Rauh, In re

• Decision Date: 06 February 1997
• Docket Number: No. 96-1845,96-1845
• Citation: 119 F.3d 46
• Parties: , Bankr. L. Rep. P 77,487 In re David C. RAUH, Debtor. David J. NOONAN, Trustee, Plaintiff, Appellant, v. KUEI FONG RAUH, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 46

119 F.3d 46

38 Fed.R.Serv.3d 499, Bankr. L. Rep. P 77,487

In re David C. RAUH, Debtor.

David J. NOONAN, Trustee, Plaintiff, Appellant, v. KUEI FONG RAUH, Defendant, Appellee.

No. 96-1845.

United States Court of Appeals, First Circuit.

Heard Feb. 6, 1997.

Decided July 18, 1997.

Claudia J. Reed, with whom David J. Noonan and Cohen, Rosenthal P.C. were on brief for appellant.

Joseph I. Schindler, with whom Jonathan S. Schindler and Klieman, Lyons, Schindler, Gross & Pabian were on brief for appellee.

Before Boudin, Circuit Judge, Cyr, Senior Circuit Judge, and Lynch, Circuit Judge.

CYR, Senior Circuit Judge.

Appellant David J. Noonan, trustee in bankruptcy of David C. Rauh ("Debtor"), challenges various bankruptcy court rulings--later affirmed by the district court--declining to set aside certain prepetition transfers to Kuei Fong Rauh, the Debtor's wife, and disallowing the Trustee's postjudgment motion to amend the complaint, findings, and judgment relating to three fraudulent-conveyance claims belatedly asserted against Mrs. Rauh. We affirm the judgment, as amended to reflect an additional voidable transfer to Mrs. Rauh.

I BACKGROUND

In 1976, the Debtor, Gary Stahelski, and a third individual no longer involved in the case, founded a partnership, Environmental Water Systems ("E.W.S."), which was to engage in the plumbing and heating business. Six years later, the same individuals formed a corporation, E.W.S. Realty, Inc. ("Realty") For a time, E.W.S. and Realty were reasonably successful, especially during 1986, 1987 and 1988. As the Massachusetts real estate market slumped in 1989, however, the Debtor's financial position deteriorated, due to difficulties in obtaining lessees for space in the Pioneer Mall, a slowdown in the construction business, and the heavy indebtedness incurred with E.W.S. and/or Realty for services performed in connection with the Pioneer Plaza project. E.W.S. and Realty in turn became deeply indebted to third parties. By May 1989, the Debtor realized that he and Stahelski would be unable to meet the $200,000 mortgage payment due the sellers of the Pioneer Plaza real estate in June and an additional payment due Country Savings around the same time.

which developed real property for sale or lease. The principal lenders for the various real estate development projects undertaken by Realty were Commerce Bank & Trust Co. ("Commerce Bank") and Country Bank for Savings ("Country Savings"). The loans obtained to finance the Realty projects were secured by mortgages on the various properties under development and were guaranteed by Realty, as well as by the Debtor and Stahelski in their individual capacities. During 1988, the Debtor, Stahelski, and Vincent and Ernest Osterman engaged in a real estate development project in their individual capacities. Around the same time, these four individuals formed Pioneer Valley Partners No. 1, Inc. ("Pioneer"), a corporation which was to develop a shopping mall known as Pioneer Plaza. The Pioneer Plaza project financing came from the real estate sellers and Commerce Bank. The loans were secured by mortgages on the Pioneer Plaza real estate and guaranteed by the various corporations, the Debtor, Stahelski, and the Ostermans.

Between June 1 and September 2, 1989, Mrs. Rauh unilaterally withdrew $127,758 from various joint accounts maintained in the names of both spouses and deposited the proceeds in accounts she either held jointly with her daughter or in her own name as trustee for her son. The bankruptcy court found that these transfers were made by Mrs. Rauh with actual intent to remove the monies in the joint spousal accounts from the reach of the Debtor's creditors.

On June 28, 1989, the Debtor suddenly absconded with $9,000 withdrawn from an unspecified joint spousal account. Mrs. Rauh sought an explanation from Stahelski, who described the dismal financial picture confronting him and the Debtor and suggested that the Debtor might have left with another woman. The Debtor resurfaced approximately two weeks later, however, and Stahelski terminated the Debtor's employment with Realty shortly thereafter. At about the same time, the E.W.S. partnership was dissolved.

The Debtor sued Stahelski to recover the value of his interests in E.W.S. and Realty. Mrs. Rauh joined the action, claiming damages for emotional distress caused by her dealings with Stahelski following the Debtor's disappearance. The suit was settled on July 23, 1991 (the "Stahelski Settlement"), with the Debtor receiving vehicles and equipment of little value in return for relinquishing all interests in E.W.S. and Realty to Stahelski; Mrs. Rauh received $15,000 in cash and a $40,000 promissory note payable to Realty. ¹ She continued to receive all payments made on the $40,000 note until well after the Debtor filed a voluntary chapter 7 petition on March 24, 1992.

