Opinion
ORDER ON MOTIONS FOR SUMMARY JUDGMENT
PETER W. BOWIE, Chief Judge, United States Bankruptcy Court
Jet Source Charter, Inc., (Plaintiff) has a judgment claim against Brian J. Doherty (Debtor). Plaintiff commenced the above referenced adversary proceeding seeking, among other things, to set aside various transfers from Debtor to his wife Victoria L. Doherty (Defendant). Plaintiff and Defendant have filed motions for summary judgment regarding specific transfers which Plaintiff alleges are avoidable as fraudulent conveyances and/or preferences.
This Court has subject matter jurisdiction over the proceeding pursuant to 2 8 U.S.C. § 13 34 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) & (H).
CASE STATUS
On February 20, 2004, Debtor filed a voluntary petition under chapter 11 of the Bankruptcy Code. Plaintiff is a judgment creditor of the Debtor based upon a judgment entered on August 6, 2001 (Judgment). As of the petition date, the Judgment had not been satisfied. The Judgment has been ruled nondischargeable.
Plaintiff commenced this adversary proceeding seeking, among other things, to avoid various transfers from Debtor to Defendant as fraudulent transfers under state and federal statutes and/or preferences. Generally, the alleged transfers fall into four categories:
1. Money Debtor transferred directly or indirectly into Defendant's bank accounts (Deposits);
2. The transfer of the residence at 3192 Caminita Cortina, Fallbrook, California (Residence) from community property to separate property;
3. The $32,200 cashier's check which Defendant withdrew from and later redeposited into her bank account; and
4. The alleged concealment of Debtor's interest in the business and commercial property known as Main Street Autobody in Fallbrook, California.
Plaintiff and Defendant filed cross-motions for summary judgment. The Court heard argument. At the hearing the Court granted summary judgment in favor of Defendant with respect to the $32,200 cashier's check and the business and commercial property known as Main Street Autobody. As to the remaining matters, the Deposits and the Residence, the Court gave the parties an opportunity to file supplemental briefs. Plaintiff and Defendant filed supplemental briefs, and the Court thereafter took the matter under submission. In its supplemental brief, Plaintiff argues that there are questions of facts both as to the Residence and the Deposits. For the reasons discussed below the Court agrees and denies both motions on the remaining issues. An evidentiary hearing will be necessary.
The Debtor and Defendant were married on December 23, 1981. Prior to the marriage they entered into a prenuptial agreement (Prenuptial Agreement). The Prenuptial Agreement provided that all property owned or acquired by Debtor and Defendant during their marriage would remain the separate property of each.
The Deposits
Throughout the marriage Defendant was employed as a flight attendant with Delta Airlines. She maintained a bank account with Delta Employee's Credit Union. Beginning prior to Debtor's business relationship with Plaintiff, Debtor and Defendant used Defendant's account as a depository for both of their incomes. From this account Defendant paid the joint expenses as well as separate expenses of Debtor. Defendant would then transfer the remainder to Debtor's individual account. According to an accounting provided by Defendant (and not challenged by Plaintiff) from January 2000 to February 2004, $1,460,044.00 was deposited into the account by or on behalf of the Debtor. During this same period of time Defendant paid Debtor's expenses totaling $444,788.00. Over the same period $1,086,000.00 was transferred out of Defendant's account and back into Debtor's personal accounts.
Plaintiff seeks to set aside the Deposits as fraudulent conveyances - both actual and constructive.
The Residence
On March 15, 2 001, Defendant and Debtor purchased the Residence. The down payment of $350,000 was paid by Debtor. The Debtor and Defendant initially took title to the Residence as community property as reflected in the Grant Deed. This was done, according to Defendant, at the request of the lender. Concurrent with the purchase they each executed quitclaim deeds transferring their interests to each other as their sole and separate property as to an undivided fifty percent interest. The quitclaim deeds were recorded one day after the Grant Deed was recorded.
DISCUSSION
1. Defendant's Motion
Deposits - Actual Fraud
Defendant argues that Plaintiff has failed to provide evidence that the Deposits were made with the actual intent to defraud. The Court agrees that Plaintiff has not provided "smoking gun" evidence that Debtor and Defendant intended to defraud creditors. However, direct evidence of fraud is rarely-available. Rather, circumstantial evidence of "badges of fraud," is most often considered by the finder of fact to determine the intent of the transferor. In re Beverly, 374 B.R. 221, 235 (9th Cir.BAP 2007). "Whether there is actual intent to hinder, delay, or defraud under UFTA is a question of fact to be determined by a preponderance of the evidence." Id. "The focus is on the intent of the transferor." Id. In the case at hand, the evidence before the Court is that Debtor and Defendant used a method of bill payment which is at best unconventional, and did in fact result in money being, at least temporarily, out of the hands of the Debtor and beyond the reach of his creditors. While this does not establish intent to defraud as a matter of law, it does give rise to a question of fact with respect to the Debtor's intent - the intent of the debtor being the critical factor.
