Rose v. Bargeski

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF MARYLAND
at Greenbelt
IN RE:
AUDREY YVONNE BARGESKI Case No. 01-18272PM
Chapter 7
Debtor
____________________________________/
CHERYL E. ROSE, TRUSTEE
Plaintiff
vs. Adversary No. 04-1432PM
ALBERT M. BARGESKI
Defendant
Third-Party Plaintiff
vs.
AUDREY Y. BARGESKI (BUCKBEE)
Third-Party Defendant
____________________________________/
MEMORANDUM OF DECISION
The Plaintiff, Cheryl E. Rose, Chapter 7 Trustee, filed a Complaint pursuant to § 549(a) of the
Bankruptcy Code seeking the avoidance of a transfer of Audrey Y. Bargeski’s (the Debtor”) interest as
a tenant in common of the former marital residence of the Debtor and her former husband, the
Defendant, Albert M. Bargeski (sometimes “Albert” or “Mr. Bargeski”) (collectively, “the Bargeskis”),
Date signed February 24, 2005
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located at 6650 Coldstream Drive, New Market, Maryland (“the Coldstream Drive property”). The
case is governed by § 549 of the Bankruptcy Code, the applicable provisions of which are as follows:
11 U.S.C. § 549. Postpetition transactions
(a) Except as provided in subsection (b) or (c) of this section, the trustee may avoid a
transfer of property of the estate –
(1) that occurs after the commencement of the case; and
(2)(A) that is authorized only under section 303(f) or 542(c) of this
title; or
(B) that is not authorized under this title or by the court.
* * * * * * *
(c) The trustee may not avoid under subsection (a) of this section a transfer of real
property to a good faith purchaser without knowledge of the commencement of the case
and for present fair equivalent value unless a copy or notice of the petition was filed, where
a transfer of such real property may be recorded to perfect such transfer, before such
transfer is so perfected that a bona fide purchaser of such property, against whom
applicable law permits such transfer to be perfected, could not acquire an interest that is
superior to the interest of such good faith purchaser. A good faith purchaser without
knowledge of the commencement of the case and for less than present fair equivalent value
has a lien on the property transferred to the extent of any present value given, unless a
copy or notice of the petition was so filed before such transfer was so perfected.
(d) An action or proceeding under this section may not be commenced after the earlier
of –
(1) two years after the date of the transfer sought to be avoided; or
(2) the time the case is closed or dismissed.
This case involves an unfortunate combination of actions taken in good faith by Mr. Bargeski,
that interacted with the harsh provisions of the Bankruptcy Code to produce the unfair result and Order
that the court is compelled to enter. He acted in ignorance of § 549(a)(2) to his detriment. But this
opinion must reflect that throughout the transaction in question Mr. Bargeski did nothing of a dishonest
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or dishonorable nature. On the other hand, the Debtor departs from this bankruptcy case unscathed
with her chapter 7 discharge untouched. She retains substantial amounts of non-exempt property,
including jewelry. In her answer to question No. 4 of the Statement of Financial Affairs dated June 21,
2001, she perjured herself when she failed to list the lawsuit of Bargeski v. Bargeski in the Circuit
Court for Frederick County, Maryland, filed by her on November 2, 2000. She likewise lied on the
witness stand when she said that she did not know that the divorce case had been filed. Maryland Rule
of Procedure 9-202(a) required that she personally sign each pleading. She signed the complaint. The
court does not believe her statement that she did not know that the case had been filed. The court is
likewise convinced that the Debtor lied in denying that she owned substantial items of jewelry and
furniture. On the other hand, the court finds Mr. Bargeski’s testimony credible in all respects.
The following numbered paragraphs paraphrase the Stipulated Facts of the parties.
(1) The Debtor and Albert, a widower, were married on November 28, 1987. In February
1988, Albert added the Debtor’s name to the title of property located in Temple Hills, Maryland, that
he owned prior to the marriage. The property was unencumbered. On August 28, 1989, the parties
sold the Temple Hills property, clearing $141,190.54 from the sale. They then purchased real property
in Martinsburg, West Virginia, that was titled as a tenancy by the entirety, sold that property, purchased
property in Frederick City, Maryland, that was also held in a tenancy by the entirety, sold that property
and thereafter used the proceeds to purchase the Coldstream Drive property.
