Gugino v. Kerstein (In re Miller)

• Decision Date: 08 September 2015
• Docket Number: Adv. No. 14–06022–TLM,Case No. 13–02215–TLM
• Citation: 536 B.R. 863
• Parties: In re William Lee Miller and Nancy Carol Miller, Debtors. Jeremy Gugino, Plaintiff, v. Chester and Joann Kerstein, Defendants.
• Court: U.S. Bankruptcy Court — District of Idaho

536 B.R. 863

In re William Lee Miller and Nancy Carol Miller, Debtors.

Jeremy Gugino, Plaintiff

v.Chester and Joann Kerstein, Defendants.

Case No. 13–02215–TLM

Adv. No. 14–06022–TLM

United States Bankruptcy Court, D. Idaho.

Signed September 8, 2015

Matthew Todd Christensen, Angstman Johnson, PLLC, Boise, ID, for Plaintiff.

Jeffrey R. Sykes, McConnell Wagner Sykes & Stacey PLLC, Boise, ID, for Defendants.

MEMORANDUM OF DECISION

TERRY L. MYERS, CHIEF U. S. BANKRUPTCY JUDGE

The chapter 7 trustee, Jeremy Gugino (“Trustee”), filed a complaint commencing this adversary proceeding.¹ Trustee alleges defendants Chester and JoAnn Kerstein (the “Kersteins”) received from the chapter 7 debtor, William Miller (“Debtor”), a fraudulent transfer which Trustee may avoid under § 548 and/or under state law made applicable through § 544(b).² The cause was tried and taken under advisement. ³

This Decision constitutes the Court's findings of fact and conclusions of law under Rule 7052.⁴

FACTS

According to Debtor's testimony, Investors Property Management, Inc., (“IPM”) was an Idaho corporation formed in 2002. Debtor was an owner of IPM, along with his sons Taylor Miller and Steven Miller. In 2009, Debtor sold his interests in IPM to his sons effective December 31, 2009.⁵ Debtor executed a January 15, 2010 letter “resigning” as a director, stockholder, and employee of IPM.

Following the sale and resignation, Taylor Miller ran IPM along with a bookkeeper and a few other employees. Debtor also worked on his own separate business affairs at the IPM office suite for a period of time and, in 2010, paid IPM “rent” for a small office. Debtor testified his post–2009 work was either as an individual or, at some point, in connection with Miller Real Estate Services, LLC (at times in this Decision, “MRES”), a limited liability company for which he was the sole member and manager. There is no evidence establishing that after the resignation in January 2010, Debtor worked as an employee of IPM or served any role with IPM.

IPM was engaged in the property management and maintenance business. For a number of years prior to July 2007, the Kersteins used IPM as the property manager for several of their real estate investment properties. IPM found and dealt with tenants, took and held security deposits, paid the expenses associated with the properties including maintenance and repair, and accounted for the cash in and out through monthly statements. On July 31, 2007, the Kersteins entered into a new, written management agreement with IPM. Ex. 102.⁶ Debtor signed that property management agreement on behalf of IPM.

Debtor acknowledged in his testimony that, up to his resignation in January 2010, he was the “point person” in the IPM property management business, including in its dealings with the Kersteins. Mr. Kerstein testified that he had been referred to Debtor's business by a previous property manager who was retiring. He stated he placed trust in individuals, not their corporations, and he relied on that former property manager's representations about Debtor's honesty. He felt he was working with Debtor, even though the contract was with IPM.

Mr. Kerstein testified that, at some ill-defined point, the statements received from IPM triggered concerns on his part. It appeared the properties were not performing, and the revenues from the rentals were dropping. And it seemed that bills associated with the properties were not being paid. Workers and vendors started to demand direct payment from him, and some threatened to file liens on his properties.

Mr. Kerstein received a letter from IPM on September 13, 2010, detailing multiple outstanding “back charges” allegedly due to IPM. IPM asserted the total account balance was a “negative” $148,224.38 (meaning the Kersteins owed IPM that amount). Ex. 205.⁷ Discussions to address the matter were unsuccessful.⁸ The Kersteins elected to terminate the management contract. IPM then “offset” over $140,000 owed by the Kersteins against amounts IPM owed to the Kersteins. IPM failed to transfer tenant security deposits to the Kersteins' replacement property manager.

