In re Harlin

• Decision Date: 03 February 2005
• Docket Number: No. 04-73358.,04-73358.
• Citation: Lewis v. Harlin (In re Harlin), 321 B.R. 836 (E.D. Mich. 2005)
• Parties: In the Matter of Edwin HARLIN, Debtor. Wendy Turner Lewis, Trustee, Plaintiff-Appellant, v. Janice D. Harlin, Defendant-Appellant.
• Court: U.S. District Court — Eastern District of Michigan

321 B.R. 836

In the Matter of Edwin HARLIN, Debtor Wendy Turner Lewis, Trustee, Plaintiff-Appellant, v. Janice D. Harlin, Defendant-Appellant.

No. 04-73358.

United States District Court, ED. Michigan, Southern Division.

February 3, 2005.

Timothy J. Miller, Schneider, Miller, Detroit, MI, for Appellant.

Martin L. Fried, Goldstein, Bershad, Southfield, MI, for Appellee.

MEMORANDUM AND ORDER

COHN, District Judge.

I. Introduction

This is a bankruptcy appeal in a Chapter 7 case. The Trustee, Wendy Turner Lewis, appeals from the decision of the Bankruptcy Court denying her motion for summary judgment and granting defendant's, Janice D. Harlin (Harlin), motion to dismiss the Trustee's adversary complaint. The issue on appeal is whether the debtor Edwin Harlin's lump sum payment of a mortgage on a home owned by the debtor and Harlin, his wife, under the circumstances described below constitutes a fraudulent conveyance under Michigan law. The Court finds that it does and therefore REVERSES the decision of the Bankruptcy Court and REMANDS this case for further proceedings consistent with this Memorandum and Order.

II. Background

The relevant facts are straightforward and undisputed. On April 9, 2001, the debtor received $497,000.00 in settlement of a wrongful discharge claim against a prior employer. The debtor used a portion of the settlement proceeds, approximately $200,000.00, to pay income taxes. On April 11, 2001, the debtor also used $146,861.15 to retire the mortgage debt on the home which he jointly owned with his wife as tenancies by the entirety.

Over two years later, on August 28, 2003, the debtor filed a voluntary Chapter 7 petition. The petition described a residence in Troy, Michigan with a value of $350,000.00. The debtor disclosed liabilities of $3,779,448.00.

The debtor admits that he was insolvent at the time the mortgage debt was satisfied.

The Trustee filed an adversary proceeding against Harlin, seeking to avoid the transfer of $146,861.15 as a fraudulent conveyance and for a judgment allowing a sale of the home. The Trustee claimed (1) intentional fraud and (2) constructive fraud.

The Trustee filed a motion for summary judgment on both counts.

Harlin filed a motion to dismiss the adversary complaint.

The Bankruptcy Court held a hearing at which it denied the Trustee's motion and granted Harlin's motion essentially on the grounds that the payment at issue was not a fraudulent conveyance under Michigan law.¹

The Trustee appeals, arguing that its complaint should not have been dismissed. She also argues that it is entitled to summary judgment on both of her claims of actual fraud and constructive fraud. Alternatively, the Trustee says she made at least a prima facie showing under each claim and/or that there are genuine issues of material fact precluding the dismissal of its claims.

III. Standard of Review

This Court reviews factual findings made by a bankruptcy judge for clear error, which requires the appellant demonstrate "the most cogent evidence of mistake of justice." In re Baker & Getty Fin. Servs., 106 F.3d 1255, 1259 (6th Cir.1997). Conclusions of law are reviewed de novo. In re Zaptocky, 250 F.3d 1020, 1023 (6th Cir.2001). See In re Lopez, 292 B.R. 570, 573 (E.D.Mich.2003).

IV. Analysis

A. The Trustee's Complaint

1 The Trustee claimed both actual fraud and constructive fraud under Michigan's Uniform Fraudulent Transfer Act, M.C.L. 566.31 et seq.² In count I, The Trustee claims that the debtor's payment of the mortgage was an actual fraudulent conveyance because at the time of the payment the debtor had several creditors and paid off the mortgage debt with the intent to hinder, delay, or defraud either existing or future creditors. In count II, the Trustee claims that the payment of the mortgage debt amounts to a constructive fraudulent conveyance as between the debtor and Harlin and that the debtor did not receive reasonably equivalent value from Harlin for the benefits she received— an enhanced value to the estate.