(2) Shortly after the marriage, Albert retired from his employment at the National Oceanic and
Atmospheric Administration, where he had worked for it and its predecessors as an oceanographer for
36 years. His pension was based upon this and two years of prior military service. The Debtor was
employed throughout the marriage of the parties. These facts are significant in that under Maryland law,
in the event of a divorce, the Chancellor would consider only a small portion of Albert’s pension to be
marital property, while a substantial portion of Audrey’s property would be so considered, thereby
influencing the ultimate amount of the monetary award.
(3) A second mortgage was placed on the Coldstream Drive property to secure a loan
obtained from the Navy Federal Credit Union. The proceeds of this loan were used to pay off various
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debts of the Debtor. The Debtor made the payments on the second mortgage until the separation of the
parties.
(4) On June 26, 2001, the Debtor filed this bankruptcy case under chapter 13. Insofar as is
pertinent to this case, the joint property of the parties consisted of the Coldstream Drive property, a
pontoon boat, and a 1994 Toyota Camry. On November 29, 2001, the court entered an Order
confirming the Debtor’s Chapter 13 Plan dated November 6, 2001. The Order provided that the
property of the estate shall not vest in the Debtor until the discharge of the Debtor or the dismissal of
the case.
(5) On May 9, 2000, shortly before their separation, the Bargeskis bought a 1998 Mercedes
automobile for the sum of $43,750.00. Financing of the purchase was accomplished through a
conditional sales agreement that provided for 60 payments of $832.80 with an interest rate of 8% per
annum. The vehicle was treated as the Debtor’s automobile.
(6) On May 21, 2002, the parties entered into a Voluntary Separation and Property
Settlement Agreement (“Agreement”). Counsel for the parties (not trial counsel) were aware of the
existence of the chapter 13 bankruptcy case at the time of the execution of the Agreement. Albert was
not scheduled as a creditor.
(7) In Exhibit 19, Albert’s state court counsel was advised by the Debtor’s state court counsel
that the Coldstream Drive property was not a part of the chapter 13 bankruptcy estate. This advice
was misleading.
(8) On June 26, 2002, in conjunction with the Barjeski’s Agreement, the Debtor signed a
Deed for the subject property conveying her interest to Albert. The Deed was recorded August 14,
2002. At about the same time as the execution of the Deed, the court finds that the parties conveyed
their interests in the respective automobiles (1998 Mercedes to the Debtor and the 1994 Toyota
Camry to Albert) to each other, and the pontoon boat was transferred to Albert.
(9) On November 21, 2002, on the Debtor’s motion, the case was converted from a case
under chapter 13 to a case under chapter 7.
(10) The Toyota Camry was sold for $2,000.00, the pontoon boat for $1,000.00.
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The following facts are also pertinent. On June 26, 2003, Albert sold the Coldstream Drive
property to the daughter of a neighbor for $295,000.00. It is stipulated that at the time of the sale, the
property had a value of $305,000.00. Albert cleared $133,480.25 from the sale. The Debtor’s
Schedule of Exemptions filed with her petition claimed $2,000.00 in value of the Coldstream Drive
property as exempt, together with $1,047.00 in exemptions in the pontoon boat and the Toyota
Camry. No objection was filed to this Schedule of Exemptions. The court sustained the Chapter 7
Trustee’s objection to the Debtor’s subsequent attempt to amend her Schedule of Exemptions.
Therefore, $2,000.00 of the value of the real property and the entire proceeds of the pontoon boat and
the Camry were excluded from her bankruptcy estate. While Albert testified that he bought an
engagement ring for the Debtor and that cost $5,000.00, the Debtor did not list this ring on her
Schedule of Personal Property. The Chapter 7 Trustee has not sought to recover the ring.
