Decision Denying the Motion of the Chapter 7 Trustee for Summary Judgment against Defendants the Estate of Jane S. Telfair and the Jane S. Telfair Declaration of Trust Dated February 1, 1999
GUY R. HUMPHREY, Bankruptcy Judge.
I. Procedural Background and Findings of Fact
On January 31, 2013, the Chapter 7 Trustee, John Paul Rieser (the "Trustee") commenced an adversary proceeding and asserted in his complaint that the debtor, Dr. M. Donald Hayes ("Hayes") fraudulently transferred a collection of antiques and artwork to his elderly mother, Jane S. Telfair ("Telfair"). Alternatively, the Trustee has argued that some or all of this collection was not transferred at all, but was Hayes' property on the petition date and, is, therefore, property of the estate and subject to turnover to the Trustee. Telfair passed away on September 2, 2013 and the Estate of Jane S. Telfair, for which Hayes is the executor (the "Telfair Estate"), and the Jane S. Telfair Declaration of Trust Dated February 1, 1999 (collectively, the "Telfair Trust and Estate") were substituted as party defendants.1 See doc. 80, Trustee Exhibits A-2 (copy of the declaration of trust) and A-3 (last will and testament of Telfair). The Trustee filed an amended complaint on June 15, 2015 to substitute the necessary parties as defendants and moved for summary judgment on September 21, 2015.
Hayes filed a petition for relief under Chapter 7 of the Bankruptcy Code on February 1, 2011. Hayes did not schedule or reference a large and significant collection of antiques, art and jewelry, the bulk of which is referred to in this litigation as the "Americana Collection." The Trustee alleges that Hayes informed the Trustee at the meeting of creditors that the Americana Collection had been transferred to Telfair in October 2004, but the transcript was not included in the summary judgment motion as evidence. At the time of this purported transfer, Telfair was 84 years old. Telfair was 93 years old when Hayes' bankruptcy petition was filed. Hayes asserts in an affidavit that he was solvent at the time of the transfer. doc. 86, Hayes affidavit, ¶ 2.2 The only documentation of this transfer is a short hand-written note (the "Note") apparently written by Hayes and signed by Telfair that failed to describe any consideration for the transfer.3 doc. 86, Telfair Trust and Estate Exhibit A. However, Hayes' affidavit states that Telfair sold some of the Americana Collection to pay "Fifth Third Bank in excess of $200,000 on her loans," but provides no other information in regard to those loans. Hayes Affidavit, ¶ 6. In the answers of the Telfair Trust and Estate (docs. 74 & 75), they plead that Hayes borrowed $200,000 from US Bank which was secured by "deposit investment accounts" of Telfair. The Telfair Trust and Estate assert that Hayes verbally promised Telfair that he would repay the loan. When Hayes was unable to pay US Bank, the bank setoff $98,603 from her investment accounts. Hayes claims that the transfer of the Americana Collection was for consideration and to prevent US Bank from seizing the Americana Collection to repay these loans.
It appears undisputed that the Americana Collection was never physically transferred to Telfair's residence. Instead, the Americana Collection largely remained with Hayes at his separate residence. The explanation that Hayes gives for this fact is as follows: "Several of the items in the collection were subsequently sold by Jane S. Telfair, and the proceeds of the sale were applied to the debts of Jane S. Telfair. . . . The remainder of the collection remain in the home of the Debtor where the items could be later displayed. Jane S. Telfair regularly entertained guests in the home of the Debtor. Jane S. Telfair's home was not suitable to display or store the Americana collection. . . . The Collection remains in the home of the Debtor." doc. 80, Trustee Exhibit A-1 (response to interrogatory 4 by Hayes, as executor of the Telfair Estate).
The Trustee asserts that, in 2006, Hayes, through written financial statements, represented to Fifth Third Bank that he was the actual owner of the Americana Collection and valued the collection at $1,593,000, but the Telfair Trust and Estate denied these allegations in its answers. doc. 69, exhibit B; docs 74 & 75. Hayes states that it was "err and oversite [sic] on my part to have listed the art collection on an application for a loan to Fifth Third Bank after the gift to my mother." Hayes Affidavit, ¶ 5. In addition, the Trustee attached a May 29, 2010 statement from an auction house showing what is apparently part of the Americana Collection being sold. Trustee Exhibit E. The confirmation statement is listed as prepared for Telfair. Hayes filed his bankruptcy petition approximately eight months later.
Separate from the issue of the disputed transfer of the Americana Collection in 2004 is a transfer of $138,142 of art, jewelry and antiques sometime in 2007 or 2008, also from Hayes to Telfair (the "2007/2008 Transfer"). Directly related to the 2007/2008 Transfer, Hayes plead guilty, in March 2015, in the United States District Court for the Southern District of Ohio, to one count of violating 26 U.S.C. § 7206(1). That statute provides that "[a]ny person who . . . [w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter . . . shall be guilty of a felony . . . ." Specifically, Hayes admitted, as charged in the Information of the United States Attorney, that in completing Form 433-A [Collection Information Statement for Wage Earners and Self-Employed Individuals], under penalty of perjury, and filing the statement with the IRS in July 2009, he failed to report assets transferred for less than full value. The 2007/2008 Transfer was by gift and Hayes knew the form was not completed in a true and correct manner. Hayes apparently did so to avoid collection on past federal tax liabilities, but it ultimately did not affect his tax liability. See Trustee Exhibits B-D.
