Matter of Frank

• Decision Date: 18 April 1984
• Docket Number: Bankruptcy No. 183-30836-16,Adversary No. 183-0374-16.
• Citation: 39 BR 166
• Parties: In the Matter of Claudette FRANK, Debtor. Claudette FRANK, Plaintiff, v. Milton BERLIN and the Bank of New York, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

39 B.R. 166 (1984)

In the Matter of Claudette FRANK, Debtor Claudette FRANK, Plaintiff, v. Milton BERLIN and the Bank of New York, Defendants.

Bankruptcy No. 183-30836-16, Adversary No. 183-0374-16.

United States Bankruptcy Court, E.D. New York.

April 18, 1984.

Frank X. Kilgannon, Mineola, N.Y. by Daniel P. Buttafuoco, Bethpage, N.Y., for plaintiff.

Stim & Warmuth, P.C. by Joseph D. Stim, Huntington, N.Y., for defendants.

MANUEL J. PRICE, Bankruptcy Judge.

This is an adversary proceeding brought by the debtor in possession, Claudette Frank, ("Frank," the "plaintiff," or "debtor") pursuant to section 1107(a) of the Bankruptcy Reform Act of 1978, (the "Code") 11 U.S.C. § 1107(a), to set aside the sheriff's sale of her share in a one family residence located at 67 Colonial Drive, Massapequa, New York, owned by her and her husband, Albert Frank, to the defendant, Milton Berlin, ("Berlin," or the "defendant") on the ground that the sale constituted either a fraudulent conveyance, a preferential transfer, or a transaction which violated her homestead rights under state law.

At a hearing held on November 1, 1983, (Transcript "Tr." 11/1/83), the plaintiff's action was heard together with a motion by the defendant to dismiss the Chapter 11 proceeding for the debtor's failure to submit a plan as required by section 1106(5) of the Code. I denied his motion at that time and only the plaintiff's action is to be decided here.

The facts, as stipulated by the parties, adduced at trial, and indicated from the files, are as follows:

On December 28, 1978, the Bank of New York, (the "Bank," or "creditor") obtained a default judgment for $3,019.82 against Claudette Frank and her husband. Mrs. Frank, who is a native of Trinidad, has had little formal education. Her husband, a seaman, spent much of his time away from home at sea. The Bank had obtained the obligation on which the judgment was based in 1977 by way of an assignment from a company known as Trisun Corp., from which the Franks had purchased aluminum siding on credit in order to make repairs on their home. On February 23, 1979, the judgment was docketed in the Clerk's Office of Nassau County and thus became a lien on the Franks' real property which consisted of their marital residence.

After the Bank docketed the judgment, the debtor continued to live in the premises and to make payments which significantly reduced the amount owed. Nonetheless, on January 25, 1983, with a balance outstanding of $1,024.96, the Bank caused the sheriff to conduct an auction sale of the Franks' home. (Tr. 11/1/83, p. 11) This sale took place pursuant to an order issued by Justice Arthur D. Spatt, of the New York Supreme Court, Nassau County, on July 23, 1982 which authorized the Bank to issue an execution against the real property of the Franks. The order provided that: "from the first proceeds of such sale, money, not exceeding $10,000 be paid to the judgment debtors as representing their interest in the proceeds." (Defendant's Exhibit 2) It was issued pursuant to section 5206(e) of the New York Civil Practice Law and Rules (CPLR) which provides for the sale of homesteads. According to this section:

"A judgment creditor may commence a special proceeding in the county in which the homestead is located against the judgment debtor for the sale, by a sheriff or receiver, of a homestead exceeding ten thousand dollars in value. The court may direct that the notice of petition be served upon any other person. The court, if it directs such a sale, shall so marshal the proceeds of the sale that the right and interest of each person in the proceeds shall correspond as nearly as may be to his right and interest in the property sold. Money, not exceeding ten thousand dollars, paid to a judgment debtor, as representing his interest in the proceeds, is exempt for one year after the payment, unless, before the expiration of the year, he acquires an exempt homestead, in which case, the exemption ceases with respect to so much of the money as was not expended for the purchase of that property; and the exemption of the property so acquired extends to every debt against which the property sold was exempt."

N.Y.Civ.Prac.Law & R. § 5206(e) (McKinney 1978).

