Whitney et al v. Newman

IN THE UNITED STATES BANKRUPTCY COURT
DISTRICT OF MARYLAND
at GREENBELT
In Re: 	*
* 	Case No. 	06-14435-TJC	Dorothy Whitney,
* 	Chapter 	13
Debtor. 	*
************************************* 	*
*
*
Dorothy Whitney,
James Whitney,
Timothy P. Branigan, Chapter 13 Trustee, 	*
Plaintiffs, 	* 	Adv. No. 	06-1597
vs. 	*
*
*
Michael Newman,
*
Defendant. 	*
MEMORANDUM OPINION
This action arises out of a complaint to set aside a fraudulent transfer filed by
Plaintiffs Dorothy and James Whitney (the “Whitneys”) and Timothy P. Branigan,
Chapter 13 Trustee (the “Trustee”) (the Whitneys and the Trustee are collectively
referred to herein as the “Plaintiffs”). The Plaintiffs contend that the Whitneys’ transfer
Date signed July 30, 2007
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of their home to the Defendant Michael Newman (the “Defendant”), should be avoided as
a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B). 1 The Whitneys also contend that
the Defendant committed fraud by, among other things, misrepresenting the nature of the
transaction that resulted in the transfer of the home. The Defendant filed an answer to the
complaint denying the allegations.
The Court held a trial on the complaint on May 30, 2007, after which the parties
submitted post-trial briefs. For the reasons set forth in this memorandum opinion, the
Court will enter a judgment in favor of Plaintiffs and against Defendant avoiding the
transfer of the Property but dismissing the Plaintiffs’ claim for fraud.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334, 157(a),
and Local Rule 402 of the United States District Court for the District of Maryland. This
is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H). The following constitutes the
Court’s findings of fact and conclusions of law.
FINDINGS OF FACT
The debtor, Dorothy Whitney, filed a voluntary petition for relief under Chapter
13 of the Bankruptcy Code on July 27, 2006. Thereafter, the Trustee was appointed to
serve as the Chapter 13 Trustee in the debtor’s case and continues to serve as the Chapter
13 Trustee.
Prior to March 2, 2005, the Whitneys were the owners of improved real property
located at 13504 Leesburg Place, Upper Marlboro, Maryland 20774 (the “Property”).
The Property served as the Whitneys’ residence at that time and at all times through the
1 The Whitneys also contend in Counts 2 and 3 that the transfer is avoidable as a fraudulent transfer under
§15-204 and §15-207 of the Commercial Law Article of the annotated Code of Maryland. Because the
Court finds and concludes that the transfer was a fraudulent transfer under 11 U.S.C. § 548(a), the Court
does not address Counts 2 and 3.
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date of the trial. The Whitneys fell behind on their mortgage payments and, as a result, a
foreclosure action was docketed against the Whitneys in the Circuit Court for Prince
George’s County, Maryland. 	The foreclosure case was styled as John S. Burson, et al. v.
James F. Whitney and Dorothy B. Whitney, CAE05-2613.
The Whitneys searched for a way to save the Property from foreclosure. The
Whitneys knew that they needed approximately $11,000 in order to cure the defaults on
the first deed of trust and reinstate the mortgage. They came into contact with the
Defendant after they contacted Providence Mortgage about a potential refinance.
The Defendant met with the Whitneys at the Property on the evening before the
foreclosure. The Defendant left overnight with the Whitneys unsigned copies of the
following documents: (1) a quitclaim deed reflecting that the Whitneys would quitclaim
the Property to the Defendant for $32,000; (2) a quitclaim bill of sale to the same effect;
and; (3) a promissory note in the amount of $32,000. 	Mrs. Whitney asked the Defendant
why the promissory note was in the amount of $32,000 when the approximate amount to
cure the default was $11,000. The Defendant replied that the difference was his fee to
undertake the transaction and to advance the funds. Later that evening, Dorothy Whitney
contacted the Defendant and told him that the Whitneys wanted to go forward with the
proposed transaction.
