Oliver, Trustee v. Cooper et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
GREENVILLE DIVISION
IN RE:
LUTHER WHITFIELD BATEMAN, JR.,
DEBTOR
CHAPTER 7
CASE NO. 10-06206-8-RDD
GEORGE M. OLIVER, TRUSTEE, ADVERSARY PROCEEDING
NUMBER: 11-00397-8-RDD
Plaintiff
v.
CAROL BATEMAN COOPER,
LOUIS EUGENE BATEMAN,
TIMOTHY ROSS BATEMAN, and
ROBERT CHARLES BATEMAN,
Defendants.
ORDER GRANTING MOTION TO DISMISS ADVERSARY PROCEEDING
Pending before the Court is the Motion to Dismiss Amended Complaint (the “Motion”) filed
by Carol Bateman Cooper and Timothy Ross Bateman (the “Movants”) on May 14, 2012, and the
Response to Motion to Dismiss Amended Complaint (the “Response”) filed by George M. Oliver,
SO ORDERED.
SIGNED this 26 day of July, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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Chapter 7 Trustee (the “Trustee”) on June 4, 2012. On June 21, 2012, the Court conducted a hearing
on the Motion and the Response in New Bern, North Carolina.
BACKGROUND
Luther Whitfield Bateman, Jr. (The “Debtor”) filed a voluntary petition for relief under
Chapter 7 of the Bankruptcy Code on August 4, 2010. On September 2, 2004, the Debtor purchased
real property described as 106 Sanderlin Road, Shawboro, North Carolina (the “Property”). On
September 26, 2008, the Debtor transferred his interest in the Property by North Carolina General
Warranty Deed to Carol Bateman Cooper, Timothy Ross Bateman, Louis Eugene Bateman, and
Robert Charles Bateman (collectively hereinafter referred to as the “Defendants”). The Debtor
retained a life estate in the Property “for and during the term of his life, or until such time as he shall
cease to reside at the same for a period of twenty-four (24) months.” On Schedule A of the petition,
the Debtor valued his interest in the Property at $186,000.00. Schedule D lists a mortgage on the
Property held by Guardian Federal Credit Union (“Guardian Federal”) in the amount of $15,395.99.
The Trustee commenced this adversary proceeding against the Defendants on
December 30, 2011, with the filing of the Complaint for Avoidance and Recovery of Fraudulent
Transfer (the “Complaint”). In the Complaint, the Trustee sought to avoid and recover fraudulent
transfers relating to the transfer of the Debtor’s Property to the Defendants pursuant to 11 U.S.C.
§ 548, N.C. Gen. Stat. § 39-23.4, and 11 U.S.C. §§ 501 and 551. Specifically, the Trustee alleged
that the Defendants, who are the children of the Debtor, are insiders and paid little or no
consideration to the Debtor for the transfer of his interest in the property.
On January 30, 2012, the Movants filed a Motion to Dismiss, requesting the Court dismiss
the Trustee’s Complaint for failure to state a claim upon which relief may be granted pursuant to
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Federal Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Federal
Rule Bankruptcy Procedure 7012(b). The Court conducted a hearing on the Movants’ Motion to
Dismiss Complaint on March 14, 2012, in Wilson, North Carolina. On April 2, 2012, the Court
entered the Order Granting Motion to Dismiss Adversary Proceeding, Granting Oral Motion for
Leave to Amend Complaint, and Setting Deadlines for Filing Amended Complaint and Responses
Thereto (the “Order”). The Order granted the Movants’ Motion to Dismiss upon finding that the
Complaint failed to allege sufficient factual allegations as to the elements of a preference claim
under 11 U.S.C. § 548, N.C. Gen. Stat. § 39-23.4, and 11 U.S.C. §§ 501 and 551. The Order also
granted the Trustee’s oral motion for leave to amend, and allowed the Trustee twenty-one (21) days
in which to file an amended complaint.
On April 23, 2012, the Trustee filed the Amended Complaint for Avoidance and Recovery
of Fraudulent Transfer (the “Amended Complaint”). The Amended Complaint also seeks to avoid
the transfer of the Debtor’s Property to the Defendants pursuant to 11 U.S.C. § 548, N.C. Gen. Stat.
§ 39-23.4, and 11 U.S.C. §§ 501 and 551. The Trustee’s Amended Complaint adds few facts that
were not previously set forth in the Complaint. Specifically, the Amended Complaint adds the
following paragraphs:
11. According to the Deed, the Debtor retained a life estate in the Property.
12. The Debtor asserted on his Schedule C-1 that [he] was seventy eight (78)
years of age as of the Petition date. . . .
