Opinion
7:00-CV-0027-R
March 12, 2001
MEMORANDUM OPINION
Plaintiff, Bankruptcy Trustee Uarry L, Cure, filed suit against Defendant Mary L. Krottinger to recover certain monies or properties allegedly transferred from the estate of Debtor Ira Krottinger to the Defendant in violation of 11 U.S.C. § 547, 548, and 549 (Bankruptcy Code) and §§ 24.001 et seq. of the Texas Business and Commerce Code (Texas Uniform Fraudulent Transfers Act). Now before this Court is Defendant's Motion for Summary Judgement, filed on January 5, 2001.
For the reasons stated below, this motion is GRANTED in part and DENIED in part.
Background
Defendant Mary L. Krottinger is the wife of Ira Krottinger. Mr. Krottinger filed For Bankruptcy on December 7, 1998 and Plaintiff, Harry L. Cure, was appointed as the trustee in bankruptcy for Mr. Graettinger's estate. Plaintiff alleges that Mr. Krottinger fraudulently transferred certain properties from his estate to the Defendant in order to keep these assets from Mr. Krottinger's creditors. The allegedly fraudulent transfers include:
1) payment of proceeds from the sale of a condominium at Possum Kingdom Lake; 2) conveyance of three oil and gas leases; 3) payments by Mr. Krottinger to the Defendant and her children for household expenses; 4) payments by Mr. Krottinger to third parties; and 5) conveyance of Mr. Krottinger's homestead interest by quit-claim deed.
This Court will discuss the specific facts surrounding each transfer as that transfer is addressed below.
Discussion
I Standard of Review
Rule 56(e) of the Federal Rules of Civil Procedure allows summary judgment only when there is no genuine issue as to any material fact and the party moving for summary judgment is entitled to judgment as a matter of law. See FED. R. CIV. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986); Melton v. Teachers Ins. Annuity Assoc. of Am., 114 F.3d 557, 559 (5th Cir. 1997). The court must decide all reasonable doubts and inferences in the light most favorable to the party opposing the motion. See Walker v. Scars. Roebuck Co., 853 F.2d 355, 358 (5th Cir. 1988); Thornbrough v. Columbus Greenville R.R. Co., 760 F.2d 633, 640 (5th Cir. 1985). As long as there appears to be some support for the disputed allegations such that "reasonable minds could differ as to the import of the evidence," the motion must be denied. See Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 250 (1986).
II The Applicable Law
Section 24.005 of the Texas Uniform Fraudulent Transfers Act (TUFTA) and section 548 of the United States Bankruptcy Code (Bankruptcy Code) empower a bankruptcy trustee to "avoid" (recover) transfers of a property interest, or any obligation incurred by a debtor that fall into one of two categories: (1) transfers made with the actual intent to hinder, delay or defraud any creditor of the debtor; or (2) transfers made without receiving a reasonably equivalent value in exchange for the transfer or the obligation. Tex Bus. Comm. Code § 24.005(a); 11 U.S.C. § 548(a). Section 547 of the Bankruptcy Code and section 24.006(b) of TUFTA empower a trustee to avoid those transfers that create "preferences" in certain creditors (enable them to receive more than they would have if the transfer had not been made and payment had instead been received through the pending Bankruptcy proceeding). 11 U.S.C. § 547(b); Tex Bus. Comm. Code § 24.006(b). Section 549 of the Bankruptcy Code empowers a trustee to avoid post-petition transfers (transfers of the property of the estate after the bankruptcy petition is filed). 11 U.S.C. § 549.