The Defendant makes much of the fact that a foreclosure sale was scheduled for
March 2, 2005, and the Whitneys had no set solution to resolve the problem. However,
as Mr. Whitney astutely testified, “people do what they must” (or words to that effect).
Having viewed Mr. Whitney’s demeanor and resolve, the Court finds that the Whitneys
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would have taken some alternative action to save their home in the event the transaction
with the Defendant did not occur.
The next day, March 2, 2005, the Defendant and the Whitneys met at the
courthouse prior to the scheduled foreclosure sale. There, the Whitneys executed the
following documents, all dated March 2, 2005: (1) a deed conveying the Property to the
Defendant and reciting consideration for the conveyance in the amount of $157,000 (the
“Deed”); (2) a promissory note from the Whitneys payable to the order of the Defendant
in the amount of $32,000 (the “Note”); (3) a quitclaim deed quitclaiming the Whitneys
interest in the Property to the Defendant and reciting consideration for the conveyance in
the amount of $32,000; and (4) a quitclaim bill of sale conveying to the Defendant the
rights, title and interest held by the Whitneys subject to prior liens and encumbrances.
Notwithstanding the plain language of the Deed, the quitclaim bill of sale, and the
quitclaim deed which purported to transfer the Property to the Defendant, the parties
testified that they believed they were entering into a financing transaction. The
Defendant testified that he believed that he was lending the Whitneys funds necessary to
reinstate the mortgage and stop a foreclosure sale so that the Whitneys would have
sufficient time to refinance the Property. He testified that he had the Whitneys sign the
Deed (which did not refer to the Note or state that the Deed was being granted to serve as
collateral security for the Note) because that was the only way he knew how to document
the transaction.
Similarly, the Whitneys believed that the Defendant was advancing them a loan in
order to save the Property from foreclosure and allow them sufficient time to refinance
the Property. While the Note does not specify a due date, the Whitneys expected to repay
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the Defendant at the time the Property was refinanced from the proceeds of the
refinancing. As the nature of the transaction is a mixed question of law and fact, the
Court addresses the nature of the transaction further in the Conclusions of Law.
The Defendant learned that the amount needed to stop the sale and cure the
arrearage that was owed on the first deed of trust loan against the Property was
$11,174.58. He delivered a check in that amount to the law firm that was conducting the
foreclosure sale. The foreclosure sale was then cancelled.
The Whitneys continued to reside in the Property after they executed the Deed,
Note and other documents. They were not relieved of their mortgage obligation and
continued to make the payments on the first deed of trust loan against the Property
(although, as described below, the Defendant made the April, 2005, deed of trust
payment in connection with stopping the foreclosure sale).
After the transaction with the Defendant, the Whitneys continued their effort to
refinance the Property and repay the Defendant. The Whitneys apparently were unable to
refinance the Property prior to November of 2005. Additionally, the Whitneys made no
payments to the Defendant on the Note.
Defendant spoke to the Whitneys in the middle of March, 2005, and did not speak
to them again before he recorded the Deed. On November 4, 2005, without prior demand
or notice of any kind, the Defendant recorded the Deed. After recording the Deed, he did
not inform the Whitneys that he had done so or send them notice of the recordation.
They found out the Defendant had recorded the Deed when they were so informed during
their efforts to refinance the Property.
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Defendant provided no other services to the Whitneys and advanced no other
monies directly to the Whitneys. In addition to paying $11,174.58 to stop the foreclosure
sale, the Defendant paid the following amounts in connection with the Property after
March 2, 2005:
$1,501.11 	April, 2005 payment on first deed of trust loan
$1,602.00 	Payment to homeowners’ association
$1,395.00 	Payment of property taxes
$3,700.00 	Recording and filing fee
$ 426.40 	Payment of water and sewage bill
The parties stipulate that the fair market value of the Property was $250,000 in
March, 2005, and $315,000 in November, 2005. The parties further stipulate that the
Property was encumbered by liens totaling $190,000 on March 2, 2005 (the “Liens”)
The parties also stipulate that the Whitneys were insolvent during all periods
relevant in this adversary proceeding.
CONCLUSIONS OF LAW
A. 	The Transfer of the Property was a Fraudulent Transfer under 11 U.S.C.
§ 548(a)(1)(B).
