Braunstein v. Leung et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION
___________________________________
IN RE:
ROBERT G. LEUNG, 	Chapter 7
DEBTOR 	Case No. 05-18073-WCH
___________________________________
JOSEPH BRAUNSTEIN, CHAPTER 7
TRUSTEE,
PLAINTIFF, 	Adversary Proceeding
v. 	No. 07-1168-WCH
ROBERT G. LEUNG AND
MARIA LEUNG,
DEFENDANTS
___________________________________
MEMORANDUM OF DECISION
I. INTRODUCTION
The matter before the Court is the Complaint filed by Joseph Braunstein, Chapter 7 trustee
(the “Trustee”), against Robert G. Leung (the “Debtor”) and his wife, Maria Leung (“Maria”)
(collectively, the “Defendants”) through which he seeks to avoid the Debtor’s payment of $90,000
to reduce Maria’s loan obligation as a fraudulent or preferential transfer. For the reasons set forth
below, I will enter an order awarding judgment to the Trustee.
II. BACKGROUND
The facts are largely stipulated. On May 18, 1988, the Defendants purchased real estate
located in Quincy, Massachusetts (the “Property”) as tenants by the entirety for $210,000. 	On1
September 9, 1998, the Defendants obtained a $72,000 Home Equity Line of Credit from
Joint Pretrial Statement (“PTS”), Docket No. 30 at ¶ 2.6.1
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BankBoston, which later merged into Fleet Bank (the “Fleet Bank LOC”). 	The Fleet Bank LOC2
was secured by a second mortgage on the Property. 3
In 2000, the Debtor and his two partners (collectively, the “Partners”) agreed to start a
restaurant business. 	The Partners incorporated Miracle Century, Inc. as the owner and operator of4
the restaurant business. 	The Partners also established Miracle Century Realty Trust to hold a parcel5
of commercial real estate located at 497 Bedford Street, Abington, Massachusetts (the “Abington
Real Estate”), which was used as the location of the restaurant. 	The Debtor received a 40%6
ownership interest in Miracle Century, Inc. and Miracle Century Realty Trust.7
The Partners obtained a $607,000 loan from Allied Capital (the “Business Loan”) to partially
finance the purchase price of the Abington Real Estate. 	As security, Allied Capital received a first8
mortgage on the Abington Real Estate, a first priority lien on the restaurant’s assets, and a personal
guarantee from each of the Partners. 	In addition to personally guaranteeing the Business Loan,9
between March 13, 2000 and December 11, 2000, the Debtor borrowed a total of $91,900 on the
PTS at ¶ 2.7.2
Id. at ¶ 2.8.3
Deposition of Robert G. Leung, April 29, 2008 (“D-”), D-19, L 12-13.4
PTS at ¶ 2.15.5
Id. at ¶ 2.10.6
Id. at ¶ 2.24.7
Id. at ¶ 2.13; ¶ 2.14.8
Id.9
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Fleet Bank LOC to invest in the restaurant business. 	The Debtor also incurred a significant amount10
of credit card debt in renovating and operating the restaurant and was only able to pay the minimum
monthly balances through cash advances from other credit cards. 	In total, the Debtor amassed over11
$700,000 in debt to invest in the business. 12
On April 17, 2001, the Debtor transferred his interest in the Property to Maria for the stated
consideration of $1.00. 	The Debtor testified that when he conveyed his interest to Maria the13
business was going “downhill,”and Maria was “scared” and thought it would be beneficial if the
Property was held solely in her name. 	Maria then borrowed $197,000 from Countrywide Home14
Loans (“Countrywide”). 	She used $101, 921.12 of the proceeds to pay off the first mortgage on15
the property and $68, 203.55 to pay the Fleet Bank LOC. 	On August 27, 2002, Maria obtained a16
$187,000 loan from Citizens Bank of Massachusetts (“Citizens”), secured by a mortgage on the
Property. 	The Debtor testified that he was not liable on the Note and that it was Maria’s17
obligation. 	Using the proceeds of the loan from Citizens, Maria paid the balance of the April 17,18
Id. at ¶ 2.12.10
D-32, L 5-24; D-33, L 1-17; D-51, L 8-21.11
Transcript of Hearing, June 25, 2008 (“T-”), T-10, L 15-17.12
Id. at ¶ 2.16.13
D-19, L 14-21.14
Id. at ¶ 2.17.15
Id.16
Id. at ¶ 2.18; D-29, L 14-16.17
D-15, L 16-18; D-29, L 14-16.18
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2001 loan from Countrywide.19
In early 2005, after learning that the Debtor’s business partners intended to buy out his
interest in the restaurant business, the Debtor contacted bankruptcy attorney Timothy Mauser.20
