In re Jackson

• Decision Date: 18 August 2006
• Docket Number: No. 05-2702.,05-2702.
• Citation: 459 F.3d 117
• Parties: In re Stanley W. JACKSON, Debtor. Victor Dahar, Trustee, Appellee, v. Susan W. Jackson, Individually and as Trustee of SWJ Trust I and SWJ Trust II, Defendant, Appellant, Stanley W. Jackson, Jr.; Stanley W. Jackson, Defendants.
• Court: U.S. Court of Appeals — First Circuit

Page 117

459 F.3d 117

In re Stanley W. JACKSON, Debtor.

Victor Dahar, Trustee, Appellee, v. Susan W. Jackson, Individually and as Trustee of SWJ Trust I and SWJ Trust II, Defendant, Appellant, Stanley W. Jackson, Jr.; Stanley W. Jackson, Defendants.

No. 05-2702.

United States Court of Appeals, First Circuit.

Heard June 6, 2006.

Decided August 18, 2006.

COPYRIGHT MATERIAL OMITTED

Mary Ann Dempsey, with whom Thomas J. Pappas and Wiggin & Nourie, P.A. were on brief, for appellant.

Richard Thorner, with whom Stephen L. Boyd and Wadleigh, Starr & Peters, P.L.L.C. were on brief, for appellee.

Before SELYA, LYNCH, and LIPEZ, Circuit Judges.

LIPEZ, Circuit Judge.

Defendant Susan W. Jackson appeals from the bankruptcy court's judgment setting aside certain property transfers made to her from Stanley W. Jackson, debtor and husband of the defendant, as constructively fraudulent pursuant to the New Hampshire Uniform Fraudulent Transfer Act, N.H.Rev.Stat. Ann. § 545-A:4. Victor Dahar, Chapter 7 trustee, commenced these adversary proceedings against the debtor, the defendant, and their son, Stanley W. Jackson, Jr., in 2002. The bankruptcy court granted summary judgment for Dahar on his claim against the son, voiding a transfer to him of $ 25,000.00. After a four-day trial on the trustee's claims against the debtor and the defendant, the bankruptcy court concluded that certain transfers of property by the debtor to the defendant were constructively fraudulent, and entered a judgment of $ 260,130.67 in favor of Dahar. The defendant appealed to the district court, which affirmed the decision of the bankruptcy court. We also affirm.

I.

We summarize the facts as follows. At the time of the trial in 2004, the debtor had been in the business of buying and selling real estate for approximately 30 years. On or about August 22, 1990, he executed a term note in the amount of $ 800,000. The note was subsequently assigned to Citizens Bank. The debtor made a payment on the note but then did not make further payments because, he contended, the bank had not fulfilled its responsibilities in connection with the note. Over the next few years, the debtor and the bank fought over the amount owed on the note but no collection proceedings were commenced by Citizens Bank.

On June 3, 1999, the debtor transferred numerous parcels of real property ("subject parcels") to the defendant for no consideration.¹ Testifying that they made the transfer for estate planning purposes, the debtor and the defendant explained that their estate planning attorney had advised them to equalize their estates and create two trusts, SWJ Trust I and SWJ Trust II, to hold their assets and to obtain the maximum benefit of the federal estate tax marital deduction. In the eighteen months following the transfer, the defendant sold almost all of the subject parcels. The proceeds were used to pay the debtor's business and living expenses. The debtor made no payments to his largest creditor, Citizens Bank, during this time period.

On December 16, 1999, Al Ho, LLC acquired Citizens Bank's note and demanded that the debtor satisfy the balance due. No payments were made and Al Ho foreclosed on the mortgaged properties securing the debtor's obligation. The foreclosure sale covered only some of the balance owed, leaving a deficiency of $877,129.14, which Al Ho demanded from the debtor on May 25, 2000. After state court proceedings on the validity of the note, the debtor and Al Ho stipulated to an order of judgment in the amount of $931,818.56. The stipulated order barred the debtor from transferring any property or assets from May 29, 2001, until July 13, 2001. A few days before the stipulated order was signed, the debtor transferred to the defendant, for consideration, two mortgage receivables. He transferred his remaining mortgage receivables to the defendant, for consideration, on July 13, 2001. The debtor then filed his bankruptcy petition on October 15, 2001.