In Count I of the Amended Complaint, the Plaintiffs seek a determination that the
transfer of the Property to Defendant was a fraudulent transfer under 11 U.S.C.
§548(a)(1)(B).
The parties do not agree on the characterization of the transaction between the
Whitneys and the Defendant. The Plaintiffs’ litigation position is that the transaction was
a sale, and the date of transfer for purposes of Section 548 analysis was November 4,
2005, the date the Defendant recorded the Deed. The Defendant’s litigation position is
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that the transaction was a “sale of equity with an option to repurchase” as of March,
2005. 2 At trial, both Mr. Whitney and the Defendant testified that they believed the
transaction was a loan from the Defendant to the Whitneys secured by the Property.
It is understandable why both parties’ litigation position (presumably developed
by counsel) differs from the parties own testimony on the nature of the transaction. The
transaction is neither fish nor fowl. The Deed, the quitclaim deed and the bill of sale all
reflected that the transfer was absolute on its face, and nothing states that the transfer
documents were given as collateral security for a loan by the Defendant to the Whitneys.3
On the other hand, the Whitneys signed the Note, which obviously is inconsistent with a
sale transaction, and both Mr. Whitney and the Defendant testified that they believed the
transaction was a loan transaction. The Note was in the amount of $32,000, although at
the time the Note was made the Defendant only advanced $11,174.58, and never came
close to advancing $32,000. The Note contained no maturity date or interest rate. The
Defendant certainly did not act like a lender after the transaction – he never sent a notice
of default or demand letter, and he had no contact with his “borrower” after the
transaction other than one conversation in mid-March, 2005. He recorded the Deed
without providing notice of any kind.
The Court finds and concludes that it need not, and cannot, determine whether the
transaction was a sale or a loan. The documentation is simply incomprehensible on this
point. Nevertheless, whether the transaction is considered to be a sale or a loan
2 Defendant’s Post Trial Memorandum of Law, Docket 66 at p. 1. Because there was no factual basis
whatsoever in the record for the Court to find or conclude that the Defendant gave the Whitneys an option
to repurchase the Property, the Court will not address the transaction as if an option was granted.
3 The Deed recited consideration of $157,000, while the quitclaim deed recited consideration of $32,000.
Candidly speaking, neither of these amounts has any valid economic justification in the record.
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transaction, the transfer to the Defendant is avoidable as a fraudulent transfer under
Section 548(a)(1)(B).
Section 548(a)(1)(B) of the Bankruptcy Code is a constructive fraudulent transfer
provision. It provides:
(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 two 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 such obligation was incurred, or became
insolvent as a result of such transfer or obligation;...
11 U.S.C. § 548. As noted above, the parties stipulate that the Whitneys were insolvent
at the time of the transfer. The only issues in dispute that are pertinent to the claim under
Section 548 are when the transfer was made and whether the Whitneys received
reasonably equivalent value for the transfer.
1. 	The date of the transfer.
One of the primary disputes between the parties is the date of the transfer for
purposes of determining whether a fraudulent transfer occurred under Section 548. The
Defendant contends that the date of the transfer was March 2, 2005, because that is the
date the Deed was signed by the Whitneys. The Plaintiffs contend that the date of the
transfer was November 4, 2005, because that is the date the Deed was recorded.
Section 548(d)(1) provides:
( d)(1) 	For the purposes of this section, a transfer is made when such
transfer is so perfected that a bona fide purchaser from the debtor
against whom applicable law permits such transfer to be perfected
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cannot acquire an interest in the property transferred that is superior
to the interest in such property of the transferee, but if such transfer is
not so perfected before the commencement of the case, such transfer is
made immediately before the date of the filing of the petition.
Under Maryland law, a transfer of real estate “is so perfected that a bona fide
purchaser from the debtor . . . cannot acquire an interest in the property transferred that is
superior to the interest in such property of the transferee...” at the time the transferee’s
deed is recorded. Md. Code Ann. Real Prop. § 3-203. 4 Accordingly, the Court finds and
concludes that, for purposes of determining whether a fraudulent transfer occurred in this
case under Section 548, the date of transfer is November 4, 2005, the date the Deed was
recorded.
