In re: Arnold I. Meyer

PUBLISHED PUBLISHED PUBLISHED PUBLISHED
UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT FOR THE FOURTH CIRCUIT FOR THE FOURTH CIRCUIT FOR THE FOURTH CIRCUIT
In Re: ARNOLD I. MEYER,
Debtor.
HARRY SHAIA, JR., Trustee,
No. 98-1534
Plaintiff-Appellee,
v.
ARNOLD I. MEYER; NAOMI A. MEYER,
Defendants-Appellants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Richmond.
Robert E. Payne, District Judge.
(CA-97-352, BK-95-32427-DOT, AP-96-3006)
Argued: March 4, 1999
Decided: March 28, 2001
Before WIDENER, LUTTIG, and MICHAEL, Circuit Judges.
_________________________________________________________________
Vacated and remanded by published opinion. Judge Widener wrote
the opinion, in which Judge Luttig and Judge Michael joined.
_________________________________________________________________
COUNSEL COUNSEL COUNSEL COUNSEL
ARGUED: ARGUED: ARGUED: ARGUED: Bruce H. Matson, LECLAIR RYAN, P.C., Richmond,
Virginia, for Appellants. James Joseph Burns, WILLIAMS, MUL-
LEN, CHRISTIAN & DOBBINS, Richmond, Virginia, for Appellee.

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ON BRIEF: ON BRIEF: ON BRIEF: ON BRIEF: Paula Steinhilber Beran, LECLAIR RYAN, P.C., Rich-
mond, Virginia, for Appellants. Patrick R. Hanes, WILLIAMS, MUL-
LEN, CHRISTIAN & DOBBINS, Richmond, Virginia, for Appellee.
_________________________________________________________________
OPINION OPINION OPINION OPINION
WIDENER, Circuit Judge:
Defendants, Arnold and Naomi Meyer, appeal the district court's
judgment in favor of plaintiff, Harry Shaia, Jr. (trustee), in a bank-
ruptcy proceeding pursuant to 11 U.S.C. § 544(b). The district court
affirmed the bankruptcy court's holding that Meyer's pre-payment of
mortgages on real property owned by himself and his wife as tenants
by the entirety with funds he was bequeathed under the will of his
father was an avoidable voluntary conveyance under Virginia Code
§ 55-81. The district court further affirmed the bankruptcy court's
joint and several judgment against the Meyers in the amount of the
mortgage pre-payment plus interest costs.
We emphasize at the outset that the only question before us is
whether or not the prepayment of the previously existing secured
mortgage obligation is a voluntary conveyance which may be set
aside under Virginia Code § 55-81. That Code section provides, in
pertinent part, that
Every gift, conveyance, assignment, transfer or charge
which is not upon consideration deemed valuable in law, or
which is upon consideration of marriage, by an insolvent
transferor, or by a transferor who is thereby rendered insol-
vent, shall be void as to creditors whose debts shall have
been contracted at the time it was made, but shall not, on
that account merely, be void as to creditors whose debts
shall have been contracted or as to purchasers who shall
have purchased after it was made.
Va. Code § 55-81. To avoid a transfer pursuant to this provision, the
trustee must demonstrate that (1) a transfer was made, (2) the transfer
was not supported by consideration deemed valuable in law, and (3)
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the transfer was done when the transferor was insolvent or the transfer
rendered the transferor insolvent.
The transfer which was made was the payment of the mortgages
from the personal funds of Meyer. That is acknowledged. The holding
of the bankruptcy court, that the payment to the mortgage note hold-
ers rendered Meyer insolvent, was affirmed by the district court on
appeal, and is not contested on appeal to this court. Therefore, the
only issue here is whether or not the payment of the mortgage notes
was supported by "consideration deemed valuable in law." We are of
opinion that the payment of the mortgage notes was supported by
consideration deemed valuable in law. Thus, we vacate the judgment
of the district court and remand for further proceedings, should the
trustee be so advised.
