GREGORY F. KISHEL, Chief Judge.
This adversary proceeding came before the Court on the Plaintiff's motion for summary judgment and on the Defendants' responsive request for summary judgment. The Plaintiff appeared by her attorney, Andrea M. Hauser. The Defendants appeared by their attorneys, Thomas J. Flynn and Julie N. Nagorski. The following decision is based on the written record submitted for the motion, and on counsel's written and oral argument.
The Debtor is a resident of Ramsey County, Minnesota. She filed a voluntary petition for bankruptcy relief under Chapter 7 on December 24, 2008.
The Plaintiff is the Trustee of the Debtor's bankruptcy estate.
The individual Defendants ("the Welshes") are the Debtor's parents. Defendant The Welsh Living Trust was formed by the Welshes.
The subject of this adversary proceeding is real estate located at 1866 Wellesley Avenue in St. Paul, Minnesota. The Plaintiff pleads the following facts in relation to that real estate. In October, 1994, the Welshes and the Debtor and her then-husband, Daniel Lumbar, entered a contract for deed for the sale of the property. The Welshes were the sellers and the Lumbars were the purchasers. Eleven years later, there was a rapid succession of legal proceedings: the Lumbars went through a proceeding for the dissolution of their marriage; the Welshes undertook to cancel the contract for deed; the Lumbars and the Welshes were embroiled in litigation in the Ramsey County District Court over the property; they entered into a settlement of that litigation; various instruments relating to the title of the property were executed, including a quit claim deed from the Debtor to the Welshes; and some, but not all, of those documents were filed in the land records for Ramsey County.
In her complaint, the Plaintiff seeks to undo the ultimate disposition of the Debtor's interest in the real estate, and to recover that interest or its value. She challenges the various component transactions under six separate counts of her complaint:
To support these theories, the Plaintiff recites a long, involved series of fact averments, largely transactional and documentary in nature.
In their answer, the Defendants admit many of the fact averments. (Most of the admitted facts would be based on objectively-memorialized, documentary evidence anyway.) They deny the remainder, particularly those that are inferential and that would characterize the acts of the Debtor and the Welshes as subjectively fraudulent. They plead a handful of affirmative defenses: the Plaintiff's failure to state a claim on which relief could be granted, and the time-worn "equitable defenses of laches, estoppel, and waiver." They assert the effectiveness of their cancellation of the contract for deed as a defense. They argue that avoidance remedies under fraudulent transfer law do not apply to an effective cancellation of a contract for deed. Finally, they plead that the Debtor "received reasonably equivalent value in return," to "the extent that the Debtor transferred anything of value" in the real estate to them.
The Plaintiff requested summary judgment via a formal motion. The target of the motion is the second of the potential transfers identified in her complaint—the one that would have been effected via the quit claim deed from the Debtor to the Welshes, which was given as part of the settlement of the state-court litigation. The Plaintiff sought judgment, as a matter of law, on Counts II-V of her complaint—i.e., the avoidance or nullification of any transfer to the Defendants that was made when the Debtor gave the deed.
To support the motion, the Plaintiff submitted a body of evidence, mostly documentary in nature. This, she argued, made out a prima facie case under those counts, for avoidance of a transfer of an interest in real estate as a constructively-fraudulent transfer under provisions of the Bankruptcy Code and Minnesota's fraudulent transfer law. She also sought avoidance as an actually-fraudulent transfer under the Bankruptcy Code, using a "badges of fraud" analysis. In the alternative, she argued, the transfer had to be deemed ineffective against her under Minnesota law, in her status as a hypothetical bona fide purchaser under 11 U.S.C. § 544(a).
As the Plaintiff would have it, the granting of any of these expedients would entitle her to recover the value of an undivided one-half interest in the equity in the real estate, measured as of the date of the deed. The recovery would be effected by a money judgment against the Defendants pursuant to 11 U.S.C. § 550(a). She maintained that the amount of that value could be readily liquidated on the record she made.
The unspoken postulate of the Plaintiff's motion was that her evidence was uncontroverted. If that were the case, a grant of summary judgment would be mandated, if the governing law entitled the Plaintiff to relief on the facts thus established. Fed.R.Civ.P. 56(a), as incorporated by Fed. R. Bankr.P. 7056 ("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.").