A transfer that is fraudulent due to receipt of less than reasonable value also requires an additional showing not addressed by either party in this motion. The Plaintiff must show that the debtor was either: (a) insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation (§ 548 only); (b) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital (§§ 548 and 24.005); or (c) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured (§§ 548 and 24.005). 11 U.S.C. § 548 (a); Tex Bus. Comm. Code § 24, 005(a),
In his Amended Complaint, the Plaintiff alleged violations of both prongs of the fraudulent transfers provisions, violations of the insider preference provisions, and violations of the post-petition transfer provision. Although the briefs submitted in support of this motion were not entirely clear regarding which claims the Defendant would like this Court to dismiss, the legal arguments presented speak primarily to whether reasonable value was given for each transfer at issue and in certain instances, whether the insider preference or post-petition transfer provisions apply. The issue of intent to hinder, delay, or defraud a creditor is raised only by conclusory statements and/or allegations about why the debtor and/or the Defendant did or did not take certain actions. The lack of legal argument demonstrates that the debtor's intent is a highly Factual inquiry best left to the jury; the fact finders will have to judge the credibility of the debtor, the Defendant, and any witnesses presented. Therefore, unless this Court indicates otherwise, insofar as the Defendant is moving for Summary Judgement on the issue of transfers made with the intent to defraud, delay or hinder, this Motion is DENIED and this Court will limit its legal analysis to issues other than the debtor's intent.
III Purchase and Sale of the Possum Kingdom Condominium
A Factual Background
The Defendant and Mr. Krottinger purchased a condominium on June 14, 1996, for $65,000. The down payment on the Condo, in the amount of $9,562.36 was paid by a check drawn from a Norwest bank account of which the Defendant was the sole signatory and owner. This bank account had been opened with $10,000 that Defendant avers was a distribution to her from her mother's estate. The balance of the purchase price was borrowed from a bank in the amount of $54,744.13. The Promissory Note for this Loan was signed by both the Defendant and Mr. Krottinger and the Krottinger's took title to the Condo jointly, After purchasing the Condo, the Defendant spent $9,097.64 of money that she avers is her own, on remodeling costs,
On September 12, 1997, the unit was sold and the net sales proceeds of $83,000.87 were deposited in a Charles Schwab bank account of which the Defendant wits the sole signatory and owner. On September 19, 1997, the Defendant repaid the Promissory Note on the Condo, plus interest, with a cashier's check drawn from a second Norwest account of which the Defendant was the sole signatory and owner. The Defendant avers that the funds in this account came from a second distribution from her mother's estate., received in early September. Defendant also used $26,879.34 of the Condo proceeds in the Schwab bank account to pay debts allegedly owed by Mr. Krottinger.
B Discussion
Plaintiff alleges that the receipt of the Condo proceeds by the Defendant constituted a fraudulent transfer of funds out of the community estate to the Defendant, Defendant argues that because she used her own, separate property for the down payment on the Condo, the remodeling of the Condo, and the repayment of the Promissory Note, she had an equitable interest in the proceeds of the Condo and a right to reimbursement for her own monies expended. The Defendant therefore concludes as follows: Defendant became a creditor of Mr. Krottinger, the receipt of the Condo proceeds constituted repayment of an anteccdent debt, and thus the community estate received reasonable value in exchange for the Condo proceeds. Defendant argues further that payment of Mr. Krottinger's debts out of the Defendant's separate property also constituted the payment of reasonable value for the Condo proceeds that she ultimately retained. Although the Plaintiff makes a number of arguments in response, this Court finds one argument controlling on the issue of summary judgement: the Defendant failed to provide clear and convincing evidence that her separate properly was used to make the above-described payments.