Defendant further contends that the Plaintiffs are collaterally estopped to claim
that the date of the transfer was November 4, 2005 because the District Court for
Montgomery County, Maryland (the “District Court”) previously determined that the
effective date of the transfer was March 2, 2005, in litigation between the parties. The
Defendant submitted into the record without objection a transcript of a hearing in the
District Court, 5 which was apparently a transcript of a hearing on the Defendant’s
ejectment action of the Whitneys from the Property after the Defendant recorded the
4 Md. Code Ann. Real Prop. 3-203 provides:
Every recorded deed or other instrument takes effect from its effective
date as against the grantee of any deed executed and delivered
subsequent to the effective date, unless the grantee of the subsequent
deed has:
(1) Accepted delivery of the deed or other instrument:
(i) In good faith;
(ii) Without constructive notice under § 3-202; and
(iii) For a good and valuable consideration; and
(2) Recorded the deed first.
5 The only date on the transcript is May 29, 2007, which the parties stipulated was the date it was printed.
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Deed. The District Court ruled that, for purposes of determining whether the
Homeowners Foreclosure Act applied to the transaction, the date the “transaction
occurred” was the date of the Deed, March 2, 2005, rather than the date of recordation,
because Md. Code Ann. Real Prop. § 3-201 6 provides that the effective date of a deed is
the date it is delivered. See Transcript at p.19-20.
Collateral estoppel does not apply to the District Court’s ruling. 7 The issue
resolved by the District Court is not the same issue as that before this Court. 	As it
appears from the transcript, the issue before the District Court was whether the recently
enacted Homeowners Foreclosure Act applied to the transaction. That act was enacted in
May, 2005, and has an effective date of October 1, 2005, both of which dates are between
the date of the execution of the Deed and the date of the recording of the Deed in this
case. As stated above, the District Court ruled that the date the “transaction occurred”
was the date of the Deed, March 2, 2005, rather than the date of recordation, because Md.
Code Ann. Real Prop. § 3-201 provides that the effective date of a deed is the date it is
delivered. See Transcript at p.19-20. The District Court’s ruling was expressly limited to
6 Md. Code Ann. Real Prop. § 3-201 provides:
The effective date of a deed is the date of delivery, and the date of
delivery is presumed to be the date of the last acknowledgment, if any,
or the date stated on the deed, whichever is later. Every deed, when
recorded, takes effect from its effective date as against the grantor, his
personal representatives, every purchaser with notice of the deed, and
every creditor of the grantor with or without notice.
7 Although neither party cited the Court to any authority on the issue of collateral estoppel, it is well
established in Maryland that in order for collateral estoppel to apply, a party must show that: (1) the issue
decided in the prior adjudication is identical with the one presented in the action in question; (2) the prior
action resulted in a final judgment on the merits; (3) the party against whom the plea is asserted is a party
or is in privity with a party to the prior adjudication; (4) the party against whom the plea is asserted was
given a fair opportunity to be heard on the issue. See Colandrea v. Wilde Lake Community Ass'n, 361 Md.
371, 391 (Md. 2000). See also, Allen v McCurry, 449 U.S. 90, 96 (1980). ("Congress has specifically
required all federal courts to give preclusive effect to state-court judgments whenever the courts of the state
from which the judgments emerged would do so,…")
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a determination of whether the Homeowners Foreclosure Act applied to the transaction in
light of that act’s effective date. 8
The issue before this Court differs markedly from the issue before the District
Court. Here, the issue is what is the date of the transfer for purposes of 11 U.S.C. § 548.
As noted above, Section 548(d) expressly provides when a transfer is made. 	This
definition is an explicit and unambiguous statutory term and differs from the general
definition of “transfer” under the Bankruptcy Code. See 11 U.S.C. § 101(54). Thus, the
District Court’s determination of the date of a transaction for purposes of determining the
applicability of a state law statute has no bearing on when a transfer is made for purposes
of Section 548, which provides expressly when a transfer is made for its purposes. Thus
the issue presented in this case is not identical with the issue adjudicated by the District
Court. See Colandrea v. Wilde Lake Community Ass'n, 361 Md. 371, 391 (Md. 2000).
