CRAIG A. GARGOTTA, UNITED STATES BANKRUPTCY JUDGE.
On November 13, 2018, came on for hearing The Trustee of the Bergerud Heritage Trust's Motion to Dismiss the Original Complaint of Plaintiff Jose Rodriguez, In His Capacity as Chapter 7 Trustee of the Estate of Steven Jeffrey Cyr (ECF No. 72) (the "BHT Trustee's Motion to Dismiss") and Le Ann Mary Cyr's Motion to Dismiss the Original Complaint of Plaintiff Jose Rodriguez, In His Capacity as Chapter 7 Trustee of the Estate of Steven Jeffrey Cyr (ECF No. 99) ("Le Ann Cyr's Motion to Dismiss") (collectively, the "Motions to Dismiss"). Plaintiff, Jose C. Rodriguez, in his capacity as Chapter 7 Trustee
This Court has jurisdiction over these Motions to Dismiss pursuant to 28 U.S.C. §§ 1334(b), 157(b)(2)(A) (administration of the estate), and (H) (proceedings to determine, avoid, or recover fraudulent conveyances). Venue in this district is proper under 28 U.S.C. §§ 1408 and 1409. The statutory predicate for relief is Fed. R. Civ. P. 12(b)(6), made applicable to this proceeding through Fed. R. Bankr. P. 7012 and Local Rule 7012.
On January 20, 2018, Dr. Steven Jeffery Cyr ("Dr. Cyr" or "Debtor") filed bankruptcy under chapter 7 of the Bankruptcy Code (Case No. 18-50102). On June 15, 2018, the BHT Trustee filed this Adversary Proceeding seeking a determination of the Trustee's interest in the Bergerud Heritage Trust (the "BHT") (ECF No. 1). Subsequently, the Trustee filed his Unopposed Motion to Realign the Parties to correct the posture of the case so that the Trustee would be designated as the Plaintiff and the BHT Trustee would be designated as the Defendant (ECF No. 34). The Court entered its Order Granting the Trustee's Unopposed Motion to Realign the Parties (ECF No. 36) and issued a resultant Sua Sponte Order Regarding Pleading Deadlines setting forth new deadlines for the Trustee to file an Original Complaint and the BHT Trustee to serve an answer or dispositive motion (ECF No. 55).
On October 30, 2018, the Trustee filed his Original Complaint of Plaintiff, Jose Rodriguez, In His Capacity as Chapter 7 Trustee of the Estate of Steven Jeffrey Cyr (ECF No. 61) (the "Trustee's Original Complaint"). As part of the Trustee's Original Complaint, the Trustee also added Le Ann Mary Cyr in her individual capacity ("Le Ann Cyr") as a defendant to this Adversary Proceeding. The Motions to Dismiss were filed, the Trustee filed his Responses thereto, and the BHT Trustee filed her Reply to the Trustee's Response. The Trustee asserts eleven claims for relief, ten of which are the subject of the Motions to Dismiss.
On November 2, 2009, John and Carol Bergerud (the "Trustmakers") created the
Exh. A, at § 1.05; Exh. B, § 1.05. Additionally, the Trust Documents contain the following spendthrift provision:
Exh. A, at § 8.02; Exh. B, § 10.02. Finally, the Trustee alleges that on or about August 1, 2017, Debtor was removed as a trustee of the BHT leaving Le Ann Cyr as the sole remaining trustee. (ECF No. 61, ¶ 17).
In the Fifth Circuit, when considering a motion to dismiss for failure to state a claim, the court must "accept all well-pleaded facts as true and view all facts in the light most favorable to the plaintiff."
"On a motion to dismiss, the court may properly consider the documents
Under Count 1, the Trustee "seeks declaratory judgment ... that the BHT is a self-settled trust or `similar device' under [11] U.S.C. § 548(e)(1),
The Court finds this case and
The BHT Trustee asserts that the Trustee is using Count 1 as a means of
Here, the Trustee seeks a determination that all assets of the BHT are property of Debtor's estate and subject to claims of creditors on the basis that the BHT is a self-settled trust or similar device. Section 548(e)(1) does not permit the avoidance of all transfers of assets to a self-settled trust or similar device on the sole basis that the trust at issue is a self-settled trust or similar device. Instead, the Trustee is required to specifically identify the assets transferred, as he did in Counts 2-11, and demonstrate that the elements of § 548(e)(1) are satisfied with respect to each asset. Therefore, while the Court does not agree that
The Trustee alleges that beginning December 2016, Debtor filed a lawsuit (the "Hillman Lawsuit") that was ultimately resolved by written settlement agreement executed on or about March 23, 2017. Pursuant to the terms of the settlement agreement, Debtor was to be paid $1,000,000 on or before April 20, 2017, and another $600,000 in monthly installments on September 1, 2017 through November 1, 2018. The $600,000 was payable to the Debtor in three promissory notes in the amount of $200,000 each, which were to be executed by each of three defendants in the case. The Trustee alleges that the sums paid as a result of the Hillman Lawsuit were not paid to Debtor, but instead paid to the BHT at Debtor's direction.
