In re Auxano, Inc.
| Decision Date | 28 March 1989 |
| Docket Number | Bankruptcy No. 88-00606-C,Adv. No. 88-0661-C. |
| Parties | In re AUXANO, INC., Debtor. Jack BROWN, Trustee, Plaintiff, v. Garland E. HARRIS, Evelyn Harris and ITT Financial Services, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Missouri |
Norman W. Lampton, Columbia, Mo., for ITT.
James W. Riner, Jefferson City, Mo., for plaintiff/trustee.
R. Max Humphreys, Jefferson City, Mo., for defendants Harris.
Steven J. Bratten, Jefferson City, Mo., for debtor.
Jack E. Brown, Columbia, Mo., trustee.
Debtor, Auxano, Inc., was a Missouri corporation whose principal office was located in Cole County. Garland E. Harris was its president and one of its principal owners. Debtor entered into certain real estate leases and contracts with Wanda L. Gerken. When she filed several lawsuits against debtor in various counties where the involved real estate was located, debtor filed its petition for relief under Chapter 7 on February 10, 1988. Debtor subsequently filed a Motion to Dismiss the proceedings to which Ms. Gerken objected, alleging post-petition transfer of certain real estate intended to defraud debtor's creditors. Dismissal was denied and the Trustee filed this adversary action to set aside the transfer of the real estate and a Deed of Trust executed to ITT Financial Services ("ITT"). In its Answer to the Trustee's Complaint, ITT claims that as a good faith purchaser who gave value without knowledge of the voidability of the transfer, it is protected from any action to avoid the transfer. ITT further cross-claimed for the principal and interest accruing under the Harrises' Note, in addition to costs and fees. This Opinion follows the trial of those issues.
Evidence adduced at the hearing showed that the Veterans Administration ("VA") transferred to debtor by Special Warranty Deed two tracts of real estate located in Callaway County, Missouri. Although that Deed was dated February 1, 1988, the closing was not held until early March—probably March 4, 1988, the date on which said Deed was recorded. On that same date, debtor transferred the real estate to Garland E. Harris and Evelyn L. Harris, husband and wife, by General Warranty Deed. Garland Harris was debtor's president and majority stockholder. Debtor paid the VA $55,000 for the property. The Harrises allegedly paid debtor $90,000 for the property. This would appear to be an excellent deal for debtor from the face of these transactions, but closer examination reveals some unusual dealings as outlined hereunder.
For the ostensible purpose of financing the purchase of the real estate from the VA, ITT advanced $70,000 by check payable to debtor and to the Harrises. The Harrises executed a $70,000 note to ITT secured by a Deed of Trust on the real estate which was duly recorded in the Callaway County Recorder's Office on March 4, 1988. The Harrises then paid $11,000 of that money back to ITT to release a lien which ITT held on a piece of real estate that the Harrises owned and in which debtor had no interest. Debtor paid the VA $55,000 for the real estate and thus retained only $4,000 of the $70,000 advanced by ITT. The Harrises paid debtor the remaining $20,000 of the alleged $90,000 sale price by returning 2,998 shares of debtor to debtor. According to an affidavit signed by debtor's secretary and transfer agent, this stock had a par value of $6.67 per share.1
As to the subject real estate, the VA had appraised it at $62,000 at the time of contracting to sell it to debtor. Debtor had expended several thousand dollars in materials and several thousand dollars in labor to rehabilitate the property. ITT subsequently appraised the property for $87,000 when it made the $70,000 loan. Thus, with the real estate having a value of approximately $87,000 and a purchase price to debtor of $55,000, debtor's equity in the property was roughly $32,000. What did debtor receive for the transfer to the Harrises? Debtor obtained relief from the $55,000 purchase price, some $4,000 in cash, and treasury stock without value because debtor either was or became insolvent at the moment of transfer. The remaining $11,000 did not go to debtor, but was used instead for the Harrises' personal benefit to pay off their obligation to ITT which was secured by their own real estate. What value then did ITT actually part with through its loan to the Harrises? Because the Harrises immediately handed back to ITT $11,000 of the $70,000 "loan" to satisfy a separate personal debt with ITT, the Court finds that ITT only gave value of $59,000 to this debtor.
from the debtors to the Harrises and thence to ITT and recover the real estate from ITT.