Accordingly, the Court finds and concludes that, for purposes of the analysis under
Section 548, the transfer of the Property occurred on November 4, 2005, the date that the
Defendant recorded the Deed.
2. 	Reasonably equivalent value.
Under Section 548(a)(1)(B)(i), a transfer can only be avoided if the debtor
“received less than reasonably equivalent value for such transfer…” For purposes of
Section 548, “…value means property, or satisfaction or securing of a present or
antecedent debt of the debtor…” 11 U.S.C. § 548(d)(2)(A). “[R]easonably equivalent
value looks to the consideration actually received by the debtor, not to the value given by
the transferee.” Koch v. Rogers (in re Broumas), 203 B.R. 385, 393 (D. Md. 1996)
8 The District Court expressly stated it was not ruling on whether the transaction was subject to challenge,
and indeed, stated it had no jurisdiction to do so. See Transcript at p. 19-21.
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(citing Harman v. American Bank of Maryland (In re Jeffrey Bigelow Design Group,
Inc.), 956 F.2d 479, 484 (4th Cir. 1992)).
In order to determine whether the debtor received reasonably equivalent value for
the transfer, the Court must compare the value of the consideration received by the debtor
with the value of the property transferred by the debtor. BFP v. Resolution Trust Corp.,
511 U.S. 531, 546 (1994) (“There is no doubt that this provision [11 U.S.C. §
548(a)(1)(B)] directs an inquiry into the relationship of the value received by the debtor
to the worth of the property transferred.”) Reasonable equivalence is to be determined as
of the date of the transfer. In re Morris Communications NC, Inc, 914 F.2d 458, 466 (4th
Cir. 1990). “[R]easonable equivalence is not wholly synonymous with market value even
though market value is an extremely important factor to be used in the Courts assessment
of reasonable equivalence.” Id. The determination of whether reasonably equivalent
value was received requires a case by case analysis taking into account the good faith of
the transferee and whether the sale was “an arms length transaction between a willing
buyer and a willing seller.” Id.
a. 	The transaction as a sale transaction.
Treating the transaction as a sale transaction, the parties stipulated that: (1) the
fair market value of the Property on November 4, 2005 was $315,000; and (2) the amount
of the existing deed of trust loans secured by the Property on November 4, 2005 was
$190,000. Therefore, the Whitneys’ equity in the Property at the time of transfer was
$125,000. It is also uncontested that the Defendant did not assume the existing loans, but
took title subject to them. Thus, on the date of the transfer under Section 548, the
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Whitneys gave, and the Defendant received, the equity in the Property of $125,000
($315,000 - $190,000). 9
The Court must next determine the value of the consideration received by the
Whitneys in exchange for the transfer. The Court finds and concludes that the value
received by the Whitneys in exchange for the Property was $16,099.09. This total
includes: (1) the $11,174.58 payment to reinstate the mortgage; (2) the $1,501.11
payment for the April, 2005, mortgage payment; (3) the $1,602 payment to the
homeowners association; (4) the $1,395 payment for property taxes; and (5) the $426.40
payment for water and sewage. Although items (2) through (5) were paid by the
Defendant after the initial transaction in March, 2005, the Court will include them in the
analysis because these payments benefited the Whitneys.
The Court finds and concludes that the Whitneys receipt of $16,099.09 in
exchange for equity in the Property valued at $125,000 does not constitute reasonably
equivalent value. Under this analysis, the Whitneys received approximately 13 percent of
the value of the equity in the Property in exchange for the transfer. Under no
circumstances is $16,099 reasonably equivalent to $125,000.
The Defendant contends that in addition to the amounts enumerated above, the
Court should also include in the amount received by the Whitneys the $3,700 recording
cost incurred by the Defendant. Additionally, the Defendant maintains that the Court
should also include in the amount received by the Whitneys a hypothetical cost of sale,
namely, a six percent real estate brokers’ fee, that the Whitneys did not incur by entering
into the sale transaction with the Defendant.
