Kepler v. Eichline (In re Eichline)
| Decision Date | 13 December 2011 |
| Docket Number | Adv. No. 11-00100,Case No. 06-10658 |
| Parties | In re: Earl Arthur Eichline, Debtor. Michael E. Kepler, Trustee. Plaintiff, v. Earl Arthur Eichline, and Earl A. Eichline Revocable Trust dated April 22, 2009, and any amendments thereto, By its Trustee, Earl Arthur Eichline, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Wisconsin |
Earl Arthur Eichline ("Defendant") filed for relief under chapter 7 on April 12, 2006, was granted a discharge on August 8, 2006, and the case was closed on December 3, 2007. On January 21, 2011, the U.S. Trustee filed a motion to reopen the case, having received information that the Defendant may have had an interest in property which was not disclosed in his bankruptcy schedules or Statement of Financial Affairs. The case was reopened, and the chapter 7 trustee commenced this adversary under 11 U.S.C. § 549 and 551. A trial was held on Septembers, 2011.
Prior to 1998, the Defendant owned a 160-acre parcel of land in Columbia County, Wisconsin (the Property) where he lived in one house and his son Eric Eichline ("Eric") lived in another. In 1997, a mortgage foreclosure judgment was entered against the Property. Pursuant to that judgment, the Property was to be sold at a sheriff's sale. The Defendant wished to redeem, but was unable to obtain another mortgage in his name. Eric obtained a mortgage in his and his wife's names and used the proceeds to fund the redemption.
To facilitate Eric's obtaining of the mortgage, on December 17, 1998, the Defendant conveyed the Property to Eric and his wife by Warranty Deed. (For the rest of this opinion, "Eric" will refer to his wife as well when they acted jointly.) On February 27, 1999, the Defendant and Eric entered into a contract (the Agreement) by which Eric agreed to convey the Property to either the Defendant or the Defendant's "family trust" at the time the mortgage "is paid, refinanced, or released for whatever reason." The recitals in the Agreement indicate that "Earl has assisted [Eric] in obtaining a mortgage ... on certain real estate ... Earl and [Erie] wish to preserve the Real Estate for their mutual use and enjoyment, as well as the use and enjoyment of their heirs ... [Eric] acknowledges the consideration for the transfer of title agreed to herein is both the assistance Earl gave to obtain and pay the Mortgage, as well as the other assistance given by Earl to permit [Eric] to obtain title to the Real Estate." The Agreement was recorded with the Register of Deeds for Columbia County on June 3, 2008, almost 9 years after it was executed. The document was in the possession of the Defendant's attorney prior to its recording.
Since 1997, the Defendant and Eric have continued to live on the Property in separate houses. The mortgages taken out in Eric's name after the Property was conveyed to him in 1998 were assigned and satisfied several years later. Eric refinanced the mortgages on the Propertyseveral times between 1998 and 2008, and gave various amounts of money from these refinancings (totaling approximately $38,000) to the Defendant.
In his bankruptcy schedules, the Defendant declared that he had no interest in real estate and no future claims against anyone. The case was closed on December 3, 2007 as a no-asset case. On May 12, 2009, at the Defendant's insistence, Eric conveyed the Property to the Earl A. Eichline Revocable Trust by Quit Claim Deed. The Earl A. Eichline Revocable Trust, dated April 22, 2009, is a revocable trust established under Wisconsin law, of which the Defendant is the trustee. The Defendant testified that he believes his Revocable Trust to be essentially the same as himself, rather than a separate entity. The Quit Claim Deed was recorded on December 28, 2010.
Reportedly, the Property was recently listed for sale at a price in excess of $1,000,000.00. An email from a realtor to Eric alluded to the fact that there is substantial equity in the Property, as she told Eric that "you could consider presenting your father with some alternatives that may not be as acceptable to him as selling at a nice profit." The trustee believes that there continues to be equity in the Property. The Property is currently subject to a mortgage given by Eric while he was the title holder. According to Eric, the amount owing on this mortgage is under $400,000.00.
The trustee contends that the Defendant's right to reconveyance of the Property under the Agreement was an asset of the bankruptcy estate as of the date of the bankruptcy filing, and the May 2009 transfer of the Property to the Revocable Trust was an unauthorized post-petition transfer subject to 11 U.S.C. § 549. He seeks to have that transfer and the Property preserved for the benefit of the bankruptcy estate under 11 U.S.C. § 551.