A bankruptcy estate includes:
all interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is: (A) under the sole, equal, or joint management and control of the debtor; or (13) liable: for an allowable claim against the debtor, or For both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.11 U.S.C. § 541(a)(2)(A.) and (B). IF money "which would have comprised part of the Bankruptcy Estate was used for the above-described payments, then no "value" would have been given in exchange for the transfer of the Condo proceeds out of the marital estate; the transfer would have been merely a gift to the Defendant. Tex. Bus. Comm. Code § 24.004; 11 U.S.C. § 548(a)(2)(A); Bankr. L. Fundamentals § 10.07 (In its most straightforward application, gratuitous transfers between family members are crude attempts to protect assets in anticipation of bankruptcy.). Therefore, this Court must determine whether the "value" given by the Defendant was from community property or the Defendant's separate property,
This question will be answered pursuant to Texas property law because, as both parties recognize, property rights of a bankruptcy debtor arc "created and defined by state law" and are not "analysed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. U.S., 440 U.S. 48, 55 (1979). Under Texas law, property acquired during the marriage is presumed to be community property and the degree of proof necessary to establish that property is separate is clear and convincing evidence. Tex. Fam. Code § 3.003(a) and (b). Additionally, Texas courts hold that "the testimony of an interested party, when not corroborated, does not conclusively establish a fact even when uncontradicted," Robles v. Robles, 965 S.W.2d 605, 616 (Tex.App.-Houston 1998)(citing, Kirtly v. Kirtly, 417 S.W.2d 847, 853 (Tex.Civ.App.-Texarkana 1967, writ dism'd)).
Here, Defendant alleges that the money used to give "value" for the Condo proceeds came from a distribution from her mother's estate. However, the only evidence offered in support of this allegation is the Defendant's own affidavit and a bank deposit slip on which Defendant wrote her mother's last name. This uncorroborated evidence is not sufficient for this Court to grant summary judgement, even in the absence of contradicting evidence. Defendant citesThurmond v. Thurmond, 888 S.W.2d 269, 273 (Tex.App.-Amarillo, 1994) for the proposition that uncontroverted testimony that a distribution came from a testamentary trust is sufficient to establish that no genuine issue of material fact exists as to the source of the money at issue. However, in Thurmond the court was presented both with the appellant's own testimony regarding the source of the funds and the testimony of the co-trustee of the estate from which the funds purportedly came. Similarly, in the case of Rusk v. Rusk. 5 S.W.3d 303 (Tex.App — Houston 1999), the court was presented with both the Defendant's testimony and the testimony of the parent who had given Defendant the money in question,
Here, we have only the Defendant's uncorroborated testimony that the money was given to her as a gift from her mother's estate. Deciding all reasonable doubts and inferences in the light most favorable to the Plaintiff, there exists a genuine issue of material fact as to whether the money used to pay the Condo down payment, to improve the property, and to pay off the note was the Defendant's separate property. The Defendant's Motion for Summary Judgement as to this transfer is therefore DENIED.
IV Transfer of the Bowes, Barrow, and Burgess Oil and Gas Leases
A Factual Background
In early November 1998, approximately one month before Mr. Krottinger filed for bankruptcy, three oil and gas leases were transferred to the Defendant. The Burgess Lease was transferred to the Defendant from the 765 Production Trust. This trust was established by Mr.
Krottinger's parents for Mr. Krottinger and his siblings and Mr. Krottinger was the trustee. The other two leases, the Bowes Lease and the Barrows Lease appear to have been transferred to the Defendant from Mr. Krottinger himself.
B Discussion
The Defendant first argues that the Burgess Lease was not a fraudulent transfer under TUFTA or the Bankruptcy Code because it was not transferred from Mr. Krottinger or the community — it was transferred from an independent trust. Neither the trust, nor any property owned by the trust should have been preserved for the benefit of Mr. Krottinger's creditors and thus the trust was free to transfer the Burgess Lease to the Defendant.
Plaintiff did not respond to this argument. However, the evidence before this Court shows that the trust may be considered property of Mr. Krottinger and thus an asset that his creditors could reach. Specifically, Schedule U of Mr. Krottinger's Bankruptcy Petition lists the 765 Production Trust as personal property. Therefore, the Burgess Lease will be considered along with the Bowes and Barrows leases in the analysis of whether value was given for this transfer.
The Defendant next argues that she gave reasonable value for the transfer of all three leases, Defendant argues that in exchange for the leases she agreed to pay for the operating expenses of each tease and that she also paid approximately $17,000 in debts owed by Mr. Krottinger. The Plaintiff responds that the payment of Mr. Krottinger's debts do not constitute value because they were merely payments of household expenses and because a number of the payments were made after Mr. Krottinger filed for bankruptcy. The Plaintiff also argues that oven if value was given, the transfers constituted an insider preference in violation of section 547 of the Bankruptcy Code.
