Millbury National Bank et al v. Palumbo

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS

In re:

PAUL O. PALUMBO,
DEBTOR.

Chapter 7
Case No. 05-49073-JBR

MILLBURY NATIONAL BANK,
ANNE J. WHITE, TRUSTEE,
PLAINTIFFS,

Vv. Adv. Pro. No. 06-4023

PAUL O. PALUMBO,
DEFENDANT. _)

Nee eee ee ee OA OA Sa ae a

MEMORANDUM OF DECISION ON DEFENDANT’S MOTION FOR SUMMARY
JUDGMENT

This matter came before the Court for hearing on the Debtor-Defendant’s Motion for
Summary Judgment [#16] and Millbury National Bank’s (the “Bank”) opposition thereto [#23].
The Debtor seeks dismissal of the two count amended complaint on the grounds that the actions
complained of in Count I occurred more than a year prior to the bankruptcy and thus cannot be
the basis for denial of discharge under 11 U.S.C. § 727(a)(2)(A) and that the amended complaint
fails to join, and indeed cannot join, the transferee of alleged fraudulent transfer as a party.’ For
the reasons set forth herein, the Motion is DENIED.

FACTS

The following facts are taken from the Debtor’s Statement of Material Undisputed Facts

'The Debtor also sought dismissal on the grounds that a fraudulent conveyance action
belongs only to the Chapter 7 trustee. The Trustee and the Bank entered into a stipulation,
approved by the Court, that any recovery in this case is an asset of the bankruptcy estate. The
Trustee also sought and obtained permission to be added as a party in this proceeding.

AUTHENTICATED
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GPO

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and from the Debtor’s and his spouse’s schedules. The Debtor is indebted to the Bank pursuant
to a promissory note executed in 1997 and two guaranties given in 2003. Prior to March 1, 2004
the Debtor and his wife (“Nanci”) owned their residence (the “Residence’”’) as tenants by the
entirety; the Debtor had recorded a declaration of homestead. On or about March 30, 2004, for
nominal consideration, the Debtor and his wife transferred the Residence to Nanci who recorded
a declaration of homestead. On April 19, 2005 the wife recorded a new declaration of
homestead after which she immediately filed a voluntary Chapter 7 petition. Nanci, who was
obligated to the Bank pursuant to a guaranty she had executed, scheduled the Bank as an
unsecured creditor (Schedule F in 05-42542-HJB). She also scheduled the Bank as a secured
creditor holding a claim in the amount of $905,070 with “set off rights against savings account
#12396.” Schedule H indicates that the Debtor, AB Palumbo Electrical Contractors, Inc. and
Vox Communications, Inc. are co-debtors on the Bank debt.

Nanci’s Schedule D reflects two mortgages on the Residence held by another secured
creditor. A third creditor of both the Debtor and Nanci, objected to Nanci’s homestead
exemption. The objection was overruled. While the objection to Nanci’s homestead exemption
was pending, the Debtor filed the instant bankruptcy on October 13, 2005 (the “Petition Date”).

Nanci subsequently received a discharge. Although the Chapter 7 Trustee of Nanci’s
estate filed a Report of No Distribution, the Bank filed a proof of claim in the amount of
$945,658.12 in Nanci’s bankruptcy and, at the same time, filed an identical proof of claim in the
instant case. Both proofs of claim indicate the claims are unsecured. Nanci’s case was
subsequently closed.

POSITION OF THE PARTIES

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The Debtor argues that he is entitled to dismissal of Count I because the transfer of the
residence occurred on March 30, 2004, almost a year and a half before he filed his bankruptcy
petition. Therefore he argues that the plain language of 11 U.S.C. § 727(a)(2) mandates that this
count be dismissed. Moreover he argues that the Plaintiffs cannot establish that he concealed the
transfer during the year prior to the Petition Date.

The Bank proffered the affidavit of its president who testified that the Debtor and Nanci
never notified the Bank of the transfer despite the fact that they signed a financial statement
which requires them to do so. In fact the affiant states that the Debtor continued to misrepresent
that he owned the Residence after the transfer. According to the Bank it was not notified of the
transfer until Nanci filed bankruptcy.” Therefore the Bank argues that under the doctrine of
continuing concealment, the Debtor’s concealment of the transfer forms a basis for denying the
Debtor his discharge under § 727(a)(2)(A). The Debtor counters that it is property, not the
transfer of property, which must be concealed if his discharge is to be denied.