The Trustee asserts four causes of action with respect to the payment of the Hillman Lawsuit proceeds to the BHT:
The BHT Trustee argues that the Trustee's causes of action under § 548(a)(1) fail to provide fair notice of the nature of the Trustee's allegations. Specifically, the BHT Trustee asserts that the cause of action does not indicate whether the Trustee is alleging that such transfer was done with actual intent to hinder, delay, or defraud under § 548(a)(1)(A) or whether such transfer was a constructively fraudulent transfer under § 548(a)(1)(B). Moreover, to the extent that the Trustee alleges such a transfer was done with actual intent to hinder, delay, or defraud, the BHT Trustee argues that the Trustee's Original Complaint fails to satisfy Federal Rule of Civil Procedure 9(b) because the Trustee
It is the Trustee's position that by alleging a cause of action under § 548(a)(1), the Trustee is providing fair notice that the Trustee is pursuing claims under both § 548(a)(1)(A) and (B). As to whether the Trustee has met the heightened pleading standard for his claim under § 548(a)(1)(A), the Trustee asserts that he has met such standard because the Trustee has plead with specificity at least three badges of fraud. Finally, with respect to the pleading of insolvency for purposes of a constructive fraud claim, the Trustee asserts that he has plead insolvency by stating that the Cyrs contemplated bankruptcy for more than a year and had gone as far as preparing and signing a proposed, joint chapter 11 petition. By pleading such facts, the Trustee asserts an inference can be made that the Cyrs were insolvent. The Trustee requests, however, that to the extent the Court disagrees with the Trustee, the Court order these claims to be replead rather than dismissed.
The Trustee's Original Complaint alleges transfers under 11 U.S.C. § 548(a)(1). Section 548(a)(1) provides:
11 U.S.C.A. § 548(a)(1). The provision provides two bases by which the Trustee may avoid a qualifying transfer: actual fraud and constructive fraud. While each form of fraud shares common elements, the forms of fraud are distinguished by how fraud is proven. A transfer made with actual fraud involves a transfer made with actual intent to hinder, delay, or defraud. Id. at § 548(a)(1)(A). On the other hand, a constructively fraudulent transfer is a transfer (1) which the debtor received less than
While the Fifth Circuit has not yet decided the issue of whether Federal Rule of Civil Procedure 9(b)'s heightened pleading standards apply to fraudulent transfers,
Here, § 548(a)(1)(A) requires a showing that a debtor transferred an interest of the debtor in property or incurred an obligation within two years before the filling of a petition with actual intent to hinder, delay, or defraud a present or future creditor. Therefore, a cause of action for actual fraud involves both a pleading of the circumstances surrounding the transfer and conditions of a debtor's mind. As to the circumstances founding the transfer, the Trustee must plead with specificity that Debtor transferred an interest of the debtor in property or incurred an obligation within two years before the filling of a petition—the who, what, and when. Under Rule 9(b), the conditions of Debtor's mind, however, are not subject to such heightened pleading standard and the Trustee need only plead actual intent to hinder, delay, or defraud a present or future creditor generally—with factual allegations that show that relief is plausible. See
Second, to the extent that the Trustee must allege the "how" element, the Court does not agree that the Trustee must allege how the transfer was made with actual intent to hinder, delay, and defraud. As previously explained, Rule 7009(b) distinguishes between pleading the circumstances of the alleged fraud and the conditions of the defendant's mind at the time of the alleged fraud. Thus, the heightened standard requiring the specifics of the "who, what, when, where, and how" of the alleged fraud applies to the circumstances surrounding the fraud, not the conditions of the defendant's mind at the time of the alleged fraud. Therefore, to the extent that the Trustee needs to plead the how element, the Trustee need only plead the logistics of the transfer—for example, how the transfer was executed or the means by which the transfer occurred— not how the transfer was made with actual intent to hinder, delay, or defraud.
While the Court does not agree that the BHT Trustee's inquiry is the correct inquiry, the Court finds it necessary to interpret her argument broadly and therefore will address it accordingly. Under a broad interpretation of the BHT Trustee's argument, the BHT Trustee alleges that the Trustee did not plead how the transfer occurred. As previously discussed, the heightened standard for pleading the circumstances of alleged fraud is context-specific and depends on the elements of the claim at hand.
As to whether the Trustee properly pled facts alleging actual intent to hinder, delay, or defraud present or future creditors, the Trustee asserts it has done so by asserting facts supporting three badges of fraud. As previously discussed, Rule 9(b) permits "malice, intent, knowledge, and
The Fifth Circuit has recognized that reliance on badges of fraud is permissible for establishing fraudulent intent:
The Trustee asserts that it has alleged facts asserting three badges of fraud: (1) the family, friendship or close associate relationship between the parties; (2) the retention of possession, benefit or use of the property in question by the Cyrs; and (3) transactions whereby assets were placed in the BHT during a period when the Cyrs were contemplating bankruptcy. The Court disagrees.
