Consolidated Partners Inv. Co. v. Lake, Bankruptcy No. B89-4851

• Decision Date: 01 April 1993
• Docket Number: Adv. No. B92-1301.,Bankruptcy No. B89-4851
• Citation: 152 BR 485
• Parties: CONSOLIDATED PARTNERS INVESTMENT CO., Trustee, Plaintiff, v. John LAKE, et al., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Ohio

152 B.R. 485 (1993)

CONSOLIDATED PARTNERS INVESTMENT CO., Trustee, Plaintiff, v. John LAKE, et al., Defendants.

Bankruptcy No. B89-4851, Adv. No. B92-1301.

United States Bankruptcy Court, N.D. Ohio, E.D.

April 1, 1993.

COPYRIGHT MATERIAL OMITTED

Michael P. Harvey, Walter, Haverfield, Buescher & Chockley, Cleveland, OH, for plaintiff.

Thomas A. Kondzer, Dorothy H. Bretnall, Kolick & Kondzer, Westlake, OH, for defendant John Lake.

MEMORANDUM OF OPINION AND ORDER

RANDOLPH BAXTER, Bankruptcy Judge.

I.

In this proceeding Joel Rathbone ("The Trustee") seeks, inter alia, to avoid certain postpetition transfers of real property that were made from the bankruptcy estate of Consolidated Partners Investment Company (The Debtor). To resolve the matter, the parties hereto have submitted cross-motions for summary judgment. Following a hearing thereon, the foregoing findings of fact and conclusions of law are herein made.

II.

The Court acquires core matter jurisdiction under provisions of 28 U.S.C. 157(b)(2)(H) and (O). The operative facts are generally not in dispute. On November 24, 1989, an involuntary Chapter 7 petition was filed against the Debtor in this Court. No interim trustee was appointed during the gap period. Postpetition, and prior to the Court entering an order for relief thereon, an entity known as Mel Mitchell Investments, Inc. (M.M.I.), (a dba of the Debtor) caused to be transferred three parcels of the estate's real property to Defendant John Lake (Lake) on February 15, 1990. Undisputedly, said postpetition transfers were made without Court authorization and on an account of an antecedent prepetition debt. On February 26, 1990, this Court entered its Order for Relief with respect to the involuntary Chapter 7 filing. Subsequently, on March 23, 1990, the Debtor successfully sought conversion of its involuntary Chapter 7 case to a voluntary Chapter 11 case. Thereafter, the Debtor operated its business as a debtor-in-possession until the Court entered an order on August 14, 1990 reconverting the case to proceedings under Chapter 7. Upon reconversion to Chapter 7, an interim trustee was appointed to administer the Debtor's estate on August 20, 1990. In July of 1991, Joel Rathbone (The Trustee) was appointed to serve as the permanent trustee in the case. On April 20, 1992, The Trustee filed this adversary proceeding against Defendants Lake, the County Treasurer, County Auditor, and the County Recorder of Cuyahoga County, Ohio, to avoid the aforesaid transfers or, alternatively, to recover postpetition transfers, to seek authority to sell certain real property, and to seek a determination of the extent, validity and priority of liens. Thereupon, Lake and the Trustee filed cross-motions for summary judgment.

III.

Alleging that the subject transfers were made with an actual intent to hinder, delay, and defraud creditors, with the Debtor receiving less than fair consideration in exchange while insolvent, or was thereby rendered insolvent, the Trustee contends that the transfers are avoidable under §§ 544 or 548 of the Bankruptcy Code 11 U.S.C. §§ 544 and/or 548 as fraudulent conveyances. The Trustee further alleges that, as postpetition transfers, said transfers are avoidable pursuant to § 549 of the Code. The remaining Counts of the Complaint seek authorization to sell these properties, once recovered by the estate, and for a determination of the extent, priority and validity of liens.

Defendant Lake filed his motion for an award of summary judgment or, alternatively, for dismissal of this adversary proceeding. Therein, Lake argues that both §§ 544 and 548 pertain only to prepetition transfers and, as such, are not applicable herein as the transfers of real property occurred postpetition. With regard to the § 549 complaint allegation, Lake contends that the properties are not avoidable as the Trustee is time-barred by the two-year statutory limitation period set forth in § 549(d). Regarding the dismissal aspect, Lake contends, inter alia, that since the tenants who occupy these properties also hold purchase options thereon, the Trustee has failed to include them as necessary parties defendant to this proceeding.