14. Also listed on the Debtor’s Schedule D and Schedule F are total liabilities
of $75,559.33, consisting of $29,181.98 in secured claims and $44,377.35 in
unsecured claims.
15. On Debtor’s Schedule I is listed $3,562.40 in average monthly income
versus $3,564.42 in average monthly expenditures listed on Schedule J, leaving
a net of negative $2.02 per month.
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16. Based on the approximate market value of the Property and the amount of
the mortgage to Guardian Federal, as listed on the Debtor’s schedules, equity
existed in the Property of approximately $170,604.01 on the Petition Date.
17. As a result of the transfer of the property, the Debtor was left insolvent,
owing, at minimum, a mortgage to Guardian Federal, which the Debtor would
have been unable to meet as the obligation came due.
Amend. Compl. at 2, 3.
On June 4, 2012, the Movants filed the Motion, requesting the Court dismiss the Trustee’s
Amended Complaint for failure to state a claim upon which relief may be granted pursuant to Federal
Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Federal Rule
Bankruptcy Procedure 7012(b). The Movants contend that the Trustee fails to allege sufficient
factual allegations to support a claim under 11 U.S.C. § 548 (a)(1)(B). Specifically, the Movants
argue that as to the insolvency requirement the Trustee fails to provide any facts to show that all of
the elements of § 548(a)(1)(B) were met; and that the Trustee merely makes the conclusory statement
that “as a result of the transfer of the Property, the Debtor was left insolvent, owing, at a minimum,
a mortgage to Guardian Federal, which the Debtor would have been unable to meet as the obligation
came due.” Movants further contend that the Trustee failed to “set forth any information as to the
Debtor’s financial status as of September 30, 2008 when the Deed was recorded or shortly
thereafter.”
In the Trustee’s Response, the Trustee contends the “Amended Complaint sets forth factual
allegations which demonstrate that upon the transfer of the Debtor’s interest in the Property, the
Debtor was left insolvent, owing, at minimum, a mortgage to Guardian Federal, which the Debtor
would have been unable to meet as the obligation came due.” The Trustee further contends that
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these factual allegations establish sufficient facts to state a claim for relief that is plausible on its
face.
DISCUSSION
A pleading that states a claim for relief must contain “a short and plain statement of the claim
showing that the pleader is entitled to relief . . . . ” Fed. R. Civ. P. 8(a)(2). According to Bell Atl.
Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), there is a
heightened pleading standard, and the complaint must include “enough facts to state a claim to relief
that is plausible on its face.” Angell v. Ber Care, Inc. (In re Caremerica, Inc.) 409 B.R. 737, 745
(Bankr. E.D.N.C. July 23, 2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S. Ct.
1955, 1974, 167 L.Ed. 2d 929 (2007)). There are “two working principles” upon which the
heightened pleading standard rests:
First, the tenet that a court must accept as true all of the allegations contained
in a complaint is inapplicable to legal conclusions. Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do not
suffice . . . . Second, only a complaint that states a plausible claim for relief
survives a motion to dismiss.
Id. at 747 (quoting Iqbal, at 1949).
Pursuant to 11 U.S.C. § 548(a)(1), the trustee may avoid fraudulent transfers of an interest
of the debtor in property incurred within two years before the petition date. Section 548 provides
in part:
(a)(1) [t]he trustee may avoid any transfer . . . of an interest of the debtor in
property, . . . that was made . . . on or within 2 years before the date of the filing
of the petition, if the debtor voluntarily or involuntarily . . .
(B)(i) received less than a reasonably equivalent value in exchange for such
transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made . . . or became
insolvent as a result of such transfer . . . .
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To avoid a transfer under § 548, the debtor must be insolvent on the date that such transfer
was made. Callaway v. Novelli (In re Bouchard) 09-06110-8-RDD, 2011 WL 110901 at *2 (Bankr.
E.D.N.C. Jan. 12, 2011). Section 101(32)(A) provides that a debtor is insolvent when “the sum of
such entity’s debts is greater than all of such entity’s property, at a fair valuation . . . .” Ber Care, Inc.,
409 B.R. at 745 (citing 11 U.S.C § 101(32)(A)). “Because a debtor must be insolvent on the date of
the transfer, in order for the trustee to be successful in a claim based on § 547(b), it follows that the
trustee must allege facts sufficient to show that such insolvency is plausible.” Id. at 752. While the
Trustee in this case does not seek to avoid a preference under § 547(b), the Court finds that the
insolvency requirement of § 547(b)(3) and the insolvency requirement of § 548(a)(1)(B)(ii)(I) are
substantively the same. Therefore, for the Trustee to be successful in this claim based on
§ 548(a)(1)(B), the Trustee must allege facts sufficient to show that the Debtor was insolvent on the
date of the transfer. With this in mind, the plaintiff “bears the burden of proof on all essential
elements of § 548(a)(1)(B).” Warren v. Abreu (In re Skumpija), AP No. 11-00072-8-SWH, 2011 WL
5909263, at *2.