As to the relationship between Debtor and the BHT, the Trustee alleges the following: When the Trust was originally created, Debtor and Le Ann Cyr were listed as Trustees and Debtor, Le Ann Cyr, and their children were identified as beneficiaries. (ECF No. 61, ¶ 9). The Trustee also alleges that the Debtor and Le Ann Cyr have utilized the BHT to hold ownership interests in businesses and profit-making endeavors and made themselves employees of entities owned by the BHT. (Id. at ¶ 11). Moreover, the Trustee asserts that the Debtor and Le Ann Cyr have utilized the BHT to assemble and hold considerable assets and generate considerable income. (Id. at ¶ 12). The Trustee also alleges that Debtor and Le Ann Cyr, both individually and as Trustees of the BHT have enjoyed unfettered access to the assets and income of the BHT, and routinely disregard the terms and restrictions of the BHT, whenever it suits them to do so. (Id. at ¶ 13). Finally, the Trustee alleges that on or about August 1, 2017, the BHT Advisor,
With respect to "the retention of possession, benefit or use of the property in question by the Cyrs," the Trustee alleges that Debtor and Le Ann Cyr have utilized the BHT to hold ownership interests in businesses and profit-making endeavors and made themselves employees of entities owned by the BHT (Id. at ¶ 11) and that both have enjoyed unfettered access to the assets and income of the BHT, and routinely disregard the terms and restrictions of the BHT, whenever it suits them to do so. (Id. at ¶ 13). The Court can reasonably infer that such alleged unfettered access to the BHT results in Debtor benefiting and using assets transferred to the BHT.
The Trustee also argues that it asserted factual allegations demonstrating that transfers to the BHT were made during a time when the Cyrs were contemplating bankruptcy. The Trustee alleges that the Cyrs contemplated bankruptcy for more than a year prior to filing chapter 7 bankruptcy on January 20, 2017. (Id. at ¶ 16). The Trustee also asserts that as of January 7, 2017, Debtor and Le Ann Cyr had gone as far as preparing and signing a proposed, joint chapter 11 petition. (Id.) The Trustee does not specify which badge of fraud is manifested by such factual allegations and it is not clear to the Court which badge of fraud these facts are intended to support. At least two badges of fraud deal with the financial condition of the Debtor at the time of the transfer; however, the Court is not convinced that the Trustee has properly plead facts demonstrating either badge of fraud. For example, one badge of fraud involves the financial condition of the party sought to be charged both before and after the transaction in question. The Trustee has not asserted any facts alleging the financial condition of Debtor before each transfer. The Court is not convinced that contemplating bankruptcy and/or filing bankruptcy is sufficient to demonstrate the status of Debtor's financial condition. As acknowledged below, individuals seek protections provided by the Bankruptcy Code for a myriad of reasons, not solely because they are experiencing financial ruin. The second badge of fraud dealing with a debtor's financial condition involves the existence or cumulative effect of the pattern or series of transactions or course of conduct after the onset of financial difficulties. Again, the Court is not convinced that contemplating and/or filing bankruptcy is sufficient to demonstrate that Debtor was experiencing financial difficulties.
As previously noted, while it is not necessary that all or any one of the badges of fraud be established to support a finding of actual fraudulent intent by the debtor, more than one badge of fraud must be shown to establish actual fraudulent intent.
As previously noted, a constructively fraudulent transfer involves: (1) a transfer by a debtor for which a debtor received less than reasonably equivalent value in exchange for such transfer; (2) while the debtor experienced a form of statutorily-enumerated financial condition. Id. at § 548(a)(1)(B). Section 548(a)(1)(B)(ii) provides an exhaustive list of what constitutes such financial vulnerability for purposes of a constructively fraudulent transfer:
The Trustee asserts that he has properly pled facts alleging insolvency because the Trustee asserted that by the time Debtor filed bankruptcy on January 20, 2018, the Cyrs had contemplated bankruptcy for more than a year and had gone as far as preparing and signing a proposed, joint chapter 11 petition. Moreover, the Trustee asserts that this would indicate that the Cyrs believed they were insolvent, from which an inference of insolvency can be drawn. The Court disagrees.
As Counsel for the Trustee conceded at the oral hearing, individuals file bankruptcy for reasons other than being insolvent. Therefore, the fact that the Cyrs contemplated bankruptcy prior to filing bankruptcy on January 20, 2018 does not necessary mean the Cyrs were insolvent. Moreover, "insolvent" is a defined term under the Code. Section 101(32)(A) describes an individual as insolvent when the sum of the individual's debts is greater than the individual's assets. The Code's definition of insolvency excludes both (1) "property transferred, concealed, or removed with intent to hinder, delay or defraud such [individual's] creditors;" and (2) the debtor's exempt property. 11 U.S.C. § 101(32)(A). The Trustee presented no allegations regarding the value of the Cyr's debt relative to the value of the Cyr's assets at the time the transfers were made. As such, the Court agrees with the BHT Trustee in that the Trustee has failed to properly plead insolvency for purposes of a constructively fraudulent transfer claim.
