In re Skalski
| Decision Date | 02 January 2001 |
| Docket Number | Bankruptcy No. 99-14798 K. Adversary No. 99-1368 K. |
| Citation | 257 BR 707 |
| Parties | In re Theresa H. SKALSKI, Debtor. William E. Lawson, as Trustee in Bankruptcy of Theresa H. Skalski, Plaintiff, v. William R. Barden and Christine A. Barden, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of New York |
William E. Lawson, Buffalo, Trustee.
David A. Curtin, Williamsville, for Debtor.
This case presents the common scene of a parent (perhaps an aged or infirm parent) transferring her valuable house, without consideration, to a grown child while she is insolvent (or rendering herself insolvent), in what she thinks is a guileless, fair, and fair-minded exchange for her future care by her child.
In law, it is a fraudulent transfer even if the child did not know about the debts. If the child is not going to pay the fair value of the house, then he or she should have searched for and paid all the parent's debts (borrowing against the house if necessary). If that was not done, and the transfer is exposed years later in a statelaw fraudulent transfer action (in either bankruptcy court or state court) the son or daughter is caught in a bind that can be tragic for everyone other than the parent's creditors.
The Chapter 7 Trustee commenced this adversary proceeding pursuant to 11 U.S.C. § 548 and § 550 and § 544 and Bankruptcy Rule 7001(c) seeking to avoid and recover a transfer made by the Debtor to the Defendants. The thrust of the Trustee's fraudulent transfer argument seems to fall under New York Debtor and Creditor Law § 273.1 The Trustee asserted that the Defendants are the Debtor's daughter and son-in-law. He became aware at the § 341 meeting that the Debtor transferred her home at 18 Fairview Drive, Depew, New York, to the Defendants on March 3, 1995, that she took a note in the amount of $35,000 therefor, and that at some point in time the Debtor forgave the obligation. The circumstances surrounding the transfer, the $35,000 note, and the forgiveness thereof, appear not to be in dispute, but the details are not clear from the record.
The Defendants make general denials and raise the statute of limitations as an affirmative defense. After a pre-trial conference and voluntary discovery the Trustee moved for summary judgment on the grounds that there is no genuine issue as to any material fact and that the transfer was fraudulent by reason of the fact that it was made without fair consideration and that the Debtor was insolvent on the date the transfer was made. The Trustee's motion was supported by the Debtor's Schedules showing that her unsecured nonpriority claims, totaling $65,788.83, almost all originated before the 1995 transfer. The Trustee also addressed Defendants' affirmative defense regarding the statute of limitations by pointing out that the statute of limitations for objecting to a fraudulent transfer under New York law is six years and that the Trustee was timely in commencing the adversary proceeding.
The Defendants' attorney responded to the summary judgment motion with his own answering affirmation alleging that the Trustee did not meet his burden for summary judgment because the Trustee "merely alleges in general fashion that the conveyance at issue was fraudulent." (Curtin Aff. ¶ 3). The Defendants' attorney correctly argues that the Trustee is time-barred under 11 U.S.C. § 548 and correctly seems tacitly to concede that the Trustee is not time-barred under New York fraudulent transfer law. On the merits, he offers as evidence the affidavits of the Defendant Christine A. Barden and Debtor Theresa H. Skalski stating that any "loan forgiveness" was in fact a bargained-for promise of future support, and he attaches documentation claiming fulfillment of that obligation to the extent of $23,149.07. He argues that summary judgment must be denied because there is an existence of material fact as to the consideration underlying the conveyance at issue.
The Court has advised both parties to read Wallach v. Kotowski (In re Dziadosz), Ch. 7 Case No 97-11056-K, Adv. No. 98-1355 (Bankr.W.D.N.Y. June 23, 1997) wherein this Court has previously ruled that a promise of future support is not good consideration.2
The Defendants' attorney seeks to distinguish Kotowski because in that instance the transferee was aware of the Debtor's insolvency at the time of the transfer. Further it is argued that in the event summary judgment were to be granted, the Defendants would be entitled to certain offsets which will be discussed later.