The Chapter 7 Trustee seeks to recover the value of the Debtor’s interest in the pontoon boat,
Toyota Camry, and the Coldstream Drive property. Because the Debtor claimed her interest in the
pontoon boat and the Toyota Camry as exempt, and no objection was filed to that claim, those items
may not be considered property of the estate. As for the Coldstream Drive property, the Chapter 7
Trustee’s action against the ultimate purchaser of the property would have been subject to the defense
by that individual as a good faith purchaser under § 549(c) of the Bankruptcy Code.
Upon the entry of the Judgment of absolute divorce of the parties on July 16, 2002, the
property previously owned as tenants by the entirety was converted by operation of law into a tenancy
in common. Bruce v. Dyer, 524 A.2d 777, 781 (Md. 1987). Also, as noted above, the Order
confirming the Debtor’s Chapter 13 Plan provided that the property of the estate did not vest in Debtor
until she was granted a discharge or the case was dismissed. Therefore, the Debtor’s interest in the
Coldstream Drive property remained property of the chapter 13 estate. The real property was thus
conveyed by the Debtor while it was property of the bankruptcy estate.
Under § 348(f)(1)(A) of the Bankruptcy Code, the property of the estate in a converted case
consists of the property of the estate as of the date of the filing of the petition remaining in the
possession of the debtor at the time of conversion. The plain meaning of this section might seem to
exclude from the property coming under the trustee’s dominion that property that was transferred
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contrary to law. This is because the trustee’s powers to avoid postpetition transfers is limited to
transfers of property of the estate. But such a construction would lead to an absurd result that compels
departure from the seemingly plain meaning of the section. Cf. Maryland Department of Education
v. U.S. Department of Veterans Affairs, 98 F.3d 165, 169 (CA4 1996). As explained in Collier’s
on Bankruptcy, ¶348.07 (15th Ed. Rev. 2004), the addition of § 348(f) by the Bankruptcy Reform
Act of 1994 was to clarify the law so as to protect property acquired by the debtor during the pre-
conversion chapter 13 case and to eliminate a serious disincentive to chapter 13 filings. H.R. REP. 103-
184 at 42-43 (1994); see In re Young, 66 F.3d 376 (CA1 1995). Were the 1994 amendment
construed otherwise, it would lead to the mother of all bankruptcy abuses. A debtor files a case under
chapter 13, disposes of valuable property prior to converting to a case under chapter 7 and then
thumbs her nose at creditors following conversion. But § 549(a) enables the trustee to avoid such
unauthorized transfers made while the case remained under chapter 13.
After avoidance of the transfer, Albert would then have a claim pursuant to § 502(h) of the
Bankruptcy Code against the estate for the amount that he paid for the Debtor’s share of the real
property. The next issue involves the issue of quantifying the recovery of the value of the property
recovered as a result of the avoidance. 11 U.S.C. § 550(a). In a recent case, the Tenth Circuit
rejected the Trustee’s argument that the bankruptcy estate should recover the appreciated value of the
asset transferred. The court noted:
Our own review of fraudulent transfer cases has revealed no such general rule,
however, particularly where the property in question has, as here, appreciated since the
time of the transfer. The cases cited by In re Colonial and by the appellants in support
of this rule all deal with instances where the transferred property had decreased in
value since the time of the transfer. See Kepler v. Sec. Pac. Hous. Servs. (In re
McLaughlin), 183 B.R. 171, 176-77 (Bankr. W.D. Wis. 1995); Shape, Inc. v.
Midwest Eng’g (In re Shape, Inc.), 176 B.R. 1, 3 (Bankr. D. Me. 1994); Official
Creditors Comm. v. Agri Dairy Prods, Inc. (In re James B. Downing & Co.), 74
B.R. 906, 911 & n. 6 (Bankr N.D. Ill. 1987). The rationale behind the rule in those
cases is to avoid the inequity to the bankruptcy estate that would result if the court
ordered the return of the actual property at issue. See Tidwell v. Chrysler Credit
Corp. (In re Blackburn), 90 B.R. 569, 573 (Bankr. M.D. Ga. 1987) (“Because of the
depreciable nature of the property involved [here], the Court finds that Trustee is
entitled to recover the value of the property at the time of transfer.”). As the In re
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Colonial court recognized, “‘the proper focus in [§ 550(a)] actions is not on what the
transferee gained by the transaction, but rather on what the bankruptcy estate lost as a
result of the transfer.’” In re Colonial Realty Co., 226 B.R. at 525 (quoting Gill v.