Acting on the advice of Mr. Mauser, on February 16, 2005, Maria conveyed the Property to the
Debtor and herself as tenants by the entirety for the stated consideration of $1.00. 	The Debtor then21
recorded a Declaration of Homestead on the Property pursuant to Mass. Gen. Laws ch. 188, § 1.22
On March 3, 2005, pursuant to a Stock and Trust Beneficial Interest Buyout and Transfer Agreement
(the “Agreement”), the Debtor’s business partners purchased the Debtor’s ownership interest in
Miracle Realty Century Trust and Miracle Century, Inc. for a cash payment in the amount of $90,000
(the “Monies”). 	The Debtor testified that the business was “underwater” when he was bought out.23 	24
Section 5 of the Agreement provided that Miracle Century, Inc. would indemnify the Debtor for any
claims asserted against him “arising out of any debts, claims, actions, liabilities or other actions that
were incurred by the Corporation or that were caused by the Corporation’s actions[,]” excluding the
Debtor’s personal credit card debt. 	The Debtor never received a release of his guarantee on the25
PTS at ¶ 2.19.19
T-9, L 16-25; T-10, L 20-25; T-11, L 1-3.20
Id. at ¶ 2.21; T-12, L 2-12.21
PTS at ¶ 2.23.22
Id. at ¶ 2.25.23
D-30, L 15-18.24
Plaintiff’s Ex. 11.25
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Business Loan from Allied Capital. 	On March 8, 2005, the Debtor transferred the Monies to26
Citizens to reduce the balance of Maria’s obligation on the Note by $90,000 (the “Transfer”). 	The27
Debtor did not make any payments on his unsecured debt following his receipt of the Monies.28
On September 6, 2005, the Debtor filed for bankruptcy relief. On amended Schedule F –
Creditors Holding Unsecured Nonpriority Claims, the Debtor listed $742,154.28 in general
unsecured debt, including the $587,435.24 balance of the Business Loan from Allied Capital. On
Schedule A – Real Property, the Debtor listed an interest in the Property, which he described as
“TXE.” He disclosed that the fair market value of the Property was $500,000 and his interest was
$250,000. He also indicated that the mortgage on the Property was $85,000 and that his share of the
mortgage was $42,500. 	He claimed in Schedule C – Property Claimed as Exempt, the Debtor
claimed an exemption under Mass. Gen. Laws ch. 188, § 1 in the amount of $187,500. The Trustee
objected to the Debtor’s claim of exemption in the Property on the grounds that the Debtor’s
exemption had to be capped under 11 U.S.C. § 522(p) because the Debtor had acquired his interest
in the Property within 1,215 days prior to his bankruptcy filing. On December 6, 2006, I sustained
the Trustee’s objection.29
On April 10, 2007, the Trustee filed a complaint against the Debtor and Maria seeking to
avoid and recover the Transfer. I conducted a trial on June 25, 2008. At the trial’s conclusion, I took
D-27, L 6-7.26
PTS at ¶ 2.26.27
Id. at ¶ 2.29.28
My decision regarding the Debtor’s exemption is set forth in In re Leung, 356 B.R. 31729
(Bankr. D. Mass. 2006).
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the matter under advisement. Both parties filed post-trial memoranda and the Trustee filed a Motion
to Amend the Complaint to Conform with the Evidence to add a preferential transfer count. 	I
granted the motion over the Defendants’ objection on September 16, 2008. The Defendants’ counsel
is holding $95,000 in escrow to be paid to the Trustee to the extent the Trustee is awarded
judgment. 30
III. POSITIONS OF THE PARTIES
The Trustee
The Trustee asserts that he may avoid the Transfer pursuant to 11 U.S.C. §§ 548(a)(1)(A) and
548(a)(1)(B), as well as Mass. Gen. Laws ch. 109A, §§ 5 and 6. The Trustee alleges that there is
compelling circumstantial evidence of fraudulent intent. Further, the Trustee alleges that the Debtor
was insolvent at the time the transfer was made and did not receive reasonably equivalent value in
exchange for his payment on Maria’s obligation.
Additionally, the Trustee asserts that the Transfer was preferential under 11 U.S.C. § 547 and
Mass. Gen. Laws ch. 109A, § 6(b). The Trustee argues that, even assuming the Debtor promised
Maria he would pay her obligation on the Note, it would be avoidable because she received more
than other unsecured creditors. 	Moreover, the Trustee contends that the Transfer was made on
behalf of an antecedent debt, and that Maria, as an insider, knew that the Debtor was insolvent at the
time of the Transfer.