By deed dated October 1, 1973, the Meyers acquired their resi-
dence as tenants by the entirety with the right of survivorship as at
common law. By February 1994, the Meyers' residence was encum-
bered with secured mortgage obligations that totaled $168,211.65. In
addition to these mortgages, Meyer was responsible for several unse-
cured debts that he had obtained through the years to support his vari-
ous business ventures. Meyer was in default on his repayments to
several of these unsecured creditors.
On September 12, 1993, Meyer's father died testate. The father's
will contained a specific bequest to Meyer, individually, of a "sum
equal to the remaining principal balances, if any, of all mortgages
upon . . . [Meyer's] principal residence" at the time of the father's
death (the cash bequest). The exact amount of the bequest was
$169,223.71. Meyer deposited the cash bequest into a joint checking
account that he shared with his wife. Then, on February 27 and 28,
1994, Meyer delivered two checks in the total amount of $168,211.65
to the mortgage creditors (the mortgage pre-payment). Upon receipt
of the mortgage pre-payment, the creditors released their security
interests in the Meyers' residence.
Meyer's financial situation worsened throughout 1994, and on June
13, 1995, he declared bankruptcy under Chapter 7 of the Bankruptcy
Code. Upon reviewing the bankruptcy schedules filed by Meyer, the
trustee discovered that Meyer had used most of the substantial cash
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bequest to pre-pay and satisfy two mortgages secured by his residence
that he co-owned with his wife as tenants by the entirety. Meyer
claimed that this residential property was exempt from his creditors
in the bankruptcy proceedings pursuant to 11 U.S.C.§ 522(b)(2)(B).
The trustee objected to Meyer's claimed exemption of the residence
and filed a complaint in an adversary proceeding against the Meyers
on January 5, 1996. The complaint asserted that, by the payment of
the mortgage on the residence, the transfer of the debtor's individual
nonexempt cash bequest into an exempt interest in the residential real
property constituted both a voluntary conveyance under Va. Code
§ 55-81 and a fraudulent conveyance under Va. Code § 55-80.
The bankruptcy court determined that when Meyer made the pre-
payments of the two mortgages, two distinct transfers occurred simul-
taneously. Shaia v. Meyer, 206 B.R. 410, 416 (Bankr. E.D. Va. 1997).
First, there was a transfer from Meyer to the mortgage creditors. Sec-
ond, there was a transfer from Meyer to the tenancy by the entirety
as a result of the increased equity in the residence that occurred when
the residence was freed of all encumbrances. Shaia, 206 B.R. at 416.
The court held that the second transfer was not supported by valuable
consideration and avoided the mortgage pre-payment as a voluntary
conveyance under Va. Code § 55-81. Shaia , 206 B.R. at 417.*
The Meyers appealed the bankruptcy court's judgment, and the dis-
trict court affirmed. The court stated that "Mr. Meyer attempted to
transfer the cash bequest, his individual, non-exempt asset, from him-
self to himself and his wife as tenants by the entireties. The transfer
of [the] cash bequest, therefore, resulted in a corresponding increase
in the equity in the exempt, real property." The court concluded that
the mortgage pre-payment "should be voided [as a voluntary convey-
ance] to prevent the creditors from being prejudiced by Mr. Meyer's
effort to convert the non-exempt cash bequest into an exempt asset."
We disagree with the district court's application of the voluntary con-
veyance statute and hold that the mortgage pre-payment was a single
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*Because the bankruptcy court avoided the mortgage pre-payment as
a voluntary conveyance it did not address the trustee's argument that the
transaction also was voidable as a fraudulent conveyance under Va. Code
§ 55-80. Shaia, 206 B.R. at 418 n.7.
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transaction that was supported by consideration deemed valuable in
law.
As there are no factual issues in dispute, we review the district
court's legal conclusions de novo. See Yancey v. Varner (In re Pucci
Shoes, Inc.), 120 F.3d 38, 40-41 (4th Cir. 1997). The Bankruptcy
Code provides that a trustee in bankruptcy "may avoid any transfer
of an interest of the debtor in property or any obligation incurred by
the debtor that is voidable under applicable law by a creditor holding
an [allowable] unsecured claim." 11 U.S.C.§ 544(b)(1). The litigants
agree that Virginia law is the applicable law in this proceeding.
