Opinion
NOT FOR PUBLICATION
MEMORANDUM DECISION
JAMES W. MEYERE, Judge, United States Bankruptcy Court
I
Gregory Akers, Chapter 7 Trustee ("Plaintiff" or "Trustee") filed the complaint in this adversary proceeding to avoid a transfer of real property at 841-843 Euclid Avenue in San Diego, California. ("Property"). The Trustee alleged that the transfer of the Property on December 29, 2005, from the Debtor and his wife to Adolfo Castillo Jr. and Ana Castillo ("Defendants") was a fraudulent transfer as to the creditors of the Debtor, and therefore avoidable under 11 U.S.C. § 544. The Trustee sought to avoid the transfer and to recover and sell the Property free of the interests of co-owners, or to recover the value of the property. The Trustee also requested punitive damages against the Defendants for knowingly and willfully participating in a fraudulent transfer scheme. The Trustee submitted an order to allow the filing of an amended complaint, which was entered on June 19, 2007. The first proposed amended complaint was attached as an exhibit to the order, but does not appear to have been separately filed. The document added a claim against the Castillos for money transfers of $155,362.68, the amount of the check issued to the Debtor and his wife from escrow for the sale of the Property.
The Trustee filed a motion for summary judgment, which was denied in a written decision and order entered on September 25, 2007. The Trustee filed a Stipulation which attached another document entitled amended complaint on October 10, 2007 ("Amended Complaint"). This Amended Complaint added a series of money transfers from the Joint Account which were alleged to be made to or for the benefit of the Castillos between February 3, 2006 and May 31, 2006. After mediation and further pre-trial conferences, the Amended Complaint against the Castillo Defendants was tried on October 22 and 23, 2008, at which time the matter was taken under submission. For the following reasons, the Court will enter judgment in favor of the Trustee in the amount of $65,321.83, against Ana Castillo.
Luis Gutierrez was also added as a defendant with a claim to recover $40,000.00, which was transferred to him. However, the Trustee and the Castillos stipulated to sever the claims against the Castillos from the claim against Mr. Gutierrez, and the trial was limited to the claims against the Castillos.
II
FACTS AND PROCEDURAL BACKGROUND
Defendant Ana Castillo is the daughter of Monica Juarez and the stepdaughter of the Debtor, William Juarez. Mr. and Mrs. Juarez are over seventy years of age. They receive monthly social security and disability payments in an amount sufficient to cover their ongoing living expenses. Monica Juarez did not join in the filing of the bankruptcy petition.
The initial complaint and the Trustee's motion for summary judgment focused on the transfer of the Property by the Debtor and his wife to the Defendants for $400,000, with an $80,000 gift credit. The Trustee sought to avoid the sale as a fraudulent transfer on the grounds that the Castillos failed to pay reasonably equivalent value for the property, because it was worth over $500,000. There were net proceeds from the sale in the amount of $155,362.68. On December 29, 2005, the proceeds were placed in accounts at San Diego County Credit Union ("SDCCU") in the names of the Debtor, his wife, and defendant Ana Castillo ("Joint Account"). The motion for summary judgment was denied on the grounds that the Trustee had not established the Debtor was rendered insolvent by the sale of the Property. He had access to $15 5,362 and no more than $70,00 0 in debt, and enough income to meet his monthly expenses.
