Acequia, Inc., In re

• Decision Date: 31 August 1994
• Docket Number: 93-35412,Nos. 93-35411,s. 93-35411
• Parties: Bankr. L. Rep. P 76,068 In re ACEQUIA, INC., an Idaho Corporation, Debtor. ACEQUIA, INC., an Idaho Corporation, Plaintiff-Appellee, v. Vernon B. CLINTON, Defendant-Appellant, and Rosemary Haley, Defendant-Appellee. ACEQUIA, INC., an Idaho Corporation Plaintiff-Appellant, v. Vernon B. CLINTON; Rosemary Haley, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 800

34 F.3d 800

Bankr. L. Rep. P 76,068

In re ACEQUIA, INC., an Idaho Corporation, Debtor.

ACEQUIA, INC., an Idaho Corporation, Plaintiff-Appellee, v. Vernon B. CLINTON, Defendant-Appellant, and Rosemary Haley, Defendant-Appellee.

ACEQUIA, INC., an Idaho Corporation Plaintiff-Appellant, v. Vernon B. CLINTON; Rosemary Haley, Defendants-Appellees.

Nos. 93-35411, 93-35412.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted July 11, 1994.

Decided Aug. 31, 1994.

David M. Penny and Stanley W. Welsh, Cosho, Humphrey, Greener & Welsh, Boise, ID, for defendant-appellant-appellee.

Jim Jones, Boise, ID, and Steven D. Cundra, Thompson, Hine and Flory, Washington, DC, for plaintiff-appellee-appellant.

Robert C. Huntley, Givens, Pursley, Webb & Huntley, Boise, ID, for defendant-appellee.

Appeals from the United States District Court for the District of Idaho.

Before GOODWIN, NELSON, and HALL, Circuit Judges.

CYNTHIA HOLCOMB HALL, Circuit Judge:

In this case, we consider issues arising from chapter 11 debtor Acequia, Inc.'s ten-year effort to recover certain prebankruptcy conveyances made to Vernon Clinton, founder and former controlling shareholder of the corporation. Clinton appeals the magistrate judge's determination that he fraudulently transferred Acequia's assets to himself. Acequia, now under the control of adverse parties, cross-appeals the magistrate judge's calculation of Clinton's liability for the transfers.

Resolution of the multitude of issues in this case requires consideration of the common law of restitution, Idaho's community-property law, the equitable doctrine of setoff, and, most importantly, the fraudulent conveyance provisions of both the Bankruptcy and Idaho Codes. We scrutinize each doctrine and, ultimately, conclude the magistrate judge correctly determined that Clinton made transfers with an actual intent to hinder and delay Acequia's creditors. We hold, however, that the magistrate judge erred by limiting Acequia's recovery of the fraudulent transfers to the amount of unsecured claims against the bankruptcy estate. Accordingly, we affirm in part, reverse in part, and remand.

I.

In 1974, while married to Rosemary Haley, Vernon Clinton formed Acequia, Inc., a Subchapter S family corporation, to conduct farming and management operations on his land in Idaho. In 1981, Clinton and Haley divorced and, pursuant to a marital settlement agreement, each took fifty-percent ownership of the corporation. Acequia filed a petition under chapter 11 of the Bankruptcy Code the following year. Shortly thereafter, Haley and several creditors requested the bankruptcy court to appoint a trustee, alleging that Clinton had failed to disclose material information in Acequia's bankruptcy schedules and had engaged in blatant mismanagement. In response, Clinton eventually gave an irrevocable voting proxy to Haley, who took control of the corporation.

In 1984, Acequia confirmed a plan of reorganization over Clinton's objection. Both the district court and the Ninth Circuit subsequently affirmed. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir.1986) [Acequia I ]; see also Clinton v. Acequia, Inc. (In re Acequia, Inc.), No. 91-36176, 996 F.2d 1223 (9th Cir. June 21, 1993) (mem.) (affirming the bankruptcy court's denial of Clinton's motion to terminate the plan) [Acequia II ]. Led by Haley, Acequia then commenced an eleven-count action in bankruptcy court, seeking to recover as fraudulent certain prepetition transfers the corporation made to Clinton.

After the district court withdrew reference to the bankruptcy court, the parties consented to adjudication by magistrate judge. The magistrate judge conducted a two-month bench trial and rendered judgment in favor of Acequia on several counts and in favor of Clinton on one counterclaim. In total, the magistrate judge entered a final judgment against Clinton for $233,346.72 plus prejudgment interest, with an allowed deduction against Acequia of $117,000.00 plus prejudgment interest. Both parties appeal.

