Ostrander v. Hebert (In re Clink)
| Decision Date | 30 September 2022 |
| Docket Number | Case No. 19-30768-EDK,Adversary Proceeding No. 21-03007 |
| Parties | IN RE: Leroy R. CLINK, Terry R. Clink, Debtors. David W. Ostrander, Chapter 7 Trustee, Plaintiff, v. Patricia M. Hebert, Defendant. |
| Court | United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts |
David W. Ostrander, Ostrander Law Office, Northampton, MA, Pro Se Plaintiff.
L. Jed Berliner, Berliner Law, Hampden, MA, for Defendant.
Before the Court is a motion to dismiss (the "Motion to Dismiss") an adversary proceeding filed by the Chapter 7 trustee, David W. Ostrander (the "Trustee"), in the bankruptcy case of Leroy R. Clink and Terry R. Clink (the "Debtors") against Patricia M. Hebert ("Hebert"). In the complaint, the Trustee alleges that certain payments made to Hebert by the Debtors via credit card transactions constitute fraudulent transfers that the Trustee may avoid and recover for the benefit of the bankruptcy estate. Because the Court concludes that the complaint contains sufficient allegations to state a plausible claim, the Motion to Dismiss will be denied.
The following recitation of facts is taken from the allegations in the complaint, matters of record in the underlying bankruptcy case, documents referenced in and attached to the complaint, and other matters of which the Court may take judicial notice.1
The Debtors filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code")2 on September 26, 2019 (the "Petition Date") and indicated in their Statement of Financial Affairs that within 2 years prior to the Petition Date they paid Hebert for legal services provided to the Debtors’ daughter in connection with the daughter's divorce. The Trustee determined that from October 2017 through July 2018, the Debtors made ten payments to Hebert, totaling $62,860.46, by either charging the payments directly to the Debtors’ credit card accounts or by using convenience checks to draw on the credit card accounts. On April 29, 2021, the Trustee filed the instant adversary proceeding against Hebert asserting that the payments to Hebert are recoverable as fraudulent transfers, as the payments were made within 2 years of the Petition Date, the Debtors did not receive reasonably equivalent value for the transfers, and at the time the payments were made, the Debtors were insolvent or were rendered insolvent and had either the intent to incur, belief they would incur, or should have reasonably believed they would incur debts beyond their ability to pay as the debts came due.3 Specifically, the Trustee asserts that the payments to Hebert constitute fraudulent transfers that the Trustee may avoid under § 544(b) pursuant to Mass. Gen. Laws ch. 109A, §§ 5(a)(2), 5(a)(8), 6(a), and 8 (Counts I and II) and under § 548(a)(1)(B) (Count III), which avoided transfers the Trustee can recover and preserve for the benefit of the bankruptcy estate under §§ 550 and 551.
Requesting dismissal of the adversary proceeding, Hebert argues that the Trustee cannot avoid the payments because they were neither made by the Debtors nor with funds that the Debtors had a property interest in. First, Hebert asserts that the credit card issuers made the payments and not the Debtors themselves. Therefore, Hebert says, the Debtors were not the "transferors" of the payments. Hebert further argues that the payments cannot constitute fraudulent transfers because the Debtors did not transfer any of the Debtors’ property that otherwise would have become property of the bankruptcy estate as contemplated by the Bankruptcy Code or state law.4
To decide a motion to dismiss for failure to state a claim for relief under Fed. R. Civ. Proc. 12(b)(6), made applicable to this adversary proceeding by Fed. R. Bankr. P. 7012(b), the Court must accept the averments in the complaint as true and determine whether those alleged facts are sufficient to "state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; see also Langadinos v. Am. Airlines, Inc. , 199 F.3d 68, 69 (1st Cir. 2000).5 To assess plausibility, the Court must consider whether "the complaint warrant[s] dismissal because it failed in toto to render plaintiff's entitlement to relief plausible."
Rodriguez-Reyes vs. Molina-Rodriguez , 711 F.3d 49, 55 (1st Cir. 2013) (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 569 n.14, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ).
Allowing the recovery of fraudulent transfers protects creditors from prepetition transactions undertaken by the debtor which deplete the pool of assets available to satisfy creditors’ claims. DeGiacomo v. Sacred Heart Univ. Inc. (In re Palladino) , 942 F.3d 55, 58 (1st Cir. 2019) (citing 5 Collier on Bankruptcy ¶ 548.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017)). To that end, both §§ 544(b)(1) and 548(a)(1)(B) require that the payments to Hebert constituted transfers of the Debtors’ interest in property in order to be recoverable by the Trustee.