The Welshes did not make a formal motion for summary judgment in their favor. In their response to the Plaintiff's
The Welshes' request is not presented by motion in the strictest technical sense. However, the Plaintiff and her counsel do not complain of inadequate notice or an inability to respond.
The parties present a welter of issues, but they do not agree as to their logical sequence. The best way to sort this out is to identify the historical and transactional facts that are uncontroverted. They are as follows:
1. The Debtor and Daniel Lumbar were married on October 1, 1994.
2. On October 28, 1994, the Lumbars, as purchasers, entered a contract for deed with the Welshes, as sellers, for the real estate at 1866 Wellesley Avenue in St. Paul, Minnesota.
3. The total purchase price under the contract for deed was $150,000.00. After the crediting of a down payment of $7,500.00, the balance was to be paid with 7% interest. The debt was amortized via monthly payments of $750.00; an interim lump-sum payment of $22,500.00 due on April 1, 1996; and the remaining balance due in full on October 1, 2001.
4. The contract for deed was recorded in the Ramsey County land records on November 7, 1994.
5. In February, 2000 the Welshes conveyed their sellers' interest in the contract for deed to "Raymond J. Welsh and Joan C. Welsh, Trustees, or their successors in trust, under the Welsh Living Trust." This deed was recorded on April 10, 2000.
6. The Lumbars made the monthly payments on an ongoing basis. They did not make the interim lump-sum payment due in 1996, or the final balloon payment due in 2001.
7. The Welshes did not undertake to cancel the contract for deed on either of the defaults on the lump-sum payments. In January, 2002, the Lumbars began making monthly payments of $1,000.00. The Welshes accepted these payments as they were made.
8. In February, 2006, Daniel Lumbar commenced proceedings for the dissolution of the Lumbars' marriage, in the Hennepin County, Minnesota District Court.
9. On May 1, 2006, the Welshes served a notice of cancellation of contract for deed on the Lumbars. In the notice, the Welshes asserted that the amount due was $188,426.15, payment of which would be necessary to avoid the cancellation. The notice of cancellation specified a sixty-day cure period.
11. On June 8, 2006, Daniel Lumbar filed documents in the Ramsey County, Minnesota District Court, presenting a motion for a temporary injunction against the Welshes. He requested equitable relief to toll or defer the cancellation of the contract for deed. The documents bore a caption that named himself as the plaintiff and the Welshes and the Debtor as defendants. However, Daniel Lumbar did not file a complaint with the motion. His motion was heard on June 22, 2006. He had not filed a complaint by that date either.
12. The June 22 hearing was a long and contentious session of legal argument, without the taking of evidence. The state-court judge repeatedly took the Welshes' attorney to task for the perceived inequity of his clients' actions in seeking to divest Daniel Lumbar of the value of his interest in the property. He was especially concerned with two things: the Welshes were seeking to extinguish the purchasers' interest under the contract for deed, before the full (and apparently substantial) value of the equity could be divided in the Lumbars' dissolution proceeding; and the sequence of circumstances suggested collusion between the Welshes and their daughter, the Debtor. Daniel Lumbar's attorney insisted that his client wanted to pay off the full balance of the contract for deed per the notice of cancellation. He repeatedly stated that his client was seeking financing to fund that, but had been stymied by interference from the Welshes; and, he maintained, his client needed additional time to deal with that.
13. In an order and memorandum entered on June 27, 2006, the state court granted a temporary injunction against all of the named defendants, "against further proceedings to effectuate the termination of the contract for deed. . . ." It ordered the escrow of deeds from the Welshes and the Welsh Trust to the Lumbars, pending the closing on a loan to Daniel Lumbar (identified specifically by a numbered "Title Commitment"), and the payment to the Welshes of the full cure amount per the notice of cancellation. It also mandated the Debtor's cooperation in the loan closing, via the execution of all documents necessary to get the loan closed. (The order specified that the Debtor would not be required to assume any personal liability to the lender in connection with the loan.) The injunction was "to expire no later than July 31, 2006 or upon confirmation that Daniel Lumbar [did] not qualify for a loan" in the amount necessary for the cure.