The BHT Trustee argues that the Texas Trust Code (the "Trust Code") provides a
The Trust Code permits and enforces spendthrift trusts. The Trust Code provides that a settlor "may provide in the terms of the trust that the interest of a beneficiary in the income or in the principal in both may not be voluntarily or involuntarily transferred before payment or delivery of the interest to the beneficiary by the trustee." Tex. Prop. Code Ann. § 112.035(a). Moreover, "[a] declaration in a trust instrument that the interest of a beneficiary shall be held subject to a `spendthrift trust' is sufficient to restrain voluntary or involuntary alienation of the interest by a beneficiary to the maximum extent permitted by this subtitle" and a trust containing such terms may be referred to as a "spendthrift trust." Id. at § 112.035(b)-(c). Where a settlor is also a beneficiary of the trust, however, a spendthrift trust provision "does not prevent the settlor's creditors from satisfying claims from the settlor's interest in the trust estate." Id. at § 112.035(d). The Trust Code defines "settlor" as "a person who creates a trust or contributes property to a trustee of a trust. If more than one person contributes property to a trustee of a trust, each person is a settlor of the portion of the property in the trust attributable to that person's contribution to the trust. The terms `grantor' and `trustor' mean the same as `settlor.'" Id. at § 111.004(14). "Beneficiary" "means a person for whose benefit property is held in trust, regardless of the nature of the interest." Id. at 111.004(2). Therefore, while spendthrift trusts are enforceable under Texas law, to the extent a beneficiary also contributes property to such trust, the assets contributed by the beneficiary-settlor are deemed "self-settled" and subject to the claims of creditors.
Section 112.035(g) of the Trust Code, however, provides an exception to the Trust Code's definition of a settlor where a settlor-beneficiary contributes assets to certain types of trusts:
Id. at § 112.035(g). The BHT Trustee argues that because the BHT is an irrevocable trust, and Debtor is a named beneficiary of the BHT, the plain language of the Trust Code prohibits deeming any property contributed to the BHT to have been contributed by Debtor. The BHT Trustee does not specify which subsection of section 112.035(g) applies to the BHT.
11 U.S.C.A. § 548(e)(1). The Bankruptcy Code does not define "self-settled trust" or "similar device" and there is little case law addressing the precise definition of such terms. Some courts have looked to state-law to define whether a trust is a self-settled trust under § 548(e)(1).
The Trustee seeks to avoid transfers to the BHT under § 548(e). To prevail on such claim, the Trustee must properly plead four elements: (1) a transfer to a self-settled trust or similar device made on or within 10 years before the date of the filing of the petition; (2) a transfer by the debtor; (3) debtor is a beneficiary; and (4) debtor made the transfer with the actual intent to hinder, delay or defraud creditors. The BHT Trustee asserts that the Trustee's claim's under § 548(e)(1) are barred as a matter of law because the assets transferred by Debtor are not self-settled assets under Texas law and therefore not subject to the claims of creditors. The Court disagrees.
First, the plain language of § 548(e)(1) does not look to whether assets transferred to a self-settled trust or similar device are self-settled under state law. Section 548(e)(1) is completely devoid of any reference to non-bankruptcy law. Therefore, the requirements contained in the statute itself, not state law, determine whether the transfer of a particular asset is subject to a trustee's avoidance power under § 548(e)(1).
Second, even if this Court were to define the term "self-settled trust" according to state law and the assets transferred by Debtor to the BHT are not self-settled under the Trust Code, the plain language of § 548(e)(1) permits avoidance of transfers made to self-settled trusts or similar devices. The Court agrees with the
Finally, in this Court's opinion, § 548(e)(1) respects the rights of states who choose to shield self-settled assets from creditors and those states which do not. At common law, self-settled trusts were unlawful as a matter of public policy, and as the Fifth Circuit recognized in
The Court notes that a majority of the Parties' briefing was spent analyzing whether assets contributed by Debtor to the BHT were self-settled assets under Texas law. Because the finds that the Trust Code is not relevant for purposes of determining whether an asset is subject to the Trustee's avoidance powers under § 548(e)(1), the Court need not decide the issue.
The BHT Trustee argues that the Trustee's claim to avoid transfers under sections 24.005 and 24.006 of the Texas Business & Commerce Code is barred as a matter of law because the assets transferred to the BHT by Debtor are not self-settled assets under Texas law and therefore not subject to the claims of creditors. The Court disagrees.
Chapter 24 of the Texas Business & Commerce Code sets forth the Texas Uniform Fraudulent Transfer laws ("TUFTA"). Sections 24.005 and .006 identify which transfers constitute fraudulent transfers as to present and future creditors.
Texas Business & Commerce Code section 24.005 provides a bases for avoiding transfers that are fraudulent as to present and future creditors:
Tex. Bus. & Com. Code Ann. § 24.005 (West 2019).
Texas Business & Commerce Code section 24.006 provides a basis for avoiding transfers that are fraudulent as to present creditors:
Id. at § 24.006.
Under TUFTA, a "transfer" "means 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." Bus. & Com. Code § 24.002(12). "Asset" is defined as "property of a debtor, but the term does not include: (A) property to the extent it is encumbered by a valid lien; (B) property to the extent it is generally exempt under nonbankruptcy law; or (C) 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, under the law of another jurisdiction." Id. at § 24.002(2). While not expressly articulated by the BHT Trustee as so, the Court interprets her argument as a dispute as to whether there was a transfer of an asset for purposes of TUFTA.
TUFTA's definition of a "transfer" involves transfers of property of a debtor
The Trustee alleges that on or about October 26, 2009, Debtor and Le Ann Cyr acquired certain real property located behind their home (the "Villers St. Paul Property") and on or about October 5, 2012, Debtor and his spouse executed a warranty deed transferring such property to themselves as Trustees of the BHT. The Trustee asserts three causes of action with respect to the transfer of the Villers St. Paul Property to the BHT:
The BHT Trustee argues that to the extent the Trustee seeks to avoid the transfer of the Villers St. Paul Property under § 548(a), such cause of action is time-barred as § 548(a)(1)(A) does not authorize a trustee to avoid a transfer made more than two year prior to the petition date. The Trustee concedes that the BHT is correct in this regard and agrees that Count 3 should be dismissed only as to the claim under § 548(a)(1). As such, Count 3 is dismissed as to the claim under § 548(a)(1).
