Katherine A. Constantine, United States Bankruptcy Judge.
This matter came before the court on the plaintiff-trustee's second amended complaint pursuant to 11 U.S.C. §§ 541, 542, 544(b), 550 and 551 and Minn.Stat. §§ 513.44, 513.45 and 513.47, to avoid and recover from the defendant an alleged fraudulent transfer.
This controversy presents a story of real estate endeavors undertaken together by spouses, followed by a decision to dissolve their marriage, and now acrimonious disagreement regarding certain facts about those endeavors. Their marriage dissolution (not yet resolved in pending state court litigation) has inevitably complicated the outcomes of those earlier transactions executed during the marriage, especially in the context of the husband's intervening bankruptcy case. In this proceeding, the trustee of the husband's chapter 7 bankruptcy estate is seeking to avoid, as fraudulent, a purported transfer made to the non-debtor wife during the marriage (the "Transfer").
The debtor, Kevin Goodspeed, and the defendant, Michele Dolan, married in 2002. At that time, Dolan owned a home in St. Paul (the "St. Paul Property"), which was encumbered by a mortgage lien of approximately $56,000, securing a note for $56,000 in favor of Dolan's mother. Goodspeed owned a home located in Robbinsdale (the "Robbinsdale Property"), which was encumbered by a mortgage of approximately $58,000.
In February 2003, Goodspeed refinanced the Robbinsdale Property with a note and mortgage of $113,250 to World Savings, and withdrew approximately $50,000 in equity out of the property and used some of those funds to make repairs to the Robbinsdale Property. He loaned $20,000 of those funds to Dolan's cousin. Dolan was not a co-obligor on the note and mortgage of $113,250 to World Savings for the Robbinsdale Property.
On October 14, 2004, Dolan executed a quitclaim deed creating a joint tenancy in the St. Paul Property with Goodspeed. The deed was recorded on October 15, 2004. On October 20, 2004, Dolan's mother forgave the indebtedness on the St. Paul Property and a satisfaction of mortgage was duly filed. On October 25, 2004, Goodspeed signed a note for $200,000 secured by a mortgage of $200,000 against the St. Paul Property. Dolan was not a co-obligor on the note, but consented to the mortgage.
On November 4, 2004, Dolan and Goodspeed used $125,096 of the mortgage proceeds from the St. Paul Property to purchase real estate located in Shakopee, Minnesota (the "Shakopee Property"). The purchase of the Shakopee Property was a cash purchase; no mortgage loan financing was obtained. The Shakopee Property was titled in Dolan's and Goodspeed's names as joint tenants, and it was unencumbered until 2007, as set forth below.
In April 2006, Goodspeed sold the Robbinsdale Property. In March 2007, the St. Paul Property was appraised at a value of $350,000,
Around the same time in 2007, the tax assessed value of the Shakopee Property was $150,300 and Goodspeed took a home equity loan of $121,000 against the Shakopee Property. He was the sole obligor on the note for the home equity loan of $121,000 against the Shakopee Property, and he withdrew cash of $112,330.
On April 5, 2007, the combined cash proceeds of $189,000 from the equity loan on the Shakopee Property and the refinance loan of the St. Paul Property were used (constituting the "Transfer") to purchase
The Florida Property was titled solely in Dolan's name. Certain expenses for improvements to the Florida Property were charged to the parties' joint account at Wells Fargo in the spring of 2007. The Florida Property was rented in June 2007, and monthly rents were deposited into the parties' joint account at Wells Fargo.
The parties separated in 2010, and on March 8, 2010, Dolan filed a petition for dissolution of marriage.
The marriage of Goodspeed and Dolan was dissolved pursuant to a "Stipulated Partial Judgment and Decree to Dissolve Marriage" dated April 15, 2013, but there was no order entered identifying the parties' property interests or dividing and awarding marital assets.