In due course, the Trustee commenced an adversary proceeding to set aside several transfers to Mrs. Rauh, individually and as next friend of the Rauh children. As the challenged transfers all occurred more than one year before bankruptcy, see Bankruptcy Code § 548, the Trustee invoked Bankruptcy Code § 544(b) and chapter 109A of the Massachusetts General Laws ("ch.109A")--the Massachusetts Uniform Fraudulent Conveyance Act ("UFCA")--as grounds for avoiding them. ²

At trial, the Trustee managed to persuade the bankruptcy court to set aside only the transfer of the Debtor's joint interest in the marital home and the transfer of the $40,000 promissory note to Mrs. Rauh in connection with the Stahelski Settlement. Thereafter, the Trustee moved to amend the complaint, findings, and judgment to conform with the evidence. See Fed. R. Bankr.P. 7015(b), 7052(b), 9023(a); Fed.R.Civ.P. 15(b), 52(b), 59(a). The proposed amended complaint alleged additional fraudulent transfers. Nearly a year after trial, the bankruptcy court denied the postjudgment motion on the mistaken ground that the Trustee had failed to file a motion to amend the complaint to conform with the evidence. See infra Section II.B.

In addition to the ruling at trial--refusing to set aside Mrs. Rauh's withdrawals from the joint accounts--the Trustee now challenges the bankruptcy court's postjudgment rulings refusing to set aside: the $15,000 cash payment Mrs. Rauh received in the Stahelski Settlement; a $6,565.31 deposit, on March 27, 1992, to Mrs. Rauh's own bank account, comprised of three checks dated two weeks prior to the Debtor's chapter 7 petition, payable to the Debtor and endorsed over to Mrs. Rauh; and $3,786.76 in deposits to Mrs. Rauh's own bank account, between September 17, 1991 and February 12, 1992, consisting of several checks from the Debtor's customers made payable to Mrs. Rauh.

II DISCUSSION

A. The Joint-Account Withdrawals

The threshold matter for our consideration is whether the Trustee adequately preserved the claims asserted on appeal. A thorough review of the entire record discloses that the theory advanced by the trustee on appeal in support of his claims to the various amounts withdrawn from the joint accounts is altogether different than that litigated below. Accordingly, we conclude that these claims were abandoned below.

The Trustee argued before the bankruptcy court that Massachusetts law establishes a rebuttable presumption that the spouse whose funds are deposited in a joint spousal account ("contributing spouse") is presumed to have intended that each spouse own a one-half interest in the deposited funds. See Gibbons v. Gibbons, 296 Mass. 89, 4 N.E.2d 1019, 1020 (1936). Thus, the Trustee contended throughout the proceedings below that the Debtor was the contributing spouse; that he owned one-half the monies in these joint accounts; that Mrs. Rauh, the party challenging the aforementioned presumption, had not carried her burden, see Blanchette v. Blanchette, 362 Mass. 518, 287 N.E.2d 459, 463 (1972), of establishing that the contributing spouse intended to retain ownership of all monies deposited; ³ and, therefore, that either Mrs. Rauh had converted the Debtor's one-half share, or the Debtor had conveyed his one-half share to Mrs. Rauh in fraud of creditors. Accordingly, the Trustee claimed, the Debtor's "transfers" were voidable under Bankruptcy Code § 544(b) and ch. 109A.

The bankruptcy court instead ruled that a joint spousal account creates a very different presumption; namely, that the contributing spouse intended to give the noncontributing spouse a beneficial interest in all monies deposited to their account, subject only to the contributing spouse's coequal, unilateral right, at any time, to withdraw all monies on deposit, see Noonan v. Rauh (In re Rauh ), 164 B.R. 419, 423 (Bankr.D.Mass.1994) (citing, e.g., Blanchette, 287 N.E.2d at 463). The bankruptcy court also held that the party challenging the presumption (viz., the Trustee ) may rebut it only by adducing evidence that the contributing spouse intended to convey no present beneficial interest to the noncontributing spouse. See id. (citing, e.g The bankruptcy court reasoned as follows: (1) either spouse has the unilateral legal right to withdraw all monies in their joint spousal account, thereby divesting the other spouse of any beneficial interest, see id. at 424 (citing Heffernan v. Wollaston Credit Union, 30 Mass.App.Ct. 171, 567 N.E.2d 933, 937 (1991)); thus, in 1989 Mrs. Rauh simply withdrew her own 100% beneficial interest in the funds; (2) consequently, any "transfer" of the Debtor's beneficial interest in the deposited monies to Mrs. Rauh had occurred not at the time of the withdrawals by Mrs. Rauh in 1989, but much earlier (viz., not later than the dates on which the Debtor made the respective deposits to their accounts); (3) since the withdrawals by Mrs. Rauh in 1989 consisted entirely of her own funds, no "transfer" of property of the Debtor could have taken place; and (4) a fortiori, no conversion or conveyance, fraudulent or otherwise,...