Checks were issued from the Joint Account in January 2006, to pay the Debtor's obligations to Union Bank and American Express. The Debtor had a gambling problem. In an attempt to protect the Debtor and his wife, the Defendants bought the Property from them and intended to build another unit on the lot to rent to a third party to cover the mortgage. The Debtor and his wife would have a place to live and the Defendants hoped to receive enough rental income to pay the expenses associated with the Property. During the first part of 2006, money in the Joint Account was used to make the monthly payments to Countrywide of $2,410.24, for the mortgage on the Property, to begin work on the new unit and for some payments to another relative, Luis Gutierrez. Ana Castillo was trying to help her mother and the Debtor to control expenditures from the Joint Account. The Debtor learned that he had access to the Joint Account, and withdrew some money. To prevent the Debtor from using more money to gamble, Ana Castillo transferred the remaining balance of $92,041.45 from the Joint Account to an account solely in her name on May 31, 2006. ("May 31 Transfer") . The May 31 Transfer depleted the Debtor's assets, and rendered him insolvent. The Debtor owed Union Bank over $10,000 at that time, and remained indebted to Union Bank at the time he filed his Chapter 7 petition. After the May 31 Transfer, Ana Castillo did issue some checks on behalf of the Debtor in the following amounts:
$3,000.00
to American Express on June 5, 2006,
$ 125.00
to the U.S. Treasury on November 14, 2006,
$ 54 9.4 8
to the Franchise Tax Board on January 8, 2007,
$8,062.47
to the IRS on January 8, 2007, and
$1,000.00
to American Express on January 10, 2007.
$12,736.95
- Total
The Debtor incurred some other debts on credit cards, and when Ana Castillo refused to pay those creditors, he filed his Chapter 7 petition on March 8, 2007. The Debtor did not tell Ana Castillo that he was planning to file a Chapter 7 petition. The schedules and claims register indicate he owed three creditors just over $52,000 on the petition date, and had virtually no assets.
After the complaint was filed, the Trustee learned that Ana Castillo was still holding the Debtor's money in her account, and she wrote the Trustee a check for the remaining balance of $13,982.67. The Trustee acknowledges the Defendants are entitled to a credit for the amount already turned over. The Defendants claim they are entitled to offset the amounts paid on behalf the Debtor, including those listed above, plus another $10,650 to other family members, as well as the amounts used for mortgage payments on the Property and additional expenses they incurred for landscaping and engineering for the Property. The new unit was not built, but the Debtor and his wife still live at the Property and are now paying $500/month rent to the Defendants. During the trial, the Defendants attempted to itemize all the expenses which they felt they were entitled to offset against the May 31 Transfer. The Trustee tried to prove that the Defendants and the Debtor engaged in a scheme with the actual intent to hinder, delay or defraud creditors of the Debtor.
III
DISCUSSION
The Trustee seeks to avoid the transfer of the Property, the deposit of the escrow proceeds to the Joint Account, and a series of other transfers from the Joint Account under Cal. Civ. Code §§ 3439.04 or 3439.05, through the Trustee's strong arm power found in § 544. Fraudulent transfers are subdivided into actually fraudulent transfers which are avoidable under Cal. Civ. Code § 3439.04(a)(1), or constructively fraudulent transfers avoidable under Cal. Civ. Code §§ 3439.04(a)(2) or 3439.05. In re Cohen, 199 B.R. 709, 716 (9th Cir. BAP 1996) . "Fraud, in the sense of morally culpable conduct, need not be present in either category of fraudulent transfer." Id. To find a transfer was made with the intent to hinder, delay or defraud a creditor, the Court is to focus on the intent of the Debtor, as transferor. In re Beverly, 374 B.R. 221, 235 (9th Cir. BAP 2007), adopted and aff'd. _F.3d _, 2008 WL 53282453 (9th Cir. Dec. 24, 2008).
The Court has considered the factors enumerated in Cal. Civ. Code § 3439.04(b), and concludes that neither the sale of the Property to the Defendants nor the deposit of the escrow funds in the Joint Account constituted a fraudulent conveyance in which the Debtor had the actual intent to hinder, delay or defraud a present or future creditor. The evidence presented at trial leads to the conclusion that the Debtor's intent regarding the sale of the Property, and the deposit of escrow proceeds into the Joint Account reflected the Debtor's acquiescence to his family's concerns about his gambling problem. It was a decision by a family to try and improve their real estate in a fashion to allow the Debtor and his wife to remain in the Property, and to generate income to meet the mortgage payments. These transfers were intended to hinder the Debtor from squandering his assets on gambling rather than an attempt to hinder, delay or defraud any creditor of the Debtor. He had agreed to stop gambling and wanted help to overcome the problem.