14. After the hearing, the Welshes executed and escrowed the deeds. Daniel Lumbar was approved for a loan, in an amount more than enough to make cure pursuant to the notice of cancellation. He arranged for a closing to occur on July 7, 2006. Despite the mandate of the temporary injunction, Mary Lumbar did not attend the closing. She never executed the documents required of her.
15. On July 17, 2006, Daniel Lumbar filed a complaint in the Ramsey County District Court, which was lodged in the same-numbered court file as the earlier motion for temporary injunction and the
16. In the meantime, the Welshes had taken an appeal from the order for temporary injunction. They also filed a motion in the Ramsey County District Court, seeking to have the temporary injunction dissolved or stayed. Daniel Lumbar filed a motion to have the Debtor held in contempt for her failure to enable the loan closing.
17. The two motions were heard in the Ramsey County District Court on July 17, 2006. After a lengthy (though less contentious) hearing, the state-court judge issued an order on July 25, 2006. He declined to dissolve the temporary injunction, but he stayed it pending entry of decision by the Minnesota Court of Appeals in the Welshes' appeal. The stay was conditioned on the Debtor's execution of all documents that had been required of her for the loan closing, and their escrow. The contempt motion against the Debtor was denied, without prejudice to a renewal were she to fail to execute the closing documents thenceforth.
18. On May 29, 2007, the Minnesota Court of Appeals reversed the Ramsey County District Court's grant of a temporary injunction. Its opinion was designated as unpublished. Lumbar v. Welsh, 2007 WL 1531971. The Court of Appeals held that the trial court had lacked authority to grant interim equitable relief to Daniel Lumbar before an "action" on the contract for deed had been commenced via the filing of a complaint "setting forth [his] causes of action and supporting facts." It also discussed "the underlying merits" of the grant of temporary injunction, "in the interests of fairness and equity." Ultimately, it opined that "the relevant admissible facts [did] not support a reasonable probability of success on [Daniel Lumbar's] oral-modification-of-contract claim." (This undercut Daniel Lumbar's alternate argument against the threshold event of default that enabled cancellation.) It also expressed doubt as to the legal sustainability of his claim against the Welshes for intentional interference with contractual relationships, i.e., that based on their communication to the title company. But ultimately, the Court of Appeals observed how the lapse of time under an ongoing stay of cancellation and the intervening filing of a complaint had made "the procedural posture. . . unique." It remanded after reversing the grant of the temporary injunction. Observing that "the circumstances may have changed," the Court of Appeals suggested that the trial court might "choose to review the motion for temporary injunction and conduct an evidentiary hearing in light of the complaint."
19. After the remand, a motion for dismissal by the defendants was heard in the state trial court in mid-July, 2007. In an order entered on October 8, 2007, the state-court judge denied the motion. He held that Daniel Lumbar had pled facts sufficient to make out claims against the defendants under all 8 counts of his complaint. As an additional dispositive term of that order (but without any extended discussion in his memorandum), he directed that "[t]he cancellation of the contract [was] stayed and [Daniel Lumbar was] stayed from redeeming until this matter [was] adjudicated."
20. On November 7, 2007, the Welshes and the Lumbars executed a settlement and release agreement, pursuant to which the Ramsey County District Court litigation was to be dismissed. Under the relevant terms of the settlement,
21. On November 16, 2007, the Debtor executed a quit claim deed of her interest in the Wellesley Avenue property, in favor of the Welshes. On its face, the deed recites that the "total consideration for this transfer [was] $500 or less."
22. A stipulation of dismissal was filed in the Ramsey County District Court on January 7, 2008. The state-court judge signed the appended order of dismissal with prejudice on the same date.
23. The quit claim deed from the Debtor had not been filed in the Ramsey County land records by the date of the Debtor's bankruptcy filing on December 24, 2008.
24. When the Debtor filed for bankruptcy, she did not schedule an interest in the property as an asset.
25. At all relevant times, the Wellesley Avenue property was not subject to the encumbrance of a mortgage in favor of any third party.
26. When the complaint and answer in this adversary proceeding were filed in mid-2009, the Debtor was still residing at the property.
