In re Schneider

• Decision Date: 01 October 2009
• Docket Number: Adversary No. 07 A 00642.,Bankruptcy No. 07 B 03091.
• Citation: 417 B.R. 907
• Parties: In re Earl M. SCHNEIDER d/b/a Esthetique Wellness Spa, Inc., Debtor. Jay A. Steinberg, not individually but solely as Chapter 7 Trustee, Plaintiff, v. Sarah I. Schneider, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

Page 907

417 B.R. 907

In re Earl M. SCHNEIDER d/b/a Esthetique Wellness Spa, Inc., Debtor Jay A. Steinberg, not individually but solely as Chapter 7 Trustee, Plaintiff, v. Sarah I. Schneider, Defendant.

Bankruptcy No. 07 B 03091.

Adversary No. 07 A 00642.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

October 1, 2009.

COPYRIGHT MATERIAL OMITTED

David A. Golin, George P. Apostolides, Jonathan B. Knisley, Miriam R. Stein, Arnstein & Lehr LLP, Chicago, IL, for Plaintiff.

Ariel Weissberg, Weissberg & Associates, Ltd., Jaclyn H. Smith, Maxwell Law Group, LLC, Chicago, IL, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

SUSAN PIERSON SONDERBY, Bankruptcy Judge.

This matter comes to be heard on the complaint of Jay A. Steinberg, not individually, but as chapter 7 trustee of the estate of Earl M. Schneider d/b/a Esthetique Wellness Spa, Inc., to avoid and recover a fraudulent transfer and for turnover of estate property. A trial was held and the court makes the following findings of fact and conclusions of law. For the reasons stated, the court will enter judgment in favor of the chapter 7 trustee and against Sarah I. Schneider ("Sarah"), as trustee of the Sarah I. Schneider Revocable Trust (the "SIS Trust") on Counts I and III. Judgment will be entered on Count IV in favor of Sarah I. Schneider, in her individual capacity and against the chapter 7 trustee. Count II will be dismissed at the voluntary request of the chapter 7 trustee.

I. FINDINGS OF FACT

Procedural Background

On February 22, 2007 (the "Petition Date"), Earl M. Schneider ("Earl") filed a voluntary petition under chapter 7 of title 11 of the United States Code (the "Code"), his Schedules of Assets and Liabilities (the "Schedules") and Statement of Financial Affairs (the "SOFA"). Amended Schedules B through and including H were filed on May 29, 2007. Amended Schedule F shows more than $613,000 of unsecured nonpriority claims held by twenty-five creditors.

Jay A. Steinberg was appointed chapter 7 trustee (the "Trustee"). On July 18, 2007, he filed this four-count adversary complaint (the "Complaint") wherein, exercising his power under section 544(b) of the Code, he seeks to avoid and recover a prepetition transfer of real property from Earl to the SIS Trust, claimed to be fraudulent pursuant to the Illinois version of the Uniform Fraudulent Transfer Act, 740 ILCS 160/1 et seq. (the "IUFTA") (Counts I and III), or to avoid and recover the same transfer pursuant to sections 548 and 550 of the Code (Count II). The Trustee also seeks from Sarah the turnover of property of the estate consisting of artwork, vintage posters, a dining room set, and a pool table (collectively, the "Artwork and Furnishings") pursuant to section 542(a) of the Code (Count IV). Sarah, Earl's mother and trustee of the SIS Trust, was served with a summons and a copy of the Complaint on July 18, 2007.

At trial, the Trustee advised that he is no longer seeking a judgment on Count II. The Trustee further advised that his theory for avoidance and recovery of the fraudulent transfer pursuant to sections 544(b) and 550 of the Code in Counts I and III is limited to actual fraud under 740 ILCS 160/5(a)(1). Prior to the trial, the parties filed a joint pretrial statement (the "Pretrial Statement"), containing, inter alia, a list of stipulated facts (the "Stipulated Facts").

The Transfer of the Woodmere House

Having enjoyed some degree of financial success during their marriage, Sarah and her late husband put a fair amount of money into the SIS Trust, which was established in August of 1998. (Transcript of 11/11/08 Deposition of Sarah I. Schneider ("Dep."), pp. 13-14). Some funds in the SIS Trust were given to Earl "if he needed the money," and other funds were lent to Earl's sister as she went through her divorce. (Dep. pp. 12, 75).

Earl is a self-employed dentist and was married to Jodi Ann Schneider ("Jodi"). Within the one-year period prior to the Petition Date, Earl and Jodi were parties to a pending divorce proceeding that he initiated in 2000 in the Lake County, Illinois Circuit Court. (Trustee's Ex. 16). The court takes judicial notice of the entry of a decision of the Illinois Appellate Court on October 24, 2003, affirming the divorce court's March 4, 2002 dissolution judgment in part and reversing it in part.¹ See In re Marriage of Schneider, 343 Ill.App.3d 628, 278 Ill.Dec. 485, 798 N.E.2d 1242 (2003). The dissolution judgment provided that Jodi was entitled to a $326,000 allocation of marital assets and that Earl had to pay child support.² Id. On March 26, 2004, the Illinois Supreme Court granted Earl's leave to appeal the appellate court's decision. See Schneider v. Schneider, 208 Ill.2d 555, 284 Ill.Dec. 346, 809 N.E.2d 1292 (2004)(Table no. 97430). The appellate court's decision was affirmed in part, vacated in part, and remanded by the Illinois Supreme Court on January 21, 2005. See In re Marriage of Schneider, 214 Ill.2d 152, 291 Ill.Dec. 601, 824 N.E.2d 177 (2005).