To avoid a transfer as constructively fraudulent, the Trustee bears the burden to prove that the Debtor transferred an asset without receiving a reasonably equivalent value in exchange for the transfer, and the Debtor either was (A) engaged or was about to engage in a business or a transaction for which the remaining assets of the Debtor were unreasonably small in relation to the business or transaction, or (B) intended to incur, or believed or reasonably should have believed that he would incur debts beyond his ability to pay as they became due. Cal. Civ. Code § 3439.04(a)(2).
Defenses are available to transferees who received a transfer in good faith and for value. Cal. Civ. Code § 3439.08; In re A FI Holding, Inc., 525 F.3d 700, 704 (9th Cir. 2008).
After trial, the Court arrives at the same conclusion that it reached after summary judgment; the sale of the Property by the Debtor and his wife to the Defendants is not avoidable as a fraudulent transfer. Although the sale price may have been somewhat below market, it was not by any means an outright gift. The Defendants became obligated on a secured debt of over $320,000, and the Debtor and his wife received net proceeds from the sale of $155,362, after creditors were paid. The remaining outstanding debts of the Debtor were paid from the proceeds the following week. The Debtor and his wife still had more than enough assets to pay all outstanding liabilities, and continued to receive monthly income from social security and disability. The Debtor was not rendered insolvent by the transfer of the Property, and if he was able to control his gambling, he would have had sufficient assets to pay his debts as they became due. Similarly, the deposit of the escrow proceeds into the Joint Account was not a transfer from the Debtor to the Defendants. Adolfo Castillo was not even included on the account, and there was no showing that he had access to those funds. Although Ana Castillo was one of the three people whose name appeared on the account, she still considered the money in the account to belong to the Debtor. She was just providing additional oversight of the money. Until the May 31 Transfer, the Debtor had adequate money available to pay his bills in full. Before that date, any transfers from the Joint Account did not result in insolvency of the Debtor or inability to pay his bills.
However, the May 31 Transfer rendered the Debtor insolvent. That transfer to Ana Castillo, in the amount of $92,041.45 is avoidable as a constructively fraudulent transfer. As the Trustee has acknowledged, she is entitled to reduce that amount by the $13,982.67 already delivered to the Trustee. In addition, the Court finds that she is entitled to a further offset of the $12,736.95, itemized above on page 4 for checks she issued to non-insider creditors on the Debtor's behalf.
The Court will not deduct the amounts she spent after the May 31 Transfer for payments on the Countrywide Loan secured by the Property. The Defendants were the owners of the Property. They were liable for the Countrywide debt. The payments made were of benefit to the Defendants, not to the Debtor. They did not establish an entitlement to rent for the Property from the Debtor in the $2,410.24/month paid to Countrywide. For the same reason, Ana Castillo is also not entitled to deduct the disbursements to subcontractors to improve the Property. The Defendants bought the Property. The Court is not avoiding the sale of the Property as a fraudulent transfer. Any of the Debtor's money used toward the Property after the May 31 Transfer was of benefit to the Defendants, not the Debtor.
The Defendants are also not entitled to a credit for payments to other insiders Denise Castillo and Silvia Gutierrez. Ana Castillo unilaterally took control of the money in the May 31 Transfer. The evidence was not adequate to show that these payments were for legitimate obligations owing by the Debtor. To further compensate the creditors of the estate for the time value of the funds, it is appropriate to award interest on the judgment from October 10, 2 0 07, the date the order authorizing the filing of the Amended Complaint was entered. See In re Slatkin, 525 F.3d 805, 820 (9th Cir. 2008).
IV
CONCLUSION
The Trustee sustained his burden to prove that the May 31 Transfer to Ana Castillo was constructively fraudulent, and avoidable under Cal. Civ. Code § 3439.04(a)(2)(B). After deducting the amount she has already turned over to the Trustee, and the additional $12,736.95 as credit for the amount she paid to creditors on the Debtor's behalf, a judgment against Ana Castillo in the amount of $65,321.83 is appropriate to make the estate whole as a result of the May 31 Transfer. The Trustee did not establish conduct of a nature to support an award of punitive damages. Counsel for the Trustee is directed to submit a proposed judgment within 14 days of entry of this Memorandum Decision.