In some respects, one can see why the Trustee chose to bring her avoidance powers to bear on the Defendants' acts with respect to the Wellesley Avenue property. There is much that smacks of a "family thing" born of blood loyalty—a blunt effort to ice out Daniel Lumbar, to cut him off from any claim to the value of the property. The fact that Joan Welsh's family had generations-deep ties to the real estate only reinforces the image. The Welshes' failure to place the post-cancellation disposition of the property of record puts a surreptitious tinge on the whole process and its outcome. And, the picture of an orchestrated ploy to favor the family alone was strengthened by the bare legal outcome of the events: the Welshes had regained the power to revest the title and ownership in the Debtor, their daughter, after any intervening unpleasantness with third parties had receded.
But such an appearance alone can not direct the outcome of the Plaintiff's effort. That will turn on whether the component transfers are vulnerable to avoidance at the instance of a creditor or trustee in bankruptcy. This is a matter of the law's abstractions. Under most varieties of that abstraction, the naked self-interestedness of the acts and transfer is not relevant.
That much being said, the counts before the Court can be treated on the competing analyses argued by the parties. The discussion will be ordered by the relative viability of the several counts, in the legal sense, starting with the least viable.
11 U.S.C. § 544 enables a trustee in bankruptcy to use certain powers under
In defense, the Defendants argue that they effected and completed a cancellation of the Debtor's interest as purchaser under the contract for deed, pursuant to the stipulation in the state-court litigation, and that revested them with the full interest in the real estate in any case. Were this so, the earlier tender of the quit claim deed would arguably be irrelevant, mere surplusage, if viewed in the broader context of the stipulation and its consequences.
This argument, however, does not go to the act that the Plaintiff posits as the actionable transfer, in seeking summary judgment now: the tender of the quit claim deed, and that act alone.
Simply stated, under Minnesota law, remedies of avoidance under fraudulent-conveyance and fraudulent-transfer statutes do not lie, as to a transfer of an interest in real estate that is exemptible from claims of creditors as homestead. The underlying legal tenet was first enunciated over 130 years ago. Morrison v. Abbott, 27 Minn. 455, 455-456 (Minn. (1880). See also Ferguson v. Kumler, 27 Minn. 156, 6 N.W. 618, 620 (1880); Thysell v. McDonald, 134 Minn. 400, 159 N.W. 958, 960 (1916); Cysewski v. Steingraber, 222 Minn. 221, 24 N.W.2d 266, 269 (1946); State Bank in Eden Valley v. Euerle Farms, Inc., 441 N.W.2d 121, 125 (Minn. Ct.App.1989). The most commonly quoted articulation is itself over 60 years old:
Sisco v. Paulson, 232 Minn. 250, 45 N.W.2d 385, 387 (1950).
This holding derives not only from the basic protection from claims of general unsecured creditors or judgment lienors that Minn.Stat. §§ 510.01-510.02 afford to an interest in real estate used as a dwelling place. It also springs from the additional protection that Minn.Stat. § 510.07 grants to "the proceeds of . . . sale [of homestead real estate] for the period of one year after sale," from seizure by the holder of "any judgment or debt from which [such real estate] was exempt in the owner's hands." The connecting thought is summarized later in Sisco v. Paulson:
Id.
In this adversary proceeding, the Plaintiff's power of avoidance is governed by the Minnesota law she invokes for the substantive basis of her remedy.
In rejoinder, the Plaintiff argues that 11 U.S.C. § 522(g) should be applied to bar the use of a theory of homestead exemption to her bid for avoidance. Under that statute, a debtor in bankruptcy may assert a right of exemption as to property that would be subject to post-avoidance recovery by a trustee, but only where the pre-bankruptcy transfer of the property had been involuntary. So, as the Plaintiff would have it, the preemptive assertion of an exemption right is not available to any party here, because the Debtor voluntarily deeded the real estate to the Defendants.
The Plaintiff's threshold point cannot be denied, as to the limiting effect of
Under the governing substantive law, the Plaintiff lacks a remedy under this count. She is not entitled to judgment on Count IV, and the Defendants are.
