In re Rauh, Bankruptcy No. 92-40850-JFQ. Adv. No. 92-4285.
| Decision Date | 25 February 1994 |
| Docket Number | Bankruptcy No. 92-40850-JFQ. Adv. No. 92-4285. |
| Parties | In re David C. RAUH, Debtor. David J. NOONAN, Trustee, Plaintiff, v. Kuei Fong RAUH, et al., Defendants. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
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Christopher Brown, Cohen, Rosenthal, Price, Mirkin & Wernick, Springfield, MA, for David J. Noonan, Trustee.
Jerry P. Katz, Katz, Argenio & Powers, Springfield, MA, for Kuei Fong Rauh, et al.
A trustee in bankruptcy brings this action to avoid allegedly fraudulent transfers made by a debtor to his wife. The most novel question presented is whether there was any transfer of property when the wife withdrew funds from the parties' joint bank accounts.
David J. Noonan (the "Trustee"), trustee in bankruptcy of David C. Rauh (the "Debtor"), seeks to avoid four categories of fraudulent transfers allegedly made by the Debtor to his wife, Kuei Fong Rauh ("Mrs. Rauh"): (i) transfer of the marital home at 127 Birch Street, Ludlow, Massachusetts, (ii) transfer of proceeds from settlement of litigation against the Debtor's partner and co-stockholder, Gary Stahelski, (iii) withdrawals from the parties' joint bank accounts, and (iv) transfer of a vacation home on Lawton Avenue, Westerly, Rhode Island.
The Debtor filed under chapter 7 on March 24, 1992. All the transactions sought to be avoided took place beyond the one year prefiling period covered by section 548 of the Bankruptcy Code. Asserting his rights under section 544(b) of the Code, the Trustee relies upon chapter 109A of the Massachusetts General Laws, the Massachusetts enactment of the Uniform Fraudulent Conveyance Act.
The Debtor and Gary Stahelski formed a partnership in 1976 to engage in the plumbing and heating business, doing business under the name "Environmental Water Systems." The business was successful. Seeing the boom that was developing in real estate, the Debtor and Stahelski formed a corporation in 1982 to engage in the development of real estate, naming it E.W.S. Realty, Inc. ("Realty"). The stock was owned by the Debtor, Stahelski and a third individual whose ownership interest terminated in 1986. Realty's purpose was to build and renovate properties for rental or sale. Realty thereafter engaged in numerous transactions and made significant profits. Its principal lenders were Country Bank for Savings and Commerce Bank & Trust Co. The Debtor and Stahelski also engaged in real estate ventures outside the structure of Realty, often with other investors.
The Debtor and Mrs. Rauh were married in 1972. They have two children, Christine Rauh, a college senior, and David Rauh, Jr., a high school senior. Although Mrs. Rauh worked for a while, the Debtor was the sole source of the family's support. All funds referred to hereafter came from the Debtor's earnings and investments.
The fortunes of the Debtor and Stahelski rose and fell with the Massachusetts real estate market in the 1980's. The market began its rapid downward slide in 1988, although that did not become apparent to these parties until later. In February of 1988, the Debtor and Stahelski purchased an apartment building in West Boylston through 100% financing. On November 16, 1988 they purchased in the name of another corporation, Pioneer Valley Partners I, Inc., property in Palmer on which they intended to construct a shopping mall. Here again they employed 100% financing, obtaining a $300,000 bank loan and giving the sellers a $200,000 note for the $500,000 purchase price. On December 30, 1988, they had their corporation borrow $1,200,000 from Commerce Bank & Trust Co. to construct the mall. The Debtor was personally obligated on both these transactions.
Everything began to unravel in 1989. In the construction of the shopping mall, the parties ran up a large payable due to their plumbing partnership. The partnership, in turn, incurred debts to others. The partners faced the need for additional capital for the mall venture. By May of 1989, the Debtor realized he and Stahelski would be unable to pay the $200,000 note payable to the sellers of the mall, which was due in June. Another note to Country Bank for Savings, which had previously been rewritten, was also due in June.