9 As stated supra at n. 2, the Defendant characterized the transaction as a sale of equity (although the
Defendant also contended that he gave an option to repurchase to the Whitneys, which option this Court
rejects).
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The Court finds and concludes that including the $3,700 recording cost in the
analysis is not appropriate. As stated above, Section 548 plainly requires an examination
of whether “the debtor . . . received less than a reasonably equivalent value....” 11 U.S.C.
§548(a)(1)(B) (emphasis added). The Court is hard pressed to find that the Whitneys
received any value when the Defendant paid the cost of recording the Deed. In any
event, including the $3,700 recording fee in the value received by the Whitneys would
not change this Court’s determination that the transfer was constructively fraudulent.
Further, the Court finds and concludes that a hypothetical real estate broker’s fee
should not be included in the value “received” by the Whitneys. As a matter of fact, no
broker was retained and no fee was earned.10 Further, as a matter of fact, the Whitneys
never received the benefit of the services of a real estate broker which would have
included, among other things, actively marketing the Property to maximize the sale price.
Considering the nature of the transaction and the minimal amount of funds paid by the
Defendant, the Court finds no justification for factoring into the analysis the amount the
Whitneys would have paid a real estate broker in a bona fide marketing and sale
transaction. The Defendant acquired the Property without marketing it or testing the
market in any way; therefore the hypothetical cost of marketing the Property should not
be taken into account for purposes of Section 548.
The Defendant further contends that using the fair market value of the Property to
determine the value given is inappropriate in this case because the Property was on the
brink of going to foreclosure. In support of this contention, the Defendant relies on BFP
v. Resolution Trust Corp., 511 U.S. 531 (1994). In BFP, the Supreme Court opined that
10 While Defendant contends that a real estate broker’s commission should be included in the analysis, the
Court notes that there would have been no need for a broker if the transaction had been, in fact, a loan as
Defendant testified.
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the fair market value of real property may not be an appropriate bench mark in
determining reasonable equivalent value when a property is sold at a lawful mortgage
foreclosure sale. Id. at 538.
The holding in BFP is not controlling in the instant case. As a preliminary matter,
the Supreme Court in BFP expressly limited its holding to specific forced sales, namely,
non-collusive mortgage foreclosure sales that are conducted in accordance with state law.
Id. at 537 n3 (“We emphasize that our opinion today covers only mortgage foreclosures
of real estate. The considerations bearing upon other foreclosures and forced sales (to
satisfy tax liens for example) may be different.”) Moreover, in contrast to the facts in
BFP, no foreclosure sale was conducted in the instant case. Thus no procedural safe
guards were in place to ensure that the transaction comported with state law. More
importantly, the Property was not the subject of a properly noticed auction sale at which
willing buyers may have appeared to bid competitively for the Property. Cf., BFP, 511
U.S. at 545 (“We deem, as the law has always deemed, that a fair and proper price, or a
‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the
foreclosure sale, so long as all the requirements of the State's foreclosure law have been
complied with.”) In fact, the Supreme Court in BFP expressly stated “reasonably
equivalent value criterion will continue to have independent meaning (ordinarily a
meaning similar to fair market value) outside the foreclosure context”). Id. at 545. Thus,
the holding in BFP is inapposite to this case because no foreclosure sale was in fact
conducted. Accordingly, the Court finds and concludes that “fair market value is an
extremely important factor in determining reasonable equivalence.” See Morris, 914
F.2d at 466.
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In addition, the Defendant never produced any evidence setting forth a value for
the Property other than market value. In fact, in his closing argument, the Defendant
relied on the March, 2005, stipulated fair market value of the Property to show that the
Whitneys received reasonably equivalent value for the transfer. Moreover, there was
nothing in the record to suggest that the value paid by the Defendant had anything to do
with the value of the Property as perceived or understood by either the Whitneys or the
Defendant. Rather, the amount paid by the Defendant was simply the amounts needed to
reinstate the loan and to pay other expenses related to the loan or the Property. Thus in
no sense can the amount paid by the Defendant be considered to result in a “market”
price between a willing buyer and willing seller (no matter how much duress the
Whitneys may have been under), other than perhaps by pure happenstance in comparison
to extraneous evidence, such as an appraisal. Stated otherwise, the parties neither
understood nor intended that the amount paid by the Defendant was an approximation for
any type of value of the Property, whether reasonably equivalent or fair market.
