Crampton v. Scott (In re Scott)

• Decision Date: 27 August 2021
• Docket Number: 19-04934-5-DMW,Adversary Proceeding 21-00003-5-DMW
• Parties: GREGORY B. CRAMPTON, TRUSTEE PLAINTIFF v. ANNIE MAE SCOTT DEFENDANT IN RE: CRYSTAL J. SCOTT DEBTOR
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina

IN RE: CRYSTAL J. SCOTT DEBTOR

GREGORY B. CRAMPTON, TRUSTEE PLAINTIFF v. ANNIE MAE SCOTT DEFENDANT

No. 19-04934-5-DMW

Adversary Proceeding No. 21-00003-5-DMW

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division

August 27, 2021

MEMORANDUM OPINION SUPPORTING AVOIDANCE OF FRAUDULENT TRANSFER

This matter comes before the court upon the Complaint to Recover Fraudulent Transfer ("Complaint") filed by Gregory B. Crampton, Esq. ("Plaintiff") in his capacity as Chapter 7 trustee for Crystal J. Scott ("Debtor") on January 27, 2021, seeking the avoidance and recovery of a transfer of real property from the Debtor to Annie Mae Scott ("Defendant") pursuant to 11 U.S.C. §§ 548(a)(1) and 550(a), or alternatively, pursuant to 11 U.S.C § 544(b)(1) and N.C. Gen. Stat. § 39-23.1 et seq. The court conducted a trial on August 5, 2021 in Raleigh, North Carolina. The Plaintiff appeared on his own behalf, and Philip Sasser, Esq. appeared for the Defendant. The court entered a Judgment in favor of the Plaintiff. Pursuant to Rule 52(a)(1) of the Federal Rules of Civil Procedure, ^[1] this opinion recites the court's findings of fact and conclusions of law in support of the Judgment.

FINDINGS OF FACT

At the trial, the court admitted into evidence nine exhibits introduced by the Plaintiff. The Debtor, the Defendant, and Paul Stam, Esq. ("Mr. Stam") testified on behalf of the Defendant. Based upon the evidence and stipulations presented at trial and the court record, the court finds the relevant facts to be as follows:

1. The Defendant is the Debtor's mother.

2. The Defendant owns real property ("Property") located at 8008 Humie Olive Road, Apex, North Carolina. The Defendant inherited the Property from her late husband who died in 2011.

3. The Debtor grew up living in the Property, and although she left for some period of time, she has been living in the Property with the Defendant since January 2018.

4. Mr Stam is an attorney practicing in Apex, North Carolina.

5. In or around August 2019, the Defendant consulted with Mr. Stam about estate planning. The Defendant wished to arrange for an uncomplicated transfer of the Property to the Debtor upon the Defendant's death and decided to transfer to the Debtor a joint ownership interest in the Property with survivorship rights.

6. At the Defendant's request, the Debtor visited Mr Stam's office to sign paperwork related to the Defendant's plan to transfer an ownership interest in the Property to the Debtor, and when the Debtor met with Mr Stam, he told her of the Defendant's intentions.

7. On August 29, 2019, the Defendant executed a General Warranty Deed ("First Deed") prepared by Mr. Stam, transferring the Property from herself to herself and the Debtor as joint tenants with the right of survivorship. The First Deed was recorded with the Wake County Register of Deeds on August 29, 2019 in Book 17557, Page 2421.^[2] 8. The Defendant received no consideration from the Debtor in exchange for executing the First Deed.

9. Soon after the execution and recording of the First Deed, the Debtor informed the Defendant that she was planning to file for bankruptcy protection. The Defendant consulted with Mr. Stam who advised that the Debtor relinquish her new ownership interest in the Property.

10. On September 17, 2019, the Debtor executed a North Carolina General Warranty Deed ("Second Deed") prepared by Mr. Stam, transferring her interest in the Property to the Defendant. The Second Deed notes that "[t]he intent of this deed is to dissolve the joint tenancy with right of survivorship and vest sole title in [the Defendant]." The Second Deed was recorded with the Wake County Register of Deeds on September 18, 2019 in Book 17578, Page 2576.

