avoidance of the June 2017 Mortgage under § 544(a)(2), are granted as to the Bank and the FHLB. The motions to dismiss Count I, avoidance of the June 2017 Mortgage under § 548(a)(1), are denied as to the Bank and granted as to the FHLB. The motion to dismiss Count II against the Bank for avoidance of the Cheyenne County Mortgage and the Security Agreement under §§ 544(a)(2) and 548(a)(1), is denied. The motion to dismiss Count III against the Bank for violations of RESPA, TILA, and Reg Z. is granted. The motion to dismiss Count IV against the Bank and the FHLB for recovery of avoided transfers is denied.
It is so ordered.
