In re Peet Packing Co.

• Decision Date: 26 March 1999
• Docket Number: Adversary No. 97-2098.,Bankruptcy No. 95-20725
• Citation: 233 BR 387
• Parties: In re PEET PACKING COMPANY, Debtor. Randall L. Frank, Trustee, Plaintiff, v. Dennis L. McLain, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

233 B.R. 387 (1999)

In re PEET PACKING COMPANY, Debtor Randall L. Frank, Trustee, Plaintiff, v. Dennis L. McLain, Defendant.

Bankruptcy No. 95-20725, Adversary No. 97-2098.

United States Bankruptcy Court, E.D. Michigan, Northern Division.

March 26, 1999.

E. Todd Sable, Birmingham, MI, for plaintiff.

Dennis L. McLain, Grovetown, GA, in pro per.

Randall L. Frank, Attorney at Law, Bay City, MI, trustee.

OPINION DETERMINING THAT "FAIR CONSIDERATION" UNDER MICH.COMP.LAWS § 566.19(1) IS CONSIDERED FROM VIEWPOINT OF TRANSFEREE

ARTHUR J. SPECTOR, Bankruptcy Judge.

The issue to be decided in this proceeding is whether the transferee of a constructively fraudulent transfer, who without knowledge of the fraud and in good faith suffers a detriment in kind and amount that is a fair equivalent to what he received from the transferor, is a "purchaser for fair consideration" who is immunized from recovery under the Michigan Uniform Fraudulent Conveyance Act. The Court answers this question in the affirmative.

Introduction

An involuntary petition for relief under chapter 7 of the Bankruptcy Code was filed against the Debtor on June 29, 1995. The Debtor's principals were Dennis D. McLain ("McLain") and Roger Smigiel. In addition, McLain owned Kristin Enterprises, Inc., which in turn managed WAJY Radio, a radio station located in Aiken, South Carolina.¹

McLain arranged for the Debtor to pay, directly from its own checking account, the payroll and other expenses of WAJY in 1994 and part of 1995. Dennis L. McLain ("Defendant"), McLain's son, was employed full-time by WAJY as the station manager. During the relevant time period, Defendant received payroll checks, written on the Debtor's checking account, totaling about $26,541.24. The Trustee asserts that the wages paid to the Defendant were fraudulent transfers by the Debtor. Complaint at ¶ 52.² Accordingly, the Trustee seeks to avoid such transfers pursuant to 11 U.S.C. § 544(b), utilizing the Michigan Uniform Fraudulent Conveyance Act ("MUFCA"). Mich.Comp.Laws. § 566.11 et seq., and to recover them pursuant to 11 U.S.C. § 550(a). Complaint at ¶ 57.³

Fraudulent Conveyance Pursuant to § 544(b)

Section 544(b) provides that:

The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

11 U.S.C. § 544(b).

Section 544(b) operates by incorporating state law into the bankruptcy process and enables the "trustee . . . to exercise the rights of creditors under state fraudulent transfer law. . . ." 5 Collier on Bankruptcy ¶ 544.092 (15th ed. rev.1998). See also N.L.R.B. v. Martin Arsham Sewing Co., 873 F.2d 884, 887 (6th Cir.1989); Webster v. Barbara (In re Otis & Edwards, P.C.), 115 B.R. 900, 907 (Bankr. E.D.Mich.1990). The Trustee relies upon § 566.14 of the Michigan Compiled Laws, which provides:

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

Mich.Comp.Laws § 566.14. To satisfy the requirements of this section, the Trustee must prove that: 1) the Debtor made a conveyance or incurred an obligation; 2) the Debtor was insolvent at the time of the conveyance or the incurrence of the obligation or the conveyance or obligation caused the Debtor to be rendered insolvent; and 3) the conveyance or obligation was made without fair consideration. See Foodland Distrib. v. Al-Naimi, 220 Mich. App. 453, 481, 559 N.W.2d 379 (1997) (Pickard, J., concurring/dissenting); Otis & Edwards, P.C., 115 B.R. at 907-12.

Each paycheck dispensed to Defendant constituted a conveyance. See Mich. Comp.Laws § 566.11 (providing that a "`conveyance' includes every payment of money, assignment, release, transfer, lease, mortgage or pledge of tangible or intangible property, and also the creation of any lien or encumbrance"). The Trustee also established that the Debtor was insolvent during the time period in which it paid Defendant's salary. As to whether the conveyance was made by the Debtor without fair consideration, it is uncontested that the Defendant's labors were for WAJY Radio, not the Debtor. Moreover, it does not appear that the Debtor derived any income from Kristin Enterprises' management of the radio station.⁴ These facts demonstrate that the Debtor did not receive "fair consideration" in exchange for the paychecks conveyed to Defendant. Therefore, the Trustee is correct when he asserts that the transfers were fraudulent conveyances under state law.

