In re Stratton

• Decision Date: 30 September 1982
• Docket Number: Bankruptcy No. 179-00097(C),Adv. No. 180-0002.
• Citation: 23 BR 284
• Parties: In re Charles Wayne STRATTON, d/b/a Coleman's Home Furnishings, Redfield, SD, and Sandra Elaine Stratton, Debtors. Charles Wayne STRATTON and Sandra Elaine Stratton, Appellees, v. SIOUX FALLS PAINT AND GLASS, a corporation, and Register of Deeds of Spink County, South Dakota, Appellants.
• Court: U.S. District Court — District of South Dakota

23 B.R. 284 (1982)

In re Charles Wayne STRATTON, d/b/a Coleman's Home Furnishings, Redfield, SD, and Sandra Elaine Stratton, Debtors Charles Wayne STRATTON and Sandra Elaine Stratton, Appellees, v. SIOUX FALLS PAINT AND GLASS, a corporation, and Register of Deeds of Spink County, South Dakota, Appellants.

Bankruptcy No. 179-00097(C), Adv. No. 180-0002.

United States District Court, D. South Dakota.

September 30, 1982.

J. Bruce Blake, Sioux Falls, S.D., for plaintiffs-debtors.

John C. Quaintance, Quaintance & Swanson, Sioux Falls, S.D., for defendant-appellant Sioux Falls Paint & Glass Co.

Richard H. Battey, State's Atty., Spink County, Redfield, S.D., for appellant Register of Deeds of Spink County, South Dakota.

MEMORANDUM OPINION

DONALD J. PORTER, District Judge.

Sioux Falls Paint and Glass, Inc., Creditor, appeals the decision of the Bankruptcy Court which held a second mortgage on a homestead was voidable as a fraudulent transfer under 11 U.S.C. § 548(a)(1). The Bankruptcy Court found that Charles Wayne Stratton and Sandra Elaine Stratton, Debtors, husband and wife, executed and delivered the second mortgage to creditor within one year of filing their petition in bankruptcy and acted with actual intent to delay creditor. On appeal, this Court finds, as a matter of law, that the transfer was not fraudulent, and the case is accordingly remanded.

FACTS

Charles Wayne Stratton, debtor, operated Coleman's Home Furnishings as a sole proprietorship in Redfield, South Dakota. Sioux Falls Paint and Glass Company, creditor, extended credit to the account of debtor be sold at Coleman's Home Furnishings. Prior to January 10, 1979, debtor had incurred debts on his account in the sum of $14,369.59.

On January 10, 1979 two of creditor's representatives went to Coleman's Home Furnishings to discuss the account with Charles Stratton. Creditor's representatives sought to obtain a second real estate mortgage on debtor's home as security for the past due account. Debtor and creditor's representative conferred at debtor's bank with a representative of the bank. Following a discussion at the bank, Charles Stratton executed the mortgage.¹ Creditor's representatives then went to the Stratton home, where Sandra Stratton executed the mortgage. Creditor recorded the mortgage with the Spink County Register of Deeds on January 12, 1979. The mortgage contained a waiver of Debtors' homestead rights. Debtors filed a Chapter 13 petition in bankruptcy on December 21, 1979.

A trial was held on August 22, 1980, at which time the Bankruptcy Court heard testimony from the creditor's manager of operations and credit and Charles and Sandra Stratton. Based on that testimony and the exhibits received at trial, the Bankruptcy Court filed a memorandum decision and issued an order avoiding the real estate mortgage obtained by creditor. The Bankruptcy Court found, however, that "creditor's representatives promised Charles Stratton that, in exchange for signing the real estate mortgage in the amount of $14,360.59, Creditor would not pursue collection or file lawsuit but instead would extend further credit."

Creditor has appealed, asserting first that the transfer of the mortgage was done to enable debtors to protect their credit standing, continue in business and rehabilitate themselves and second that 11 U.S.C. § 548(a) requires a showing of fraudulent intent and no actual intent was found in this case. Creditor also urges reversal because the decision of the Bankruptcy Court will force creditors to deal harshly with debtors and therefore will be detrimental to the entire debtor-creditor relationship.

Debtors, while urging that the decision of the Bankruptcy Court avoiding the mortgage as a fraudulent transfer be affirmed, do not embrace the reasoning of the Bankruptcy Court. Debtors argue that it was error for the Bankruptcy Court to find that "Creditor's representatives promised Charles Stratton that, in exchange for signing the real estate mortgage in the amount of $14,360.59, Creditor would not pursue collection or file lawsuits but instead would extend further credit." Debtors argue that pursuant to 11 U.S.C. § 548(a)(2)(A)-(B)(i) the mortgage is voidable as a fraudulent transfer as to Sandra Stratton. Debtors continue, maintaining that upon finding the mortgage voidable as to Sandra Stratton, it follows that the mortgage is voidable pursuant to SDCL 43-31-7 which states a mortgage as to a homestead signed by only one spouse is absolutely void.