The Trustee’s Amended Complaint alleges the Debtor “became insolvent as a result of the
transfer of the Property to the Defendants.” Although the Amended Complaint recites the elements
of § 548(a)(1)(B), it fails to provide factual support of these allegations. According to Warren v.
Abreu, a complaint under § 548(a)(1)(B) must allege a “fraudulent transfer, identif[y] the
consideration alleged to have been received by the transfer, and identif[y] information concerning
why plaintiff maintains the consideration was not reasonably equivalent in value, as well as sufficient
facts regarding insolvency.” Warren, 2011 WL 5909263, at *2 (citing Ber Care, Inc., 409 B.R. at
6
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756). The Amended Complaint alleges a fraudulent transfer occurred on September 26, 2008, that
no consideration was given in exchange for the transfer, and that this did not equate to the reasonably
equivalent value of the Property. The Amended Complaint recites the Debtor’s assets and liabilities
as indicated in his schedules dated August 4, 2010, but fails to provide a basis to find that the Debtor
became insolvent as a result of the transfer on September 26, 2008, when the Deed was recorded, or
shortly thereafter. In the Order dated April 2, 2012, this Court informed the Trustee that even if the
Court were to take judicial notice of the Debtor’s schedules, there would still not be sufficient facts
to support the Debtor’s insolvency on or about the date of transfer. The Court noted that the Debtor’s
assets and liabilities as indicated on the Schedules, nearly two years subsequent to the date of the
transfer, cannot show that it is plausible the Debtor was insolvent on the date of the transfer, or
became insolvent as a result of the transfer. As such, the Amended Complaint does not provide
sufficient facts showing the Debtor’s actual assets and liabilities as they existed on the date the
Property was transferred, or shortly thereafter.
In this case, the Trustee asserts that the Debtor’s interest in the Property has no value, and as
such, the Debtor’s debts were greater than all of the Debtor’s assets at the time of the filing. To
support this assertion, the Trustee’s Amended Complaint lists the information found on the Debtor’s
bankruptcy schedules. The schedules filed in the Debtor’s bankruptcy case indicate that as of the date
of the petition, the Debtor’s assets totaled approximately $200,675.00, including the approximate
value of the Debtor’s interest in the Property, $186,000.00, while the Debtor’s liabilities totaled
approximately $73,559.33. As for liabilities, the Debtor’s schedules list approximately $29,181.98
in secured claims and approximately $44,377.35 in unsecured claims. The unsecured claims largely
represent credit card debt. The Amended Complaint fails to provide factual allegations that the assets
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were incorrectly valued on the Debtor’s petition, or that these liabilities existed on or about
September 26, 2008, the date of the transfer. In the April 2, 2012 Order, the Court also informed the
Trustee that the Complaint failed to provide factual allegations to prove that the unsecured liabilities
existed on or about September 26, 2008, the date of the transfer. The Court stated that in order to
plead sufficient facts in regard to the essential element of insolvency, the Trustee must plead facts
showing the Debtor’s actual assets and liabilities on or about September 26, 2008. Because no facts
are alleged to suggest that the assets in the Debtor’s schedules were incorrectly valued, or that the
assets and liabilities existed on the date of the transfer, the Amended Complaint fails on its face to
state a claim for which relief may be granted under the Twombly and Iqbal pleading standards.1
At the hearing on the Motion, the Trustee asserted that the Debtor has no interest in the
Property because the life estate terminated on or about September 26, 2008, the date the Property was
transferred to the Defendants. The Trustee argued that the Debtor has never lived on the Property,
but has only kept his belongings there. Therefore, the Trustee argued the Debtor’s life estate was void
as of the date of the transfer or soon thereafter, in accordance with the deed, which created a life estate
in the Debtor and a remainder interest in the Defendants. As such, the Trustee argued the Debtor’s2
interest in the Property was $0.00, leaving him insolvent as he had no assets sufficiently valued to
In the Amended Complaint the Trustee states “the Property had a market value of	1
$186,000.00 as of the Petition Date.” Amend. Compl. ¶ 10. The petition date was over a year
and a half after the transfer date. As such, the Amended Complaint fails to reasonably allege the
value of the Property at the time of the transfer.
