Olsen v. Paulsen (In re Paulsen)
| Decision Date | 30 March 2022 |
| Docket Number | Bankruptcy No. 19-82505,Adversary No. 20-96020 |
| Citation | 640 B.R. 147 |
| Parties | IN RE: James D. PAULSEN, Debtor. Joseph D. Olsen, Trustee for the Estate of James D. Paulsen, Plaintiff, v. James D. Paulsen, individually, Kathleen M. Paulsen, individually, and James D. Paulsen and Kathleen M. Paulsen, as Trustees and Beneficiaries of the Paulsen Family Trust Dated January 19, 2019, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
James T. Magee, Magee Hartman, P.C, Round Lake, IL, for Defendant James D. Paulsen, Kathleen M. Paulsen.
Craig A. Willette, Yalden Olsen & Willette, Rockford, IL, for Plaintiff.
For more than 40 years, James Paulsen and Kathleen Paulsen, his non-filing spouse, have owned their residence in Ringwood, Illinois, in joint tenancy. In January 2019, they transferred their interests in the Ringwood property into a newly formed family trust in which the Paulsens owned beneficial interests in tenancy by the entirety. This transfer occurred several months after McHenry Savings Bank sued Mr. Paulsen on its loan of more than $300,000 that the Debtor and his son had taken out for their business. Mr. Paulsen had guaranteed the business loan. That liability was Mr. Paulsen's only significant debt at the time of the transfer and the only debt he listed in his schedules when he filed his bankruptcy petition later that year.
Mr. Paulsen claims an exemption in his interest in the residence and trust under the Illinois tenancy by the entirety statute, 735 ILCS 5/12-112. The chapter 7 Trustee objects, arguing that the Defendants transferred the property with the sole intent to avoid the payment of the McHenry Savings Bank debt. The Trustee also seeks to avoid the transfer of Mr. Paulsen's direct interest in the residence to the trust. A trial was conducted on these issues at which the Paulsens and others testified.
For the reasons discussed below, the court finds that the Trustee has established by a preponderance of the evidence that the transfer was made with the sole intent to avoid the payment of debt existing at the time of the transfer beyond Mr. Paulsen's ability to pay as it became due. As such, the statutory exclusion to the tenancy by the entirety exemption applies, the Trustee's objection will be sustained, and judgment will be entered in favor of the Trustee on Counts I and II of the complaint, avoiding the transfer of Mr. Paulsen's interest in the residence. However, the Trustee has not demonstrated that sale of Mrs. Paulsen's interest in the residence is warranted under 11 U.S.C. § 363(h). Judgment will therefore be entered in Mrs. Paulsen's favor on Count III, but without prejudice.
The Debtor filed his chapter 7 petition on October 29, 2019. In his schedules filed with the petition, he listed the Ringwood property to be worth $300,000 and owned in "Tenancy by the Entirety Held in Land Trust," and asserted a 100% exemption in his interest under 735 ILCS 5/12-112. He amended his schedules on January 22, 2020, but made no change to his description of the Ringwood property or this claim of exemption. The court extended the time to object to exemptions and the Trustee filed his objection to the Debtor's claim of exemption on May 27, 2020. (ECF No. 46.)
Relying on the Illinois statute, the Trustee asserts that the property was transferred into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer beyond the Debtor's ability to pay those debts as they become due, thereby disqualifying him from asserting the exemption. The Trustee also invokes the statute to allege that the exemption is not allowable as to income generated by the property. Finally, citing In re Jaffe , 932 F.3d 602 (7th Cir. 2019), he asserts the exemption does not apply to the Debtor's contingent future interest in the property.
The Trustee also brought this adversary proceeding against James and Kathleen Paulsen, individually, and in their capacities as Trustees and Beneficiaries of the Paulsen Family Trust Dated January 19, 2019. Count I of his complaint asserts the Trustee's powers under 11 U.S.C. § 544(b) (and by incorporation 735 ILCS 5/12-112 ) to avoid the transfer of the Debtor's interest in the Ringwood property to the family trust. Count II seeks to recover the transferred interest or its value from the family trust under 11 U.S.C. § 550. Finally, Count III requests that the Trustee be authorized under 11 U.S.C. § 363(h) to sell both the Debtor's interest and Kathleen Paulsen's interest in the Ringwood residence.