There is no dispute that the payments to Hebert were made by charges to or convenience checks from the Debtors’ credit card accounts. Hebert argues that because the credit card issuers transferred the funds, the payments were not made by the Debtors. The Trustee counters that the Debtors’ credit card issuers did not independently decide to pay Hebert; instead, the Debtors made the payments by taking affirmative action to incur debt on the Debtors’ credit cards via charges and/or convenience checks made out to Hebert.
Notably, in specifying that a trustee may avoid any transfer of property of the debtor, the plain language of both §§ 544(b)(1) and 548(a)(1)(B) does not limit the Trustee's avoidance powers to transfers where the Debtors act as the "transferors." And § 101(54) of the Bankruptcy Code broadly defines "transfer" to include indirect, absolute, or conditional modes of parting with property or an interest in property. 11 U.S.C. § 101(54). Neither party disputes that the Debtors made a request to their credit card issuers to borrow funds with a direction to forward those funds to Hebert.
Since "transfer" includes indirect modes of disposition and neither §§ 544(b)(1) nor 548(a)(1)(B) limit the Trustee's avoidance power to transfers made by a debtor, the Court finds Hebert's focus on the transferor to be misplaced. As the Trustee asserts, and Hebert does not dispute, the Debtors’ credit card issuers forwarded funds to Hebert solely because the Debtors directed them to do so. The Debtors exercised control over disbursement and thereby utilized an indirect mode to voluntarily part with funds borrowed from their credit card issuers when they requested to incur debt and directed that the borrowed funds be provided to Hebert.
The question remains, however, as to whether the payments to Hebert constituted transfers of the Debtors’ interest in property . An "interest of the debtor in property" is not defined in the Bankruptcy Code. The Supreme Court has found that the phrase "an interest of the debtor in property," for purposes of avoidance actions, is coterminous with "property of the estate" as defined by § 541(a)(1), "which includes all legal or equitable interests of the debtor in property as of the commencement of the case" wherever located and by whomever held. Begier v. Internal Revenue Service , 496 U.S. 53, 58 and n. 3, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). A debtor's property interests as of the date of a transfer are determined by state law. Butner v. United States , 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). However, while state law creates underlying property interests, federal bankruptcy law determines the extent to which a property interest is property of the bankruptcy estate.
In re TelexFree, LLC , 941 F.3d 576, 584 (1st Cir. 2019) (citing Butner, 440 U.S. at 55, 99 S.Ct. 914 ); Rine v. Rine Auctioneers Inc. v. Douglas Cty. Bank & Tr. Co. (In re Rine & Rine Auctioneers, Inc.), 74 F.3d 854, 857-58 (8th Cir. 1996) ).
Property interests are created, and their extent is defined, "by existing rules or understandings that stem from an independent source such as state laws." Haverhill Manor, Inc. v. Comm'r of Pub. Welfare , 368 Mass. 15, 23, 330 N.E.2d 180 (1975) (quoting Regents of State Colls. v. Roth , 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972) ). While the Court has not discerned, and neither party has cited to, any Massachusetts authority specifically addressing whether a debtor has a property interest in funds borrowed from a credit card issuer who forwards those funds directly to a third party at the debtor's direction, "property" is broadly defined as "anything that may be subject to ownership" for purposes of the Massachusetts Uniform Fraudulent Transfer Act, M.G.L. ch. 109A, § 2. Generally, in determining whether a transfer constitutes a transfer of "an interest of the debtor in property," most courts have applied a dominion/control test, which the Trustee asks the Court to apply here. See Parks v. FIA Card Servs., N.A. (In re Marshall) , 550 F.3d 1251 (10th Cir. 2008). Pursuant to the dominion/control test, "a transfer of property will be of ‘an interest of the debtor in property’ if the debtor exercised dominion or control over the transferred property." Id . at 1255.
Hebert, relying on the First Circuit's focus in Palladino on the purpose behind fraudulent transfer laws – to protect creditors from a debtor's prepetition transactions that deplete the pool of assets later available to satisfy creditors’ claims – implores this Court to apply a "diminution of estate" test. See Palladino , 942 F.3d at 58. Pursuant to the diminution of estate test, "a debtor's transfer of property constitutes a transfer of ‘an interest of the debtor in property’ if it...
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Seventh Circuit: No Avoidance Of Preferential Or Fraudulent Transfer Absent Diminution Of The Estate
...'an interest of the debtor in property' if the debtor exercised dominion or control over the transferred property."); accord In re Clink, 643 B.R. 522, 526 (Bankr. D. Mass. 2022). The dominion/control tests is grounded in the concept that a debtor's "right to use an item or control its use"......