On September 26, 2002, Dahar initiated an adversary proceeding against the Jacksons, alleging that the debtor's transfers of the subject parcels and certain mortgage receivables to the defendant were fraudulent. Although rejecting a claim of actual fraud, the bankruptcy court concluded that the transfers of the subject parcels were constructively fraudulent under New Hampshire law.² The bankruptcy court found that the value of the subject parcels fraudulently transferred was $ 585,500.00 but awarded Dahar a judgment of $ 260,130.67, which reflected an equitable deduction of the "amount of proceeds utilized to pay business debts of Mr. Jackson and the ordinary and necessary living expenses of his family or $ 365,369.33." The district court affirmed on appeal.

II.

Dahar brought his complaint under section 544(b) of the Bankruptcy Code, which "allows the avoidance of `any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law.' Applicable law includes various state fraudulent conveyance statutes, many based on the Uniform Fraudulent Transfer Act [("UFTA")]." See FCC v. NextWave Personal Commc'ns, Inc. (In re NextWave Personal Commc'ns, Inc.), 200 F.3d 43, 49 (2d Cir.1999) (quoting 11 U.S.C. § 544(b)). The applicable law in this case, the New Hampshire UFTA, provides in pertinent part:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(a) With actual intent to hinder, delay, or defraud any creditor of the debtor; or

(b) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(1) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(2) Intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.

N.H.Rev.Stat. Ann. § 545-A:4(I). The bankruptcy court found that the transfer here met the elements of § 545-A:4(I)(b)(1). Specifically, the bankruptcy court found that the debtor did not receive "reasonably equivalent value in exchange" for the subject parcels, and that the debtor was engaged "in a business . . . for which the remaining assets of the debtor were unreasonably small in relation to the business." N.H.Rev.Stat. Ann. § 545-A:4(I)(b)(1).³

The defendant does not contest the bankruptcy court's first finding — that the debtor did not receive reasonably equivalent value in exchange for the subject parcels he transferred to the defendant. However, the defendant raises several arguments challenging the bankruptcy court's second finding that the debtor was engaged in a business for which his remaining assets were unreasonably small in relation to the business. The defendant also argues that the bankruptcy court applied the wrong standard of proof for establishing constructive fraud under N.H.Rev.Stat. Ann. § 545-A:4(I)(b)(1). In addition, the defendant argues that the bankruptcy court erred in limiting the equitable adjustment it applied to the judgment.

We address these arguments in turn, beginning with the burden issue. We review the bankruptcy court's conclusions of law de novo and its factual findings for clear error. See Davis v. Cox (In re Cox), 356 F.3d 76, 82 (1st Cir.2004). Although the district court has reviewed the bankruptcy court's decision in this case, we "exhibit no particular deference to the conclusions of . . . the district court." Brandt v. Repco Printers & Lithographics, Inc. (In re HealthCo Int'l), 132 F.3d 104, 107 (1st Cir.1997).

A. Standard of proof for establishing constructive fraud pursuant to N.H.Rev.Stat. Ann. § 545-A:4(I)(b)(1)

N.H.Rev.Stat. Ann. § 545-A:4(I)(b)(1) is silent on the issue of the standard of proof to be applied to constructive fraud claims, and the New Hampshire Supreme Court has not yet addressed this issue. "In the absence of controlling state law, a federal court should choose the rule that it believes the state's highest court is likely to adopt in the future." Amherst Sportswear Co. v. McManus, 876 F.2d 1045, 1048 (1st Cir. 1989). The bankruptcy court held that the plaintiff had the burden of establishing constructive fraud by a preponderance of the evidence. The defendant argues that the clear and convincing evidence standard, not the preponderance of the evidence standard, should apply to constructive fraud claims.

In the context of claims involving "actual intent to hinder, delay, or defraud" creditors, the New Hampshire Supreme Court held that the "plaintiff has the burden of proving by clear, convincing and direct evidence the existence of a fraudulent intent." Chagnon Lumber Co. v. DeMulder, 121 N.H. 173, 427 A.2d 48, 51 (1981). As the bankruptcy court aptly noted, however, this is not a case involving "actual intent to hinder, delay, or defraud" a creditor. This is a case involving constructive fraud. Constructive fraud is generally defined as an "unintentional deception or misrepresentation that causes injury to another." Black's Law Dictionary 686 (8th ed.2004) (emphasis added). Under the constructive fraud provision in the New Hampshire UFTA, the court is required to assess objective factors, not actual intent. See N.H.Rev.Stat. Ann. § 545-A:4(I)(b)(1) (stating that a transfer is fraudulent if the debtor did not receive "a reasonably equivalent value in exchange for the transfer" and the debtor "[w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction" (emphasis added)). This distinction is important because the stigma that attaches to a finding of intentionally fraudulent conduct does not attach to a...