Maddalena (In re Maddalena), 176 B.R. 551, 557 (Bankr. C.D. Cal. 1995)). Rather
than In re Colonial’s rule, we believe the only generally applicable rule in regard to
§ 550(a) valuation is that “the time at which the value is measured depends upon the
circumstances of each individual case.” Pitchard v. Brown (In re Brown), 118 B.R.
57, 60 (Bankr. N.D. Tex. 1990) (quoting In re Blackburn, 90 B.R. at 573 (citing 4
Collier on Bankruptcy ¶ 550.02 n. 6 (15th ed. 1987))).
In re Integra Realty Resources, Inc., 354 F.3d, 1246, 1267 (CA10 2004). The court is spared
exploration of this issue by the Stipulation.
This leads the court to an interesting speculation. What happens if the clock is turned back?
One begins with the strong public policy of Maryland expressed by legislature and courts favoring
settlement of disputes, particularly involving family matters. The beginning premise is, of course, that the
divorce court is expressly forbidden to transfer ownership of personal or real property from one party
to another. Nisos v. Nisos, 483 A.2d 97 (Md. App. 1984); Watson v. Watson, 551 A.2d 505 ( Md.
App. 1989); Lemley v. Lemley, 649 A.2d 1119, 1134 ( Md. App. 1994). However, this rule does
not bar the Chancellor from considering the source of funds to determine what is and what is not marital
property. In making this monetary award, the court need not look to legalistic concepts of title, as
explained in Grant v. Zick, 477 A.2d 1163, 1171 (Md. 1984) (“[W]e now hold that when
characterizing property as marital or nonmarital under § 3-6A-05(a), for the purpose of granting a
monetary award under § 3-6A-05(b), a presumption of gift does not arise from the titling of property as
tenants by the entirety.”).
Thus, Albert had a meritorious basis for asserting that a substantial portion of the equity in the
Coldstream Drive property was not marital property, tracing that equity to the property owned by him
prior to the parties marriage. Furthermore, as pointed out above, almost all of Albert’s pension was
not marital property. However, under the “Bangs formula” used by Maryland courts in determining the
marital portion of pension assets, as noted above, a substantial segment of the Debtor’s pension was
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1The “Bangs formula” is used by Maryland courts to calculate the marital portion of a pension
for the purposes of valuation upon divorce. See, Potts v. Potts, 790 A.2d 703, 718-719 (Md App.
2002).
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marital property and subject to a monetary award.1 Finally, following the separation of the parties,
Albert made substantial payments on the obligation secured by liens on the Coldstream Drive property
for which he had a claim for contribution from the Debtor upon sale.
In all likelihood had that divorce case gone to trial, Albert would have emerged with a
substantial monetary award. The parties must have recognized this and entered into the Settlement
Agreement that they did. The Debtor got everything that she was entitled to under the Agreement.
What Albert got was this action by the Chapter 7 Trustee. If this were a fair world, Albert would win.
However, fairness has little to do with the situation at hand.
The court finds that the Trustee is entitled to recover from Albert a judgment in the sum of
$152,500.00, minus a sum equivalent to one-half of the liens secured by the subject property as of June
26, 2002. Counsel for the Trustee shall submit an appropriate order.
cc:
James M. Hoffman, Esq., 11921 Rockville Pike, Rockville, MD 20852
Harry T. deMoll, Esq., 129 West Patrick Street, Unite 3, Frederick, MD 21701
Laura J. Margulies, Esq., 6205 Executive Blvd., Rockville, MD 20852
End of Memorandum
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