Neither party addresses what appears to be the threshold issue of whether the Defendant used her separate property to pay the alleged "value" for the leases. As discussed above, under Texas law, property acquired during the marriage is presumed to be community property and the degree of proof necessary to establish that property is separate is clear and convincing evidence. Tex. Fam. Code § 3.003(a) and (b). If the "value" given for the leases came from the community then the transfer of the leases was merely a gift from the community to the Defendant and whether the "value" was reasonably equivalent to that of the leases themselves is irrelevant
In addition, this Court agrees with the Plaintiff's argument that there exists a genuine issue of material fact as to whether the debt payments listed by the Defendant should be considered as value given in exchange for the leases. The Defendant submitted a table of 14 Separate payments made at completely different times (judging by the check numbers — no dates were provided to this Court) for items such as Mr. Krottinger's child support payments from a previous marriage, Mr. Krottinger's legal fees, and medical care for Mr. Krottinger's daughter from a previous marriage. It appears that the Defendant simply compiled a list of payments that she happened to have made for her husband and is now asking this Court to conclude as a matter of law that this constituted the consideration given in exchange for the oil and gas leases. This evidence does not entitle the Defendant to judgement as a matter of law as to the transfer of the oil and gas leases. Accordingly, summary judgement is DENIED as to these transfers.
IV Payment of Household Expenses
A Factual Background
In response to interrogatories submitted by the Defendant, the Plaintiff identified 20 allegedly fraudulent payments made by Mr. Krottinger to the Defendant between February 1997 and August 1998, The payments range in amounts from $32.37 to $1,8282,42 and total $12,704.11.
B Discussion
The Defendant argues that the payments were made by Mr. Krottinger in order to satisfy the obligations of support that he has to his spouse and children under Texas law. Defendant argues further that a transfer in satisfaction of an obligation of support is not a fraudulent transfer. The Plaintiff did not respond to this argument.
This Court does not need to analyze whether or not Texas law does in fact create an obligation on the part of Mr. Krottinger to support his family and whether the satisfaction of this obligation would constitute "value" under the Bankruptcy Code or TUFTA. The briefs submitted fail to address a number of factual issues that prevent this Court from granting summary judgement on this particular transfer. Primarily, other than the Defendant's averments, there is no evidence regarding what happened to these payments and whether they were ever transferred out of the estate in the first place. The only evidence before this Court is photocopies of the checks themselves. There is no evidence as to whether they were deposited, whether they were cashed, and what the money was spent on, if anything.
These questions, if answered, may very well weigh in favor of the Defendant, however, in light of the dearth of evidence presented by either party, and weighing all inferences in favor of the non-moving party, summary judgement must be DENIED as to this transfer.
V Third Party Payments
In her Motion for Summary Judgement, the Defendant asks this Court to grant summary judgement on the issue of the fraudulent transfer of "cash equivalents" from Mr. Krottinger to certain third parties that the Plaintiff identified in his interrogatories as allegedly constituting fraudulent transfers to the Defendant. However, the Defendant did not put forth any arguments regarding this transfer in her brief in support of the motion. Because this Court was not presented with any evidence or legal argument on this issue, summary judgement is DENIED as to the transfer of cash equivalents to third parties.