In May 2011, the Kersteins filed suit in Idaho state court against IPM, Debtor, and Taylor Miller. Ex. 201. They asserted claims for breach of contract, breach of implied covenants of good faith and fair dealing, fraud,⁹ breach of fiduciary duty¹⁰ and an accounting. The prayer of the complaint sought judgment against IPM on the breach of contract and breach of implied covenant causes of action. It sought judgment against all the defendants, jointly and severally, on the causes of action for fraud and breach of fiduciary duty. Ex. 105 at 8–9. The defendants, collectively and through a single attorney, answered and IPM asserted a counterclaim for breach of contract and unjust enrichment related to the amounts allegedly owed by the Kersteins. Ex. 202.¹¹

In May 2012, following mediation, the disputes among all parties were settled.¹² A “settlement agreement and mutual release” was prepared and executed by the parties on May 10. Ex. 110. The “defendants” (IPM, Taylor Miller and Debtor) collectively agreed to pay the Kersteins $50,000. Id. at 1 (“Defendants shall make a total payment in the amount of Fifty Thousand Dollars ($50,000.00) to Plaintiffs.”) In return for such payment, all parties released all claims or demands. Under the agreement, the Kersteins did not pay anything to IPM, Debtor or Taylor Miller.¹³

The agreement called for payment by certified check the following day. The Kersteins received a May 11, 2012 cashier's check for the settlement amount. Ex. 111. The funds for the settlement were generated in the following fashion.

A $40,000 check dated May 9, 2012, was issued and made payable to Debtor personally. That check was drawn, by Debtor, on a Key Bank account in the name of “Miller Commercial Real Estate,” which was a “dba” of Debtor. Exs. 107, 108.

Debtor deposited this check in a Wells Fargo Bank account. That account was a business checking account in the name of “Miller Real Estate Services, LLC,” Debtor's limited liability company. Ex. 109.¹⁴ When the $40,000 deposit occurred on May 9, this account had a substantial preexisting balance. Thus, Debtor was able to withdraw $50,000 on May 11, which was the source of the cashier's check, Ex. 111, used in the settlement.¹⁵

After the $50,000 settlement payment was made, Debtor drew $15,000 from the Miller Commercial Real Estate Key Bank account. The check was dated May 30, 2012, and it was deposited in the MRES Wells Fargo account the same day. Exs. 107–109.

Debtor testified that even though he felt he had no personal liability to the Kersteins, especially after resigning in early 2010, his attorneys advised him differently.¹⁶ In further explaining why he gathered the funds used in settlement, Debtor testified that his son also had serious medical issues and so he also, “as a father,” wanted to get the case settled.

Debtor and his wife filed for joint chapter 7 relief about a year and a half later. In answering question 10 on their statement of financial affairs, which calls for identification of all transfers within two years of the October 30, 2013 petition date, Debtors did not disclose the $50,000 paid on May 11, 2012 in settlement of the Kersteins' lawsuit. Ex. 101.¹⁷

Debtor testified that the assets and liabilities listed in the bankruptcy schedules in October 2013 would have been roughly the same in May 2012, when the settlement with the Kersteins occurred. Debtor explained that the value of their home might have been “slightly higher or about the same,” and Debtors owned no other real estate at that time. They did exchange one vehicle for another, selling a GMC Yukon in October 2013 and gaining a BMW, but with no net gain. Beyond such minor variations, he stated that the number and value of assets in May 2012 was about the same as on the petition date.

Debtor also indicated that their liabilities were about the same at both points. The amount of debt at bankruptcy was approximately $708,000.¹⁸ Schedule F includes numerous creditors asserting claims against Debtors for IPM-related liabilities. See Ex. 101. However, even excluding those creditors (all of whom were scheduled as disputed, contingent and unliquidated), Debtor testified that in 2012, they owed one law firm close to $24,000 and another about $37,500. There was a $425,000 line of credit owed to Key Bank on a 2010 short sale. And there was a $41,000 liability on a co-signed equipment lease to another bank. These amounts alone exceed $525,000, far outweighing the approximately $28,400 of equity Debtors had in real estate¹⁹ and the aggregate value of their personal property.

DISCUSSION AND DISPOSITION

Trustee's action is brought under § 548(a)(1)(B).²⁰ Trustee prays that, under this section, the transfer of $50,000 to the Kersteins on May 11, 2012, be avoided and recovered from them under § 550(a) for the benefit of Debtors' estate.

This Court summarized:

There are multiple elements that must be established by a plaintiff to sustain a cause of action under § 548(a)(1)(B). There must be a “transfer” of property of the debtor that occurs within two years of the filing of the bankruptcy petition. The debtor must have received less than “reasonable equivalent value in exchange for the transfer” and the transfer had to have occurred when the debtor was insolvent or the debtor had to be rendered insolvent as a result of the transfer. Plaintiffs bear the burden of proving all these elements in order to recover under § 548.

Jordan v. Kroneberger (In re Jordan) , 392 B.R. 428, 440 (Bankr.D.Idaho 2008) (citing Krommenhoek v. Natural Res. Recovery, Inc. (In re Treasure Valley Opportunities, Inc.), 166 B.R. 701, 703 (Bankr.D.Idaho 1994) ). Trustee bears the burden of establishing all the § 548(a)(1)(B) elements.

Id. ;

Murietta v. Fehrs (In re Fehrs), 391 B.R. 53, 73 (Bankr.D.Idaho 2008).

A. Insolvency

Insolvency is defined in § 101(32)(A) as a “financial condition...