II.

Section 548 of the Bankruptcy Code empowers a bankruptcy trustee to recover "fraudulent transfers" made by the debtor within one year of the bankruptcy petition:

(a) The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor ...

(1) made such transfer ... 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 ..., indebted....

11 U.S.C. Sec. 548(a)(1) (emphasis added). Under section 548(a)(1), "[t]he transfer of any interest in the property of a debtor, within one year of the filing of a petition in bankruptcy, is voidable by the trustee in bankruptcy if the purpose of the transfer was to prevent creditors from obtaining satisfaction of their claims against the debtor by removing property from their reach." Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248, 1254 (1st Cir.1991).

As a debtor-in-possession, Acequia invoked section 548 on its own behalf, ¹ alleging in Counts I through IV and parts of Count IX of its complaint that Clinton received fraudulent transfers within the scope of the statute. The magistrate judge analyzed the relevant transfers from Acequia to Clinton by tracing the funds "to determine if the money was used by Clinton for personal purposes, as alleged [by Acequia], or if the money was returned to Acequia [as claimed by Clinton]." Ultimately, the magistrate judge concluded that Acequia could recover $118,367.97 as fraudulently transferred within the meaning of section 548(a)(1):

The transfer the Court is concerned with is the transfer of Acequia funds to Clinton's personal name. Such transfers could not help but hinder and delay payment to Acequia's creditors[,] a fact Clinton would certainly have been aware of as the Chief [O]perating [O]fficer of the corporation in charge of all books and records. By then Acequia had missed the two principal payments due to Prudential [a secured creditor] on March 15, 1979 and 1980. Clinton was negotiating a settlement with Prudential to fend off a foreclosure action. Other suits were pending involving KLW [another creditor] and its operation of [Clinton's] ranch. The bankruptcy filing was imminent and[,] when filed[,] Clinton only listed cash from which Acequia could meet its debts in the amount of $2,000.00. Clinton has not attempted to explain the transfer[s] other than that the funds were used for personal expenses. Therefore, Clinton will be required to return the funds to Acequia as the transfer[s] hindered and delayed Acequia creditors.

(emphasis added). On Clinton's motion for reconsideration, the magistrate judge clarified his analysis:

... The Court agrees with Clinton that[,] if the sole indicia of fraud was that Clinton personally used the funds[,] that Acequia did not meet its burden of proof. However, the Court found and sets forth more clearly at this point, that Acequia presented evidence that by the beginning of 1981 numerous badges of fraud existed which shifted the burden of proof to Clinton to explain or uphold the transfer. It was Clinton's sole explanation that the funds were used for personal expenses that [led] this Court to find that Clinton had not met his burden of proof to explain the transfer.

(emphasis added) (citation and footnotes omitted).

A.

We review for clear error the magistrate judge's factual determination that Clinton intended to hinder and delay Acequia's creditors. E.g., Harman v. First Am. Bank (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 481 (4th Cir.1992) ("For a finding of fraudulent intent in an actual fraudulent transfer, a reviewing court must apply a clearly erroneous standard."); Gough v. Titus (In re Christian & Porter Aluminum Co.), 584 F.2d 326, 335 (9th Cir.1978); 4 Collier on Bankruptcy p 548.02 at 548-49 n. 62 (15th ed. 1994) ("A finding of a trial judge, ... who has heard the oral testimony that a transfer has or has not been effected with actual fraudulent intent, is undoubtedly entitled to great weight on appeal in view of the peculiar importance in section 548(a)(1) cases of the witness examined on the intent issue.") [Collier ]. Applying this deferential standard of review, we affirm the magistrate judge's holding that Clinton is liable for fraudulent transfers in violation of section 548(a)(1).

B.

Clinton argues that, instead of intending to defraud Acequia's creditors, he considered the corporate conveyances to be personal loans or, alternatively, reimbursement for living expenses in lieu of salary. Uniquely, Clinton grounds this contention in his complete failure to observe corporate formalities and his consistent treatment of Acequia "merely as an extension of himself."

We cannot agree. Although novel, Clinton's "white heart, empty head" argument ignores the use of circumstantial "badges of fraud" in fraudulent transfer cases:

It is often impracticable, on direct evidence, to demonstrate an actual intent to hinder, delay or defraud creditors. Therefore, as is the case under the common law of fraudulent conveyance, courts applying Bankruptcy Code Sec. 548(a)(1) frequently infer fraudulent intent from the circumstances surrounding the transfer, taking particular note of certain recognized indicia or badges of fraud.

Among the 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...