Cruickshank-Wallace v. County Banking and Trust Co., 1447

• Decision Date: 31 October 2005
• Docket Number: No. 1447,1447
• Parties: Bonnie CRUICKSHANK-WALLACE v. COUNTY BANKING AND TRUST COMPANY.
• Court: Court of Special Appeals of Maryland

885 A.2d 403

165 Md. App. 300

Bonnie CRUICKSHANK-WALLACE v. COUNTY BANKING AND TRUST COMPANY.

No. 1447, September Term, 2004.

Court of Special Appeals of Maryland.

October 31, 2005.

Melvin J. Sykes, Baltimore, for appellant.

Lawrence J. Gebhardt (Dale S. Betterton, Gebhardt & Smith, LLP, on brief), Baltimore, for appellee.

Panel KENNEY, EYLER, DEBORAH S. and ADKINS, JJ.

Opinion by EYLER, DEBORAH S., J.

In the Circuit Court for Cecil County, County Banking and Trust Company ("the Bank"), the appellee, sued Bonnie Cruickshank Wallace ("Bonnie"), the appellant, for actual and constructive fraudulent conveyances under the Maryland Uniform Fraudulent Conveyance Act ("MUFCA"), Md.Code (1975, 2000 Repl.Vol.), sections 15-201 through 15-214 of the Commercial Law Article ("CL").

In a prior suit ("the Debt Action"), the Bank had obtained a judgment against Great Christian Books, Inc. ("GCB"), and William Wallace ("William"), Bonnie's husband, as guarantor of a debt of GCB. It is undisputed that the judgment in the Debt Action rendered William insolvent. In the case at bar, the Bank alleged that, in 1999, after he was insolvent, William fraudulently conveyed his 1998 federal and state income tax refunds to Bonnie, thus keeping them out of the Bank's reach.

Bonnie and the Bank each moved for summary judgment. The court denied Bonnie's motion and granted the Bank's motion.¹

Bonnie noted an appeal, posing two questions, which we have rephrased slightly:

I. Did the circuit court err in denying her motion for summary judgment on the fraudulent conveyance claim for the amount of the 1998 federal and state income tax refunds?

II. Did the circuit court err in granting summary judgment to the Bank on its fraudulent conveyance claim for the amount of the 1998 federal and state income tax refunds?

For the reasons set forth below, we answer "no" to both questions and shall affirm the judgment of the circuit court.

FACTS AND PROCEEDINGS

At all times pertinent to this case, William and Bonnie were husband and wife and were living together in an intact marriage with their two sons, born in 1990 and 1993. William has an adult child from a prior marriage who visits the Wallaces occasionally, but does not live with them.

The Wallaces were married in 1987. On November 27, 1987, they executed a property agreement.² They amended that agreement on December 4, 1991, while residing in the State of Washington, which is a community property state, by means of a document entitled "Separate Property Status Agreement."³ It appears from the name of the December 4, 1991 agreement that it and the prior agreement were entered into for the purpose of characterizing some of the Wallaces' property — that otherwise would be community property under the laws of the State of Washington — as their own separate property.

On June 8, 1994, William purchased 75% of the stock of GCB from Walter C. Hibbard and Phillip Hibbard.

A week later, the Wallaces executed a "Community Property Agreement,"⁴ modifying their December 4, 1991 Separate Property Status Agreement. The modification language states:

[Bonnie] and [William] agree as follows.... [Bonnie] and [William] shall own as community property the assets pertaining to the June 8, 1994 Agreement Stock Ownership Of Great Christian Books, Inc. entered into between Walter C. Hibbard, Phillip Hibbard, and [William] including, without limitation: 203 shares of Great Christian Books, Inc. ("GCB") stock transferred from Walter C. Hibbard; and 547 shares of authorized GCB stock to be immediately issued; and all future issued and transferred GCB Stock and any stock of any present and future affiliate of GCB to either [Bonnie] or [William] or any entity owned in part or whole by either or both of the parties hereto.

Sometime in late 1994 or early 1995, the Wallaces moved from Washington to Pennsylvania, which is not a community property state. In May of 1995, the Bank extended a one-year revolving line of credit and a $234,000 secured loan to GCB. William gave a personal guaranty of payment for GCB on both obligations.