11 U.S.C. § 544(a)(3) vests a trustee in bankruptcy with the power to "avoid any transfer of property of the debtor . . . that is voidable by . . . a bona fide purchaser of real property, . . . whether or not such a purchaser exists." The existence and scope of this avoidance power is also fixed by applicable state law. In re Rolain, 823 F.2d 198, 199 (8th Cir.1987); In re Ozark Rest. Equip. Co., Inc., 816 F.2d 1222, 1229 (8th Cir.1987); In re Griffin, 319 B.R. 609, 613 (8th Cir. BAP 2005); In
In Count V of her complaint, the Plaintiff uses this provision to invoke the provisions of Minn.Stat. § 507.34, part of the state's Recording Act, which provides as follows:
She points out that the quit claim deed in question was never filed in the land records for Ramsey County. That, she argues, makes any conveyance effected by the instrument void as to her; and therefore any transfer as between the Debtor and the Defendants must be avoided so as to vest the underlying interest in the bankruptcy estate by operation of 11 U.S.C. § 551.
This theory was treated in Sisco v. Paulson. In that case, the grantee of the judgment debtor's interest in her homestead did not record the deed until after the debtor-transferor's death. The judgment creditor in Sisco v. Paulson pointed out that the deed was not of record when the debtor's occupancy of the property as homestead ceased (i.e., upon her death); so, he argued, his judgment lien had attached at that time. Thus, he maintained, the conveyance of the property had to be void as to him and his lien, due to its unperfected status.
The Minnesota Supreme Court rejected this analysis, holding:
45 N.W.2d at 387.
The facts at bar are not 100% on point, but the differences do not distinguish Sisco v. Paulson from this adversary proceeding. The fact that the Defendants did not have the quit claim deed recorded before the Debtor filed for bankruptcy does not render it vulnerable to avoidance at the Plaintiff's instance. The exempt status of the real estate when the Debtor conveyed it to the Defendants took its transfer out of the purview of the Recording Act, as to any person that otherwise would have a right to rely on the record status of title, i.e., a subsisting, partial interest of record in the Debtor, as a co-purchaser under a recorded contract for deed. Hence, the Plaintiff may not disregard the conveyance to compel avoidance in the estate's favor.
The Plaintiff is not entitled to judgment on Count V either, and the Defendants are.
11 U.S.C. § 548(a)(1)(B) vests a trustee in bankruptcy with a second power to avoid pre-petition transfers of property of a debtor that are deemed constructively fraudulent on creditors. Its language is very similar to corollary constructive-fraud provisions of the UFTA.
Thus, the precept in Minnesota law—that exempt homestead real estate is not capable of fraudulent transfer such as to trigger statutory avoidance remedies— extends to the federally-created remedy of § 548(a)(1). E.g., In re Agnew, 818 F.2d 1284, 1289-1290 (7th Cir.1987) (holding that state law prohibiting recognition of fraudulent conveyance of otherwise-exempt property bars creditor from maintaining adversary proceeding for denial of discharge under 11 U.S.C. § 727(a)(2), when sole cited transfer was of exemptible property); In re Delson, 247 B.R. 873, 875-876 (Bankr.S.D.Fla.2000) (applying Florida law and summarizing past decisions limiting application of § 548 in consequence); In re Robinett, 47 B.R. 591, 592 (Bankr.S.D.Fla.1985) (applying Florida law; citing In re Treadwell, 699 F.2d 1050, 1051 (11th Cir.1983)).
The Plaintiff has no independent fraudulent transfer remedy against the Defendants under § 548 either. The Defendants are entitled to judgment on Count II.
11 U.S.C. § 548(a)(1)(A) gives a trustee in bankruptcy the power to
As the Plaintiff would have it, the record compels a finding of actual intent to remove "the asset which [the Defendants] attempted to shield from Daniel Lumbar's claims . . . also . . . from claims of [the Debtor's] other creditors."
The Plaintiff cites points of fact that are all circumstantial in nature: the positions of parties in relation to one another and the subject assets, over a span of time; the sequence of acts, events, and transactions in relation to the dissolution proceeding and the Debtor's bankruptcy filing; the transfer itself and all of its incidents; and so forth. These, she insists, cumulate as "badges of fraud" in an "overwhelming" fashion. As she would have it, there is only one reasonable finding, of the requisite malign intent, which would mandate summary judgment on Count III.
The Defendants, of course, had a different spin on these scattered points of fact. It need not be recapitulated here; the Plaintiff's argument was so misdirected, and in so many ways, that it merited rejection from the bench. The Defendants were granted summary judgment on this count, at the hearing. The rationale was memorialized on the record. It is appropriate to expand on that a bit.
