Opinion
Case No. 14-12496
09-17-2015
In Re ANITA RAMIREZ GARZA Debtor
Chapter 7
MEMORANDUM OF DECISION ON ORDER DENYING MOTION TO AVOID LIEN
The Debtor, Anita Ramirez Garza ("Garza"), asks this Court to avoid a judicial lien held by Michael B. Schmidt ("Schmidt") under 11 U.S.C. § 522(f)(1)(A). Schmidt is the chapter 7 trustee serving in Garza's parents' bankruptcy case filed in 2009 in Texas. In the Texas bankruptcy case, Schmidt obtained a judgment for $1,602,645.43 against Garza predicated on a fraudulent transfer of certain funds from Garza's parents to Garza and her siblings shortly before filing their bankruptcy petition. Schmidt converted the judgment obtained against Garza into a judicial lien, which he had placed on Garza's Ohio residence. Before the Court is the motion to avoid Schmidt's judicial lien as an impairment of Garza's Ohio homestead exemption claimed under Ohio Rev. Code § 2329.66(A)(1). See Doc. 24 ("Motion").
Schmidt, not surprisingly, vigorously opposes the Motion. See Doc. 26 ("Response"). Schmidt contends in his Response that the homestead exemption should be reduced under the provisions of 11 U.S.C. § 522(o) - part of the recently enacted BAPCPA reforms of 2005 designed to prevent debtor abuse of the bankruptcy system. See Soule' v. Willcut (In re Willcut), 472 B.R. 88, 94 (B.A.P. 10th Cir. 2012)("the statute was enacted to prevent the fraudulent attempt to build up equity in a homestead.").
JURISDICTION
The Court has jurisdiction over this action pursuant to 28 U.S.C. § 1334(a) and (b). This proceeding arises in a case referred to this Court by the Standing Order of Reference entered in this District, is determined to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (K), and the Court is authorized to enter final judgment under the Constitution. See Wellness Int'l Network, Ltd. v. Sharif, ___ U.S.___,135 S. Ct. 1932, 191 L. Ed. 2d 911 (2015). This memorandum constitutes the Court's findings of fact and conclusions of law under Federal Rule of Bankruptcy Procedure 7052.
ISSUES PRESENTED
The parties raise two issues: (1) whether Garza's Ohio homestead exemption should be reduced pursuant to § 522(o); and (2) whether Schmidt's judicial lien impairs the judicially-determined homestead exemption, if any, pursuant to § 522(f)(1)(A).
SUMMARY OF HOLDING
For the reasons that follow, a reduction of Garza's Ohio homestead exemption to $0 is warranted under § 522(o). Consequently, Schmidt's judicial lien cannot be avoided under § 522(f)(1)(A) because it does not impair an allowed homestead exemption.
OVERVIEW OF § 522(O)
Garza claims a homestead exemption of $84,975.00 pursuant to Ohio Rev. Code § 2329.66(A)(1). Section 522(o) reduces the amount of a state homestead exemption "to the extent that the value of the exemption is attributable to nonexempt property that the debtor converted into the homestead within 10 years of filing for bankruptcy, if the conversion was made with the intent to hinder, delay, or defraud a creditor." In re Addison, 540 F.3d 805, 810 (8th Cir. 2008); see also Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 62, at XVII, (D. Michael Lynn et al. eds., 2015).
Section 522(o) provides, in relevant part:
For purposes of subsection (b)(3)(A), and notwithstanding subsection (a), the value of an interest in-
. . .
(4) real or personal property that the debtor or a dependent of the debtor claims as a homestead,
shall be reduced to the extent that such value is attributable to any portion of any property that the debtor disposed of in the 10-year period ending on the date of the filing of the petition with the intent to hinder, delay, or defraud a creditor and that the debtor could not exempt, or that portion that the debtor could not exempt, under subsection (b), if on such date the debtor had held the property so disposed of.
To date, Addison is the only circuit decision to construe § 522(o). --------
Under § 522(o), a bankruptcy court may reduce the amount of the homestead exemption if the following elements have been established: (1) the debtor disposed of property within the 10 years preceding the bankruptcy filing; (2) the property that the debtor disposed of was nonexempt; (3) the disposition of the nonexempt property is attributable to, among other things, a reduction of the debt associated with an existing homestead; and (4) the debtor disposed of the nonexempt property with the intent to hinder, delay, or defraud a creditor. In re Arends, 506 B.R. 516, 521 (Bankr. N.D. Iowa 2014); In re Corbett, 478 B.R. 62, 69 (Bankr. D. Mass. 2012). In an uncustomary role as a creditor of Garza's estate, chapter 7 trustee Schmidt bears the burden of proving these elements by a preponderance of the evidence. See Willcut, 472 B.R. at 92; Corbett, 478 B.R. at 69-70.