In this case, the trustee asserts a fraudulent transfer avoidance action under state law. The Bankruptcy Code allows for avoidance under state law pursuant to § 544(b), which provides:
11 U.S.C. § 544(b)(1) (emphasis added).
Section 544(b) requires both satisfaction of the requirements of the applicable state law and the additional requirement that for any avoidance of a transfer under this section the trustee must show that there is "a creditor holding an unsecured claim that is allowable under section 502 of this title. . . ." Section 502 adds a timing reference, that is, the creditor must be holding the claim as of the date of the filing of the petition. Taken together, these requirements are often referred to as the predicate creditor, and they have been discussed at length by various courts.
These statements are insufficient to establish the existence of a predicate creditor and were denied in the answer. See e.g., In re Petters, 495 B.R. 887, 895-901 (Bankr.D.Minn.2013). Had a Rule 12(b)(6) motion to dismiss been brought, with nothing more, it likely would have been granted.
However, the petition, schedules, statement of financial affairs and claims docket which were admitted into evidence at trial pursuant to stipulation suggest that a predicate creditor exists. Assuming arguendo then, that the existence of the required predicate creditor is sufficiently established, and to forestall any future potential arguments regarding the predicate creditor requirement, the substantive elements applicable in this adversary proceeding under state law as asserted by the trustee have been reviewed, as set forth below. The ultimate outcome of this case is based on the failure of the insolvency elements under the applicable state law.
In this case, the applicable state law is the Minnesota Uniform Fraudulent Transfer Act ("MUFTA"). Minn.Stat. §§ 513.41-513.51. The purpose of MUFTA
In Counts I and II of the amended complaint, the trustee seeks to avoid and recover, for the benefit of the bankruptcy estate, the debtor's Transfer of his alleged interest in the equity from the St. Paul and Shakopee Properties to the defendant (to purchase the Florida Property).
Under Count I, the trustee seeks avoidance of the Transfer pursuant to Minn. Stat. § 513.45(a) as a transfer fraudulent as to present creditors.
Minnesota Statute § 513.45(a) provides:
Minn.Stat. § 513.45.
"The act defines `debtor' as `a person who is liable on a claim' and defines `creditor' as `a person who has a claim.'" Reilly v. Antonello, 852 N.W.2d at 698, citing Minn.Stat. § 513.41(4), (6).
It is undisputed that the debtor and the defendant used equity proceeds of the various properties, in excess of the amount used to purchase the Florida Property, to pay off their debts. But, of course, the banks funding the equity and refinancing loans remained unsatisfied, and the banks' claims arose before the alleged Transfer
"[T]ransfer" as used in § 513.45(a) is defined broadly as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, release, lease, and creation of a lien or other encumbrance." Reilly v. Antonello, 852 N.W.2d at 699, citing Minn.Stat. § 513.41(12).
Assuming that the property in question, in this case the equity proceeds from the St. Paul and Shakopee Properties, constituted an asset of the debtor,
Value is defined for purposes of MUFTA as follows:
Minn.Stat. § 513.43(a).
The debtor was solely liable for the debts that procured the equity. The debts were secured by the real properties providing the equity, but only the debtor was liable on the notes. The defendant consented to the mortgages, but she was not a borrower on the notes.
The defendant contends that in order to answer the question of reasonably equivalent value with respect to the Transfer, the value of what the debtor transferred must first be determined. In this case, the defendant argues, the value of what the debtor transferred is zero because the equity funds transferred constituted the defendant's non-marital asset. Accordingly, the debtor received nothing in exchange for the Transfer because the debtor gave nothing and therefore there was an equal exchange, and reasonably equivalent value would therefore be a non-issue in this case. As discussed below, however, the determination of value exchanged, if any, will not be made by this court. It is unnecessary to do so because the element of insolvency under § 513.45(a) is not met.
Insolvency is the last element to be considered to resolve Count I. Insolvency is
Minn.Stat. § 513.42.
Under § 513.45(a), for a transfer to be fraudulent, the debtor must have been insolvent at the time of the Transfer or he must have been rendered insolvent as a result of the Transfer. As recited above, there are two definitions, or tests, for insolvency. The first test, the test under § 513.42(a), and commonly referred to as the balance sheet insolvency test, is not satisfied in this case. The parties contend that the insolvency issue turns on whether the debtor can claim all, or only half, of the value of the St. Paul and Shakopee Properties, which were held by the parties in joint tenancy, as an asset on the debtor's financial balance sheet as of the time of the Transfer.
