In re Beverly

• Decision Date: 24 July 2007
• Docket Number: Adversary No. LA 05-01257 TD.,Bankruptcy No. LA 04-29840 TD.,BAP No. CC-06-1250-KBN.,BAP No. CC-06-1273-KBN.,Adversary No. LA 05-01254 TD.,BAP No. CC-06-1449-KBN.,BAP No. CC-06-1284-KBN.,Adversary No. LA 05-01649 TD.
• Citation: 374 B.R. 221
• Parties: In re William J. BEVERLY, Debtor. Edward M. Wolkowitz, Appellant, v. Stephanie Beverly; William J. Beverly, Appellees. Catherine Outland; Administrator of the Estate of Christine Martell; Susan Outland Gleason, Appellants, v. Edward M. Wolkowitz, Chapter 7 Trustee; William J. Beverly, Appellees.
• Court: U.S. Bankruptcy Appellate Panel, Ninth Circuit

374 B.R. 221

In re William J. BEVERLY, Debtor.

Edward M. Wolkowitz, Appellant, v. Stephanie Beverly; William J. Beverly, Appellees.

Catherine Outland; Administrator of the Estate of Christine Martell; Susan Outland Gleason, Appellants, v. Edward M. Wolkowitz, Chapter 7 Trustee; William J. Beverly, Appellees.

BAP No. CC-06-1250-KBN.

BAP No. CC-06-1449-KBN.

BAP No. CC-06-1273-KBN.

BAP No. CC-06-1284-KBN.

Bankruptcy No. LA 04-29840 TD.

Adversary No. LA 05-01254 TD.

Adversary No. LA 05-01257 TD.

Adversary No. LA 05-01649 TD.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted March 21, 2007.

Filed July 24, 2007.

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Sidney Lanier, Ayscough & Marar, Torrance, CA, for Edward M. Wolkowitz.

Dennis E. McGoldrick, Torrance, CA, for William J. Beverly.

Before: KLEIN, BRANDT and NIELSEN^*, Bankruptcy Judges.

OPINION

KLEIN, Bankruptcy Judge.

The bankruptcy planning dispute presented in these related appeals requires us to transit waters made turbulent by cross-currents of exemptions, fraudulent transfer, denial of discharge, and divorce. We publish to dispel the myth that the toleration of bankruptcy planning for some purposes insulates such planning from all adverse consequences — it does not. In matters of bankruptcy and insolvency planning, supposed safe harbors from one danger are exposed to dangers from other quarters and may, in any event, be too small to shelter large capital transactions.

Here, a lawyer, anticipating a, large judgment on a community debt, used a marital settlement agreement ("MSA") in his pending divorce to shoulder the debt but strip himself of assets with which to pay the debt. Colluding with his spouse, he transferred his interest in $1 million of nonexempt funds in exchange for her interest in his $1.1 million exempt retirement fund.

Notwithstanding compelling evidence regarding intent, the court reasoned that such "planning" transfers can neither be avoided in bankruptcy, nor lead to denial of discharge.

We REVERSE as to both fraudulent transfer and denial of discharge. This is a paradigm case of actual intent to hinder, delay, or defraud creditors under the Uniform Fraudulent Transfer Act ("UFTA"). The California Supreme Court has held that MSA transfers may be avoided under UFTA. The same conduct leads to denial of discharge under 11 U.S.C. § 727(a)(2).

FACTS

William Beverly, a lawyer, and his spouse executed an MSA on April 9, 2004, in a hostile divorce filed in August 2002.

The MSA was signed during a recess of a legal malpractice trial ("Outland litigation") in which Beverly told his spouse's attorney, Nancy Dunaetz, that he would lose up to $1 million and end up in bankruptcy.¹

The community assets to be divided included Beverly's share of his law firm pension plan, which plan is ERISA-qualified and is exempt under California law. The Outland liability arose before 2002 and was conceded in the MSA to be community debt.

The MSA purported to divide and allocate all community property and debts. In addition to unexceptionable divisions of personal property, Beverly received the entire community property interest, worth about $1.1 million, in the exempt pension plan. He also received $100,000 for Outland litigation expenses (as a loan backed by a $135,000 deed of trust on property in escrow).

Beverly's spouse received: the entire community property interest in about $1 million from four nonexempt bank accounts, including proceeds from sale of the family home;² an Individual Retirement Account ("IRA") worth $100,000; the $135,000 deed of trust (as "equalizing payment" securing $35,000 for her attorneys' fees and $100,000 loaned to Beverly); miscellaneous personal property. She also would receive spousal support ($6,500/month after August 2004) and child support.

As to community debts under the MSA, Beverly undertook to pay the Outland litigation liability, together with tax liens and obligations attributable to him or to property he retained. His spouse assumed about $25,000 in credit card debt.

During MSA negotiations, Beverly proposed a "trade" in lieu of immediate distribution of proceeds when the sale of the family residence closed in March 2004. He would "trade" his share of more than $600,000 in proceeds for his spouse's share of the exempt pension plan.³ The net result would be that he would be left with only exempt or illiquid assets, while his spouse would receive all nonexempt liquid assets.