On June 1, 1995, the Wallaces executed a document entitled "Transfer Agreement,"⁵ which modified their June 15, 1994 Community Property Agreement. The Transfer Agreement states:

[Bonnie] and [William] agree as follows.... [William] transferred his interest in the stock of Great Christian Books, Inc. ("GCB") to the community property of [Bonnie] and [William], as provided in the June 15, 1994 Community Property Agreement, and [William] hereby transfers all his rights and property ("benefits") from his late father's estate, and from GCB to and to be derived by [William], including without limitation, deposits in GCB's employee deposit plan, loan repayment obligations, pension and retirement plans, wages, reimbursements, refunds, options, commissions, bonuses, deferred compensation, automobile and equipment leases, and from legal claims that [William] may have concerning GCB, to [Bonnie] and [William] to be held in common during the term of their marriage with the survivor owning these benefits in entirety.

(Emphasis added.)

At the end of 1996, the GCB credit line was paid off, and then was renewed for $750,000. It was again renewed in early 1998. The loans were current until October of 1998.

That month, GCB missed a payment. The Bank accelerated the loan balance and, in the Circuit Court for Cecil County, filed a confessed judgment action against William, as guarantor. On November 25, 1998, a confessed judgment was entered in favor of the Bank and against William.⁶

In 1998, GCB was paying William a salary, from which federal and state income taxes were withheld. Immediately after the judgment was entered against him in the Debt Action, William stopped taking a salary from GCB and started collecting $1,000 a month in unemployment benefits.

Somewhere in this time frame, not clearly disclosed by the record, the Wallaces moved to Elkton, Maryland.

In early 1999, William and Bonnie filed joint federal and state income tax returns for the 1998 tax year. The returns, prepared by an accountant, showed they were entitled to a $19,984 tax refund from the Internal Revenue Service ("IRS") and a $2,821 tax refund from the State Comptroller's Office. The refund amounts equaled the amounts of federal and state income tax withheld from William's 1998 salary from GCB. Bonnie did not earn any income in 1998. She did have a loss carry-forward, however, from her subchapter S corporation, Cruickshank Holsteiners, Inc., a horse boarding and breeding business.

In April and May of 1999, the Wallaces received income tax refund checks from the IRS and the Maryland Comptroller's Office. The checks were payable to both of them. William endorsed the checks and gave them to Bonnie, who deposited them in her Merrill Lynch CMA account ("CMA account"). Bonnie's CMA account statements show that the amount of the state refund check, $2,821, was added to her account balance on April 19, 1999, and the amount of the federal refund, $19,984, was added to her account balance on May 3, 1999. Statements for the CMA account show in detail how the funds were spent.⁷ Bonnie spent the entire $22,805 in income tax refunds by June 30, 1999.

The Bank learned of these and other transfers through discovery in aid of enforcement, including a deposition of William taken on May 21, 1999, and a deposition of Bonnie taken on March 31, 2000.

On February 24, 2000, in the Circuit Court for Cecil County, the Bank filed the instant suit against Bonnie.⁸ The Bank alleged that William's transfer to Bonnie of the refund from his 1998 federal income tax return was a fraudulent conveyance. Specifically, it alleged that the transfer was an actual fraudulent conveyance, because it was made with the actual intent to defraud William's creditors, see CL § 15-207; and that the transfer was a constructive fraudulent conveyance, because, even if made without an actual intent to defraud, it was made when William was insolvent and was not for fair consideration. See CL § 15-204. The Bank asked the court to set aside the conveyance or, in the event that Bonnie had made a subsequent transfer of the money, enter a judgment against her in the amount of the transfer. Bonnie did not file a timely answer. Ultimately, on September 11, 2001, the court entered a default judgment against her for $19,984, the amount of the 1998 federal income tax refund.⁹ Bonnie pursued an appeal to this Court. In a reported opinion, filed on September 26, 2002, we vacated the default judgment. See Holly Hall Publ'ns, Inc. v. County Banking and Trust Co., 147 Md.App. 251, 807 A.2d 1201 (2002).¹⁰

Upon remand to the circuit court, the parties engaged in discovery, the Bank amended its complaint to add actual and constructive fraudulent conveyance of the 1998 Maryland state income tax refund, and each filed a plethora of motions and cross-motions. After still more discovery was undertaken, the operative motions left pending were those by each party for summary judgment.

Bonnie's theory on summary judgment was that, on the undisputed facts, the income tax refunds were from their inception tenancy by the entirety property not reachable by William's creditors. For that reason, there was no conveyance of the property from William to her, let alone a fraudulent conveyance. She put forth four reasons as to why the refunds were tenancy by the entirety property. First, the Transfer Agreement made all benefits to William generated by GCB, including wages and future income tax refunds, tenancy by the entirety property. Second, the refunds were tenancy by the entirety property because they were paid by checks issued to William and Bonnie as joint payees. Third, the Wallaces' filing status of "married filing jointly" made the refunds tenancy by the entirety property. Finally, the tax refunds were tenancy by the entirety property because they resulted at least in part from an operating loss...