The trustee argues that the Defendant committed fraud by "parking the real estate with his son and daughter-in-law" but maintaining control over the Property throughout the bankruptcy while he concealed his interest in it. The evidence shows that several "badges of fraud" were present when the Defendant conveyed the Property to Eric. See Village of San Jose v. McWilliams, 284 F.3d 785, 791 (7th Cir. 2002).
The Defendant contends that his interest in the Property was not an asset of the bankruptcy estate when he filed his petition, and therefore, the post-bankruptcy transfer does not fall within § 549. He submits that the Agreement was unenforceable for lack of consideration. He further argues that even if the Agreement was enforceable at the time the petition was filed, it reserves only a contingent interest to the Defendant because it gives Eric the choice to convey the Property cither to the Defendant or to a trust. The Defendant also seeks protection under the statute of limitations in 11 U.S.C. § 549(d)(2).
An action under § 549(d) "may not be commenced after the earlier of- (1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed." 11 U.S.C. §549(d). This case was closed on December 3, 2007, well before the trustee commenced this action on March 18, 2011. Thus, while the trustee's complaint was filed within two years of the transfer, the statute of limitations expired once the case was closed.
Equity may require tolling the statute of limitations if property was fraudulently transferred or if the transfer was fraudulently concealed. See In re Olsen, 36 F.3d 71 (9th Cir. 1994) (); see also In re Papa's Market Cafe, Inc., 162 B.R. 519, 524-25 (Bankr. N.D. Ill. 1993). Equitable tolling"applies when the plaintiff is prevented from asserting a claim by wrongful conduct on the part of the defendant, or when extraordinary circumstances beyond the plaintiff's control made it impossible to file a claim on time." In re Jim L. Shetakis Distributing Co., 415 B.R. 791, 800 (D. Nev. 2009) (quoting Stall v. Runyon, 165 F.3d 1238, 1242 (9th Cir. 1999)). In the context of § 549(d), the statute is tolled until the trustee discovers the conveyance. In re Olsen, 36 F.3d at 73.
Equitable tolling may apply if the Defendant's active or passive concealment prevented the trustee from discovering his causes of action. Morton v. Kievit, 2011 Bankr. LEXIS 2864, * 109 (Bankr. N.D. Tex. July 19, 2011) (citing In re Juliet Homes, LP, 2010 Bankr. LEXIS 4826 (Bankr. S.D. Tex. Dec. 16, 2010)). If the defendant passively (or negligently) conceals the transfers, the statute of limitations begins to run when the trustee either acquired or should have acquired actual knowledge of the existence of a cause of action. Juliet Homes, 2010 Bankr. LEXIS at *34. The trustee must show that she "exercised reasonable diligence to discover the fraud." Id.
The facts in this case provide ample evidence establishing active concealment on the part of the debtor. The parties signed the Agreement on February 27, 1999, but it was not recorded until June 3, 2008 - almost ten years after it was executed and six months after the bankruptcy case was closed. Although the Defendant conveyed legal title to Eric in 1998, he continued to live on the Property. The Agreement indicates that the Property is to be preserved for the benefit and enjoyment of the Defendant, Eric, and their heirs. The Defendant testified that he did not disclose the Agreement because he did not have title to the Property, and he implied that there was no need because it was to stay in the family. I must infer that the Defendant actively concealed die Agreement and did not disclose it at bankruptcy because he wanted to keep it inhis family. Because active concealment exists here, the statute of limitations did not begin to run until the trustee gained actual knowledge of the transfers, which was January 2011.
Even if the concealment was passive, that is: the Defendant erroneously believed that he did not need to disclose the Agreement on his bankruptcy schedules, the trustee would not have been able to discover the asset in an exercise of diligence during the course of the bankruptcy case. Unlike in Morton, the trustee could not have discovered the Agreement during the bankruptcy case because it was not recorded until after the case closed. The statute of limitations would run from January 2011. Because the evidence supports active, or at the very least, passive concealment by the debtor, equitable tolling of § 549(d) is justified and this case may be considered on the merits.
The trustee may avoid an unauthorized transfer of property of the estate after the commencement of the case. Any entity defending a transfer under § 549 of the Code has the burden of proof Fed. R. Bankr. Proc. 6001. No party disputes that the transfer of the Property to the Defendant's Revocable Trust occurred post-petition and without court or Code authorization. Thus, to prevail, the Defendant must establish...
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