In the absence of agreement, a California court presumably would have divided community assets equally, the consequence of which would have been that each spouse would have had assets that included half of the exempt pension and more than $500,000 of cash each (of which $50,000 or $75,000 could have been rolled over into a new California exempt homestead).

Moving assets beyond the reach of the Outland creditors was explicitly part of the MSA negotiations as early as March 2003.⁴ On January 2, 2004, Beverly complained to Dunaetz that delays were eroding asset planning opportunities.⁵ The concern gained urgency as the house sale loomed.⁶ Dunaetz acknowledged the prospect of a judgment.⁷ The risk was apparent to both spouses.⁸

When he executed the MSA, Beverly gave notice that the dire financial situation created for him by the MSA could lead to bankruptcy and to requesting spousal support for himself from the funds transferred to his spouse.⁹

On May 4, 2004, the Outland jury awarded $424,450 against Beverly personally (legal malpractice $289,350, breach of fiduciary duty $111,300, and constructive fraud $23,800), plus another $153,650 against two other defendants. The Outland judgment was entered on May 20, 2004. Beverly appealed.

The final divorce judgment, which incorporated the MSA, was entered on July 20, 2004. The record does not suggest that the state court was informed that the MSA left Beverly without assets from which to satisfy a $424,450 community debt assigned to him.

After Beverly told the judgment creditors he lacked assets to pay the judgment, they filed an involuntary chapter 7 case.

Relief was ordered on November 1, 2004, and Beverly was ordered to file schedules and statements by November 16, 2004.

Beverly filed the schedules and statements on March 17, 2005, six days after the trustee and the Petitioning Creditors had objected to discharge on various 11 U.S.C. § 727(a) theories in two parallel adversary proceedings (Adv. Nos. 05-1254 and 05-1257). The creditors' action included nondischargeability counts under 11 U.S.C. §§ 523(a)(3) and (4).

Beverly exempted his $1,161,467.08 interest in the pension plan and claimed a $50,000 homestead exemption on a mobile home.

On June 14, 2005, the trustee sued Beverly and his former spouse to recover Beverly's share of the nonexempt funds transferred through the MSA, alleging counts under 11 U.S.C. §§ 544(b), 547, 548(b) and 550 (Adv. No. 05-1649).

The bankruptcy court consolidated the objections to discharge for trial, bifurcating (and later staying during this appeal) the creditors' § 523 nondischargeability counts.

Trial was held in three installments on the consolidated discharge objection adversary proceedings, which by then asserted counts under §§ 727(a)(2)(A), (a)(3), and (a)(6). The parties proceeded solely by declaration, deposition, and documentary evidence and chose not to present live testimony in open court.

The second and third installments of the discharge objection proceedings were combined with hearings on cross-motions for summary judgment in the trustee's avoiding action.

The court rendered oral findings of fact and conclusions of law, rejecting all three discharge denial theories.¹⁰ As relevant to this appeal, it ruled that the MSA did not embody a fraudulent transfer for purposes of § 727(a)(2).

The court's basic line of analysis was that exemption planning is tolerated in bankruptcy, that the MSA embodied a transfer for reasonably equivalent value, and that there was no actual intent to defraud, hence there was no fraudulent transfer for purposes of § 727(a)(2). The trustee and the Outlands each appealed (BAP Nos. 06-1273 and 06-1284).

The court disposed of the trustee's avoiding action (No. 05-1649) on cross-motions for summary judgment, reasoning that the protection given to MSAs and exemption planning also blocked exercise of the trustee's avoiding powers, including UFTA and § 548. The judgments entered seriatim in favor of each of the Beverlys, the first of which was accompanied by a Rule 54(b) certification, were appealed (BAP Nos. 06-1250 and 06-1449).

JURISDICTION

The bankruptcy court had jurisdiction via 28 U.S.C. § 1334 over these core proceedings under 28 U.S.C. §§ 157(b)(2)(F), (H), and (J). We have jurisdiction under 28 U.S.C. § 158(a).

ISSUES

(1) Whether the judgment in the consolidated discharge objection actions was final.

(2) Whether the MSA included a fraudulent transfer under California's UFTA.

(3) Whether the trial evidence warranted denial of discharge under § 727(a)(2)(A)"

STANDARD OF REVIEW

Whether orders are final relates to our jurisdiction, may be raised sua sponte, and is reviewed de novo. Menk v. LaPaglia (In re Menk), 241 B.R. 896, 903 (9th Cir. BAP 1999).

We review summary judgment de novo, viewing the facts in the light most favorable to the nonmoving party, to determine whether genuine issues of material fact remain for trial and which party is entitled to judgment as a matter of law. Harmon v. Kobrin (In re Harmon), 250 F.3d 1240, 1245 (9th Cir.2001); Miller v. Snavely (In re Snavely), 314 B.R. 808, 813 (9th Cir. BAP 2004).

In bankruptcy discharge appeals, we review findings of fact for clear error, conclusions of law de novo, and also apply de novo review to "mixed questions" of law and fact that require consideration of legal concepts and the exercise of judgment about the values that animate the legal...