In re Laines

• Decision Date: 18 February 2005
• Docket Number: Bankruptcy No. 04-10020-RGM.,Adversary No. 04-1052.
• Citation: 352 B.R. 397
• Parties: In re Juan LAINES, Debtor. H. Jason Gold, Trustee, Complainant, v. Juan Laines, et als., Respondents.
• Court: U.S. Bankruptcy Court — Eastern District of Virginia

352 B.R. 397

In re Juan LAINES, Debtor H. Jason Gold, Trustee, Complainant, v. Juan Laines, et als., Respondents.

Bankruptcy No. 04-10020-RGM.

Adversary No. 04-1052.

United States Bankruptcy Court, E.D. Virginia, Alexandria Division.

February 18, 2005.

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Charles G. Preston, Great Falls, VA, for Debtor.

Joel S. Aronson, Ridberg Sherbill & Aronson LLP, Bethesda, MD, for Trustee, Complainant.

MEMORANDUM OPINION

ROBERT G. MAYER, Bankruptcy Judge.

The chapter 7 trustee seeks to avoid transfers of two properties, the debtor's home and a rental townhouse, as voluntary and fraudulent conveyances under the Virginia Code and the Bankruptcy Code, and to deny the debtor a discharge for having fraudulently transferred property within one year prior to the filing of this case.

I. Background

The facts relating to the transfers are not contested. The debtor bought his home on November 28, 2000. He was unmarried at the time and took title solely in his name. Fifteen weeks later, on March 15, 2001, he married Ana E. Laines. Three days later, he transferred his home to his bride and himself as tenants by the entirety with the common-law right of survivorship. The deed was recorded on March 22, 2001.¹ a was captioned "Deed of Gift" and recited that the conveyance was "for estate planning purposes and for no monetary consideration." It was exempt from recordation taxes under Va. Code (1950) §§ 58.1-810(3) and 58.1-811(D).² The debtor and his wife conveyed the home to Fidel Rovira and Ana E. Laines, the debtor's wife, by a deed recorded on October 10, 2003. They hold the home as joint tenants with the common-law right of survivorship.³ This deed was also captioned "Deed of Gift" and also recited that the conveyance was "for estate planning purposes and for no monetary consideration." It was exempt from recordation taxes under Va.Code (1950) § 58.1-811(D).

The townhouse was also owned solely by the debtor prior to his marriage. He purchased it on December 9, 1998. On March 26, 2001, he conveyed it to himself and his bride, Ana E. Laines, as tenants by the entirety. There was also a second transfer of this property. By a deed recorded on December 26, 2002, the debtor and his wife conveyed the townhouse, to themselves and Miguel A. Perez as tenants in common.⁴ This deed was also captioned "Deed of Gift," recited that it was made for "no monetary consideration," and was exempt from recordation taxes under Va.Code (1950) § 58.1-811(D).

The debtor filed his petition in bankruptcy on January 2, 2004.⁵ The trustee asserts that all four transfers are avoidable as both fraudulent conveyances and voluntary conveyances under both the Virginia Code and the Bankruptcy Code, Va.Code (1950) §§ 55-80 and-81 and 11 U.S.C. §§ 548(a)(1)(A) and (3), the state law remedies being available by virtue of 11 U.S.C. § 544(b). There are a total of four transfers, each potentially avoidable under four statutes, for a total of 16 separate analyses. However, only the March, 2001 transfers of the home and the townhouse need to be analyzed under Va.Code (1950) § 55-80.⁶

II. Avoidance of the March, 2001 Transfers

The trustee may avoid the March 22, 2001 transfer of the house and the March 26, 2001 transfer of the townhouse as fraudulent conveyances under the Virginia fraudulent conveyance statute, Va.Code (1950) § 55-83, which states:

Every gift, conveyance, assignment or transfer of, or charge upon, any estate, real or personal, every suit commenced or decree, judgment or execution suffered or obtained and every bond or other writing given with intent to delay, hinder or defraud creditors, purchasers or other persons of or from what they are or may be lawfully entitled to shall, as to such creditors, purchasers or other persons, their representatives or assigns, be void. This section shall not affect the title of the purchaser for valuable consideration, unless it appear that he had notice of the fraudulent intent of his immediate grantor or of the fraud rendering void the title of such grantor.

Va.Code (1950) § 55-80.

It is not often possible to prove an intent to hinder, delay or defraud directly. It is usually proven with circumstantial evidence. Under Virginia law, certain evidence has become badges of fraud. Hutcheson v. Savings Bank of Richmond, 129 Va. 281, 284, 105 S.E. 677, 680 (1921); Young v. Willis, 82 Va. 291 (1886). Establishing badges of fraud creates a prima facie case that must be rebutted by the party seeking to uphold the transfer. Hutcheson v. Savings Bank, 129 Va. at 284, 105 S.E. at 681. Every badge of fraud does not need to be present in order to find of an intent to hinder, delay or defraud.