In the midst of the divorce litigation, Sarah as trustee, caused the SIS Trust to issue a check in the amount of $5,000 to Earl dated February 5, 2001. (Stipulated Facts p. 8). Within the two months after the entry of the dissolution judgment, the SIS Trust issued three more checks to Earl on April 5, 2002 ($35,000), April 6, 2002 ($1,000), and May 1, 2002 ($100,000). (Id; Dep. pp. 9-13). "Loan to Earl for the House" is written on the memo line of the last check. There are no promissory notes in the record pertaining to the four checks.

On May 30, 2002, Earl, using the $100,000 he received from the SIS Trust, purchased a house on Woodmere Drive in Northbrook, Illinois for $753,000 (the "Woodmere House"). (Stipulated Facts pp. 8-9; Dep. pp. 8, 12, 20). The next day, Earl executed a "Pledge of Personal Property" to Sarah which provided, in part,

for value received, ... Earl [] (Pledgor) of 2810 woodmere (sic), Northbrook, II, hereby deposits, delivers to and pledges with Sarah [] (Pledgee) ..., as collateral security to secure the payment of the following described debt owing Pledgee:

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The collateral consisting of the following personal property:

HOME AT 2810 WOODMERE WITH ALL FURNISHINGS AND ANY AND ALL ARTWORK, ITEMS TO BE SECURED BY LOAN IS DINING ROOM SET, KITCHEN SET AND POOL TABLE WHICH HAD BEEN GIFTED BY FATHER IN 1992 UNTIL DEBT OF $108,929.47 IS REPAID IN FULL

(Dep. p. 21; Trustee's Ex. 2). There is no evidence in the record that the Pledge was recorded or otherwise publicized.

Although the Woodmere House is not personal property, it appears that Earl may have initially attempted via the Pledge to put it up as collateral to secure debt to Sarah. There is no evidence in the record that a mortgage on the Woodmere House was given to the SIS Trust.

Less than a year later, on January 24, 2003, Earl quitclaimed the Woodmere House to the SIS Trust. (Stipulated Facts p. 9; Dep. pp. 27-28; Trustee's Ex. 3). There is little, if anything, in the record to suggest that the then existing debt, if any, to the SIS Trust was extinguished via the quitclaim of the Woodmere House. Indeed, the quitclaim deed itself claims exemption from applicable transfer tax asserting that there was less than $100 consideration given by the SIS Trust for the transfer. (Trustee's Ex. 4); See 35 ILCS 200/31-45(e).

About two months later, on March 13, 2003, the SIS Trust quitclaimed the Woodmere House back to Earl. (Stipulated Facts p. 9). Sarah testified that she did not recognize the signature on that quitclaim deed as her own. (Dep. p. 38). Within two weeks of reacquiring title to the Woodmere House, Earl obtained a $50,000 home equity line of credit from U.S. Bank, secured by a mortgage on the house. (Stipulated Facts p. 9; Trustee's Ex. 5). The line was taken out to pay down an existing mortgage that Earl had been paying. (Dep. p. 47). There is nothing in the record to indicate the amount of the mortgage debt that was paid down with the $50,000. In connection with applying for the line of credit, Earl executed an Occupancy and Use Statement representing that he would use the Woodmere House as his primary residence and not transfer title until the line was paid in full. (Trustee's Ex. 5).

Four months later, on July 29, 2003, Earl, ostensibly as trustee of the Earl M. Schneider Revocable Trust, attempted to quitclaim the Woodmere House back to Sarah. (Stipulated Facts p. 9; Trustee's Ex. 6). The quitclaim was ineffective, however, because there was no such trust in existence, and the then holder of title to the Woodmere House was Earl himself. Sarah testified that she did not recognize the signature of the person who signed this quitclaim deed as her agent. (Dep. p. 54). She did not remember giving anyone authority to sign on her behalf. (Dep. p. 55).

Perhaps recognizing the ineffective transfer of the house from a non-existent trust that was not in title, about eight months later, on March 23, 2004, Earl (this time in his individual capacity) "corrected the scrivener's error," by quitclaiming the Woodmere House to the SIS Trust (the "March 23, 2004 Transfer"). (Stipulated Facts p. 9; Trustee's Ex. 7). Sarah testified that she did not recognize the signature of her purported agent on this quitclaim deed either. (Dep. p. 56).

After the March 23, 2004 Transfer, the SIS Trust cut checks to Earl in the amounts of $10,000 and $20,000 on May 26, 2004 and June 8, 2004. (Stipulated Facts p. 9). To sum up, the total amount of the checks issued by the SIS Trust to Earl prior to the March 23, 2004 Transfer of the Woodmere House is $141,000. There are no notes in evidence concerning those checks and Sarah does not recall, with the exception of the $100,000, why they were given to Earl. (Dep. p. 12.). The total amount of checks issued by the SIS Trust to Earl after the March 23, 2004 Transfer is $30,000. A promissory note dated June 5, 2004 in the principal amount of $30,000 was executed,...