The Debtor and Kathleen Paulsen timely answered the complaint. Asserting that the Ringwood residence is fully exempt as owned in tenancy by the entirety, the Debtor moved to compel the Trustee to abandon the estate's interest in the residence and trust. (ECF No. 61.)1
The court heard the matters on a consolidated basis, recognizing the overlap in issues for the objection to exemption, the adversary proceeding and the motion to compel abandonment. The Defendants initially moved to dismiss the adversary proceeding. Their primary argument was that 735 ILCS 5/12-112 does not provide a creditor with power to avoid a transfer which could be adopted by a bankruptcy trustee under 11 U.S.C. § 544(b) and that a "transformation" of an interest in property from joint tenancy to tenancy by the entirety is not a "transfer" which can be avoided under section 544. The court rejected both legal arguments in its memorandum opinion dated September 29, 2020. (ECF No. 27.) In that decision, the court additionally found that the complaint met the pleading standards of Rules 8 and 9 and stated a claim for relief. Later, the Defendants moved for summary judgment. That, too, was denied, together with the Defendants’ separate motion for judgment on the pleadings. (ECF Nos. 72, 73.)
The court conducted a trial on July 12, 2021, August 23, 2021, and September 1, 2021. Due to the then ongoing coronavirus pandemic, the trial was held via its video teleconference platform with the parties’ consent. In anticipation of trial, the parties submitted a joint stipulation of certain facts. (ECF No. 63.) During the trial the court received over three dozen exhibits, heard the testimony of James and Kathleen Paulsen, their son Daniel Paulsen, and their attorney James Magee, as well as the testimony of the Trustee Joseph Olsen. The court will note at the outset that the testimony of the Defendants as to motives for executing the trust and transfer instruments and ability to pay the bank's judgment debt was not credible. In considering the Defendants' testimony, their demeanor, and how their answers to questions related to other evidence at trial, it was clear that this testimony was self-serving, evasive, and vague. Both Defendants had an obvious interest in preserving their equity in the Ringwood residence and insulating it from the bank's efforts to collect its debt.
The court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter involves the allowance or disallowance of exemptions from property of the estate, the avoidance of transfers, and the sale or abandonment of estate property and, therefore, is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (H), (N) and (O). See, e.g., Kelley v. Boosalis, 974 F.3d 884, 902 (8th Cir. 2020) (); In re Green, No. 21 B 06189, 637 B.R. 605, 606–07, 2022 Bankr. LEXIS 630 at *2 (Bankr. N.D. Ill. Mar. 9, 2022) (allowance or disallowance of exemptions from the bankruptcy estate is a core matter for which a bankruptcy court has authority to enter final judgment). Additionally, the parties have stipulated to entry of final order or judgments by this court pursuant to Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. 665, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).
James and Kathleen Paulsen have owned their residence in Ringwood, Illinois since 1974. From at least 1998 through 2019 they owned the property "as joint tenants with the right of survivorship." They have had no recorded mortgage or liens on the property since at least 2011. In January 2014, the Debtor and his son Daniel Paulsen obtained a $345,000 business loan from McHenry Savings Bank for their company, Paulsen Paving Company. The Debtor is liable on the loan; Kathleen is not. The Debtor and Daniel pledged as collateral for the loan certain commercial real estate, equipment and other assets related to their company. They closed the business sometime in 2016 or 2017. Mr. Paulsen testified that the company "was generating no income whatsoever" in 2016, 2017 and 2018.
The Debtor and his son fell behind in payments on the McHenry Savings Bank debt. A January 9, 2019, payoff letter lists an asserted payoff amount of $361,521.69 and states that it received the last payment on July 20, 2018. Mr. Paulsen testified that "he had difficulty making the monthly payments in a timely fashion" largely because his "only source of business income was the sale of equipment." He also admitted that he did not pay property taxes on the commercial real estate on time. The 2016 taxes payable in 2017 were not paid on time. Ultimately, the Paulsens redeemed those taxes by paying just over $10,000, made possible through the sale of equipment that was part of the collateral on the McHenry Savings Bank loan.
McHenry Savings Bank sued the Debtor and Daniel on October 15, 2018, in the Twenty-Second Illinois Judicial Circuit (McHenry County). Its complaint alleges a default on the loan, in part due to the borrowers’ failure to pay 2016 or 2017 real estate taxes on the commercial property. On October 8, 2019, the bank obtained a judgment against the Debtor and his son in the state court in the amount of $348,531.15.
The...
To continue reading
Request your trial