In the first place, the written articulation of the Plaintiff's theory all accused the Defendants of having actual fraudulent intent. The Plaintiff clearly sees the
Beyond that, the record presented—as abstract and externally-oriented as it was—simply does not support a finding as to what the Debtor herself intended in relation to the real estate, or how her retention or relinquishment of it would bear on the interests of her creditors.
The Plaintiff proffers the following allegations of fact as her "badges":
1. The Welshes had a dual status as recipients of the transfer and as "insiders" to the Debtor, within the meaning of 11 U.S.C. § 101(31)(A)(i).
2. The Debtor continued to occupy the real estate after she gave the deed to the Welshes, and through the course of this litigation.
3. The Debtor retained "equitable title to the real estate," because the Defendants had never completed or perfected a cancellation of her purchaser's interest.
4. The Debtor had attempted a "concealment" of the relevant events and circumstances. However, the only cited act of concealment was the one-word description of the terms of settlement of the state-court litigation as "confidential," in the statement of financial affairs for the Debtor's bankruptcy case.
5. The Defendants' receipt of the quit claim deed was related (in some unspecified sense) to the past acts of the Debtor and the Defendants in "attempting to shield the equity in the real estate from claims of Daniel Lumbar in the dissolution proceedings."
6. The value of the Debtor's interest as purchaser, stated as $170,000.00, was the Debtor's "only significant unencumbered asset."
7. The Debtor received no reasonably equivalent value for giving the quit claim deed to the Defendants.
8. When she gave the deed, the Debtor was insolvent, in the sense that her "liabilities exceeded her non-exempt assets."
As ruled at the hearing, these scattered abstractions of placement and sequence did not ignite in common, to expose a debtor purposely depriving her own creditors of the value of a non-exempt asset. They did not even smolder. There was no direct evidence going to the Debtor's intent at all. There was nothing in the array of scattered surrounding circumstances, on which to conclude that the Debtor was even considering the interests of her creditors when she gave the deed, some months before the eventuality of her bankruptcy filing.
To mix the metaphor, proof of intent under a badges-of-fraud analysis is not like a carnival dart game, where simply popping a given number of balloons entitles one to the big prize. Yet that is the image that best matches to the Plaintiff's approach on this count, for this motion. The fatal problem with the Plaintiff's presentation is that there is no overriding logical sense of an intentional scheme directed at the Debtor's creditors, that culminated
In coming forward on a motion under Rule 56, the Plaintiff was deemed to be taking her very best shot at a case-in-chief, the same one she would bring forward at trial through equivalent live evidence. The showing she relied on was so deficient that it merited a doubly-summary treatment—not only an adverse determination as a matter of law, despite the fact that her opponents had not expressly requested that, but a terse rejection from the bench at hearing. The present discussion is cumulative to that memorialization. It all evidences why the Defendants are entitled to judgment on Count III.
Under these rulings, the Defendants are entitled to judgment on most of the counts of the Plaintiff's complaint.
Thus, the parties will have to litigate— or consensually dismiss—the Plaintiff's remaining requests for relief before judgment may be entered on the present rulings.
IT IS THEREFORE ADJUDGED AND ORDERED:
1. The Plaintiff's motion for summary judgment is denied, in its entirety.
2. The Defendants are entitled to summary judgment in their favor, on Counts II-V of the Plaintiff's complaint, in accordance with Terms 3-5 as follows.
3. The remedy of avoidance as a fraudulent transfer under 11 U.S.C. §§ 544 and 548(a) and Minn.Stat. §§ 513.44-.45 is not available to the Plaintiff as a trustee in bankruptcy, as to any transfer that the Debtor made to the Defendants of her interest as purchaser under a contract for deed for the property located at 1866 Wellesley Avenue, St. Paul, Ramsey County, Minnesota, via the execution and tender of a quit claim deed dated November 16, 2007.
4. The remedy of avoidance under 11 U.S.C. § 544 and the Minnesota law governing
5. Hence, the Plaintiff is not entitled to avoid any such transfer to the Defendants, or to recover the value of the subject property from the Defendants.
6. The entry of a judgment on Terms 3-5 shall be deferred, pending final disposition of the Plaintiff's requests for relief under all other counts of her complaint.
By comparison, Minn.Stat. § 513.44(a)(2) provides:
