Lassman v. Sergio (In re Sergio)

• Decision Date: 20 June 2016
• Docket Number: Adversary Proceeding No. 13–1077,Case No. 12–15702–FJB
• Citation: 552 B.R. 9
• Parties: In re John Sergio, Debtor Donald R. Lassman, Chapter 7 Trustee, Plaintiff v. John Sergio, Connie Sergio, and Susan Burke, Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

552 B.R. 9

In re John Sergio, DebtorDonald R. Lassman, Chapter 7 Trustee, Plaintiff

v.John Sergio, Connie Sergio, and Susan Burke, Defendants.

Case No. 12–15702–FJB

Adversary Proceeding No. 13–1077

United States Bankruptcy Court, D. Massachusetts, Eastern Division .

Signed June 20, 2016

Alexander L. Cataldo, Alexander L. Cataldo, P.C., Boston, MA, for Plaintiff.

John Sergio, Brockton, MA, pro se.

Ronald N. Whitney, Whitney Law Office, Whitman, MA, Ryan E. Prophett, Wynn & Wynn, Raynham, MA, for Defendants.

MEMORANDUM OF DECISION

Frank J. Bailey, United States Bankruptcy Judge

I. Overview

By his amended complaint in this adversary proceeding, Donald Lassman (the “Trustee”), plaintiff and chapter 7 trustee in the bankruptcy case of the debtor and defendant John Sergio (the “Debtor”), seeks to avoid an alleged prepetition fraudulent transfer of the Debtor's interest in certain real property and seeks recovery or turnover of that property or the proceeds thereof. After a trial, the Court now makes the following findings and rulings and, on the basis thereof, concludes that judgment shall enter for the defendants dismissing the Trustee's amended complaint with prejudice.

II. Procedural History

On July 2, 2012, the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code, commencing the present bankruptcy case. On March 5, 2013, the Trustee timely filed a complaint commencing this adversary proceeding. The original complaint named the Debtor and his former wife, Connie Sergio (“Mrs. Sergio”), as defendants and sought avoidance of an alleged prepetition fraudulent transfer to Mrs. Sergio of the Debtor's interest in real property located on High Street in Bridgewater, Massachusetts (the “High Street Property”). The Trustee alleged in the original complaint that the Debtor voluntarily transferred his interest in the High Street Property to Mrs. Sergio for no consideration without receiving reasonably equivalent value in exchange for the transfer. The Trustee further alleged that, subsequent to the alleged fraudulent transfer, Mrs. Sergio sold the High Street Property to unrelated buyers. In addition to avoidance of the transfer to Mrs. Sergio, the original complaint sought recovery and turnover of a portion of the proceeds derived from Mrs. Sergio's sale of the High Street Property.

The Debtor timely filed an answer to the original complaint. Mrs. Sergio did not timely file an answer. Consequently, the Clerk entered a default against Mrs. Sergio.

A trial was scheduled for December 20, 2013. Shortly before this first scheduled trial date, the parties filed a joint motion to continue the trial on the basis that during discovery, the Trustee had learned additional details concerning the existence of a subsequent transferee of the proceeds from the sale of the High Street Property. The alleged subsequent transferee was Mrs. Sergio's daughter, Susan Burke (“Mrs. Burke”). The Court granted the continuance. Subsequently, Mrs. Sergio moved to vacate her default, which motion the Court eventually allowed after the Trustee first filed and then withdrew an opposition. In October 2014, the Trustee moved to amend his complaint, which motion the Court allowed.

The amended complaint names the Debtor, Mrs. Sergio, and Mrs. Burke as defendants. In addition to the facts alleged in the original complaint, the amended complaint alleges that after selling the High Street Property, Mrs. Sergio transferred some or all of the sale proceeds to her daughter, Mrs. Burke. The amended complaint states three counts. Count I seeks avoidance and recovery of the alleged fraudulent transfer pursuant to 11 U.S.C. §§ 544 and 550 and Mass. Gen. Laws ch. 109A, § 5(a)(2)(ii). Count II seeks avoidance and recovery of the alleged fraudulent transfer pursuant to 11 U.S.C. §§ 544 and 550 and Mass. Gen. Laws ch. 109A, § 6(a). Count III seeks turnover of $31,456 of the proceeds from the sale of the High Street Property plus interest pursuant to 11 U.S.C. § 542(a).

The Court held a one-day trial. Prior to trial and again at trial, the Court asked the parties whether they consented to the Court entering final judgment on all counts in this matter. The Trustee consented. Notwithstanding prior written statements to the contrary, at trial all three defendants also consented to the Court entering final judgment. After the close of evidence, Mrs. Burke moved for a directed verdict, which motion the Court denied, treating it as a motion for judgment on partial findings under Fed.R.Civ.P. 52(c), as made applicable by Fed. R. Bankr.P. 7052. After trial, the parties submitted proposed findings of fact and conclusions of law. The Court then took the matter under advisement.