A list of the factors to be considered can be found in In re Beverly. 374 B.R. at 235.
Defendant relies on In re Montalvo, 333 B.R. 145 (Bankr.W.D.Ken. 2005), in which the court found no intent to defraud where the debtor made transfers to the non-debtor wife to pay living expenses. However, that case was decided after trial and based upon a weighing of the evidence. The Court finds that the circumstances surrounding the Deposits gives rise to at least a question of fact regarding Debtor's intent. Defendant's motion for summary judgment on the issue of actual intent with respect to the Deposits is denied.
Deposits - Constructive Fraud
Defendant also seeks summary judgment on the ground that Debtor received reasonably equivalent value in exchange for the Deposits because Defendant used the money to pay Debtor's obligations and returned the remainder to Debtor. Like intent, reasonably equivalent value is a question largely of fact. The fact that Debtor's estate was ultimately not reduced, does not necessarily carry the day as to the value Debtor received when the Deposits were made. None of the cases relied upon by Defendant deal with the situation we have in this case where the Defendant did not immediately use the money to pay Debtor's obligations, the obligations which were ultimately paid did not necessarily exist at the time of the Deposits, and the Defendant was, so far as the Court can tell, under no contractual obligation to use the Deposits to pay Debtor's obligations. The Montalvo case, as noted, was decided after a trial and based upon Kentucky law (which provided that debtor had a legal obligation to support his wife and children). The Court finds that it has insufficient evidence of the actual value that Debtor received at the time the Deposits were made. The ultimate determination may-depend upon the agreement, understanding and practice of the Defendant and Debtor. At any rate, this question of fact requires denial of Defendant's motion for summary judgment on this ground. Accordingly, Defendant's motion for summary judgment with respect to the Deposits is denied.
Residence - Actual Fraud
Debtor and Defendant took the Residence as community property, which was contrary to their Prenuptial Agreement. As community property it was available, subject to homestead considerations, to creditors of both. Defendant and Debtor promptly transferred their community property interests in exchange for separate interests in half of the Residence, rendering the other half beyond the reach of creditors of the other. This may have been, as Defendant argues, initially an innocent adherence to the demands of the lender and, subsequently, their longstanding Prenuptial Agreement. On the other hand, it may have been with the intent to hinder or delay creditors. In State Board of Equalization v. Woo, 82 Cal.App.4th 481 (2000), the court held that a transmutation of community property to separate property did, in that case, amount to an intentional fraudulent conveyance. The Court has insufficient evidence to make this determination as a matter of law. Specifically, Defendant has failed to provide any testimony of the Debtor of his intent - that, as discussed above, being the focus. Accordingly, Defendant's motion for summary judgment on this ground is denied.
Residence - Constructive Fraud
Debtor and Defendant acquired the Residence as community property, but immediately thereafter Debtor transferred his community interest in the Residence to Defendant in exchange for a separate interest in the half. Plaintiff seeks to set aside the transfer as constructively fraudulent, arguing that Debtor received less than reasonably equivalent value. However, it is unclear from Plaintiff's argument exactly what transfer it seeks to set aside. At first blush, it appears Plaintiff is focusing on the transfer by Debtor of his community property interest in the Residence in exchange for a separate property interest in half of the Residence. If this is the case. Plaintiff, who has the burden to establish less than reasonably equivalent value, has provided neither evidence nor authority establishing that Debtor received less than he gave. Debtor began with a community property interest in the entire property and exchanged that for an undivided 50% interest in the Residence as a tenant in common.
That is, of course, different from the creditor's perspective, where a creditor has less to look to. Another facet of Plaintiff's argument appears to be that because Debtor paid the $350,000 down payment, and then gave Defendant a one-half interest in the Residence for no immediate consideration, that transfer was constructively fraudulent.
The bigger picture argument advanced by Plaintiff is that Debtor and Defendant took title to the property as community property, and that it should be considered to have remained as community property notwithstanding the transfer of interests by quitclaim deeds.