Va. Code § 55-81 simply requires that a transfer or conveyance be
"upon consideration deemed valuable in law." This phrase refers to
"any valuable consideration received by the transferor." See Moore v.
Manson (In re Springfield Furniture, Inc.), 145 B.R. 520, 533 (Bankr.
E.D. Va. 1992). Here, the parties agree that Meyer transferred
$168,211.65 to his mortgage creditors in satisfaction of his outstand-
ing debt. In return for this payment, the creditors released their
secured claims to the Meyers' property. The creditor's release of
secured debt against his property is surely valuable consideration that
Meyer received in return for pre-paying the mortgage. See also Berg-
quist v. Theisen, 45 B.R. 122, 127 (Bankr. D. Minn. 1984) (holding
that payment of antecedent secured debt was "fair consideration" and
rejecting a second transfer theory which claimed, as here, that pay-
ment of a secured debt on real estate subject to homestead exception
was a voidable transfer to exempt property).
Two cases decided by district courts in Virginia are consistent with
our decision as to a "consideration deemed valuable in law" under Va.
Code § 55-81. In Inspiration Coal, Inc. v. Mullins, 690 F. Supp. 1502
(W.D. Va. 1988), the question was whether deeds of trust given by
Mullins to secure antecedent indebtedness of Mullins to the two banks
involved met the requirements of the statute. Relying on a line of Vir-
ginia cases, e.g., Bank of Commerce v. Rosemary & Thyme, Inc., 239
S.E.2d 909, 912 (Va. 1978), holding that an antecedent debt is valu-
able consideration for a conveyance of land, the court held that the
antecedent debt of Mullins to the banks was consideration deemed
valuable in law under § 55-81, precisely the same Code section
involved here. C-T of Virginia v. Euroshoe Associates, 762 F. Supp.
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675 (W.D. Va. 1991), aff'd, 953 F.2d 637 (4th Cir. 1992) (table), was
a case involving a leveraged buyout of a shoe manufacturing com-
pany. The new controlling shareholders set up a third corporation to
furnish funds, which new corporation purchased all of the outstanding
shares of C-T, the original shoe manufacturing company. The form of
the transfer was payment by C-T to its shareholders. Following the
bankruptcy of C-T, it sought to set aside the purchase of its own
shares because they were not for a consideration deemed valuable in
law under § 55-81. Following Inspiration Coal, the court held that the
shareholders received money for their stock and the holding company
received control of C-T, which, in the opinion of the court, was con-
sideration deemed valuable in law. The court pointed out that C-T
"gained something, and that is enough to prevent avoidance of a
transaction." C-T of Virginia, 762 F. Supp. at 678.
Inspiration Coal relied on Mitchell Powers Hardware Co. v. Eaton,
198 S.E. 496 (Va. 1938), which held that a note secured by a pledge
of stock given by a man to his sister was for a consideration deemed
valuable in law when the consideration for the note was that she
would perform the man's duty of keeping up his aged mother.
The district court, however, proceeded further in its analysis of the
transaction. As a result of Meyer's mortgage pre-payment, the equity
in his residence increased because the property was no longer encum-
bered with the secured mortgages. Consequently, the district court
found that through the mortgage payment Mr. Meyer transformed the
cash bequest (nonexempt property) owned solely by himself into
equity in real property (exempt property) held by both himself and his
wife. The district court adopted the bankruptcy court's conception of
the transfer as one in which Meyer's mortgage payments effected one
transfer under Va. Code § 55-81 to the mortgage creditors and a sec-
ond transfer under § 55-81 to the tenancy by the entirety. The court
then avoided the mortgage pre-payment as a voluntary conveyance on
the basis that the second transfer to the tenancy by the entirety was
without consideration deemed valuable in law.