The Trustee alleges that in approximately July 2013, Debtor and Le Ann Cyr entered into an agreement to acquire a substantial lake house at Horseshoe Bay, Texas (the "Lake House"), and subsequently transferred the right to acquire the Lake House to the BHT in a transaction that closed on or about September 12, 2013. The Trustee also alleges that contemporaneously with the closing, Debtor and his spouse executed a Note in the amount of $1,680,000 to Broadway National Bank and a deed of trust granting Broadway Bank National Bank a lien on the Lake House. Finally, the Trustee contends that Debtor and his spouse caused the BHT to sign the deed of trust as "Borrower" since title was held in the BHT's name. The Trustee asserts three causes of action with respect to the Lake House:
The BHT Trustee argues that to the extent the Trustee seeks to avoid the transfer of the Lake House under § 548(a), such cause of action is time-barred as § 548(a)(1)(A) does not authorize a trustee to avoid a transfer made more than two year prior to the petition date. The Trustee concedes that the BHT is correct in this regard and agrees that Count 4 should be dismissed only as to the claim under § 548(a)(1).
The BHT Trustee argues that the Texas Trust Code provides a complete bar to the Trustee's claims under § 548(e) as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Texas Trust Code the Trustee may not avoid such transfers under 11 U.S.C. § 548(e). For the reasons stated under Count 2, the Court disagrees.
The BHT Trustee asserts that the § 548(e)
The Bankruptcy Code defines "transfer" to mean:
11 U.S.C. § 101(54). "Congress intended the term `transfer' to be construed as broadly as possible."
The Trustee has not properly alleged a transfer of an interest of the debtor. First, the Trustee does not identify the direct transfer. Specifically, the Trustee does not identify the third party who conveyed the Lake House to the BHT. The Trustee only alleges that Debtor and Le Ann Cyr entered into an agreement to acquire the Lake House. Moreover, the Trustee does not identify or describe the agreement which allegedly effectuated the direct transfer. Second, the Trustee does not allege facts demonstrating that Debtor ever had an interest in the property the Trustee seeks to avoid—the Lake House. The Trustee argues that but for the transfer of the Cyrs' rights to acquire the Lake House to the BHT, the Lake House would have otherwise belonged to the Cyrs'. While that may be true, the Trustee does not explain how this right to acquire translates to a legal or equitable interest in the Lake House that belonged to Debtor.
The BHT Trustee argues that the Texas Trust Code provides a complete bar to the Trustee's claims under TUFTA as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Texas Trust Code the Trustee may not avoid such transfers under TUFTA. For the reasons stated under Count 2, the Court disagrees.
The Trustee alleges that on or about August 18, 2018, the BHT Trustee entered into an Earnest Money Contract
The Trustee alleges that one check, in the amount of $166,747.49, was earmarked for payment of Le Ann Cyr's delinquent taxes, while the other check, in the amount of $484,732.55 was earmarked for pre-payment of the BHT's 2017 taxes. Furthermore, the Trustee alleges that on the same day, the BHT Trustee instructed her tax counsel to drive from San Antonio to Horseshoe Bay, retain possession of the checks, and deliver them to the Internal Revenue Service. According to the Trustee, her tax counsel complied. As a result of the sale proceeds being paid out, the motion for the temporary restraining order became moot.
The Trustee asserts two causes of action with respect to the Lake House and the payments made to the Internal Revenue Service from the proceeds of the Lake House:
The BHT Trustee argues that the Trust Code provides a complete bar to the Trustee's claims under § 548(e) and TUFTA as a matter of law.
Le Ann Cyr submits that the Trustee's § 549(a) claim fails as a matter of law because under the facts, as alleged by the Trustee, the BHT sold the Lake House and that the proceeds of such sale were paid to the IRS. Therefore, because the Lake House was not sold by Debtor, the proceeds of the Lake House sale that were allegedly transferred are not property of the estate and no recovery under § 550 is permissible. The Trustee asserts that the foundation for the Trustee's § 549(a) claim under Count 5 is a finding that the Lake House was fraudulent transferred to the BHT under Count 4.
Section 549(a) applies only to property of the estate. Property of the estate includes "[a]ny interest in property that the trustee recovers under ... § 550." 11 U.S.C.A. § 541(a)(3). Section 550 enumerates circumstances under which a trustee may recover property or its value from the transferee of an avoided transfer. Id. at § 550(a). Such circumstances include transfers avoided under §§ 544 and 548. Id. Therefore, any property avoided by the Trustee subsequent to the commencement of the case under § 544 and 548 constitutes property of Debtor's estate.
Under Count 4, the Trustee seeks to avoid the Lake House as a fraudulent transfer under § 548(e)(1) and TUFTA.
