In re Forbes

• Decision Date: 25 July 2007
• Docket Number: No. 06-8075.,06-8075.
• Citation: 372 B.R. 321
• Parties: In re Cheryl A. FORBES, Debtor. James D. Lyon, Trustee, Plaintiff-Appellee, v. D. Lavonne Eiseman and Gregory C. Forbes, Defendants-Appellant.
• Court: U.S. Bankruptcy Appellate Panel, Sixth Circuit

372 B.R. 321

In re Cheryl A. FORBES, Debtor James D. Lyon, Trustee, Plaintiff-Appellee, v. D. Lavonne Eiseman and Gregory C. Forbes, Defendants-Appellant.

No. 06-8075.

United States Bankruptcy Appellate Panel of the Sixth Circuit.

Argued: May 1, 2007.

Decided and Filed: July 25, 2007.

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ARGUED:

Michael J. Gartland, Wise Delcotto PLLC, Lexington, KY, for Appellant. Chrisandrea Turner Ingram, Lexington, KY, for Appellee.

ON BRIEF:

Michael J. Gartland, Wise Delcotto PLLC, Lexington, KY, for Appellant. Chrisandrea Turner Ingram, John O. Morgan, Jr., Lexington, KY, for Appellee.

Before AUG, GREGG, and PARSONS, Bankruptcy Appellate Panel Judges.

OPINION

AUG, Bankruptcy Appellate Panel Chief Judge.

This appeal involves an alleged fraudulent transfer by Cheryl Forbes (the "Debtor") to her sister, D. Lavonne Eiseman ("Eiseman"). The disputed transfer occurred when the Debtor's ex-husband, Gregory Forbes ("Greg Forbes"), loaned approximately $157,000 to Eiseman. Eiseman used those funds as a down payment toward the purchase of a house for the Debtor in Lodi, California and subsequently, in Versailles, Kentucky. The bankruptcy court found that the $157,000 down payment on the Lodi property was, in actuality, property of the Debtor, that the transfer of the funds to Eiseman constituted an avoidable fraudulent conveyance under § 544(b) of the Bankruptcy Code, and that the Versailles property was property of the Debtor's estate.¹ For the reasons that follow, the bankruptcy court's judgment is AFFIRMED.

I. ISSUES ON APPEAL

The issues on appeal are: (1) whether a loan in the amount of $157,480.99 ("the $157,000 loan") from Greg Forbes to Eiseman was, in effect, a transfer of the Debtor's property; and (2) whether the Trustee has standing under § 544(b) and California law to pursue the asserted fraudulent conveyance claim against the Debtor.

II. JURISDICTION AND STANDARD OF REVIEW

The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to this Panel and a final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment." Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations and internal quotation marks omitted). The bankruptcy court's judgment resolved the underlying adversary proceeding on its merits and is a final, appealable order. See In re FBN Food Servs., Inc., 82 F.3d 1387, 1392 (7th Cir.1996) (order setting aside fraudulent conveyance under 11 U.S.C. § 548(a) is a final order); see generally Geberegeorgis v. Gammarino (In re Geberegeorgis), 310 B.R. 61, 63 (6th Cir. BAP 2004) ("[A]n order that concludes a particular adversarial matter within the larger case should be deemed final and reviewable in a bankruptcy setting.") (citations omitted).

The bankruptcy court's legal conclusion that the transfer at issue constituted an avoidable fraudulent conveyance is reviewed de novo. See Stevenson v. J.C. Bradford & Co. (In re Cannon), 277 F.3d 838, 849 (6th Cir.2002) (citations omitted). "Questions of standing ... are [also] reviewed de novo." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27, 29 (6th Cir. BAP 1998). "De novo means that the appellate court determines the law independently of the trial court's determination." Treinish v. Norwest Bank Minn., N.A. (In re Periandri), 266 B.R. 651, 653 (6th Cir. BAP 2001) (citation omitted).

The bankruptcy court's determination that the challenged transfer involved property of the Debtor is a factual finding that must be upheld on appeal unless it is clearly erroneous. Westgate Vacation Villas, Ltd. v. Tabas (In re Int'l Pharmacy & Discount II, Inc.), 443 F.3d 767, 771 (11th Cir.2005) (citations omitted). A factual determination is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Bailey v. Bailey (In re Bailey), 254 B.R. 901, 903 (6th Cir. BAP 2000) (citations and internal quotations omitted).