I.

The Bankruptcy Court decided this case under § 548(a)(1) of Title 11 of the United States Code. Section 548(a)(1), covering fraudulent transfers, provides:

(a) The trustee² may avoid any transfer of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within one year before the date of the filing of the petition, if the debtor —

(1) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer occurred or such obligation was incurred, indebted. . . .

A transfer is "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest." 11 U.S.C. § 101(40). By executing a mortgage in favor of creditor, debtors clearly transferred an interest in their property. The transfer occurred within one year of debtor's filing a petition in bankruptcy. Debtors, as the parties seeking to avoid the transfer, carried the burden of proving that this transfer can be avoided. General Kontrolar Co. v. Allen, 124 F.2d 123 (6th Cir. 1942). To succeed, they needed to prove that they transferred the interest with the actual intent element of the statutory section.

Much of the problem in this case must be attributed to confusion in the meaning of the words "actual intent to hinder, delay or defraud." 11 U.S.C. § 548(a)(1). The Bankruptcy Court made a factual finding that debtors transferred the mortgage to creditor with the actual intent of postponing the beginning of proceedings to enforce the account. Certainly, actual intent is a question of fact, Nicklaus v. Peoples Bank & Trust Co., Russellville, Arkansas, 369 F.2d 683 (8th Cir. 1966), and factual findings should not be disturbed unless clearly erroneous. In re Peoria Braumeister Co., 138 F.2d 520 (7th Cir. 1943). While this Court has limited power to review factual findings of the Bankruptcy Court, this Court also has a responsibility to ensure that the lower court applied the correct legal standards to the facts. "A finding of fact is the assertion that a phenomenon has happened . . . independent of . . . any assertion as to its legal effect." L. Jaffe, Judicial Control of Administrative Action 548 (1965).

A determination of the intent of debtors when they transferred the mortgage interest to creditor is a task for the trier of fact. Whether that factual finding has any legal effect, however, is subject to review on appeal. The legal effect is found in the construction of the relevant statutory language. The reviewing court must determine whether the trial court applied the proper legal standard to the facts. See United States v. Singer Manufacturing Company, 374 U.S. 174, 193, 83 S.Ct. 1773, 1783, 10 L.Ed.2d 823 (1963). Thus, the question is not simply whether debtors transferred an interest with an intent to delay creditors, but rather whether the actual intent found by the Bankruptcy Court was an "intent to hinder, delay, or defraud," within the meaning of § 548(a)(1). That question is a question of law.

The findings of the Bankruptcy Court were as follows:

. . . Creditor went to the residence of the Debtors in the evening with the stale bill that had remained unpaid and took a second mortgage on the property. The situation thereby created was that Debtors intended to delay this Creditor in starting repossession of the inventory or legal proceedings to enforce this account, and Debtors intended to ensure their further supply of inventory. The second mortgage did delay Creditor from any of these further proceedings. And all of this was at the express invitation of Creditor, who was attempting the traditional bankruptcy eve Creditor\'s race to a favorite position.

In re Stratton, 8 B.R. 674 (Bkrtcy.D.S.D. 1981).

Clearly, "where . . . the debtor is motivated by a purpose to protect his credit standing, to continue in business, and to rehabilitate himself financially, his action in making transfers has often been held not to be fraudulent in fact notwithstanding his insolvency at the time of entering such transactions." 4 Collier, supra, at ¶ 548.025. See Blackman v. Bechtel, 80 F.2d 505 (8th Cir. 1935). Vain hopes of remaining afloat appear to have motivated debtor in this case. The Bankruptcy Court found that these hopes masked an intent to delay creditor. In stating the facts, however, the Court found that it was creditor who went to debtor with an offer to delay proceedings in return for security on the debts owed by debtor. Since § 548 governs fraudulent transfers, the statutory provisions should be construed with the overall purpose of this section in mind.

Fraudulent transfers occur usually when a debtor attempts to protect himself from losses that he would otherwise suffer by going through bankruptcy. "A financially troubled debtor, surrounded by creditors seeking to use his property to satisfy their claims, will sometimes attempt to place his property outside the reach of creditors by engaging in transactions which operate to prejudice their legal or equitable rights." Macey, Preferences and Fraudulent Transfers under the Bankruptcy Reform Act of 1978, 28 Emory L.J. 685, 702-03 (1979). The relationship between debtor and creditor in this case is exactly the reverse. A troubled debtor has taken his property, which could not satisfy the...