The Debtor argues that Count IT must be dismissed as the Plaintiffs did not, and indeed in
light of Nanci’s discharge, cannot join her as a defendant although she is an indispensable party
to the fraudulent transfer action. The Bank does not directly deal with this argument but instead
counters that if the fraudulent transfer is avoided the Residence, or at least the Debtor’s interest
in it, will be returned to his bankruptcy estate. At the hearing the Chapter 7 Trustee argued that
this case presents an in rem situation not covered by Nanci’s discharge order.

DISCUSSION

2Nanci’s schedule A lists the Residence and describes the nature of her interest in the
property as “fee simple.”

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Summary judgment is appropriate if there is no genuine issue of material fact and the
movant is entitled to judgment as a matter of law.. Fed. R. Civ. P. 56(c) made applicable by Fed.
R. Bankr. P. 7056.

Count I

Section 727(a)(2)(A) provides:
The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or
an officer of the estate charged with custody of property under this
title, has transferred, removed, destroyed, mutilated, or concealed,
or has permitted to be transferred, removed, destroyed, mutilated,
or concealed--
(A) property of the debtor, within one year before the date of the
filing of the petition.... (Emphasis added).

The parties agree that the transfer of the Debtor’s interest in the Residence to Nanci
occurred outside the one year period of § 727(a)(2)(A) but the Debtor can be denied a discharge
for concealing property within one year prior to his bankruptcy if he did so to hinder, delay or
defraud his creditors. “Under the ‘doctrine of continuous concealment,’ a debtor may be denied
a discharge, notwithstanding the time of the debtor's transfer or original concealment of his or
her interest in property, if it is established that the debtor continued to conceal that interest from
creditors during the year prior to the petition filing. Jn re Bottone, 209 B.R. 257, 262 (Bankr. D.
Mass. 1997). As the Bankruptcy Appellate Panel in Rhode Island Depositors Economic
Protection Corp. v. Hayes (In re Hayes), 229 B.R. 253, 259 (1st Cir. BAP 1999), framed the
issue: “Did the [Debtor], within a year of bankruptcy, place assets beyond the reach of creditors
or withhold knowledge of assets by failing or refusing to divulge information to which creditors

are entitled?” (Emphasis added).

In this case the Bank alleges that the Debtor had an affirmative duty, imposed by the

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documents he executed, to inform it of the change of ownership. Yet instead of informing the
Bank, the Debtor continued to represent that he remained an owner of the property. Now the
Debtor asks this Court to rule that the very deception he allegedly fostered renders §
727(a)(2)(A) inapplicable because he never concealed the Residence, only the transfer of his
interest in the Residence. But this argument overlooks that he allegedly mislead the Bank as to
the ownership of the Residence at least until Nanci’s bankruptcy.’ By doing so, he may well
have hindered or delayed collection activities. Now when it will benefit the Debtor, he
maintains that he does not own the property because legal title resides in Nanci’s name. The
asset does not need to be literally concealed, however. A classic example of concealment
involves “a transfer of title coupled with the retention of the benefits of ownership.” /d. (Internal
quotation marks and citation omitted). Although the Debtor transferred his interest in the
Residence to his wife for nominal consideration, the Debtor’s and Nanci’s petitions indicate they
continue to reside at the same address. Whether the Debtor has retained other benefits of
ownership and thus owns a concealed interest in the Residence cannot be resolved without resort
to further facts not currently before the Court.

The Debtor’s argument that concealment includes only instances where a debtor actually
conceals property, not a transfer of property, fails. If a debtor were able to transfer property and
continue to represent he owned it until it was too late for a creditor to reach that assct, the effect
would be to permit a debtor to hid his assets in plain sight. To allow a debtor to mislead his

creditors about his assets prior to bankruptcy and then permit him to use the transfer of legal title

*That the transfer was effected by deed that became a matter of public record is
insufficient to find as a matter of law that the transaction was not concealed given the couple’s

behavior. Hayes, 229 B.R. at 257.

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as a shicld against his creditors is at odds with the policy underlying the Bankruptcy Code. The
Bank’s affiant states that the Bank did not learn of the transfer until Nanci’s bankruptcy, a date
within the year prior to the Debtor’s petition date, because the Debtor continued to represent that
he and Nanci jointly owned the Residence. Therefore it is improper on the record before the

Court to dismiss Count I.