The defendant was the only bidder at the sale, the Franks themselves did not attend, and he obtained the property for $500. The parties have stipulated that at the time of the sale the fair market value of the property was $55,000. (Tr. 11/1/83, p. 15) It was subject to a mortgage held by the Bowery Savings Bank of $30,621.77; a mortgage held by the Nassau County Department of Social Services of $2,448.85; a tax lien of $120.02; a mechanic's lien of $534.05, and judgment liens totalling $8,583. (Debtor's Schedule A-3, Proofs of Claim and stipulation Tr. 11/1/83, pp. 16, 22) The liens and encumbrances therefore amounted to $42,307.69 which, taken from the $55,000 stipulated fair market price, left the Franks with an equity of $12,692.31 and the debtor, Claudette Frank, with an equity of $6,346.15. According to New York State law, however, as provided in CPLR § 5203(a)3, Berlin took the property free of judgment liens. See May v. Finnerty, 104 Misc.2d 450, 428 N.Y.S.2d 570, 571 (Sup.Ct.1980) and First Federal Savings & Loan Association of Port Washington v. McKee, 61 Misc.2d 693, 305 N.Y.S.2d 589 (Sup.Ct.1969). Consequently, he received a piece of property which had an equity of $21,275.31 for a bid of $500.

On February 4, 1983, the sheriff issued a deed to the property (Defendant's Exhibit 1) to Berlin and it was recorded in the Nassau County Clerk's Office on March 7, 1983. (Tr. 11/1/83, p. 12) The proceeds of the sale were disbursed according to the court order and a check for $175.29 was sent to the Franks to cover their homestead exemption. The plaintiff denied receiving this check and it was conceded at the trial that it was never cashed. The Bank's attorneys received the remaining $324.71 to reimburse them for the expenses of the sale. (Id. pp. 13-14) Although the debtor contends that her husband was at sea and thus was never served with the summons in the Bank's action against him and that the underlying judgment, and consequently the sale of his share of the property which they held as tenants by the entirety, is therefore void, no action was taken by them in state court to vacate the judgment or the sale. (Id. pp. 5-6) Instead, on April 25, 1983, less than two months after the deed was recorded, the debtor filed an individual petition for relief under Chapter 11 of the Code and on August 4, 1983, as the debtor in possession, asserting the powers of a trustee under section 1107(a), she filed the complaint herein to have the conveyance of her share set aside.

Section 1107(a) of the Code, 11 U.S.C. § 1107(a) enables a debtor in possession to assert the powers of a trustee. This section provides:

"Subject to any limitations on a trustee under this chapter, and to such limitations or conditions as the court prescribes, a debtor in possession shall have all the rights, other than the right to compensation under section 330 of this title, and powers, and shall perform all the functions and duties, except the duties specified in sections 1106(a)(2), (3), and (4) of this title, of a trustee serving in a case under this chapter."

By filing her petition for relief under Chapter 11, the debtor, as debtor in possession, assumed the right to pursue avoidance actions under section 547(b) and section 548(a) of the Code. The cause of action she most vigorously pursues is that of the fraudulent conveyance of her interest in the property under section 548(a).

Fraudulent Conveyance

Section 548(a) of the Code provides that:

"The trustee may avoid any transfer of an interest 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; or

(2)(A) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(B)(i) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(ii) was engaged in business, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or

(iii) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor\'s ability to pay as such debts matured."

Although her complaint states that the sale was made with the "actual intent to hinder, delay or defraud" creditors under section 548(a)(1), she failed to allege any facts either in the complaint or the post-trial memorandum, to support this assertion which in any case hardly seems appropriate for an involuntary transfer to a stranger. That claim must therefore be rejected. The plaintiff also claims, however, that the sale constituted a fraudulent conveyance under section 548(a)(2) insofar as the debtor did not receive "reasonably equivalent value" for the transfer within the meaning of section 548(a)(2)(A).

In response, the defendant argues that the transfer to him cannot be avoided because it should be deemed to have been made beyond the one year period within which such conveyances are vulnerable to attack. He contends that the time of the transfer should be deemed to relate back to the time when the judgment against the debtor and her husband was docketed by the bank. Defendant's Post Trial Memorandum, pp. 10-11.

In addition, he maintains that any consideration at a forced sale, not otherwise improper, should be regarded as conclusively "equivalent value" under section 548(a)(2)(A). Id., pp. 4-9....