As of the date of this Order, Count 4 has one remaining cause of action under TUFTA. The BHT Trustee moved to dismiss the Trustee's TUFTA claim under Count 4 on the basis that the Trust Code insulates Debtor's conveyances to BHT from creditors' reach. The Court rejected this argument. Because Count 4 has one remaining cause of action under which the Trustee could potentially prevail, dismissal of Count 5 is premature. As such, Le Ann Cyr's Motion to Dismiss is denied as to Count 5.
The Trustee alleges that on or about March 7, 2013 a warranty deed was executed whereby Le Ann Cyr's parents, John and Carol Bergerud, acquired 80% interest in real property located at 3 Bishops Green (the "Bishops Green Property") with the remaining 20% interest in the property going to the BHT. The Trustee also alleges that in October 2014, John and Carol Bergerud transferred their ownership interest in the Bishops Green Property to the John and Carol Bergerud Living Trust. By default, and because the BHT did not join in the deed, the Trustee asserts that 20% of the Bishops Green Property still belongs to the BHT.
The Trustee asserts the following cause of action with respect to the transfer of the interest in the Bishops Green Property to the BHT:
The BHT Trustee asserts that the § 548(e) violation under Count 6 alleged by the Trustee has not been adequately plead because the Trustee does not properly allege a transfer of an interest of a debtor as required under § 548(e). Specifically, the BHT Trustee argues that the Trustee does not explain how the transfer of an interest from a seller to the BHT is a transfer of
Using the principles articulated under Count 4, the Court agrees with the BHT Trustee. The Trustee has not plead Trustee has not properly alleged an indirect transfer of an interest of the Debtor. First, the Trustee does not identify the direct transfer. Specifically, the Trustee does not identify the third party who conveyed the interest in the Bishops Green Property to the BHT. The Trustee only alleges that the BHT acquired 20% interest in the Bishops Green Property. Second, the Trustee does not explain how Debtor caused the direct transfer. The Trustee alleges the BHT's purchase of the 20% interest was an enticement to John and Carol Bergerud to move from Virginia to San Antonio. These allegations alone, however, do not explain Debtor's role in the direct transfer. Finally, the Trustee does not allege facts demonstrating that Debtor ever had legal or equitable time to the Bishops Green Property such that the Property was an interest of the Debtor.
The Trustee alleges that on or about December 1, 2017, the BHT, the Debtor and Le Ann Cyr entered into an earnest money contract for purchase of certain real property in Spring, Texas (the "Spring House") for the purchase price of $3,333,000.00. The Trustee also alleges that Le Ann Cyr signed the earnest money contract both individually and as BHT Trustee and signed for Debtor. The Trustee asserts three causes of action with respect to the Spring House:
The BHT Trustee argues that the Trust Code provides a complete bar to the Trustee's claims under § 548(e) as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Trust Code, the Trustee may not avoid such transfers under 11 U.S.C. § 548(e). For the reasons stated under Count 2, the Court disagrees.
The BHT Trustee asserts that the § 548(e) violation under Count 7 alleged by the Trustee has not been adequately plead because the Trustee does not properly allege a transfer of an interest of a debtor as required under §§ 548(a)(1) and 548(e).
Second, the Trustee does not allege facts demonstrating that Debtor had an interest in the property the Trustee seeks to avoid—the Spring House. The Trustee alleges LeAnn Cyr signed the earnest money contract for the Debtor but that the property was deeded by the seller to the BHT. As previously stated, the Trustee does not allege why Debtor is bound by Le Ann Cyr signing on his behalf. Even if the Trustee had alleged such facts, the Trustee does not allege facts explaining how the Debtor's rights under the earnest money contract translate to a legal or equitable interest in the Spring House belonging to Debtor.
The BHT Trustee argues that the Trustee's claim to avoid the transfer of the Spring House under sections 24.005 and 24.006 is barred as a matter of law because the Spring House is not a self-settled asset under Texas law and therefore not subject to the claims of creditors. For reasons stated under Count 2, the Court disagrees.
The BHT Trustee argues that a cause of action for the transfer of the Spring House under § 548(a)(1) fails to provide fair notice of the nature of the Trustee's allegations. Specifically, the BHT Trustee asserts that the cause of action does not indicate whether the Trustee is alleging that such transfer was done with actual intent to hinder, delay, or defraud under § 548(a)(1)(A) or whether such transfer was a constructively fraudulent transfer under § 548(a)(1)(B). Moreover, to the extent that the Trustee alleges such a transfer was done with actual intent to hinder, delay, or defraud, the BHT Trustee argues that the Trustee's Original Complaint fails to satisfy Federal Rule of Civil Procedure 9(b) because the Trustee does not allege facts establishing the "how" and "why" the Spring House transfer were made with actual intent to hinder, delay, or defraud. Finally, to the extent the Trustee alleges such a transfer was a constructively fraudulent transfer under § 548(a)(1)(B), the BHT Trustee contends that the Trustee has failed to allege facts to support an allegation of insolvency as required under § 548(a)(1)(B)(ii).
With respect to the BHT Trustee's arguments regarding fair notice, the Court agrees for reasons stated under Count 2. Moreover, regarding her argument regarding
The Trustee alleges that Le Ann Cyr is the president of Oracle Research & Consulting, LLC ("Oracle"), a Wyoming limited liability company formed during her marriage with Debtor. The Trustee also alleges that she was previously 100% owner of Oracle, and that on January 4, 2017, she transferred all her ownership interest in Oracle, to the BHT. The Trustee also submits that her ownership interest in Oracle is community property that she owned with Debtor.