Count I

Count II seeks to set aside the transfer of the debtor’s interest in the Residence pursuant
to the Massachusetts Fraudulent Conveyance Act, M.G. L. C. 109A, § 9. Section 544(b)(1)
permits a trustee to avoid a transfer of a debtor’s interest in property that could be avoided by an
unsecured creditor under state law. Section 550 then permits the trustee to recover the
transferred property or the value of that property from the transferee. “Both the transferor and
the transferee should be named as necessary parties to a fraudulent transfer suit. See 5 COLLIER
on Bankruptcy, § 548.07 [1] at 548-54 note I (15th ed. revised 1998) (citing In re Farmer's
Market, 22 B.R. 71 (9th Cir. BAP 1982); Fed. R. Bankr.P. 7019).” Jn re Halpert & Co., Inc.,
254 B.R. 104, 116 (Bankr. D.N.J. 1999). Because Nanci received a discharge in her case, the
Debtor argues she cannot be joined as a defendant and thus Count II must be dismissed. The
Chapter 7 trustee argues that the action relies on the Court’s in rem jurisdiction and therefore the
discharge injunction does not bar the avoidance of the transfer.

The parties have not cited, nor could the Court find, any case that held a fraudulent
transfer action was only in rem. Nevertheless, as the Supreme Court has emphasized that

“Tb]ankruptcy jurisdiction, at its core, is inrem.” Central Virginia Community College v. Katz,

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_ US. __, 126 S.Ct. 990, 995, 163 L.Ed.2d 945 (2006). This idea is nothing new. Indeed in the
early days of the Bankruptcy Code, courts examined the in rem jurisdiction of bankruptcy courts,
often in the context of determining the propriety of nationwide service of process in bringing
before the bankruptcy court recipients of estate property. For example, in Whitlock vy. Worrall
(In re American Aluminum Window Corp.), 15 B.R. 803, 805 (D. Mass.1981), the court held that
recovery of a preference requires in rem jurisdiction over the property of the estate and not
necessarily in personam jurisdiction over the defendant. More recently, in Tennessee Student
Assistance Corp. v. Hood, 541 U.S. 440, 448, 124 S.Ct. 1905, 1911 (2004), the Supreme Court
held that the exercise of in rem jurisdiction to discharge a state-held student loan did not violate
the Eleventh Amendment of the United States Constitution. In discussing the concept of in rem
jurisdiction, the Court noted

A bankruptcy court’s in rem jurisdiction permits it to “determin[e]
all claims that anyone, whether named in the action or not, has to
the property or thing in question. The proceeding is ‘one against
the world.’” 16 J. Moore, et al., Moore’s Federal Practice § 108.70
[1], p. 108-106 (3d ed.2004). Because the court's jurisdiction is
premised on the res, however, a nonparticipating creditor cannot
be subjected to personal liability. See Freeman v. Alderson, 119
U.S. 185, 188-189, 7 S.Ct. 165, 30 L.Ed. 372 (1886) (citing
Cooper v. Reynolds, 10 Wall. 308, 19 L.Ed. 931 (1870)).

The notion that a Bankruptcy Court can exercise in rem jurisdiction without subjecting a
party to in personam jurisdiction is likewise not a novel one.

It is hornbook law that a valid lien survives a discharge in
bankruptcy unless it is avoidable and the debtor takes the proper
steps to avoid it. Holloway v. John Hancock Mut. Life Ins. Co. (In
re Holloway ), 81 F.3d 1062, 1063 (11th Cir.1996). A surviving
lien remains enforceable, for “a bankruptcy discharge extinguishes
only one mode of enforcing a claim--namely, an action against the
debtor in personam--while leaving intact another--namely, an
action against the debtor in rem.” Johnson v. Home State Bank,

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501 U.S. 78, 84, 111 S.Ct. 2150, 115 L.Ed.2d 66 (1991).
Arruda y. Sears, Roebuck & Co., 310 F.3d 13, 21 (1st Cir. 2002).

That Nanci is not named as a defendant does not bar the action to the extent the adversary
proceeding only seeks to restore to the estate property that, if the allegations are proven,
rightfully belongs to this estate. Moreover, the record does not indicate that the Plaintiffs are
precluded from seeking relief in Nanci’s bankruptcy to add her as a party.

Finally the Debtor’s reliance on the fact that the challenge to Nanci’s homestead was
unsuccessful is misplaced. Her claim of homestead is irrelevant in this proceeding if the
Plaintiffs prevail in their claim that the Debtor fraudulently transferred his interest in the
Residence. Howison v. Hanley, 141 F.3d 384, 386 (1st Cir. 1998); In re Ringham, 294 B.R. 204,
206 (Bankr. D. Mass. 2003).

For the foregoing reasons, the Motion to dismiss is DENIED.

A separate order shall issue.

(Ped fuseted

Dated: September 6, 2006

Joel B. Rosenthal
United States Bankruptcy Judge

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