III. FACTS

The facts of this case are complicated, highly suspicious, and largely undisputed. The Debtor and her ex-husband, Greg Forbes, were divorced in 1995. No spousal support was awarded under the parties' judgment of divorce, and Greg Forbes has never been under any legal obligation to support the Debtor. After their divorce, the Debtor and Greg Forbes remained co-owners of an airplane canopy manufacturer called Flight Materials, Inc. ("Flight Materials"). The Debtor served as President of the corporation. The record contains no written documentation of the Debtor's ownership interest in Flight Materials nor of Greg Forbes' ownership interest for that matter. However, both the Debtor and Greg Forbes testified that the Debtor held a fifty percent ownership interest. In addition, Greg Forbes explained that, out of a sense of fairness, he always intended to give the Debtor half the proceeds from any sale of the business.²

In early 2003, Richard Malott ("Malott") and his company Ridgewood Associates, Inc. ("Ridgewood") expressed an interest in purchasing Flight Materials. Malott and Ridgewood made a $300,000 refundable deposit toward the purchase of the corporation. If Malott and Ridgewood elected not to purchase Flight Materials, the Debtor and Greg Forbes were to repay the $300,000 deposit within forty-five days. On January 15, 2003, the Debtor and Greg Forbes executed a $300,000 promissory note stating those repayment terms.

The record contains no documentary evidence of how the original $300,000 deposit was paid or disbursed. According to Malott's testimony at trial, he did not place the funds in an escrow account but instead issued a number of cashier's checks at the request of Greg Forbes and the Debtor. Although Malott did not remember the amounts of the cashier's checks or all of the recipients, he specifically recalled that one check was made out to Greg Forbes, one to the Debtor, and one to Gary Flanders, Greg Forbes' friend and business associate. Malott thought the check to Gary Flanders was in an amount between $50,000 and $100,000. (J.A. at 233.) Greg Forbes testified that he could not remember whether the check made out to Gary Flanders was for $85,000 or $100,000. (J.A. at 276.)

Malott and Ridgewood ultimately decided not to purchase Flight Materials. When asked why that decision was made, Malott testified that when the business records were reviewed, "[t]here were no financial statements. There were no W-2s. There were no 1099s. Things had been paid by cashiers check and cash. The whole operation was [run] in such a way that I did not want to deal with it." (J.A. at 198-99.) Malott subsequently demanded return of the $300,000 deposit. Neither the Debtor nor Greg Forbes repaid the deposit in full.

On October 27, 2004, Malott and Ridgewood obtained a judgment against the Debtor, Greg Forbes, and Flight Materials in the amount of $354,298.79 in the Superior Court of California, Nevada County. It is not clear, however, that the judgment related solely to the failure to repay the $300,000 promissory note. The record reflects that Malott loaned Greg Forbes an additional $200,000 in April 2003, and that some portion of this loan remained unpaid at the time the state court judgment was entered. There is also evidence suggesting that some portion of the $300,000 obligation was repaid to Malott and Ridgewood prior to entry of the judgment.³

At the time Malott and Ridgewood were considering purchasing Flight Materials, the Debtor and her adult daughter, Francesca Forbes, lived in a single family residence located at 1116 Rivergate Road in Lodi, California (the "Lodi property"). The Debtor and Greg Forbes were leasing the Lodi property and had an option to purchase the property for $350,000 but had let that option expire. In February 2003, the owners of the Lodi property commenced eviction proceedings against the Debtor and Greg Forbes. The eviction proceeding was resolved pursuant to a settlement agreement, which included a $500,000 purchase option in favor of the Debtor and Greg Forbes.

In March 2003, the Debtor approached her sister, Eiseman, and informed her that the Debtor and Greg Forbes would not be able to obtain the financing that would be required to exercise their option to purchase the Lodi property. The Debtor then asked Eiseman if she would be willing to purchase the Lodi property, and Eiseman agreed to do so. The settlement agreement with the owners of the Lodi property was subsequently amended to extend the $500,000 purchase option to Eiseman.

Eiseman financed her purchase of the Lodi property by obtaining a $350,000 loan from World Savings Bank, FSB. Eiseman borrowed the balance of the purchase price and closing costs, in the total amount of $157,480.99, from Greg Forbes. At trial, Greg Forbes testified that he loaned this money to Eiseman at the request of the Debtor, because he wanted to provide a stable living environment for his daughter, Francesca. He further explained that he obtained the funds to loan to Eiseman by procuring an $85,000 loan from his long-time friend, Gary Flanders.⁴ The remaining $75,000 came from the $200,000 loan Greg Forbes obtained from Malott in April 2003.⁵ Eiseman testified that she never asked the Debtor or Greg Forbes about the source of the $150,000 loan. She stated that she received the asserted loan "interest free" and that there was no written documentation evidencing the loan.

There is no question that Eiseman purchased the Lodi property with the intention of allowing the Debtor and Francesca Forbes to reside there. Indeed,...