III. Findings of Fact

1. For several years during the 1980s, the Debtor owned and operated a restaurant in Halifax, Massachusetts under the name Monponsett Inn Restaurant. During this time, the Debtor first met Mrs. Sergio who was a customer at his restaurant. This restaurant closed sometime in the late 1980s.

2. Beginning in or around 1990, the Debtor owned and operated a restaurant in Whitman, Massachusetts under the name Skip Sergio's, Inc. Mrs. Sergio worked at Skip Sergio's, Inc., but she was neither a corporate officer nor an owner.

3. In 1996, the Debtor and Mrs. Sergio were married.

4. On August 25, 1998, Mrs. Sergio purchased the High Street Property, from a third party, for approximately $178,000, acquiring title in her name alone. To facilitate the purchase, Mrs. Sergio borrowed $142,400 and executed a first priority mortgage (the “First Mortgage”) on the High Street Property securing said amount. Mrs. Sergio also used funds she had received from a previous divorce settlement toward the purchase. The Debtor did not provide any of the funds used to purchase the High Street Property. Nor did he incur any of the debt used to acquire the High Street Property. The Debtor and Mrs. Sergio lived together at the High Street Property.

5. Skip Sergio's, Inc. was ultimately unsuccessful and closed on or around October 12, 1998. At that time, the Debtor was individually liable for outstanding tax debts owed by Skip Sergio's, Inc. to both the Internal Revenue Service (the “IRS”) and the Massachusetts Department of Revenue (the “MDOR”). Mrs. Sergio was not liable for the tax debts of Skip Sergio's, Inc.

6. The MDOR recorded the following tax liens at the Plymouth County Registry of Deeds against all of the Debtor's property for debts owed by the Debtor as the responsible person for Skip Sergio's, Inc.: a tax lien for $35,846.96 recorded on May 7, 1999 and a tax lien for $50,742.41 recorded on October 6, 1999.

7. In or around 1999, the Debtor purchased and began operating a restaurant in East Bridgewater, Massachusetts under the name Connie's, Inc. The Debtor was the sole shareholder and manager of Connie's, Inc. Mrs. Sergio worked at Connie's, Inc. and was a corporate officer.

8. On February 23, 2000, Mrs. Sergio, who then held title to the High Street Property in her name alone, executed a deed conveying the High Street Property from herself alone to herself and the Debtor as tenants by the entirety for consideration of $1.00.

9. On March 15, 2001, Mrs. Sergio borrowed $51,981.00 and executed a second priority mortgage (the “Second Mortgage”) against the High Street Property securing this amount. Approximately $11,000 of this loan was used to pay off a car loan in the Debtor's name. The balance was invested into the restaurant, Connie's, Inc.

10. Connie's, Inc. was also ultimately unsuccessful. On or around December 31, 2002, the Debtor closed down Connie's, Inc., and the restaurant property was foreclosed upon. At that time, the Debtor and Mrs. Sergio were both individually liable as well as jointly and severally liable for outstanding tax debts owed by Connie's, Inc. to the IRS and the MDOR.

11. On October 3, 2002, the MDOR recorded a tax lien at the Plymouth County Registry of Deeds for $11,365.48 against all of the Debtor's property and all of Mrs. Sergio's property for outstanding personal income tax debt.

12. On September 23, 2004, the MDOR recorded a tax lien at the Plymouth County Registry of Deeds for $57,615.60 against all of the Debtor's property for debts owed by the Debtor as a responsible person for Connie's, Inc.

13. The MDOR also recorded the following tax liens at the Plymouth County Registry of Deeds against all of Mrs. Sergio's property for debts owed by Mrs. Sergio as a responsible person for Connie's, Inc.: a tax lien for $18,238.54 recorded on December 20, 2001, a tax lien for $25,560.39 recorded on July 11, 2002, and a tax lien for $59,518.16 recorded on January 27, 2005.

14. In or around 2004, the Debtor and Mrs. Sergio had fallen behind on mortgage payments on the High Street Property and were facing a potential foreclosure. Mrs. Sergio solicited funds from her family and cured the default, thereby averting the foreclosure. The Debtor did not contribute any funds toward curing the default.

15. On or around July 27, 2005, the IRS recorded a tax lien at the Plymouth County Registry of Deeds for $13,285.09 against all of Mrs. Sergio's property for debts owed by Mrs. Sergio as a responsible person for Connie's, Inc. This tax lien was eventually released in 2011 as will be discussed below.

16. In or around 2005, the Debtor suffered a series of health crises that left him unable to work. The Debtor has not worked since 2005. At trial, the Debtor and Mrs. Sergio both credibly testified that after the Debtor stopped working, Mrs. Sergio paid for all expenses relating to the High Street Property, including mortgage payments, property taxes, maintenance, and upgrades. I credit this testimony.

17. In or around 2009, due in part to the strain their financial difficulties had placed on their marriage, the Debtor and Mrs. Sergio decided to divorce. At this time, the High Street Property was still encumbered by the First Mortgage, the Second Mortgage, and the above listed tax liens. The Debtor and Mrs.

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