The Trustee asserts three causes of action with respect to Oracle:
The BHT Trustee argues that the Trust Code provides a complete bar to the Trustee's claims under § 548(e) as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Trust Code, the Trustee may not avoid such transfers under 11 U.S.C. § 548(e). For the reasons stated under Count 2, the Court disagrees.
The BHT Trustee argues that the Trustee's claim to avoid the transfer of the Oracle ownership interest under sections 24.005 and 24.006 is barred as a matter of law because the ownership interests are not a self-settled asset under Texas law and therefore not subject to the claims of creditors. For reasons stated under Count 2, the Court disagrees.
The BHT Trustee argues that a cause of action for the transfer of the Oracle ownership interests under § 548(a)(1) fails to provide fair notice of the nature of the Trustee's allegations. Specifically, the BHT Trustee asserts that the cause of action does not indicate whether the Trustee is alleging that such transfer was done with actual intent to hinder, delay, or defraud under § 548(a)(1)(A) or whether such transfer was a constructively fraudulent transfer under § 548(a)(1)(B). Moreover, to the extent that the Trustee alleges such a transfer was done with actual intent to hinder, delay, or defraud, the BHT Trustee argues that the Trustee's Original Complaint fails to satisfy Federal Rule of Civil Procedure 9(b) because the Trustee does not allege facts establishing the "how" and "why" the transfer were made with actual intent to hinder, delay, or defraud. Finally, to the extent the Trustee alleges such a transfer was a constructively fraudulent transfer under § 548(a)(1)(B), the BHT Trustee contends that the Trustee has failed to allege facts to support an allegation of insolvency as required under § 548(a)(1)(B)(i).
With respect to the BHT Trustee's arguments regarding fair notice, the Court
The Trustee alleges that up until December 31, 2017, Debtor conducted his medical practice through Orthopedic & Spine Institute, LLC ("OSI") and prior to that, Debtor and/or Le Ann Cyr caused the formation of SA Spine, LLC ("SA Spine"), a Texas limited liability company, ownership of which was placed in the BHT. The Trustee also alleges that over the course of the remainder of 2017, Debtor caused OSI to transfer all of its assets and certain selected liabilities to SA Spine thereby rendering OSI an empty shell.
The Trustee asserts two causes of action with respect to formation of SA Spine and transfer of OSI's business and assets to SA Spine:
The BHT Trustee argues that the Trust Code provides a complete bar to the Trustee's claims under § 548(e) as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Trust Code, the Trustee may not avoid such transfers under 11 U.S.C. § 548(e). For the reasons stated under Count 2, the Court disagrees.
The BHT Trustee argues that a cause of action for the transfer of OSI's assets and business under § 548(a)(1) fails to provide fair notice of the nature of the Trustee's allegations. Specifically, the BHT Trustee asserts that the cause of action does not indicate whether the Trustee is alleging that such transfer was done with actual intent to hinder, delay, or defraud under § 548(a)(1)(A) or whether such transfer was a constructively fraudulent transfer under § 548(a)(1)(B). Moreover, to the extent that the Trustee alleges such a transfer was done with actual intent to hinder, delay, or defraud, the BHT Trustee argues that the Trustee's Original Complaint fails to satisfy Federal Rule of Civil Procedure 9(b) because the Trustee does not allege facts establishing the "how" and "why" the transfer was made with actual intent to hinder, delay, or defraud. Finally, to the extent the Trustee alleges such a transfer was a constructively fraudulent transfer under § 548(a)(1)(B), the BHT Trustee contends that the Trustee has failed to allege facts to support an allegation of insolvency as required under § 548(a)(1)(B)(ii).
With respect to the BHT Trustee's arguments regarding fair notice, the Court agrees for reasons stated under Count 2. Moreover, with respect to her argument regarding allegations of facts regarding insolvency, the Court also agrees for reasons stated under Count 2. As to the BHT Trustee's argument that Count 7 does not satisfy Rule 9(b)'s requirement for specificity, the Court disagrees.
The BHT Trustee asserts that the §§ 548(a)(1) and 548(e)(1) violations under Count 8 alleged by the Trustee have not been adequately plead because the Trustee does not properly allege a transfer of an interest of a debtor as required under the statutes. Specifically, the BHT Trustee argues that even if the Trustee does allege Debtor had an interest in property of OSI, and even to the extent Debtor does have such interest in OSI, it is OSI who owns its property, not Debtor and therefore such property is not an interest of the debtor. The Trustee contends that the transfers at issue were indirect transfers effectively transferring the value of Debtor's membership interests in OSI to the BHT.
As a preliminary matter, the record is clear that prior to OSI's termination, Debtor was 100% owner of OSI. (ECF No. 195 at 7).
Here, the Trustee seeks to avoid the transfer of OSI's assets and business. According to the Trustee's allegations, this property is property belonging to OSI. (ECF No. 61, ¶ 40) ("Over the remainder of 2017, the Debtor caused OSI to transfer all of its assets and certain selected liabilities to SA Spine.") In Texas, "[a] member of a limited liability company ... does not have an interest in any specific property of the company." Tex. Bus. Org. Code Ann. § 101.106(b). Therefore, as sole member of OSI, Debtor had no interest in the assets and business transferred from OSI to SA Spine. Accordingly, the Court agrees that the Trustee has failed to allege that a transfer of an interest of the debtor.