Finally, the Telfair Estate is being administered in the Clinton County Ohio Court of Common Pleas. From the summary judgment record, it appears that the Americana Collection has not been listed in the inventory and Schedule of Assets for the Telfair Estate.4
II. Analysis
A. Turnover of the Americana Collection as Property of the Estate
The Trustee asserts that the Americana Collection was never transferred and that the Telfair Estate or Telfair Trust needs to turn over to him that collection pursuant to § 542 of the Bankruptcy Code.5 Section 542(a) provides, in relevant part, that "an entity . . . in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title . . . shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate." 11 U.S.C. § 542(a). Turnover requires "that the asset to be turned over must be property of the debtor's bankruptcy estate." Lawrence v. Commonwealth of Ky. Transp. Cabinet (In re Shelbyville Rd. Shoppes, LLC), 775 F.3d 789, 793 (6th Cir. 2015). The Trustee's rights to turnover under § 542 are an "enabling provision" and flow from, and are limited by, the debtor's right to the property on the petition date. Id. at 794.
Property of the estate includes "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Under this broad definition, the Trustee asserts that Hayes had both an equitable and legal interest in the Americana Collection on the petition date. The Bankruptcy Code defines transfer, in relevant part, as "each mode, direct or direct, absolute or conditional, voluntary or involuntary, of disposing of or parting with—(i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D). Ohio law has a similar definition of transfer. See Ohio Rev. Code § 1336.01(L) ("`Transfer' means every direct or indirect, absolute or conditional, and voluntary or involuntary method 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.").
The Note is some evidence of a transfer, although it raises the reasonable question of why an individual would, counter-intuitively, decide to gift a valuable collection to a very elderly parent. The only explanation for this asserted transfer is that some of the Americana Collection was sold by Telfair to pay $200,000 toward unspecified loans to Fifth Third Bank [Hayes affidavit, ¶ 6], although this statement and the Hayes Trust and Estate answers to the complaint discussed earlier leave unanswered questions about the nature of these loans, including whether Hayes or Telfair was the borrower. The further undisputed fact that the Americana Collection remained physically in Hayes' residence also raises a question about whether a transfer did in fact take place at all. In addition, although Hayes describes it as an oversight and error, Hayes represented to Fifth Third Bank that he, and not Telfair, owned the Americana Collection. Another salient fact is that it appears that the Americana Collection is not listed as part of the assets of the Telfair Estate, perhaps suggesting Hayes has maintained his interest in the Americana Collection. The last pertinent fact in this record is the criminal conviction of Hayes for failing to disclose the 2007/2008 Transfer of assets to Telfair. He, ironically, asserts his pleas to that offense and his conviction support that a transfer occurred. However, the guilty plea is not preclusive of the issue before this court as to the whether a transfer of the Americana Collection occurred, which appears to be a completely separate transfer at a different time.
Accordingly, the record reveals a material issue of fact as to whether the Americana Collection, in part or whole, was transferred by Hayes to Telfair as the Note indicates. If the Americana Collection was in fact transferred to Telfair, then the Trustee's § 542 count for turnover of the Americana Collection must fail unless the transfer is first avoided. If the Americana Collection was not transferred, a turnover order against the defendants would be appropriate to the extent the defendants are in possession of the property. For these reasons, the court denies summary judgment on the § 542 count and determines the § 542 turnover count, the First Claim of the Amended Complaint, should be set for trial to determine whether the Americana Collection is property of the estate which must be turned over to the Trustee.
B. Fraudulent Transfer Analysis
1. Generally
The Trustee asserts that the 2007/2008 Transfer was a fraudulent conveyance and he is entitled to summary judgment.6 Under § 548 of the Bankruptcy Code, the Trustee argues, as will be further explained, that the 2007/2008 Transfer was both an actual and constructively fraudulent transfer. Further, the Trustee brings his fraudulent transfer claims under § 544(a)(3), which permits him to seek avoidance under applicable state law, in this instance the Ohio Uniform Fraudulent Transfer Act ("UFTA"). The Trustee bears the burden of proof for these claims. UFTA and § 548(a)(3) are "substantially similar both in terms of rights, remedies, and defenses." Slone v. Lassiter (In re Grove-Merritt), 406 B.R. 778, 789 (Bankr. S.D. Ohio 2009). However, UFTA has a four year reach-back period from the petition date whereas § 548 has a two year reach-back period. Compare 11 U.S.C. § 548(a)(1) and Ohio Rev. Code § 1336.04(A). In addition, the burden of proof under UFTA is clear and convincing evidence, rather than the preponderance of the evidence standard for § 548. Grove Merritt, 406 B.R. at 793.