In reaching this conclusion, however, the district court misapplied
the voluntary conveyance statute. It relied on three cases for its con-
clusion, Cramer v. Senger & Tumer, 59 S.E. 375 (Va. 1907); In re:
White, 28 B.R. 240 (Bankr. E.D. Va. 1983); and In re: Porter, 37
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B.R. 56 (Bankr. E.D. Va. 1984). These cases, however, are on facts
so different from the case at hand that they are not persuasive. In
Cramer, a husband who was subject to a judgment recovered against
him in a state court, caused to be conveyed to his wife ten acres of
land to which he was entitled. The court held this conveyance was
"nothing more than a gift" and void as to his creditors, affirming the
lower court which had ordered the ten acres of land sold to satisfy the
said judgment against Cramer in the state court. Cramer, 59 S.E. at
377. Both White and Porter involved cases in which a man who
owned real estate in his own name had conveyed the real estate to
himself and his wife as tenants by the entireties. In White the court
held that "White was insolvent at the time he transferred his interest
in the real estate to himself and his wife, for which he received noth-
ing of legal value in payment." White, 28 B.R. at 243. White being
insolvent at the time of the conveyance, and having a previous judg-
ment of record against him, the court held that the transfer constituted
a fraudulent conveyance pursuant to 11 U.S.C. § 548(a)(2)(B)(i)
(transferor insolvent on the date the transfer was made). In Porter,
following a finding of liability in a state court, but before judgment
was entered in the amount of the liability, Porter conveyed the real
estate involved to himself and his wife as tenants by the entireties.
The property was valued at $88,000 at the time, and the consideration
was claimed to be wills executed by husband and wife, disposing of
the entire estate of each to the other and various items of personal
property valued at $2,245. The wife testified, however, that the bank-
rupt husband would have transferred the house into both their names
"even if she had not transferred anything of value to him in
exchange." 37 B.R. at 59. Under those circumstances, the bankruptcy
court held that there was not "a reasonable equivalent value in
exchange for such transfer" under 11 U.S.C. § 548(a)(2)(A) or a
"valuable consideration" under Va. Code § 55-80, or a "consideration
deemed valuable in law" under Va. Code § 55-81. Porter, 37 B.R. at
69. The facts of none of those cases deal with the payment of a pre-
existing mortgage debt on property held by the entireties, and we are
of opinion they are not persuasive in this case. Rather, we follow the
cases of Inspiration Coal, Inc., C-T of Virginia, and the line of cases
illustrated by Bank of Commerce as we have mentioned above. The
transfer in this case, which is sought to be avoided, is the payment of
Meyer to the mortgage holders. Because we hold that transfer was for
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"consideration deemed valuable in law" under Va. Code § 55-81, we
proceed no further with our reasoning in this case. Section 55-81 does
not apply, and thus we reject what may be called a second transfer
theory, that the payment of the mortgages was itself a second transfer
because the land was held by the entireties.
In arriving at our decision, we are reminded of the almost unimag-
inable consequences of affirming the holding below in this case, that
the payment by one who is insolvent or rendered insolvent, of a pre-
existing mortgage debt on property held by the entireties, is not for
a "consideration deemed valuable in law" under Va. Code § 55-81.
We do not know, of course, what proportion of the homes in Virginia
are held by husband and wife by the entireties, but half would be an
estimate, not subject to reasonable dispute. If we affirmed the holding
below, every time one spouse filed for bankruptcy each payment on
the mortgage on a property held by the entireties made while the
spouse was insolvent, or which rendered the spouse insolvent, would
be void as to previous creditors. The result would be chaotic, at best.
When questioned at oral argument with respect to this effect as to
monthly payments on mortgages on homes and automobiles held by
the entireties, the trustee, as a part of an answer to a question, stated:
I think it's a difference of degree.
Q: Your answer is that trustees just aren't going to bother
with the small things.
A: That is my answer.
According to Sheshunoff, Bank and S&L Quarterly , however, the
September 1999 United States domestic mortgage debt to banks was
$1,510.3 billion. Even the monthly payments on Virginia's pro-rata
share, $38.3 billion, is hardly a small thing. And we have not consid-
ered the billions in loans not from banks. That argument also does not
support the conclusion of the district court.
The judgment of the district court is accordingly vacated, and the
case is remanded for further action not inconsistent with this opinion,
should the trustee be so advised.
VACATED AND REMANDED
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