At bottom, the transfer of the Property to the Defendant provided him with
$125,000 in equity in the Property at a cost of at most $20,000. This transaction patently
falls within the rubric of Section 548(a)(1)(B) and will be avoided.
One final note: The Defendant argues that the value he gave to the Whitneys
should include the value of the deed of trust Liens on the Property of $190,000. The
Defendant would add the value of the Liens to the amount he paid and compare that sum
to the market value to determine if he paid reasonable equivalent value. Under this
analysis the Defendant would have paid $206,099, comprised of (1) $190,000 of the
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Liens that he took the Property subject to; and (2) $16,099 he paid to reinstate the loan
and for the other expenses discussed above.11
The Court disagrees that the value of the Liens on the Property should be included
in the value received by the Whitneys. As noted above, Section 548 requires an
examination of whether “the debtor . . . received less than a reasonably equivalent
value....” 11 U.S.C. §548(a)(1)(B) (emphasis added). The Defendant did not assume the
deed of trust loans but only took the Property subject to them. The Whitneys remained
liable on the deed of trust loans and continued to make payments on them after the
transaction with the Defendant. Further, as noted above, value means “…satisfaction…of
a present or antecedent debt of the debtor…” 11 U.S.C. § 548(d)(2)(A). 	By taking the
Property subject to the Liens, the Defendant did not satisfy any present or antecedent
debts of the Whitneys and thus did not give value as defined by Section 548(d)(2)(A).
Nevertheless, even under this analysis, the Court’s conclusion would not change.
The Whitneys would have received $206,099, as described above, in exchange for the
Property valued at $315,000. Since $206,099 is 65% of $315,000, the Court would
conclude that $206,099 is not reasonably equivalent value for the transfer of the Property.
b. 	The transaction as a loan transaction.
Treating the transaction as a loan transaction does not change this Court’s
conclusion that the transfer of the Property to Defendant is avoidable as a fraudulent
transfer under Section 548(a)(1)(B).
11 The Defendant would also include the $3700 payment to record the Deed and the hypothetical broker’s
commission discussed above. And, of course, the Defendant contends that the amounts should be compared
to the market value of the Property as of March, 2005, rather than November, 2005. For the reasons stated
above, the Court has rejected these positions.
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The Whitneys signed the Note in the amount of $32,000. The only evidence in
the record to explain why the face amount of the Note was $32,000 while the Defendant
only advanced $11,174.58 at the time the Note was executed was that the difference was
the Defendant’s “fee” for entering into the transaction. Even adding to the principal on
the Note the subsequent payments made by the Defendant, as well as the $3700 for
recording the Deed, the total “advanced” by the Defendant would be $19,799.09.
Therefore, the Defendant’s fee for making a loan of less than $20,000 was $12,000. Even
if the Court were to impute a reasonable interest into the transaction, there is no
justification for the $12,000 fee.
Further, on November 4, 2005, the Defendant recorded the Deed to satisfy the
amount due on the Note without: (1) providing any demand to the Whitneys,
notwithstanding that the Note had no maturity date; (2) providing any opportunity to
cure; (3) providing the Whitneys any notice that he was going to or had recorded the
Deed; (4) complying with any state law requirements for conducting a foreclosure sale;
(5) actually conducting a foreclosure sale or other auction sale of the Property; and (6)
acting commercially reasonable in any way. Indeed, the Whitneys did not discover that
the Deed was recorded until they attempted to refinance the Property and were told they
no longer owned the Property.
The structure of the transaction, the fee charged by the Defendant and the
Defendant’s foregoing actions are very troubling, to say the least. The Whitneys may
well have a basis for relief under various consumer or other lending laws. In this action,
however, they seek to avoid the transaction under Section 548. For purposes of
determining whether the transaction was constructively fraudulent, it is sufficient to note
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that the Defendant comes into this Court with unclean hands. It may well be that the
Defendant was somewhat unsophisticated in financial transactions.12 That, however,
does not provide him with an excuse for the dismal, if not incomprehensible, method of
documenting and executing this transaction.