On procedural grounds, ITT objects to the Court's jurisdiction in this adversary proceeding stating that the matter is a non-core proceeding. Simply calling a proceeding "non-core" does not make it so. The Trustee's Complaint to avoid the disputed transfer and recover the asset involved necessarily invokes the avoidance and recovery provisions of 11 U.S.C. Section 549 and 11 U.S.C. Section 550, respectively. Because the transfer occurred post-petition, any hope the Trustee has of avoiding it lies in Section 549 which governs post-petition transactions. Although the parties' pleadings do not expressly refer to Section 549, it is incumbent upon the Court to find that the parties impliedly consent to having their pleadings conform to the evidence. Fed.R.Civ.P. 15(b). Thus, this action shall properly be treated as one to avoid a post-petition transfer under Section 549. To ITT's jurisdictional objection, the Court can and need only say that Section 549 proceedings are core proceedings. 28 U.S.C. Section 157(b)(2)(E)2; In re Global Intern. Airways Corp., 81 B.R. 541, 543 (W.D.Mo.1988).
The language of Section 549(a) unequivocally provides that all post-petition transfers of the bankruptcy estate's property that are not authorized by the court may be avoided by the trustee unless they are excepted from that rule's operation. Section 549(a); In re Robbins, 91 B.R. 879, 885 (Bankr.W.D.Mo.1988). Application of the trustee's avoidance powers under Section 549(a) involves a four-part inquiry: (1) did a transfer occur; (2) was it a transfer of property of the estate; (3) did the transfer occur after commencement of the case; and (4) was the transfer without the court's authorization. Section 549 does not apply unless all four of the above inquiries can be answered affirmatively. Id.
The Court need not examine the disputed transaction at any length to conclude that it is an avoidable transfer under Section 549(a). Taking a security interest in real estate is a "transfer" as that term is defined in 11 U.S.C. Section 101(50).3 In re Robbins, 91 B.R. 879, 885 (Bankr.W.D.Mo. 1988).
The real estate was property of the estate that was transferred after debtor had filed its petition for relief and without the Court's authorization.
A. Exception to the Avoidance Powers Under Section 549(c)
One of the ways in which the trustee's avoidance powers under Section 549(a) are limited is found in Section 549(c)4 Section 101(50) defines a "transfer" as ". . . every mode, direct or indirect, absolute or conditional, voluntary or involuntary of disposing of or parting with property or an interest in property . . ." which essentially provides that the trustee may not avoid transfers of realty to good faith purchasers for present fair equivalent value and without knowledge of the commencement of the case, if a copy or notice of the petition has not been filed in the recording office of the same county where the property is located. Such purchasers who, prior to the petition's filing, have given less than present fair equivalent value, receive protection in the form of a lien to the extent of any present value given. The purpose of Section 549(c) is to protect an unsuspecting purchaser against a fraudulent debtor selling real property. In re Purnell, 92 B.R. 625, 629 (Bankr.E.D.Pa.1988). The evidentiary burden under this provision is nevertheless placed upon its hopeful beneficiaries by way of Bankruptcy Rule 6001 which provides that any entity asserting the validity of a transfer under Section 549 has the burden of proof. See In re Robbins, 91 B.R. at 885-86; In re Purnell, 92 B.R. at 629. ITT must, therefore, prove that it acquired its interest in the subject real estate from the Harrises for its present fair equivalent value without knowledge of debtor's bankruptcy.
As to what constitutes good faith, this Court has previously opined that its presence turns on "whether the transaction carries the earmarks of an arms-length bargain" under the circumstances. In re Robbins, 91 B.R. at 885-86 (citing Inland Security Co. v. Estate of Kirshner, 382 F.Supp. 338 (W.D.Mo.1974)). Alternatively stated, good faith does not exist when a transferee possesses enough facts that would induce a reasonable person to investigate whether the debtor was in bankruptcy or that such occurrence was imminent. See In re Concord Senior Hous. Found., 94 B.R. 180, 183 (Bankr.C.D.Cal.1988); In re Nevada Implement Co., 22 B.R. 105 (Bankr.W.D.Mo.1982). In the context of Section 549, such an investigation would reveal to the transferee that the transferred property belonged to the debtor's bankruptcy estate. See In re Concord Senior Hous. Found., 94 B.R. at 183 ().
The record is devoid of any...
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