Finally, as a further theory of recovery, the Trustee, relying on the laws of equity, contends
that the Transfer unjustly enriched Maria because as the sole obligor on the Note, she received the
entire benefit of the Transfer to the detriment of the Debtor and his estate.
PTS at ¶ 2.33.30
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On these grounds, the Trustee seeks recovery of the amount avoided, plus accrued interest,
from the funds Defendants’ counsel is holding in escrow, rather than look to recovery under 11
U.S.C. § 550.
The Defendants
In opposition, the Defendants argue that the Debtor did not make the Transfer with fraudulent
intent because he was engaging in permissible pre-bankruptcy planning by making use of the
homestead exemption under Mass. Gen. Laws ch. 188, § 1. The Defendants further add that because
the Transfer caused an equity increase in the Property that exceeded the Debtor’s homestead cap, the
Debtor’s bankruptcy estate ultimately received the benefit of the pre-bankruptcy planning effort.
In response to the Trustee’s constructive fraud claim, the Defendants contend that the Debtor
received value from the Transfer because the Debtor enjoyed increased equity in the Property by that
amount. The Defendants also assert that the Debtor made a promise to Maria to return the equity
to the Property that was borrowed for the business. Moreover, the Defendants argue that the Debtor
was not insolvent at the time of the Transfer because as a contingent debt, it is improper to use the
full remaining amount of the Business Loan for purposes of determining whether the Debtor was
insolvent. 	Rather, the Defendants urge me to subtract the entire amount of the debt from the
Debtor’s liabilities because, in retrospect, the Debtor never had to make payment on the guarantee
and could have sought indemnification if he had to do so.
The Defendants additionally argue that Mass. Gen. Laws ch. 109A §§ 5 and 6 are
inapplicable, and that unjust enrichment is unavailable where there is an adequate remedy at law.
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IV. ANALYSIS
Section 548 of the Bankruptcy Code 	sets forth the powers of a trustee in bankruptcy to31
avoid fraudulent transfers. It reads in relevant part:
(a)(1) The trustee may avoid any transfer of an interest of the debtor in property, or any
obligation incurred by the debtor, that was made or incurred on or within one year before the
date of the filing of the petition, if the debtor voluntarily or involuntarily–
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or
defraud any entity to which the debtor was or became, on or after the date that such transfer
was made or such obligation was incurred, indebted; or
(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 such obligation was incurred,
or became insolvent as a result of such transfer or obligation. . . .32
In this case, the parties do not dispute that the Debtor voluntarily transferred an interest in property
within one year of the petition date. 	The only remaining issue is whether the Transfer was
demonstrative of actual or constructive fraud.
A transfer is avoidable on the basis of actual fraud if the transfer is made with “actual intent
to hinder, delay, or defraud.” 	The law of this circuit regarding actual intent is well settled.33
Because “[i]t is often impractical, on direct evidence, to demonstrate an actual intent to hinder, delay
or defraud creditors,” courts may infer fraudulent intent from the circumstances of the transfer,
All references to the Bankruptcy Code shall be to 11 U.S.C. § 101, et seq. as in effect31
prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, Pub. L. No. 109-8, 119 Stat. 23.
11 U.S.C. § 548.32
11 U.S.C. § 548(a)(1)(A).33
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“taking particular note of certain recognized indicia or badges of fraud.” 	The United States Court34
of Appeals for the First Circuit observed:
[T]he more common circumstantial indicia of fraudulent intent at the time of the transfer are
(1) actual or threatened litigation against the debtor; (2) a purported transfer of all or
substantially all of the debtor’s property; (3) insolvency or other unmanageable indebtedness
on the part of the debtor; (4) a special relationship between the debtor and the transferee; and,
after the transfer, (5) retention by the debtor of the property involved in the putative transfer.
The presence of a single badge of fraud may spur mere suspicion; the confluence of several
can constitute conclusive evidence of an actual intent to defraud, absent “significantly clear”
evidence of a legitimate supervening purpose.35
Using the circumstantial indicia of fraudulent intent as guidance, I turn to the facts of the present
case.
Looking at the circumstances of the Transfer itself, it is apparent that several badges of fraud
are present. The matrimonial status of the Debtor and Maria encompasses the “special relationship”
badge, 	and Maria sufficiently qualifies as a transferee. Although the Monies were paid directly to36
Citizens, Maria, as the sole obligor on the Note, significantly and directly benefitted.