The deed transferring the Property created a life estate in favor of the Debtor, with	2
interests transferred to the Defendants in the event that the Debtor failed to reside on the Property
for a period of 24 months. Therefore, the life estate could not be void as of the date of the
transfer because the deed creating the life estate requires the Debtor to not reside on the Property
for 24 months. Thus, the life estate could not have been void at the date of transfer. The life
estate could only have terminated at a minimum of 24 months after the date of transfer.
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cover the mortgage to Guardian Federal. In the alternative, the Trustee argued that if the Debtor still
had an interest in the Property as of the date of the petition, the Debtor’s life estate would not be
worth more than the $15,395.99 mortgage to Guardian Federal, thus leaving the Debtor insolvent.
However, none of these facts argued by the Trustee were stated in the Amended Complaint.
Further, the Trustee failed to determine, and failed to allege, the value of the life estate, should
it still be valid. Section 20.2031-7 of the Code of Federal Regulations states “the fair market value
of . . . life estates . . . is the present value of such interests.” 26 C.F.R § 20.2031-7(a). If the Debtor
had retained an interest in the life estate at the time of the filing of the petition, the value of that
interest would have been $38,353.20. Even after factoring in the mortgage to Guardian Federal, the3
reasonable inference is that the Debtor had an unencumbered interest of $22,957.21 in his life estate
at the time of the filing of the petition. The Trustee presents no facts in the Amended Complaint to
support the claim that the life estate had no value at the time of the petition, or facts to prove that the
Debtor never resided on the Property. If it were not for counsel’s arguments at the hearing on the
“The present value of the interest [in a life estate] is computed by multiplying the value	3
of the property by the appropriate remainder interest actuarial factor (that corresponds to the
applicable section 7250 interest rate . . . ) in Table S (for one measuring life) . . . . ” 26 C.F.R. §
20.2037-7(d)(2)(ii). “For purposes of the computations . . . the age of an individual is the age of
that individual at the individual’s nearest birthday.” 26 C.F.R. § 20.2031-7(d). The remainder
interest actuarial factor is found under I.R.C. § 7520.
The value of the property at the time of the filing of the petition was $186,000.00. The
age of the Debtor was 78 (the age of the Debtor at the Debtor’s nearest birthday to the date of the
present value was July 2010, as determined by the Debtor’s date of birth, July 1932). The
interest for August 2010 was 2.6%. Internal Revenue Service, www.irs.gov/business/small/
article/0,,id=20493,00.html (last visited July 5, 2012). According to the Single Life Factors
Table S, the remainder interest actuarial factor for a 78 year old at an interest rate of 2.6%, is
0.20620. Id. at www.irs.gov/retirement/article/0,,id=206601,00.html. The present value of the
interest in the Debtor’s life estate was then calculated as follows: $186,000.00 x 0.20620 =
$38,353.20.
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Motion, no party would be on notice of the Trustee’s claims as to the value of the life estate in
relation to the Debtor’s insolvency. The Amended Complaint only states that “the Debtor was left
insolvent, owing, at minimum, a mortgage to Guardian Federal, which the Debtor would have been
unable to meet as the obligation became due.” Amend. Compl. ¶ 17. The Court finds this to be a
“conclusory statement [that] ‘fail[s] to satisfy the requirements under Iqbal.” Groff v. JPMorgan
Chase Bank, N.A. (In re Groff), AP No. 11-00284-8-RDD, 2011 WL 6140744 at * 3 (Bankr. E.D.N.C.
Dec. 9, 2011) (citing Beaman v. Barth, et al. (In re Amerlink, Ltd.), AP No. 10-00164-8-JRL at 8
(Bankr. E.D.N.C. Mar. 11, 2011)).4
To be successful on the second claim for relief, under N.C. Gen. Stat. § 39-23.4(a), the Trustee
must prove elements similar to those under 11 U.S.C. § 548. North Carolina has adopted the Uniform
Fraudulent Transfer Act, which sets forth the requirements of a fraudulent conveyance. “Under the
Uniform Fraudulent Transfer Act, a transfer is fraudulent if made without receiving reasonably
equivalent value; and, the debtor was either engaged in a business transaction for which the remaining
assets of the debtor were unreasonably small in relation to the transaction, or the debtor knew debt
incurred was beyond the debtor’s ability to pay.” Beaman v. Barth (In re Amerilink, LTD.), AP No.
