Spencer Grigsby v. Keilholtz et al

UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
at Greenbelt
In re :
CASSANDRA KEILHOLTZ, : Case No. 03-30677 NVA
Chapter 13
Debtor. :
· · · · · · :
NANCY SPENCER GRIGSBY, :
Plaintiff, :
v. : Adv. Proc. No. 04-1854
CASSANDRA & RICHARD KEILHOLTZ, :
Defendants. :
MEMORANDUM OF DECISION GRANTING
TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
The above-captioned debtor (the “Debtor”) commenced this case on July 28,
2003 (the “Petition Date”) by filing a voluntary petition for relief under chapter 13 of the
Bankruptcy Code.* Nancy Spencer Grigsby (the “Trustee”) was duly appointed chapter
* Unless otherwise indicated, all section references herein are to the Bankruptcy Code, i.e., the Bank-
ruptcy Reform Act of 1978, as amended, codified in title 11 of the United States Code.
Date signed February 28, 2005
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13 trustee. On June 22, 2004, the Trustee filed a complaint to avoid as fraudulent on
creditors an August 24, 2001 transfer by the Debtor (the “Transfer”), to herself and her
husband as tenants by the entirety, of title to a property located at 9201A Dublinville
Road, Walkersville, Maryland (the “Property”). The Debtor and her husband (the “De-
fendants”) filed their answer to the complaint on August 5, 2004. On December 20,
2004, the Trustee filed a motion for summary judgment. On December 27, 2004, the De-
fendants answered the Trustee’s motion and cross- moved for summary judgment. From
a review of the papers, it appears that the material facts are not disputed and that the mat-
ter can and should be resolved as a matter of law.
In substance, the Trustee’s theory of the case is that, prior to the Transfer, the
Property was subject to execution by the Debtor’s creditors, but, as a consequence of the
Transfer, was rendered exempt from the claims of all but joint creditors of the Defe n-
dants. Under settled principles of Maryland law, such a transfer is deemed fraudulent on
creditors (without any need to show fraudulent intent) if, at the time of transfer, the trans-
feror had insufficient other assets to satisfy claims and the transfer had the effect of strip-
ping the transferor of property otherwise available by execution for the satisfaction of
such claims. See, e.g., Lutherville Supply & Equipment Co. v. Dimon, 232 Md. 195, 192
A.2d 496 (1963); Pearce v. Micka, 62 Md. App. 265, 489 A.2d 48 (1985).
The Defendants acknowledge this general rule, but argue it is inapplicable here
because, at the time of transfer, the Property was subject to a right of first refusal which
rendered it worthless to creditors. The holder of the right of first refusal is the Debtor’s
mother, Helen Ramsburg (“Mrs. Ramsburg”), personally and as representative of the es-
tate of her late husband (and the Debtor’s father), Staley Ramsburg. Mrs. Ramsburg is
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also a creditor in the case, indeed the largest creditor. The right of first refusal rendered
the Property worthless to creditors, the Defendants argue, because it gives Mrs. Rams-
burg the option, in the event of a sale of the Property, to interdict the sale by tendering
one-third of the Property’s then-appraised value. Here, that amount is less than the mort-
gage on the Property (foreclosure of which, incidentally, is not subject to the right of first
refusal). Indeed, the Defendants observe, the Ramsburgs successfully asserted in connec-
tion with an attempted judicial sale of the Property by a previous spouse of the Debtor (in
the context of a divorce) that the right of first refusal would apply to any such judicial
sale. Thus, the Defendants argue, the Transfer was not the fraudulent creation of an ex-
emption, the sine qua non of which is prejudice to creditors. Cf. Spitz v. Williams, 69
Md. App. 694, 519 A.2d 775 (1987) (husband’s transfer of entireties interest to wife not a
fraud on husband’s individual creditors); Watterson v. Edgerly, 40 Md. App. 230, 388
A.2d 934 (1978) (transfer of entireties property to a spendthrift trust was not a fraud on
the husband’s creditors, even though the parties knew that the wife was terminally ill and
that the husband was about to become sole title holder).
In reply, the Trustee makes two arguments. First, she attaches to her motion a
waiver by Mrs. Ramsburg of the right of first refusal for all purposes in the bankruptcy
case, including a sale of the Property by a chapter 7 trustee. Therefore, argues the Trus-
tee, creditors were prejudiced by the Transfer. The Defendants respond that this release
occurred post-petition, long after the Transfer, and is therefore irrelevant to the bona fides
of the Transfer when made. The Court agrees that the execution of the release does not,
in effect, retroactively invalidate the Transfer. Second, the Trustee argues that, in any
event, Mrs. Ramsburg had standing to object to the Transfer, had timely filed an action
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on January 31, 2003 seeking that relief, the action was still pending on the Petition Date
and the right of first refusal was waivable by Mrs. Ramsburg in connection with such
challenge. This argument is a little different, and in an important way.
It is crucial to notice a distinction in the Trustee’s posture in “strong arm”
claims under § 544. Under subsection (a), the Trustee stands in the shoes of a hypotheti-
cal lien creditor. As to such a creditor, the Defendants’ argument has merit. Based on
the Ramsburgs’ successful assertion of the right of first refusal against the jud icial sale
requested by the Debtor’s ex-spouse, an argument can be made that the Property was ef-
fectively immune from execution. (An argument also could be made that the two kinds
of sale are different and that the right of first refusal does not apply to an execution; as
will be seen momentarily, the Court does not need to resolve this issue in the present
case.) If so, the Trustee’s claim as hypothetical lien creditor would be similarly limited.
Under subsection (b), however, the Trustee does not assert the claims of a hypothetical
lien creditor. Rather, she asserts derivatively the avoidance claims of any actual Petition
Date creditors and does so for the benefit of all creditors. As the saying goes, the Trustee
steps into not only the shoes but the overshoes of the creditor whose avoidance claim she
asserts derivatively under § 544(b). See, e.g., In re Agricultural Research & Technology
Group, Inc., 916 F.2d 528, 534 (9th Cir. 1990) (collecting cases).
The upshot of the foregoing is that it does not matter whether Mrs. Ramsburg
is a large or a small creditor, nor whether she has now waived her right of first refusal.
(Though, reasonably, the Trustee might have declined to initiate this adversary proceed-
ing without such a waiver.) As of the Petition Date, Mrs. Ramsburg had a claim to avoid
the Transfer, to which the Trustee has now succeeded. As the Trustee observes, Mrs.
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Ramsburg plainly could have waived the right of first refusal in connection with her own
execution to satisfy her claims. It necessarily follows that the Transfer significantly im-
paired Mrs. Ramsburg’s ability to collect those claims and is thus avoidable under Lu-
therville and Pearce. From which it further follows that the Trustee, as statutory succes-
sor to Mrs. Ramsburg’s avoidance claim, is entitled to the same relief.
Accordingly, the Court hereby GRANTS the Trustee’s motion for summary
judgment. The Trustee is directed to submit a proposed final judgment, on notice to the
Defendants, consistent with the instant ruling.
cc: Chapter 13 Trustee
Defendants’ counsel
U.S. Trustee
End of Decision
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