11. The Debtor received no consideration from the Defendant in exchange for executing the Second Deed.

12. On October 24, 2019, the Debtor filed a voluntary petition ("Petition") for relief under Chapter 7 of the United States Bankruptcy Code, ^[3] and the court appointed the Plaintiff to administer the case pursuant to § 704.

13. In her Statement of Financial Affairs filed on November 5, 2019, the Debtor disclosed the transfer of her interest in the Property to the Defendant made by the Second Deed ("Transfer").

14. In her Schedules filed on November 5, 2019, the Debtor listed personal property assets totaling $22, 175.00 and liabilities totaling $86, 400.67.^[4]

15. The Debtor's bankruptcy case was designated as a "no asset" case, and creditors were instructed not to file proofs of claim.

16. The current value of the Property is approximately $224, 000.00, and the Property is encumbered by a mortgage lien of approximately $101, 000.00.

CONCLUSIONS OF LAW

Jurisdiction

This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H) which the court has the authority to hear and determine pursuant to 28 U.S.C. § 157(b)(1). The court has subject matter jurisdiction pursuant to 28 U.S.C §§ 157(a) and 1334 and the General Order of Reference entered on August 3, 1984 by the United States District Court for the Eastern District of North Carolina.

Fraudulent Transfers

Section 548(a)(1) allows a trustee to avoid a fraudulent a transfer of an interest of the debtor in property incurred within two years before the debtor's bankruptcy:

The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily-

(A) made such transfer or incurred such obligation 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 or such obligation was incurred, indebted; or

(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;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

11 U.S.C. § 548(a)(1).

The avoidance of a fraudulent transfer may be founded on actual fraud under § 548(a)(1)(A) or constructive fraud under § 548(a)(1)(B): "a transfer is avoidable if it was either actually fraudulent in that it '(i) had at its purpose an intent to hinder, delay or defraud the debtor's creditors,' or that it was constructively fraudulent in that it '(ii) was made while the debtor was in a precarious financial condition, and the transaction did not provide the debtor with a reasonably equivalent value in exchange for the item transferred.'" Angell v. Ber Care, Inc. (In re Caremerica, Inc.), 409 B.R. 737, 755 (Bankr. E.D. N.C. 2009) (quoting 5 Collier on Bankruptcy ¶ 548.01 (15th ed. rev. 2008)). In the Complaint, the Plaintiff alleges that the Transfer was both actually and constructively fraudulent.

Transfer of an Interest of the Debtor in Property

Section 548(a)(1) contains two threshold requirements to avoidance of a fraudulent transfer. First, the transfer must have occurred within two years prior to the debtor's bankruptcy petition. The Transfer occurred only thirty-six days before the Petition

The second threshold requirement under § 548(a)(1) is that the transfer be of an interest of the debtor in property meaning "property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings." Ivey v. First Citizens Bank and Trust Co., 539 B.R. 77, 82 (M.D. N.C. 2015) (quoting Askenaizer v. Wyatt (In re BeaconVision Inc.), 340 B.R. 674, 677 (Bankr. D.N.H. 2006) (quoting Begier v. Internal Revenue Serv., 496 U.S. 53, 58 (1990))). The Plaintiff contends that the Debtor obtained a one-half undivided interest in the Property as a result of the First Deed; however, the Defendant counters that the Debtor's subsequent execution of the Second Deed a mere nineteen days later evidences that the Debtor did not accept this ownership interest and thus never held an interest in the Property.

North Carolina law on delivery and acceptance of deeds provides as follows:

The word "deed" ordinarily denotes an instrument in writing signed, sealed, and delivered by the grantor, whereby an interest in realty is transferred from the grantor to the grantee. The requisites to the valid delivery of a deed are threefold. They are: (1) An intention on the part of the grantor to give the instrument legal effect according to its purport and tenor; (2) the evidencing of such intention by some word or act disclosing that the grantor has put the instrument beyond his legal control, though not necessarily beyond his physical control; and (3) acquiescence by the grantee in such intention. But manual possession of the instrument by the grantee is not essential to delivery. It is sufficient if the grantor delivers the writing to some third person for the grantee's benefit. Thus, there is an effective delivery where the grantor causes the written instrument to be recorded, or leaves it with the proper

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