The Trustee cites the Court to a number of cases that stand for the proposition that where business assets and operations were transferred from one entity to another rendering the transferor-entity worthless, such transfer are indirect transfers effectively transferring the value of the membership interests and therefore constitute a transfer of an interest of a debtor.
The Trustee encourages the Court to use its equity powers to "delve behind the form of the transactions and relationships to determine the substance." (ECF No. 97, ¶ 24). This Court will not use its equity powers to override the law. While this Court may be a court of equity, this Court is of the opinion that equity follows the law.
The BHT Trustee argues that the Trustee's claim to avoid the transfer of OSI's business and assets to SA Spine under sections 24.005 and 24.006 is barred as a matter of law because the such property is not self-settled under Texas law and therefore not subject to the claims of creditors. For reasons stated under Count 2, the Court disagrees.
The Trustee alleges that on or about August 8, 2017, Debtor and/or his spouse caused the formation of S & L BHT, LLC ("S & L BHT"), ownership of which was placed in the BHT. The Trustee also alleges that Debtor and/or his spouse are diverting the business and assets of Oracle to S & L BHT, which now has a substantial income.
The Trustee asserts two causes of action with respect to formation of S & L BHT and transfer of Oracle's business and assets to S & L BHT:
The BHT Trustee argues that the Trust Code provides a complete bar to the Trustee's claims under § 548(e) as a matter of law. Specifically, the BHT Trustee submits that because conveyances to BHT are insulated from creditors' reach under the Trust Code, the Trustee may not avoid such transfers under 11 U.S.C. § 548(e). For the reasons stated under Count 2, the Court disagrees.
The BHT Trustee asserts that the §§ 548(a)(1) and 548(e)(1) violations under Count 10 alleged by the Trustee have not been adequately plead because the Trustee does not properly allege a transfer of an interest of a debtor as required under §§ 548(a)(1) and 548(e)(1). The Trustee contends that the transfers at issue were indirect transfers effectively transferring the value of Debtor's membership interests in OSI to the BHT.
Here, the Trustee seeks to avoid the transfer of Oracle's assets and business to S & L BHT. According to the Trustee's allegations, this property is property belonging to Oracle. The Trustee identifies
The BHT Trustee argues that the Trustee's claims under § 548(a)(1) have not been plead with sufficient specificity. The Trustee, however, has only not plead a cause of action under § 548(a)(1) with respect to Count 10, and therefore the Court will not address the merits of the BHT Trustee's argument as it relates to Count 10.
The BHT Trustee argues that the Trustee's claim to avoid the transfer of OSI's business and assets to SA Spine under sections 24.005 and 24.006 is barred as a matter of law because the such property is not self-settled under Texas law and therefore not subject to the claims of creditors. For reasons stated under Count 2, the Court disagrees.
For the foregoing reasons as articulated under each Count, the Court concludes the following:
The BHT Trustee's Motion to Dismiss is granted as to Count 1 because the Trustee seeks relief he is not entitled to as a matter of law.
The BHT Trustee's Motion to Dismiss is denied as to Counts 2, 3, 4, 7, 8, 9, and 10 because the Court finds that the Trustee's cause of action under § 548(e)(1) is not subject to a determination of whether the assets transferred are self-settled under the Trust Code. The BHT Trustee's also seeks to dismiss Count 5 for the same reasons. As Count 5 has not alleged a cause of action under § 548(e)(1), the BHT Trustee's Motion to Dismiss as to Count 5 for those reasons is denied.
The BHT Trustee's Motion to Dismiss is granted as to the Trustee's § 548(a)(1) Counts 2, 7, 8, and 9 because the Court finds that the Trustee does not properly plead with specificity (1) which claims under § 548(a)(1) the Trustee is asserting and (2) actual intent to hinder, delay, or defraud present or future creditors. The BHT Trustee's also seeks to dismiss Count 10 for the same reasons. As Count 10 has not alleged a cause of action under § 548(a)(1), the BHT Trustee's Motion to Dismiss as to Count 10 for those reasons is denied.
The Trustee and BHT Trustee agreed that BHT Trustee's Motion to Dismiss is granted as to the Trustee's § 548(a)(1) claims under Counts 3 and Counts 4 because they are time-barred. The BHT Trustee's Motion to Dismiss Count 6 on the basis that it is time-barred under § 548(a)(1) is denied because the Trustee does not assert a § 548(a)(1) under Count 6.
The Trustee has fourteen (14) days from the date of entry of this Order to exercise his right to Amend his Original Complaint.
IT IS THEREFORE ORDERED that the Trustee of the Bergerud Heritage
IT IS FURTHER ORDERED that Le Ann Mary Cyr's Motion to Dismiss the Original Complaint of Plaintiff Jose Rodriguez, In His Capacity as Chapter 7 Trustee of the Estate of Steven Jeffrey Cyr (ECF No. 99) DENIED.
IT IS FURTHER ORDERED that Trustee has fourteen (14) days from the date of entry of this Order to exercise its right to amend his Original Complaint.