2. A Material Issue of Fact Exists About Whether the 2007/2008 Transfer Occurred Within the Four Year UFTA Reach-Back Period
For the 2007/2008 Transfer, the Trustee has not provided any evidence of the exact date of the transfer (or dates of the transfers if there were multiple transfers), but only seeks summary judgment based on UFTA. As the petition date was February 1, 2011, it appears likely, but it is not certain, that the 2007/2008 Transfer occurred within the four year reach-back period allowed by UFTA. Without specific dates, the court finds that there is a material issue of fact as to whether the 2007/2008 Transfer was within the four year UFTA reach-back period. For this reason alone, the court denies summary judgment as to the 2007/2008 Transfer.
3. A Material Issue of Fact Exists About Whether the 2007/2008 Transfer to the Telfair Trust and Estate was an Actual Fraudulent Transfer Under UFTA
To show actual fraud, "[a] transfer made or an obligation incurred by a debtor is fraudulent as to a creditor, whether the claim of the creditor arose before, or within a reasonable time not to exceed four years after, the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor." Ohio Rev. Code § 1336.04(A). As noted, the burden of proof is on the Trustee to establish a fraudulent conveyance under UFTA by clear and convincing evidence. Daneman v. Stanley (In re Stanley), 384 B.R. 788, 799 (Bankr. S.D. Ohio 2008).
As actual fraud is rarely established by direct evidence, courts look to circumstantial evidence, including certain "badges of fraud" to determine if assets were transferred with the requisite intent. Id. Ohio law lists the following non-inclusive factors to consider:
(1) Whether the transfer or obligation was to an insider;
(2) Whether the debtor retained possession or control of the property transferred after the transfer;
(3) Whether the transfer or obligation was disclosed or concealed;
(4) Whether before the transfer was made or the obligation was incurred, the debtor had been sued or threatened with suit;
(5) Whether the transfer was of substantially all of the assets of the debtor;
(6) Whether the debtor absconded;
(7) Whether the debtor removed or concealed assets;
(8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) Whether the debtor was insolvent7 or became insolvent shortly after the transfer was made or the obligation was incurred;
(10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred;
(11) Whether the debtor transferred the essential assets of the business to a lienholder who transferred the assets to an insider of the debtor. Ohio Rev. Code § 1336.04(B). If a sufficient number of badges of fraud exists, a presumption of fraudulent intent must be rebutted by the transferee. Stanley, 384 B.R. at 800. A "hard-and-fast rule" does not exist as to the number of badges needed. Id.
In this instance, certain badges of fraud can be readily seen. The 2007/2008 Transfer was to an insider. Ohio Rev. Code § 1336.01(G)(1)(a) (defining a relative of a debtor as an insider). Hayes maintained the assets in question at his residence and, therefore, retained possession and perhaps control over them. Hayes' financial fortune, by his own evidence, had significantly declined by the time of the 2007/2008 Transfer, but whether he was insolvent from a cash flow or balance sheet perspective at that time is not clear from this record. The conviction concerning the failure to disclose the 2007/2008 Transfer to the IRS as being for less than full value is quite probative but, in and of itself, does not resolve the question. A transfer for less than full consideration does not mean the transfer is fraudulent, although the circumstances of doing so are highly suggestive of fraudulent intent. Nevertheless, the court believes a trial in which all the relevant facts and circumstances of the 2007/2008 Transfer and his conviction can be addressed is appropriate and declines to enter summary judgment as this time.
4. A Material Issue of Fact Exists About Whether the 2007/2008 Transfer to the Telfair Trust and Estate was a Constructively Fraudulent Transfer Under UFTA
Alternatively, the Trustee argues the 2007/2008 Transfer was constructively fraudulent. A transfer is constructively fraudulent if "[w]without receiving a reasonably equivalent value in exchange for the transfer or obligation, and if . . . [t]he debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due." Ohio Rev. Code § 1336.04(A)(2)(b). The Telfair Trust and Estate provide a letter showing Hayes' retirement trust went from $1,195,145 in 2004 to $140,848 in 2007, which, as to the 2007/2008 Transfer, provides support for the Trustee's position. The Telfair Trust and Estate provide no other tax records for the relevant period of the 2007/2008 Transfer. In addition, the conviction for perjury to the IRS is also probative of Hayes' economic condition in 2007 and 2008. The Trustee does not specifically address the solvency issue as to the 2007/2008 Transfer. Looking at the limited summary judgment record, the court determines that a trial to determine whether the 2007/2008 Transfer occurred when Hayes was insolvent is necessary.
III. Conclusion
For the reasons stated, the Trustee's motion for summary judgment is denied. The court will contemporaneously issue an order consistent with this decision.
IT IS SO ORDERED.