IV.

The dispositive issue is whether the subject transfers made by the Debtor are avoidable and recoverable by the Debtor's estate. In seeking such relief, the burden of proof is upon the party who seeks to avoid the transfer. That burden, in order to be sustainable, must be met by a preponderance of the evidence standard. In re Mangold, 145 B.R. 16 (Bankr.N.D. Ohio 1992); In re Moore & White Co., Inc., 83 B.R. 277, 283 (Bankr.E.D.Pa.1988).

Applicable Law

11 U.S.C. § 544. Trustee as lien creditor and as successor to certain creditors and purchasers.

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is avoidable by—

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains . . . a judicial lien. . . .

(2) a creditor that extends credit to the debtor . . . and obtains . . . an execution against the debtor that is returned unsatisfied. . . . or

(3) a bona fide purchaser of real property, other than fixtures, from the debtor . . . that obtains the status of a bona fide purchaser at the time of the commencement of the case. . . .

(b) The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 . . . or that is not allowable only under 502(e). . . .

11 U.S.C. § 548. Fraudulent transfers and obligations.

(a) The trustee may avoid any transfer of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity. . . .

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made . . .

(ii) was engaged in business or a transaction . . .; or

(iii) intended to incur . . . debts that would be beyond the debtor\'s ability to pay as such debts matured. (Emphasis added).

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.

Rule 7056, Bankr.R. Summary Judgment.

(c) . . . The judgment sought shall be rendered forthwith if the pleadings, depositions . . . together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. . . .

(e) . . . When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon mere allegations or denials of his pleading, but his response, by affidavits or otherwise provided in this rule, must set forth specific facts showing that there is a genuine issue for trial. If he does not so respond, summary judgment, if appropriate, shall be entered against him.

V.

The first Count of the Trustee's Complaint alleges that the Debtor's transfers of estate property during the involuntary Chapter 7 gap period constitute fraudulent conveyances. In support of that allegation, he cites to Code § 544 and § 548 for statutory support. Notedly, he fails to specify which particular subsection of either Code section he relies upon. Both sections contain multiple subsections.

Section 544(a) of the Code, captioned "Trustee as lien creditor and as successor to certain creditors and purchasers," is one of several avoidance statutes and is commonly referred to as the "strong arm" clause. Neither its caption or contents address the subject of fraudulent conveyances. Importantly, what it does provide is a mechanism by which the trustee in his or her own right may avoid certain claims and interests, while serving as a hypothetical lien creditor or as a bona fide purchaser as of the time of the bankruptcy petition filing. With this conferred status, third parties' prepetition liens and interests in property that could be claimed under state law by a judicial lien creditor of the debtor, or by a purchaser of real estate from the debtor, are avoidable by the trustee under § 544(a) if at the time of bankruptcy filing the interests are subordinate under state law to the claim of a lien creditor or purchaser. In re Minichello, 120 B.R. 17 (Bankr.M.D.Pa.1990); In re Hoeppner, 49 B.R. 124, 126 (Bankr.E.D.Wis.1985); Bankruptcy, Epstein, D.G., et al., West Publishing Company (1993). Moreover, the third party claim and interest holders addressed by § 544(a) are parties who were involved in prepetition transactions—not postpetition transactions. The transaction at bar occurred postpetition. The avoiding power reposed in the trustee under the Strong Arm Clause are present "at the time of the commencement of the case." 11 U.S.C. § 544(a). Its purpose is to cut off secret and undisclosed claims against the debtor's property as of the beginning of the bankruptcy case. Necessarily, the secret and or undisclosed interests or claims must have been effectuated prior to the bankruptcy filing. Holt v. Henley, 232 U.S. 637, 34 S.Ct. 459, 58 L.Ed. 767 (1914).

Under the 1978 Code, § 544's Strong Arm Clause was amended to include § 544(a)(3). This subsection provides the trustee with powers of a...