For purposes of determining whether the transaction was constructively
fraudulent when viewed as a loan transaction, much the same analysis applies as set forth
above. The recording of the Deed by the Defendant satisfied a debt of the Whitneys (i.e.,
the Note held by the Defendant). Therefore, because the balance on the Note was
satisfied, the Whitneys’ received “value” when the Deed was recorded. See 11 U.S.C. §
548(d)(2)(A) (value means “…satisfaction…of a present or antecedent debt of the
debtor…”). The question is, whether the value given by the Whitneys was reasonably
equivalent to the value they received. As stated above, the maximum amount the
Defendant advanced on the Note was $16,099 plus the $3700 recording fees, for a total of
$19,799. For the reasons stated above in the context of analyzing the transaction as a
sale, $19,799 is not reasonably equivalent to the value given by the Whitneys (i.e., the
value of the Property subject to the Liens).
B. 	The Defendant did not commit fraud.
In count four of the complaint, the Plaintiffs contend that the Defendant is liable
for misrepresentation and fraud. Under this claim, the Plaintiffs seek compensatory
damages in the amount of $10,000 and punitive damages in the amount of $150,000.
The Plaintiffs contend that the Defendant misrepresented the nature of the
transaction. In particular, the Plaintiffs aver that the Defendant told the Whitneys that the
12 The scope of the Defendant’s experience in financial matters is not clear on the record. In answer to a
specific question, he testified that he had only done one previous transaction involving a quitclaim bill of
sale, a promissory note and a deed. He testified that he was familiar with foreclosure proceedings.
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transaction was nothing other than a loan transaction and that he never advised them that
they were actually making an outright transfer of the Property.
In Maryland, to sustain a claim for fraud or deceit a party must show: (1) that the
defendant made a false representation to the plaintiff; (2) that its falsity was either known
to the defendant or that the representation was made with reckless indifference as to its
truth; (3) that the misrepresentation was made for the purpose of defrauding the plaintiff;
(4) that the plaintiff relied on the misrepresentation and had the right to rely on it; and (5)
that the plaintiff suffered compensable injury resulting from the misrepresentation.
Ellerin v. Fairfax Sav., F.S.B., 337 Md. 216, 229 (Md. 1995); Nails v. S&R, Inc., 334
Md. 398, 415-416 (Md. 1994). A defendant’s actual knowledge that his statement is
false, coupled with his intent to deceive another by means of that statement, constitute the
“actual malice” required for the availability of punitive damages. Ellerin, 337 Md. At
240.
Considering the demeanor and the credibility of the witnesses and the evidence
presented at the trial, the Court finds and concludes that the Defendant did not commit
fraud. First, the discussion between the Defendants and the Whitneys on the eve of the
transaction was brief and the record is not clear on the nature of that conversation.
Second, the Defendant left overnight with the Whitneys unsigned documents that they
would be required to sign for the transaction. Those documents included a deed and bill
of sale that were absolute on their face. Third, the Whitneys signed the Deed, a quitclaim
deed and bill of sale, all of which stated that they were transferring the Property and none
of which indicated that the Property served merely as collateral security for a loan.
Fourth, the Defendant waited until November, 2005, to record the Deed. Fifth, as
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described above in Section A, the documents themselves were inconsistent and illogical
on their face as to be practically incomprehensible. Under these circumstances, the Court
finds and concludes that the Defendant did not make a false representation to the
Whitneys with the intent to deceive or defraud the Whitneys and upon which they
reasonably relied. To be sure, it may be that the Defendant did not know what he was
doing, but the Court determines that he did not commit fraud.
CONCLUSION
For the reasons stated above, the Court will enter an order avoiding the transfer of
the Property.
Copies to:
Plaintiffs
Plaintiffs’ Counsel
Defendant
Defendant’s Counsel
Trustee
Office of the U.S. Trustee
END OF ORDER
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