Avoiding the Fraudulent Conveyances Under Michigan Law

Whether the fraudulent conveyances can be avoided is the real question. The rights of a complaining creditor who has proved a fraudulent conveyance are set forth in Mich.Comp.Laws § 566.19. This section provides:

(1) Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately from such purchaser;

(a) Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim, or

(b) Disregard the conveyance and attach or levy execution upon the property conveyed.

Mich.Comp.Laws § 566.19(1) (emphasis added).

The Trustee does not contend that Defendant had knowledge of the fraud when he accepted the paychecks in exchange for his labors. Rather, the Trustee asserts that Defendant was not a "purchaser for fair consideration" and that, as a result, he is not protected by § 566.19 and must return the $26,541.24 to the estate. The Trustee's argument hinges on the meaning of "fair consideration." MUFCA provides:

Fair consideration is given for property, or obligation;

(a) When in exchange for such property, or obligation, as a fair equivalent therefor, and in good faith, property is conveyed or an antecedent debt is satisfied, or

(b) When such property, or obligation is received in good faith to secure a present advance or antecedent debt in amount not disproportionately small as compared with the value of the property or obligation obtained.

Mich.Comp.Laws § 566.13.

Establishing that a party to a transaction provided "fair consideration" generally requires two findings: that the party acted in good faith; and that the values exchanged were a fair equivalent. See Otis & Edwards, 115 B.R. at 907. At trial, the Trustee presented no meaningful evidence to suggest that Defendant lacked good faith when he accepted the paychecks. And the Trustee does not assert that the wages received by Defendant were unreasonable or in any way excessive.

However, the Trustee argues that the above findings do not end the inquiry. He reasons that what constitutes "fair consideration" for purposes of MUFCA "must be determined from the standpoint of creditors." Plaintiff's Post-Trial Brief at 7. That is, "fair consideration" will have been provided within the meaning of MUFCA only when the transferor receives property that is equivalent in value to the property that it gave. Id. Using this definition, the Trustee asserts that the "purchaser for fair consideration" exception in § 566.19(1) can never be used in connection with § 566.14 because once it has been shown for purposes of § 566.14 that a transferor has made a conveyance without receiving "fair consideration," the transferee cannot claim to be a "purchaser for fair consideration." Id. at 14.

As a matter of statutory interpretation, the Trustee's position does not hold water. First, § 566.13 does not in so many words say that "fair consideration" must always be determined by the measure of what the transferor received. Since § 566.13 fails to provide a definitive answer to the question, we will broaden our focus and consider how "fair consideration" fits into MUFCA as a whole. See, e.g., Drouillard v. Stroh Brewery Co., 449 Mich. 293, 303, 536 N.W.2d 530 (1995) ("In the interpretation of statutes, effect must be given, if possible, to every word, sentence and section and, to that end, the entire act must be read to be an harmonious and consistent enactment as a whole.").

MUFCA identifies five types of fraudulent conveyances: Mich.Comp.Laws § 566.14 — Conveyance by insolvent; § 566.15 — Conveyances by persons in business; § 566.16 — Conveyances by a person about to incur debts; § 566.17 — Conveyance made with intent to defraud; and § 566.18 — Conveyance of partnership property.

Each of the constructive fraud sections— §§ 566.14 through 566.16 and § 566.18(b) — requires a showing that the transferor made a conveyance without receiving "fair consideration." Conversely, under MUFCA's actual fraud section — § 566.17 — the absence of fair consideration need not be shown. A plaintiff that proves a conveyance was fraudulent pursuant to one of the above sections can then avail itself of the recovery rights delineated under § 566.19. As noted above, § 566.19 also contains the term "fair consideration." This brief tour through the landscape of MUFCA is revealing. In the Court's view, the fact that "fair consideration" is defined rather generically in § 566.13 and that the term is then interspersed throughout MUFCA, strongly points to the conclusion that a determination of whether "fair consideration" should be viewed from the standpoint of the transferor or the transferee must be decided from the context of the section at issue.

Turning to § 566.14, it is clear from its context that a conveyance is to be deemed fraudulent if the consideration does not run to the benefit of the transferor. The whole section focuses on the actions of the transferor. The subject of the...