MUFTA defines "asset" as property of a debtor, "but the term does not include: (i) property to the extent it is encumbered by a valid lien; (ii) property to the extent it is generally exempt under nonbankruptcy law; or (iii) an interest in property held in tenancy by the entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant." Minn.Stat. § 513.41(2).
As encumbered interests of the debtor at the time of the Transfer, only the Properties' equity available to the debtor is an asset for purposes of the Transfer and the insolvency test. Minn.Stat. § 513.41(2)(i). But, that limited equity interest may be excluded from the definition of "asset" if it is exempt under nonbankruptcy law. Minn.Stat. § 513.41(2)(ii). See Citizens State Bank Norwood Young American v. Brown, 849 N.W.2d 55, 65 (Minn.2014), citing Minn.Stat. § 513.41(2)(ii) ("Because the [MUFTA] definition of `insolvent' uses the term `asset,' exempt property is not included in determining" insolvency).
"Debt" is defined as "liability on a claim," Minn.Stat. § 513.41(5). But, for purposes of insolvency, MUFTA provides that "[d]ebts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset." Minn. Stat. § 513.42(e). Without this provision, a balance sheet would not be balanced; it would exclude assets while including related debt.
At the time of the Transfer, the debtor and the defendant occupied the St. Paul Property as their homestead. Pursuant to Minn.Stat. § 513.41(2)(i) and (ii), the property and any equity in that property, as an exempt asset, cannot be included in the insolvency calculation.
Restated and in summary, the St. Paul Property is not an asset in determining whether the debtor was insolvent because: (a) if the property and debt values are equivalent then the property is not an "asset" pursuant to § 513.41(2)(i); or (b) if there is some equity then the equity is exempt and thus not an "asset" pursuant to § 513.41(2)(ii). The related debt is also not to be considered in determining insolvency. Minn.Stat. § 513.42(e).
Likewise, the court does not need to decide whether the debtor could properly claim all or only half of the value of the Shakopee Property on his balance sheet. The approximate value of the Shakopee Property around the time of the Transfer was $150,300.
The only other asset of the debtor at the time of the Transfer (identified by oral testimony at trial) was a boat worth approximately $10,000. Thus, for purposes of the balance sheet insolvency test, the debtor's assets were $29,300 of equity in the Shakopee Property plus a $10,000 boat. On the debt side of the balance sheet, there is zero. The debtor had no other debts at the time, or at least no evidence established any, and the testimony at trial was undisputed that the debtor's non-mortgage related debts were all paid. Accordingly, the debtor was not insolvent at the time of the Transfer or as a result of the Transfer under Minn.Stat. § 513.42(a).
The second insolvency test, the test under § 513.42(b), also was not satisfied in this case. Notwithstanding the trustee's reliance on circumstantial evidence such as tax returns to indicate the unlikelihood of the debtor's ability to pay at the time, the evidence established that the debtor was, in fact, generally paying his debts as they became due at the time of the Transfer and for a number of years following the Transfer. The evidence also unequivocally established that the cause of the debtor's financial distress and eventual need for bankruptcy relief was not the Transfer, but primarily the divorce commenced approximately three years after the Transfer, and the financial stress naturally resulting from separating the formerly combined marital household.
Minnesota Statute § 513.44(a)(2) provides:
Minn.Stat. § 513.44(a)(2).
The elements under § 513.44(a)(2) are largely the same as those under § 513.45(a), except they apply with respect to present and future creditors, and the insolvency test is akin to the § 513.42(b) paying-debts definition. To the extent that the trustee pleaded the complaint, in part, using the language of § 513.44(a)(2)(i), it was not an argument credibly developed at trial and is not supported by the record in any event, based upon the debtor's actual continuing ability to fund all of his ongoing obligations for years following the Transfer.