B. Count II—Constructive Fraud

1. The Statute

Section 566.35 deals provides:

Sec. 5. (1) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

(2) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

M.C.L. § 566.35.

2. The Bankruptcy Court's Decision

In holding that the Trustee failed to make out a claim for constructive fraud. The Bankruptcy Court distinguished the authority upon which the Trustee relied, Glazer v. Beer, 343 Mich. 495, 72 N.W.2d 141 (1955) and In re Greenfield, 249 B.R. 856 (Bankr.E.D.Mich.2000), and noted the absence of a case finding that the payment of a mortgage under the circumstances here amounts to a fraudulent conveyance. The Bankruptcy Court also found persuasive policy considerations in finding that payment of a mortgage debt could not be viewed as a fraudulent conveyance.

3. Parties' Arguments on Appeal

The Trustee argues that Michigan courts have consistently held that where a mortgage or other encumbrance against real property held as tenancies by the entireties is paid by an insolvent debtor, that payment is fraudulent as to creditors and that the Bankruptcy Court erred in distinguishing Glazer and In re Greenfield. The Trustee also argues that the Bankruptcy Court improperly relied on case law from other jurisdictions. Finally, the Trustee argues that to the extent the Bankruptcy Court's decision can be interpreted as requiring a showing of the "badges of fraud," such a finding is erroneous because that is not necessary to a finding of constructive fraud.

Harlin argues that the cases on which the Trustee relies are no longer good law because they were decided under Michigan's Fraudulent Conveyance Act, which has been superceded by Michigan's Fraudulent Transfer Act. Finally, Harlin argues that case law from other jurisdictions declining to find similar payments amount to fraudulent conveyances is persuasive. Harlin further argues that policy considerations under the Bankruptcy Code supercede any state policy in terms of allowing a debtor to use non-exempt assets to acquire exempt assets.

4. Discussion

Harlin's argument that Michigan's adoption of the Uniform Fraudulent Transfer Act (MFTA) fundamentally altered the nature of a constructive fraudulent transfer from the prior Uniform Fraudulent Conveyance Act (MFCA) is not well-taken. The MFCA defined a constructive fraudulent transfer as follows:

Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.

M.C.L. § 566.14 (repealed). "Fair consideration" was defined as follows: "when in exchange for such property, or obligation, as a fair equivalent value therefore, and in good faith, property is conveyed or antecedent debt is satisfied." M.C.L. § 566.13 (repealed).

In terms of a constructive fraudulent transfer, the MFTA replaces "fair consideration" with "reasonably equivalent value" which is defined as follows: "Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied." M.C.L. § 566.33. The only significant difference in terms of a constructive fraudulent transfer is that "good faith" is no longer an element for determining whether a conveyance was made without receiving a reasonably equivalent value, i.e. fair consideration. See Jeffrey L. LaBine, Michigan's Adoption of the Uniform Fraudulent Transfer Act: An Examination of the Changes Effected to the State of Fraudulent Conveyance Law, 45 Wayne L.Rev. 1479, 1500 (Fall 1999).

Having determined that Michigan case law interpreting the MFCA is still viable, the question become what Michigan case law says regarding a mortgage payment by an insolvent debtor on property held by a tenancy by the entireties. The Trustee is correct that there is a long line of Michigan cases which hold that such a payment constitutes is fraudulent as to creditors.

One of the earliest cases discussing fraudulent conveyances and property held as a tenancy by the entireties is Newlove v. Callaghan, 86 Mich. 297, 48 N.W. 1096 (1891). In Newlove, the debtor, together with his wife, paid $1,850.00 to purchase land as a tenancy by the entirety. A judgment creditor attempted to levy on the property. The Michigan Supreme Court held that the creditor was entitled to the husband's share in the property, stating:

It would be a gross injustice to permit debtors to apply moneys which should be applied to the payment of their debts to the creation of an estate which would be beyond the reach of their creditors. Had the entire estate been placed in the wife's name, there could have been no question but that the same would be regarded as fraudulent under the statute, and it is no less a fraud upon creditors because the title has been taken in the name of the defendants jointly. In other words, estates in entirety cannot be created at the expense of creditors, and held in fraud of the latter's right.

86 Mich, at 300-01, 48 N.W. 1096.

Later, in Caswell v. Pilkinton, 138 Mich. 138, 101 N.W. 212 (1904), the debtor and his wife owned a parcel of land as tenants by the entirety which was subject to a purchase-money mortgage. When the debtor's father died,...