VI Conveyance of the Homestead
A Factual Background
When Mr. Krottinger filed for bankruptcy on December 7, 1998, he claimed the Krottinger's residence at 3710 Cedar Elm, Wichita Falls, Texas, as a homestead exemption. On either January 26, or January 31, 1999 (a fact unclear from the briefs), a creditors' meeting was held. On January 28, 1999, Mr. Krottinger conveyed his interest in the property to the Defendant by a quit-claim deed. On August 3, 1999, Mr. Krottinger filed amended and supplemental schedules with the Bankruptcy Court. These schedules continued to list the property as being owned by the Defendant and as being exempt. Until the filing of his Response to the Defendant's Motion for Summary Judgement, Plaintiff never formally objected to the exemption of the homestead,
B Discussion
There are three issues on which both parties appear to agree: 1) 3710 Cedar Film Street was properly claimed as exempt at the time Mr. Krottinger filed for Bankruptcy; 2) the Plaintiff never objected to the claim of this homestead exemption; and 3) the Plaintiff missed the 30 day deadline by which he was permitted by the Bankruptcy Rules to object. The parties disagree however, on the effect of the Fact that the transfer was made before the close of the 30 day deadline and the fact that the transfer was not disclosed to the Plaintiff,
Bankruptcy Rule 4003(h) states as follows: "The trustee or any creditor may file objections to the list of property claimed as exempt within 30 days after the conclusion of the meeting of creditors held pursuant to Rule 2003(a) or the filing of any amendment to the list or supplemental schedules unless, within such period, further time is granted by the court." FRRP Rule 4003(b). Although the parties disagree as to whether the 30 days ran from the conclusion of the creditors meeting or from the date on which Mr. Krottinger filed amended schedules, it is clear that the Plaintiff did not object within either of these two deadlines.
The Plaintiff argues that the timing of the transfer and Mr. Krottinger's non-disclosure makes the transfer a post-petition transfer of properly of the estate and empowers the Plaintiff to avoid the transfer under § 549 of the Bankruptcy Code. Me asks this Court to exercise its equitable powers under § 105 of the Bankruptcy Code to extend the deadline for his objection, allow him to object to the exemption, and thus make the property part of the bankruptcy estate so that the transfer can be avoided under § 549.
Section 105 states; "The court may issue any order, process, or judgement that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process." 11 U.S.C. § 105(a). The Plaintiff citesRagsdell vs. Genisco, Inc., 674 F.2d 277, 278 (4th Cir. 1972), fur the proposition that section 105 permits courts to disallow exemptions which have not been claimed in good faith. However, this argument is irrelevant because the Plaintiff provides no evidence that the exemption, when initially claimed, was made in bad faith. In fact, the Plaintiff agreed that the exemption was proper.
The Defendant argues that as a matter of law, when the Plaintiff failed to object to the exemption, the property became exempt and therefore it is no longer property of the estate for purposes of § 549. The Defendant also argues that the conveyance was permissible because the property was conveyed by a quit-claim deed and thus if objections had been raised after the property was conveyed, it automatically would have reverted back to the Bankruptcy Estate because Mr. Krottinger only conveyed what he lawfully owned at the time of the conveyance. Finally, the Defendant argues that she has personally claimed the property has her own homestead and thus even if the Plaintiff had properly objected to Mr. Krottinger's exemption, such objection could not override the Defendant's homestead rights in the property,
Exemptions are determined as of the bankruptcy petition date. Sec In re Henry, 183 B.R. 748, 751 (Bankr. N.D. Tex. 1995)(citing, e.g., In re Maricle, 25 B.R. 36, 38-39 (Bankr. N.D. Tex. 1982) (normally the date upon which the bankruptcy petition is filed is the relevant date for determination of exemption issues)). Plaintiff admits that the property was properly exempt at the time Mr. Krottinger filed for bankruptcy and he has offered no evidence to demonstrate why it should not have been considered exempt at that time. Therefore, even if this Court were to exercise any equitable powers it may have to extend the deadline for the Plaintiff's objection to the exemption of the property, there do not appear to be any grounds on which the Plaintiff could object. Although the timing of the conveyance of 3710 Cedar Elm may appear to be suspect, there is no issue of material fact as to whether property belonging to the estate was wrongfully transferred post-petition within the meaning of § 549. Therefore, summary judgement is GRANTED as to the transfer of 3710 Cedar Elm.
CONCLUSION
For the foregoing reasons, summary judgement is GRANTED as to the conveyance of 3710 Cedar Elm, Wichita Falls, Texas. Summary judgement is DENIED as to all other claims.