There is also no evidence to suggest that, at the time of the Transfer, the debtor intended to incur, or believed or should have believed that he would incur, debt beyond his ability to pay as due, as is required for a viable claim under § 513.44(a)(2)(ii). In fact, as already noted, the debtor did not fail to generally pay his debts as they came due for the three years between the Transfer and the collapse of the marriage. The record supports that the divorce, and the financial difficulties of actual separation, and not the Transfer or the other transactions involved here, ultimately caused the debtor to file bankruptcy.
Accordingly, the trustee's complaint fails on both Counts I and II for failure to establish the requisite insolvency under Minn.Stat. §§ 513.44 and 513.45.
"The question remains . . . whether [the] property constitutes an `asset' [of the debtor] so that its disposition might then qualify as a `transfer.'" In re Wintz Companies, 230 B.R. 848, 860 (8th Cir. BAP 1999). "Where the term `asset' does not apply to property which has been conveyed, neither then does the MFTA." Id. (citations omitted).
Even if the trustee's complaint did not fail based upon the lack of the debtor's insolvency under MUFTA, it could still fail if, under other applicable Minnesota law,
Accordingly, there is cause to question, but this court need not and will not decide, whether the loan proceeds used to purchase the Florida Property in fact even constituted an asset of the debtor, in whole or in part, at the time of that transaction. Those funds may have been, entirely or partially, non-marital property of the defendant. That the parties held the St. Paul and Shakopee Properties in joint tenancy at the time of the transfer does not end the inquiry.
In this case, the defendant acquired the St. Paul Property before she married the debtor, and the funds used to satisfy the pre-marital loan and mortgage on the St. Paul Property may have been, as alleged by the defendant, either gifted solely to her or inherited solely by her (by debt forgiveness). The defendant contends both that the St. Paul Property and the cash proceeds subsequently derived therefrom were, remained, and continue to be traceable as non-marital property. She claims that the quitclaim deed executed in 2004 to create a joint tenancy with the debtor in the St. Paul Property was solely for convenience, to permit the debtor to borrow on a note subject to a mortgage against the St. Paul Property, because the defendant herself lacked the creditworthiness to qualify for a mortgage loan.
The debtor claims that he and the defendant intended to purchase and own the Florida Property together in joint tenancy, and that he believed that they did own that property together and that it was titled in both of their names as joint tenants. Of the funds that flowed from the equity of the various properties, some part was used to pay off debts of the husband and the wife, either together or individually, and some part was used for improvements to some of the properties. The original and appreciation values of the properties must necessarily be attributed to the debtor and to the defendant as non-marital or marital property, and such findings would have contributed to an award of interests had that part of the dissolution proceedings proceeded to finality. These are not uncomplicated matters of family law.
Even if the Transfer was avoidable pursuant to Minn.Stat. §§ 513.44 or 513.45, this appears to be the rare case where there would be no benefit to the bankruptcy estate to avoid and recover the Transfer. Section 550 of the Bankruptcy Code requires a trustee's recovery of an avoided transfer to be of benefit to the estate. See 11 U.S.C. § 550(a). While this case was under advisement, the trustee caused to be filed a notice in the main case which provides, in relevant part, that "[t]he amount on hand for distribution by the trustee exceeds the total amount of estimated administrative expenses and all claims which have been filed to date," and extended the deadline for filing claims.
It is well-settled that notwithstanding the limitations on a creditor's remedy under MUFTA,
The recovery beyond the limitations of state law, however, must still provide a benefit to the estate, and not just a benefit to the debtor. See Wellman v. Wellman, 933 F.2d 215, 218 (4th Cir.1991). Whether there is a benefit to the estate depends on a case-by-case, fact-specific analysis. Id. This is not the usual case in which an increase in dollars to the estate results in a patent benefit to the estate. In this case, the increase in dollars to the estate which would result from the requested relief would not provide a benefit to the estate. In this case, the trustee has advised that the amount on hand for distribution from the estate already exceeds the total amount of estimated administrative expenses and all claims. Thus, in this case, the only party to benefit from avoiding and recovering the Transfer would be the debtor.