There are various expressions of the badges of fraud. The one given in Hutcheson v. Savings Bank, 129 Va. at 281, 105 S.E. at 681 quoting Hickman's Ex'r v. Trout, 83 Va. 478, 3 S.E. 131 (1887) is:

The usual badges of fraud are: Gross inadequacy of price; no security taken for the purchase money; unusual length of credit; bonds taken at long periods; conveyance in payment of alleged antecedent indebtedness of father to son residing together.

Hyman v. Porter (In re Porter), 37 B.R. 56, 63 (Bankr.E.D.Va.1984) also summarizes them:

The badges of fraud have been stated to include: (1) retention of an interest in the transferred property by the transferor; (2) transfer between family members for allegedly antecedent debt; (3) pursuit of the transferor or threat of litigation by his creditor at the time of the transfer; (4) lack of or gross inadequacy of consideration for the conveyance; (5) retention or possession of the property by the transferor; and (6) fraudulent incurrence of indebtedness after the conveyance.

A familial relationship between the parties to the transaction is not itself a badge of fraud. Hutcheson v. Savings Bank, supra; Johnson v. Lucas, 103 Va 36, 48 S.E. 497 (1904). It may, however, strengthen the presumption that arises from other circumstances. Johnson v. Lucas, 103 Va. at 40-41, 48 S.E. at 498. Where the husband is not indebted at the time of a transfer to his wife, there is no presumption of fraudulent intent and the burden is on the creditor to show that a prospective fraud was intended. Witz, Biedler & Co. v. Osburn, 83 Va. 227, 2 S.E. 33 (1887); Hutchison v. Kelly, 40 Va. (1 Rob.) 123 (1842). However, a transaction between parties related by blood or affinity "will be more closely scrutinized." Johnson v. Lucas, 103 Va. at 41, 48 S.E. at 498. Transactions between husband and wife must be closely scrutinized to assure that they are fair and honest and not merely contrivances resorted to for the purpose of placing the husband's property beyond the reach of his creditors. In such a contest, the burden of proof is on the transferee to show the bona fides of the transaction. Morrisette v. Cook & Bernheimer Co., 122 Va. 588, 95 S.E. 449 (1918); Richardson v. Pierce, 105 Va. 628, 54 S.E. 480 (1906).

The trustee points to multiple badges of fraud. The transfers were to the debtor's wife and himself as tenants by the entirety. The debtor retained an interest in the transferred properties and possession of them. There was no consideration. They were made when his start-up venture, a telecommunications company, was heavily in debt to St. Anna's Home, a debt he had guaranteed.

The debtor testified that he wanted to provide for his family in case he were to die.⁷ There is nothing wrong, in and of itself, in transferring pre-marital real property owned by the husband to the husband and wife as tenants by the entirety upon marriage. It is a substitute for a will and has other advantages that a will cannot provide such as the necessity for both husband and wife to execute any deed conveying or encumbering the property. It is a very common manner in which property is held by a married couple. However, a transaction between husband and wife must be closely scrutinized. In this case, the debtor had a significant obligation outstanding to St. Anna's Home at the time of the transaction. He had just "walked away" from a telecommunications start-up company he had organized. He did not leave with a work-out plan and made no effort to wind-up the company or pay the underlying debt. He seemingly did not part on favorable terms with St. Anna's Home. While he testified that there should have been sufficient assets to pay the obligation and to avoid a demand on his guarantee, he did not know how the assets were eventually used or liquidated and, at the time he walked away, had no assurance of how they would be used or liquidated. He faced a potentially overwhelming obligation. At this time, a time when his assets were at risk, he sought to place his home and his townhouse beyond the reach of his creditors.

Having proven these facts, the burden shifted to the wife to come forward and show that the transactions were bona fides and were not mere contrivances to place the debtor's property beyond the reach of his creditors. Richardson v. Pierce, 105 Va. at 629, 54 S.E. at 481. She did not testify. The debtor testified and the depositions of the other two transferees were admitted into evidence. There was no testimony of any financial negotiations concerning the transfer: the value of the two properties, the debts encumbering them the consideration to be paid or the terms of payment. There was no evidence supporting the assertion that the transfers were part of an estate plan, other than to provide a will substitute. There was no evidence showing that the likelihood of the debtor being called upon to honor his guarantee was remote. There was no evidence that he could have honored his guarantee if called upon to do so. There was no evidence showing that the debtor had any immediate prospects to establish regular income sufficient to meet his financial obligations as they became due. There was no other evidence showing the bona fides of the transactions.

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