On June 28, 1989, the Debtor disappeared, after withdrawing $9,000 from a personal bank account. He had said nothing to Mrs. Rauh about his intentions. Mrs. Rauh immediately went to see Stahelski, looking for an explanation. He told her of the dismal business picture, and furnished her the amounts of some of the larger debts for which he and the Debtor were personally obligated. The Debtor returned after a few weeks, but he and Stahelski had a parting of the ways. In August of 1989, the Debtor ceased to be an employee of Realty.
A person is insolvent under chapter 109A "when the present fair salable value of his assets is less than the amount that will be required to pay his probable liability on his existing debts as they become absolute and matured." Mass.Gen.L. ch. 109A, § 2. The Trustee offered no direct evidence of insolvency. Mrs. Rauh introduced the Debtor's accountant, who testified that the Debtor had a net worth of $135,255 after the Debtor's January 28, 1991 transfer to Mrs. Rauh of his joint interest in their home in Ludlow, Massachusetts. Cross examination, however, revealed deficiencies in this evidence. He assigned to the Debtor the full value of Realty properties, not a fifty percent interest, and failed to take into account market declines in his valuation of other properties. He also failed to include certain bank liabilities.
Taking all this into consideration, I conclude the Debtor was insolvent after the transfer of January 28, 1991. I also find, as required by section 4 of the Massachusetts statute and section 544(b) of the Bankruptcy Code, there were claims of creditors then in existence which continue to exist today. The Trustee has not, however, sustained his burden of proving the Debtor's insolvency following the earlier transfers which the Trustee attacks.
The Debtor brought suit against Stahelski and others to recover the value of his interests in Realty and the plumbing partnership. Mrs. Rauh joined in the suit, claiming damages for emotional distress caused by her dealings with Stahelski following the Debtor's disappearance. The parties settled this litigation on July 23, 1991. In the settlement, the Debtor received some trucks and equipment of little value and in exchange relinquished to Stahelski his interest in Realty and the partnership. Mrs. Rauh received some cash and a promissory note in the face amount of $40,000 executed by Thomas S. Skowyra et ux and payable to Realty, which Realty assigned to Mrs. Rauh. The note is secured by real estate owned by the Skowyras.
Mrs. Rauh contends she supplied consideration for the transfer of the note in that she released her emotional distress claim against Stahelski. I find she supplied no consideration for the assignment of this note. The entire quid pro quo for the note assignment was supplied by the Debtor through his release of his ownership interest in Realty and the partnership.
Mrs. Rauh relies on the requirement under chapter 109A that the transfer ("conveyance") in question must be "made" by the debtor, contending that the transfer here was made by Realty. It is true that chapter 109A, unlike section 548 of the Code, contains no reference to involuntary transfers. I assume for purposes of this case that any transfer coming within its coverage must be effected by the debtor.
The Debtor nevertheless made a transfer within the meaning of the statute. In furnishing the consideration for the note's assignment, he had the ability to control who would receive the consideration to be received in exchange. By consenting to an exchange in the form of assignment of the note to Mrs. Rauh, the Debtor effectively assigned his right to the note, just as he would have if it had been assigned first to him and then by him to Mrs. Rauh. The difference is one of form only. The Debtor made this transfer with the actual intent to hinder, delay or defraud his creditors.
Between June 1, 1989 and September 2, 1989, Mrs. Rauh withdrew $127,758 from joint bank accounts standing in hers and the Debtor's names. She placed the funds elsewhere in her name as trustee for her children or jointly with her daughter Christine. These withdrawals were as follows:
Mrs. Rauh made these withdrawals and created these accounts in order to take the funds from the reach of the Debtor's creditors. That was her prime motivation and intent. She did so for the benefit of her children, in order to protect a source for their education.
The Trustee contends the withdrawals constituted fraudulent transfers of the Debtor's interest in these accounts. The Trustee is not specific in alleging voluntary or involuntary transfers by the...
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