Garza stipulates to the existence of all but one of the required elements. See Doc. 38. Garza strenuously disputes the assertion that she acted with intent to hinder, delay, or defraud a creditor within the ambit of § 522(o)'s prescribed prohibitions. Id.
INTENT UNDER § 522(O)
Neither the Bankruptcy Code nor its legislative history defines the phrase "intent to hinder, delay, or defraud" set forth in § 522(o). Addison, 540 F.3d at 811. However, the same phrase is found in 11 U.S.C. § 548(a)(1) and 11 U.S.C. § 727(a)(2). Thus, most courts interpret § 522(o)'s operative language tempered by the judicial gloss given to those same terms in § 548(a)(1) and § 727(a)(2). Addison, 540 F.3d at 811; Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 62, at XVII.
The Sixth Circuit has not yet had to construe § 522(o), but when deciding cases under § 548(a)(1) and § 727(a)(2), where the identical phrase appears, the Court has required proof of subjective intent. See In re Keeney, 227 F.3d 679, 683 (6th Cir. 2000)(applying § 727(a)(2)). Because a debtor is unlikely to admit to acting with the requisite intent, subjective intent may be inferred from the surrounding circumstances. Id. at 684. Courts look to the existence of "badges of fraud," for evidence of proof that a debtor acted with intent to hinder, delay, or defraud a creditor. Addison, 540 F.3d at 812 (looking to badges of fraud to determine a debtor's intent under § 522(o)); Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 62, at XVII.
Badges of fraud are circumstances frequently attending fraud from which an inference of fraud arises. In re Triple S Rests., Inc., 422 F.3d 405, 414 (6th Cir. 2005). Badges identified by this Court include: (1) concealment of pre-bankruptcy conversions; (2) conversion of assets immediately prior to filing bankruptcy; (3) gratuitous transfers of property; (4) continued use by the debtor of transferred property; (5) transfers of property to family members; (6) obtaining credit to purchase exempt property; (7) conveyance of property following the entering of a large judgment against the debtor; (8) a pattern of "sharp dealing" prior to bankruptcy; and (9) conveyances of property rendering the debtor insolvent. In re Zhang, 463 B.R. 66, 79 (Bankr. S.D. Ohio 2012).
In Addison, the Eighth Circuit approved application of the statutory badges of fraud codified in a Minnesota statute after the debtor in that case claimed a homestead exemption under a different Minnesota statute. Addison, 540 F.3d at 813 (bankruptcy court properly looked to badges of fraud in Minn. Stat. Ann. § 513.44(b), where debtor claimed homestead exemption under Minn Stat. Ann. § 510.02). Applying Addison's rationale to the case at bar, Ohio's statutory badges of fraud include: (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 insolvent 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; and (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).
Armed with an understanding of the proof required under § 522(o), the Court now turns to the facts of this case.
ISSUE PRECLUSION
A threshold question which must be resolved concerns whether the parties in this proceeding are bound by the factual findings made by the Texas bankruptcy court which support the judgment against Garza obtained by Schmidt.
The doctrine of issue preclusion enjoins relitigation of certain issues of fact or law decided in a prior action between the parties based upon a different cause of action. In re Markowitz, 190 F.3d 455, 461 (6th Cir. 1999). The preclusive effect of a federal court judgment from a federal question case is governed by federal common law. Taylor v. Sturgell, 553 U.S. 880, 891 (2008). In the Sixth Circuit, issue preclusion applies if: (1) the issue was raised and actually litigated in the prior proceeding; (2) the determination of the issue was necessary to the outcome of the prior proceeding; (3) the prior proceeding resulted in a final judgment on the merits; and (4) the party against whom estoppel is sought had a full and fair opportunity to litigate the issue. Georgia-Pacific Consumer Prods. LP v. Four-U-Packaging, Inc., 701 F.3d 1093 1098 (6th Cir. 2012).
The Texas bankruptcy court issued a January 5, 2011 decision in support of Schmidt's judgment. That decision did not address the ultimate issues in this proceeding (e.g., § 522(o) and § 522(f)(1)(A)). But it did decide facts necessary to the fraudulent transfer action, both parties had a full and fair opportunity to litigate the factual record, and the factual findings resulted in a final judgment in favor of Schmidt. Consequently, the factual findings set forth in the January 5, 2011 decision ("Texas Findings") are binding upon the parties.