10-00164-8-JRL at 6 (citing N.C. Gen. Stat. § 39-23.4). North Carolina General Statute § 39-23.4
provides:
In the Amended Complaint, the Trustee failed to allege facts regarding the small	4
undivided interest in real property owned by the Debtor in Currituck County at the time of the
transfer. This fact was brought to the attention of this Court in Movants’ counsel’s argument at
the hearing on the first motion to dismiss on March 14, 2012. In the Response, the Trustee did
express his belief that the Debtor’s 1/126 undivided interest in the Currituck County real property
did not possess any significant value. However, this was only after the Movants again brought
the facts to the attention of this Court in the Motion.
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(a) A transfer made or obligation incurred by a debtor is fraudulent as to a
creditor, whether the creditor’s claim arose before or after the transfer was
made or the obligation was incurred, if the debtor made the transfer or incurred
the obligation:
(1) With intent to hinder, delay, or defraud any creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in exchange for the transfer
or obligation, and the debtor:
a. Was 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 that the debtor would incur, debts beyond the
debtor’s ability to pay as they became due.
N.C. Gen. Stat. § 39-23.4(a). The requirement that the debtor know that the debt incurred was beyond
the debtor’s ability to repay, requires analysis similar to the insolvency requirement of § 548.
As to the second claim for relief, the Amended Complaint alleges:
24. The Debtor became insolvent as a result of the transfer of the Property to
the Defendants.
25. The transfer of the Property to the Defendants represents a transfer by the
Debtor to insiders.
26. The Debtor received less than the reasonable equivalent value in exchange
for the Property and as a result debts were incurred, such as the mortgage to
Guardian Federal, beyond the Debtor’s ability to pay as they became due.
Amend. Compl. at 3. The Trustee’s only change to the second claim for relief in the Amended
Complaint, was the removal of the assertion that the “transfer of the Property was intended to hinder,
delay, or defraud creditors.” Compl. ¶ 19. Just as the Amended Complaint failed to plead sufficient
facts as to the Debtor’s insolvency under § 548, the Amended Complaint also fails to support the
conclusion that the Debtor was insolvent under N.C. Gen. Stat. § 39-23.4.
“To fully satisfy N.C. Gen. Stat. § 39-23.4, the plaintiff must . . . show that the transaction
left the debtor under capitalized.” Beaman, AP No. 10-00164-8-JRL at 10. As discussed above, the
Amended Complaint contains no additional information to allege sufficient facts to draw a reasonable
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inference that the Debtor was insolvent on the date of the transfer or became insolvent as a result of
the transfer. The allegation that the transfer caused the Debtor to become insolvent on the date of
the transfer, or shortly thereafter, is insufficient, without facts as to the Debtor’s financial situation,
to support the conclusion that the Debtor was left under capitalized. Accordingly, the allegations
made with respect to N.C. Gen. Stat. § 39-23.4 fail to satisfy the pleading requirements of Fed. R.
Civ. Pro. 8(a).
The Trustee’s third cause of action under 11 U.S.C. §§ 550 and 551 is contingent upon the
success of either the first or second cause of action. If a transfer is avoided under § 548, the trustee
may recover such property, from “(1) the initial transferee of such transfer or the entity for whose
benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.”
11 U.S.C. § 550. Pursuant to 11 U.S.C. § 551, a transfer avoided under § 548, is automatically
“preserved for the benefit of the estate.” 11 U.S.C. § 551. The Trustee added no additional
information to the third cause of action in the Amended Complaint. Therefore, because the Court
finds the Trustee has failed to provide sufficient facts to support the Trustee’s actions under 11 U.S.C.
§ 548 and N.C. Gen. Stat. § 39-23.4, the Trustee’s third cause of action is also dismissed.
“The mere recital of elements of a cause of action, supported only by conclusory statements,
is not sufficient to survive a motion made pursuant to Rule 12(b)(6).” Walters v. McMahen, No. 11-
1796, 2012 WL 2589229, at *3 (4th Cir. July 5, 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 679
(2009)). Because the Court finds the Amended Complaint fails to allege sufficient factual allegations
to support the conclusions alleged as to the elements of a preference claim under 11 U.S.C. § 548,
N.C. Gen. Stat. § 39-23.4, and 11 U.S.C. §§ 550 and 551, the Motion to Dismiss the Adversary
Proceeding is GRANTED. The Plaintiff, having now had two opportunities to allege sufficient facts
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to state a claim for relief that is plausible on its face, and having now failed to do so twice, this
adversary proceeding is DISMISSED, with prejudice.
SO ORDERED.
END OF DOCUMENT
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