Such a benefit to the debtor would be inappropriate. The provisions of MUFTA "protect creditors rather than transferors of debt." See Bartholomew v. Avalon Capital Group, Inc., 828 F.Supp.2d 1019, 1025 (D.Minn.2009). "Only creditors are entitled to remedies under the UFTA." Id. citing Minn.Stat. §§ 513.47, 513.48(b). Bankruptcy trustees (and debtors-in-possession) are the exception.
As stated in the Murphy decision, "Congress could not have intended Section 548 to abrogate state law obligations and allow debtors to avoid the state law consequences of their actions and to reap `a windfall merely by reason of the happenstance of bankruptcy.'" Murphy, 331 B.R. at 124. Under the facts of this case, where avoidance of the Transfer would benefit only the debtor, there is no benefit to the estate to recover the Transfer and it should not be recovered. Moreover, doing so would constitute an unnecessary infringement upon the policy of the state law, as expressed by its terms, that the provisions of the fraudulent transfer act are intended to protect creditors, not transferors. There is no federal bankruptcy interest in doing so when there is no harm to creditors. See Murphy, 331 B.R. at 126.
Recovering the Transfer or its value is especially inappropriate in this case as it could constitute an unnecessary interference with the pending family court proceedings involving material, substantive issues of state law which may be appropriately determined by the state court. The bankruptcy court should not be a means to circumvent the family court's process of determining property interests and making awards of property in a marital dissolution proceeding when the only benefit to the bankruptcy estate would flow to the alleged transferor debtor-spouse.
Regarding Counts I and II, the evidence failed to demonstrate the element of insolvency required by MUFTA. And, even if the Transfer had been avoidable, it appears that its avoidance would not confer a benefit upon the estate as required by the Bankruptcy Code.
With respect to Counts III and IV of the complaint, the court elected to abstain. Based upon the review of this entire matter, abstention from Counts III and IV should be by dismissal. There is no benefit to the estate to be gained based upon any outcome of those claims, and so there is no reason to expect that these matters will reappear in the bankruptcy context.
Accordingly, IT IS ORDERED:
LET JUDGMENT BE ENTERED ACCORDINGLY.
"In order to avail himself of the avoidance powers contained in section 544(b), the trustee must show the existence of an actual unsecured creditor holding an allowable unsecured claim who could avoid the transfer in question under" applicable state law. Stalnaker v. DLC, Ltd. (In re DLC, LTD.), 295 B.R. 593, 601-02 (8th Cir. BAP 2003), aff'd Stalnaker v. DLC, LTD., 376 F.3d 819, 823 (8th Cir.2004) ("11 U.S.C. § 544(b) authorizes the trustee to exercise an existing unsecured creditor's right to avoid a transfer if the creditor holds such a right under non-bankruptcy law"); In re Petters Co., Inc., 495 B.R. at 895, citing In re Marlar, 267 F.3d at 754. "However, it must be `an actual unsecured creditor [of the debtor in the case,] holding an allowable unsecured claim.'" In re Petters Co., Inc., 495 B.R. at 895, citing In re Wintz Cos., 230 B.R. 848, 859 (8th Cir. BAP 1999) (quoting Sender v. Simon, 84 F.3d 1299, 1304 (10th Cir.1996) (interior quotes and citation omitted)).
Likewise, while Count I was pleaded in the complaint with reference only generally to § 513.45 but with allegations specifically under § 513.45(a), the trustee's trial brief characterized Count I as actionable under both § 513.45(a) and (b). Count I was predominantly developed and argued in this case, and is analyzed at length in this decision, under § 513.45(a). Section 513.45(b) provides for avoidance of a fraudulent transfer made to an insider for an antecedent debt when the debtor was insolvent and the insider had reasonable cause to believe that the debtor was insolvent. See Minn.Stat. § 513.45 (b). To the extent that the trustee intended to seek relief under § 513.45(b), a claim under § 513.45(b) would fail in any event because the debtor was not insolvent, which is an essential element of § 513.45(b). Insolvency is more fully discussed in this decision under the analysis of Count I.