Thus, the factual record before this Court is comprised of the Texas Findings and, to the extent that it does not conflict with the Texas Findings, the record established at the evidentiary hearing held in this Court.
FACTS
From the record compiled in the Texas bankruptcy court and this Court, in chronological order, these facts emerge.
Garza owns a one-half interest in her Ohio residence located at 6501 Cornell Road ("Cornell"). The other one-half interest is owned by Garza's husband, Israel Garza ("Israel"), a key figure in the events leading up to this proceeding.
In October of 2005, Garza's father, Leonardo Ramirez, Sr. ("Leonardo"), who lives in Texas, intentionally shot Roberto Rodriguez ("Rodriguez"), paralyzing him, which left his family nearly destitute, given that he was the principal bread winner. Leonardo was later convicted of the shooting. Subsequently, Rodriguez and his family members filed a civil suit against Leonardo and his wife, Anita Ramirez ("Anita"), in Texas state court. Prior to the shooting, Leonardo and Anita were owners of personal property valued at just under $500,000 and a substantial amount of real estate. In April of 2008, the Rodriguezes obtained a $19.7 million judgment against Leonardo and Anita.
Garza has two siblings, Feliberto Ramirez ("Feliberto") and Leonardo Ramirez, Jr. ("Junior"). In November of 2005, while Leonardo was awaiting his criminal trial, Leonardo and Anita began to transfer real and personal property. In February and March of 2006, they transferred $450, 502.50 in cash to Feliberto and Junior, Garza's two brothers. Then, on March 17, 2008, two days before the Rodriguez state court civil trial was to begin, Feliberto caused a $150,000 cashier's check to be issued to Garza.
Immediately after receiving the check from Feliberto, Garza endorsed it and sent the check to her husband, Israel in Ohio. Israel then used the proceeds from the check to pay off the couple's mortgage on their Ohio residence on Cornell. Specifically, on March 19, 2008, Israel made a $121,839.62 payment satisfying in full the note owed to the mortgagee, Somerville National Bank ("SNB"). On that same date, he deposited the balance of the funds, $28,160.38, into an account at SNB.
As noted, on January 16, 2009, the Debtor's parents, Leonardo and Anita, filed for protection from their creditors under chapter 7 of the Bankruptcy Code in Texas. In the course of those proceedings and in a rigorous effort to recover bankruptcy estate funds, the chapter 7 trustee, Schmidt, prosecuted a fraudulent transfer action against Leonardo, Anita, and their children, Feliberto and Garza, among others. In November of 2011, Schmidt obtained the $1.6 million judgment against Garza.
ANALYSIS OF GARZA'S INTENT UNDER § 522(O)
Several badges of fraud lead this Court to the conclusion that Garza disposed of the $150,000 payment she received from Feliberto with the intent to hinder, delay, or defraud her creditors in violation of § 522(o). First, Garza transferred the $150,000 to her spouse, a close family member and insider. Second, Garza transferred the funds at a time when she was seriously threatened with legal action - a fraudulent transfer action filed three days later. According to Garza's own testimony before this Court, the Texas state court judge informed her that she was going to be sued and that she needed a lawyer. In addition, the Rodriguezes' suit against Garza's parents was going to trial just two days after she received the check for $150,000 from her brother Feliberto. Third, the Texas Findings by the learned judge in that case illustrates a pattern on Garza's part of "sharp dealing" prior to her bankruptcy filing. The Texas bankruptcy court specifically found that Garza conspired with Feliberto to aid and abet their parents' fraudulent transfer of assets. Moreover, the Texas bankruptcy judge found that "Garza repeatedly lied to the Court, and the evidence clearly and convincingly show[ed] that she was motivated by malice[.]" Texas Findings at 26. Lastly, and most importantly, this Court does not believe that Garza received any value from Israel in exchange for the $150,000 he supposedly gave to her from money he kept in his safe.