The first issue for decision is whether Defendants properly responded to the summary judgment motion in light of the ruling in Kotowski. Under Rule 56(e) "When a motion for summary judgment is made and supported as provided in this rule, an adverse party may not rest upon the mere allegations or denials of the adverse party's pleading, but . . . must set forth specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56. The Defendants' response in this case does provide affidavits to supplement the pleadings, but, in light of the Court's ruling in Kotowski, the affidavits of the Defendant and Debtor attesting to the fact that the only consideration was a promise of future support provide no evidence upon which there is a genuine issue for trial.
In reflecting upon the underlying principles, the Second Circuit Court of Appeals, quoting a district court, held that "promises of future benefits cannot be a substitute for present `property' under N.Y. Debt. & Cred. Law § 272(a)." HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1058 (quoting HBE III, 851 F.Supp. at 573 (1994)). The Circuit Court set forth a test under § 272(a) containing the following elements: (1) defendant, as recipient of debtor's property must either (a) convey property in exchange, or (b) discharge an antecedent debt in exchange, and (2) such exchange must be a fair equivalent of the property received; and (3) such exchange must be in "good faith." Id. at 1058-59. See also HBE Leasing Corp. v. Frank, et al., 851 F.Supp. 571, 574 (S.D.N.Y.1994) ().
On their face, then, the Defendants' responsive papers offer no creditable defense as a matter of law, and no issue to try.
The second question relating to Defendants' response is whether the issue, raised not in the papers, but raised for the first time at oral argument by Defendants' attorney, would be enough to defeat the summary judgment motion; i.e., to warrant trial on the matter of the Defendants' knowledge at the time of the transfer.
During oral argument the Defendants' attorney argued that Kotowski may be distinguished because in Kotowski the mother (transferee) had actual knowledge that the transfer was fraudulent, whereas in the present case the denial of such knowledge raises a genuine issue of material fact. Although no affidavit is filed, the Court will accept the argument as a proffer of evidence that the Defendants took the property without knowledge of the Debtor's insolvency.
The Kotowski case involved dozens of undocumented monetary transfers to, from, and between that debtor and her mother or to third persons "on behalf" of the Debtor or her mother (supposedly). The case did not involve a transfer of a valuable item or parcel of property. Ms. Kotowski claimed a multitude of loans, repayments, and trusts, to explain the dozens of transfer. The fact that Ms. Kotowski had knowledge of her daughter's commission of crimes and consequent insolvency did not bear on the matter of the requisite elements of the theories of recovery, but rather to make clear the good sense of the governing precepts that placed the burden of proof on her, rather than on the Trustee. She should have kept careful records to prove her tale that the various transfers were (as she sought to prove by her self-serving testimony alone) payments for money that her daughter owed her, and loans from her daughter that she subsequently repaid, and funds which she held for her daughter and daughter's family under obligations of trust which she fully performed. She could not claim good faith as an excuse for not maintaining such records. Thus, the Kotowski ruling does not make the knowledge or state of mind of the transferee an element of the cause of action, but rather addresses only the burden of proof and sufficiency of the evidence.
The statute itself does address state of mind, however, in some instances. Section 273 which is set out above refers to "fair consideration" and to determine what is meant by "fair consideration" one must look at § 272. Section 272 reads as follows:
The court in Studley v. Lefrak, 66 A.D.2d 208, 412 N.Y.S.2d 901 (App.Div. 2nd Dept.1979), aff'd 48 N.Y.2d 954, 425 N.Y.S.2d 65, 401 N.E.2d 187 (1979) held that "good faith of both the transferor and transferee . . . is an indispensable condition in the definition of fair consideration under § 272." Id. at 905.
The court in In re Bennett Funding, 2000 Bankr.LEXIS 565 (2nd Cir. BAP 2000) looked at the good faith component of the fair consideration requirement of § 272 and focused on whether it was the good faith of the transferee, transferor, or both. The court set forth the following test under § 272 stating: ...
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