Moreover, the Debtor was insolvent at the time of the Transfer. Section 101(32) defines
insolvency as the “financial condition such that the sum of such entity’s debts is greater than all of
such entity’s property, at a fair valuation. . . .” 	Here, the Debtor’s liabilities totaled $742,154.28,37
Max Sugarman Funderal Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir.34
1991).
Max Sugarman Funeral Home, 926 F.2d at 1254-1255.35
Id. citing In re May, 12 B.R. 618, 627 (N.D.Fla.1980) (“family, friendship, or close36
associate relationship”); In re Fitzpatrick, 73 B.R. 655, 657 (Bankr.W.D.Mo.), aff’d in part and
rev’d in part on other grounds (closer financial relationship between debtor and transferee than
with other creditors).
11 U.S.C. § 101(32)(A).37
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a sum substantially greater than his assets consisting of his interest in the Property, valued at
$500,000 and subject to a mortgage of $85,000, and personal property valued at $8,800. 	The
Defendants cite Covey v. Commercial Nat. Bank of Peoria 	for their contention that as a contingent38
debt, the Business Loan should not be included in the insolvency calculation. I disagree, however,
because even if the Debtor had a valid claim for indemnification, there is not evidence before me
showing that the Debtor’s partners would have been able to satisfy such a claim. The facts, as the
actually transpired, have no effect on the contingency of the Business Loan, which is measured at
the time the Transfer was made. Thus, the Defendants’ arguments that the Debtor was never called
upon to answer the debt, or could have sought indemnification under the Agreement, are not
considered.
Additionally, the Debtor retained the $90,000 following the Transfer, albeit in a different
form, implicating another badge of fraud. Although the $90,000 was paid to Citizens, the equity in
the Debtor’s home was increased by $90,000. The Defendants argue that this retention of property
is not representative of a badge of fraud, but rather is representative of permissible pre-bankruptcy
planning to maximize the Debtor’s homestead exemption. The Defendants overlook, however, that
while converting nonexempt property into exempt property may be permissible, doing so
fraudulently is not. 	Indeed, pre-bankruptcy conversions are still subject to avoidance on the basis39
See Covey v. Commercial Nat. Bank of Peoria, 960 F.2d 657, 659-660 (7th38
Cir.1992)(“to find the value of a contingent liability a court must determine the likelihood that
the contingency will occur.”)
See e.g., In re Wadley, 263 B.R. 857, 860 (Bankr. S.D. Ohio 2001) (exception to pre-39
bankruptcy conversions where there is extrinsic evidence of fraud); In re Kravitz, 225 B.R. 515,
518 (Bankr. D. Mass. 1998) (exemption claim can be denied where there is fraudulent intent).
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of fraud, measured by the same indicia of fraud Max Sugarman outlined. 	As I have already40
observed the presence of several of these badges of fraud, I find the pre-bankruptcy planning defense
unavailing. Accordingly, I find the Trustee may avoid the Transfer under 11 U.S.C. § 548(a)(1)(A).
In addition to transfers reflecting actual fraud, Section 548 permits the trustee to avoid
transfers that are constructively fraudulent. 	A transfer is constructively fraudulent if the debtor
received “less than a reasonably equivalent value in exchange for such transfer.” 	The gratuitous41
payment of Maria’s obligation merely converted the $90,000 from cash into equity in the Property.
This is not receipt of value at all, let alone reasonable equivalence. Therefore, having already found
the Debtor was insolvent, I find the Transfer also satisfies the elements of constructive fraud
pursuant to 11 U.S.C. § 548(a)(1)(B).
Having held that the Transfer was fraudulent under 11 U.S.C. §§ 548(a)(1)(A) and
548(a)(1)(B), it is not necessary for me to address the Trustee’s arguments that the Transfer was
fraudulent under Mass. Gen. Laws ch. 109A, preferential under 11 U.S.C. § 547, or unjust
enrichment under the laws of equity . Moreover, as funds have been specifically set aside in escrow42
to satisfy the Trustee’s judgment award, reference to 11 U.S.C. § 550 and an analysis of the sources
from which the Trustee may recover is unnecessary.
See e.g., In re Wadley, 263 B.R. at 860.40
11 U.S.C. § 548(a)(1)(B)(i).41
I note, however, that the equitable claim of unjust enrichment is available only in the42
absence of a remedy provided by law. See In re McCabe, 345 B.R. 1, 9 (D. Mass. 2006). Here,
the Trustee has a remedy provided by law; namely, fraud under 11 U.S.C. § 548.
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V. CONCLUSION
In light of the foregoing, I will enter an order awarding judgment to the Trustee.
______________________________
William Hillman
United States Bankruptcy Judge
Dated: September 22, 2008
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