To divert attention away from her involvement in her family's conspiracy to fraudulently transfer funds, Garza testified before this Court that Israel gave her $150,000 in cash in exchange for the $150,000 cashier's check. Garza further testified that: (1) she was in Texas when she received the cashier's check from Feliberto; (2) the Texas state court judge told her she was going to be sued and she needed a lawyer; (3) Garza couldn't cash the cashier's check in Texas; (4) Garza called Israel and said she needed $30,000 right away; (5) Garza sent the cashier's check to Israel by overnight mail; (6) Israel had $150,000 in cash in the couple's home safe in Ohio; (7) Israel sent $30,000 to Garza; (8) Garza received the $120,000 cash balance when she returned to Ohio; (9) Garza left the $120,000 cash balance in the safe, in an envelope earmarked as her funds; and (10) Garza spent the entire $150,000 in cash prior to her bankruptcy. Both Garza and Israel testified that the cash in the safe came from the sale of personal and business assets back in 2003 when the couple moved from Texas to Ohio.
This Court finds Garza's entire line of testimony about receiving$150,000 in cash from Israel and the circumstances surrounding that event completely incredulous. Garza had no receipts for any of her purported cash purchases. Initially, Garza stated that she gave receipts to her lawyer in Texas. Later, when confronted with an exhibit used for impeachment purposes only, she revised her story stating that she actually had no receipts.
Similarly, Garza at first testified that she easily spent more than $65,000 of the $150,000 on Texas attorney's fees. When confronted with an exhibit used to impeach her during cross examination, Garza conceded that only $22,000 of the alleged $150,000 was used to pay her attorney's fees in Texas.
Garza also testified implausabily that she spent $20,0000 of the $150,0000 on no less than thirty designer purses. Garza claimed further that she gave all but one or two of those purses to friends. Later, Garza admitted that she did not schedule any designer purses on her bankruptcy schedules.
Israel testified that he had $160,000 in his home safe when Garza gave him the cashier's check. Despite supposedly having that much money in his home safe, Israel testified that he did not have an insurance rider to cover the loss of the cash in case the money was ever stolen.
Most compelling to the Court, and belying Garza and Israel's fantastic story about having large amounts of cash in their home safe and expenditures on designer purses, are the bank records from SNB. Trustee Exhibit 11 is an account statement for the loan secured by Cornell. The statement reflects a cash-strapped borrower, not a borrower with $160,000 of disposable cash sitting around in his home safe. First, the statement lists five late charges between June of 2007 and March of 2008. Second, the statement enumerates two cash advances from SNB to Israel in October of 2007, adding a total of $4,288.04 to the loan balance. Lastly, the statement reflects that $1,086.04 was added to the balance for forced place insurance from January 2007 through October 2007.
Trustee Exhibit 11 also includes a deposit ticket, revealing that Israel deposited the balance of the $150,0000, after paying off the mortgage on the couple's Ohio residence, into an account at SNB. This $28,160.38 deposit is inconsistent with Israel's alleged practice of holding $160,000 in his home safe. If Israel gave Garza $150,000 of the cash, then his cash in the safe (distinct from Garza's cash in the safe) dropped from $160,000 to $10,000. If so, why would Israel not at least place the $28,160.38 in his safe? Neither Israel nor Garza provided any plausible explanation for the abrupt change in habit that, if true, would have reduced Israel's safe cash by 93.75%.
For these reasons the Court does not believe that Garza received any funds from Israel in exchange for the $150,000 cashier's check. This, and the other badges of fraud identified above, establish that Garza transferred the $150,000 cashier's check to Israel with the intent to hinder, delay, or defraud her creditors in derogation of § 522(o).
S ECTION 522 (O) C ONCLUSION
Because Garza transferred the $150,000 cashier's check with the intent to hinder, delay, or defraud, § 522(o) reduces her homestead exemption by this amount. Addison, 540 F.3d at 810. According to her Motion, she asserts a homestead exemption of $84,975.00. Consequently, § 522(o) reduces this amount to $0.
S ECTION 522 (F )(1)(A)
The Court must next determine whether Schmidt's judicial lien impairs the judicially-determined homestead exemption of $0 pursuant to § 522(f)(1)(A). The simple answer is that it does not. If there is no allowed homestead exemption, there is no impairment of any exemption and the judicial lien cannot be avoided under § 522(f)(1)(A). See In re Lafferty, 469 B.R. 235, 250 (Bankr. D.S.C. 2012)(denying motion to avoid judicial lien under § 522(f)(1)(A) where homestead exemption reduced to $0 under § 522(o)); see also In re Brinley, 403 F.3d 415, 421 (6th Cir. 2005)(equation to calculate lien avoidance under § 522(f)(1)(A)).
C ONCLUSION
For the foregoing reasons, the Motion will be DENIED. An order to this effect will be entered.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Jeffery P. Hopkins
United States Bankruptcy Judge Dated: September 17, 2015 Copies to: Default List