As has already been discussed, the central issue is intent, which will require an evidentiary hearing. Accordingly, Defendant's motion for summary judgment on this issue is denied.
Preferences
Defendant also seeks summary judgment on Plaintiff's claim of preferences, arguing that a trustee cannot avoid a transfer made in the ordinary course of the financial affairs of the Debtor. However, Defendant provides no evidence by the Debtor of his customary practices. The Court will need to consider all of the evidence regarding the arrangement between Debtor and Defendant before determining whether the Deposits (or purchase and transfer of the Residence for that matter) were made in the ordinary course. Specifically, the Court is concerned that the amounts of the Deposits seem to have increased once Plaintiff began its action.
2. Plaintiff's Motion
In its Motion for Summary Judgment Plaintiff contends that it is entitled to "judgment as a matter of law for the reason that:
1. Transfers of Brian Doherty's income directly to the account of Victoria Doherty are intended to delay, hinder and defraud Doherty's creditors.
2. The property held as the separate property of Victoria Doherty was transferred to her without an exchange of value and is therefore a fraudulent conveyance.
3. The transfers of money and property were improper preferential transfers."
Deposits - Actual Intent
With respect to the assertion of actual intent with respect to the Deposits, Plaintiff admitted at hearing that a ruling would have to be based upon circumstantial evidence presented to the Court at a trial. See Transcript at 26:10-20. Plaintiff suggests the same in its Supplemental Points and Authority. The Court agrees.
In the case upon which Plaintiff seems to rely most heavily, Kirkland v. Risso, (1980) 98 Cal.App.3d 971, the court found actual intent only after trial. It may turn out that the evidence in this case supports a finding of actual intent after trial. However, the evidence presented in support and opposition to the motions for summary judgment does not establish the fact as a matter of law - there remain material issues of fact. The Kirkland case does provide that relatives in a "confidential relationship" "are held to a fuller and stricter proof of the consideration and fairness of the transaction." Id. at 978-79. The Court will certainly keep that in mind when this case comes to an evidentiary hearing. However, that slight weighting in the relative burdens will not carry a motion for summary judgment where issues of fact exist.
Plaintiff recognizes that it will likely have to rely on one or more of the "badges of fraud," and asserts that no particular number of badges are necessary for finding of fraud citing In re Serrato, 214 B.R. 219 (Bankr.N.D.Cal. 1997). Again, the Court is persuaded that this is an accurate statement of the law. However, whether any badges of fraud exist is a factual issue which will be addressed in an evidentiary proceeding. In Serrato, the court found actual fraud based upon the existence of numerous badges of fraud. Id. at 231. However, this was only after the court conducted a lengthy trial. Id. at 225.
In In re Beverly, the trustee provided evidence in the form of correspondence of the debtor that the pre-judgment division of property was specifically designed to keep the property from the reach of the judgment creditor - "the direct evidence in the debtor's own words in letters to his spouse's counsel ... is remarkably candid." Id. at 236. The correspondence, received by the spouse, also served to belie her claim of good faith. Id. at 239. In the case at hand, we have no such direct evidence - only Plaintiff's conjecture as to the intent of the Debtor and Defendant.
Accordingly, Plaintiff's motion for summary judgment on the issue of actual intent relative to the Deposits is denied.
Deposits - Constructive Fraud
With respect to the assertion of less than reasonably-equivalent value, in its Supplemental Points and Authority-Plaintiff admits that a question of fact exists as to these transactions and whether received reasonably equivalent value was provided. The Court agrees. Accordingly, Plaintiff's motion as it relates to the Residence is denied.
Residence
As discussed above, Plaintiff has failed to establish that as a matter of law or uncontroverted fact the transfer of form of ownership - from community property to separate property - was done for less than reasonably equivalent value. Plaintiff has also failed to establish as a matter of law that it was done by Debtor with the actual intent to hinder or delay his creditors. Accordingly, Plaintiff's motion for summary judgment with respect to the Residence is denied.
Preferences
The only other assertion in Plaintiff's motion is that certain unidentified transfers of money and property from Debtor to Defendant were preferences. However, so far as the Court can discover. Plaintiff has provided no evidence that Debtor was indebted to Defendant at the time of any of the transfers. Accordingly, Plaintiff's motion on this ground is denied as well.
CONCLUSION
For the reasons discussed above, except as provided by the Court in the hearing, the motions of Plaintiff and Defendant are denied.
IT IS SO ORDERED.