Running v. Dolan (In re Goodspeed)

• Decision Date: 14 August 2015
• Docket Number: ADV 13–3239,BKY 11–37732
• Parties: In re: Kevin J. Goodspeed, Debtor. Terri A. Running, Trustee, Plaintiff, v. Michele Dolan f/k/a Michele D. Goodspeed, Defendant.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota

535 B.R. 302

In re: Kevin J. Goodspeed, Debtor.Terri A. Running, Trustee, Plaintiff

v.Michele Dolan f/k/a Michele D. Goodspeed, Defendant.

BKY 11–37732

ADV 13–3239

United States Bankruptcy Court, D. Minnesota.

Signed August 14, 2015

Matthew R. Burton, Andrea M. Hauser, Leonard, O'Brien, Spencer, Gale & Sayre, Minneapolis, MN, for Plaintiff.

Thomas H. Olive, Olive Taber PA, Bloomington, MN, for Defendant.

ORDER

Katherine A. Constantine, United States Bankruptcy Judge

This matter came before the court on the plaintiff-trustee's second amended complaint pursuant to 11 U.S.C. §§ 541, 542, 544(b), 550 and 551 and Minn.Stat. §§ 513.44, 513.45 and 513.47, to avoid and recover from the defendant an alleged fraudulent transfer.¹ At the conclusion of the trial, both parties were allowed time to file supplemental post-trial briefs.² Both parties did so and the matter was thereafter taken under advisement. For the reasons and as more specifically provided below, none of the relief requested by the plaintiff-trustee is granted. Judgment shall be entered in favor of the defendant on Counts I and II of the trustee's complaint.

PROCEDURAL BACKGROUND

This controversy presents a story of real estate endeavors undertaken together by spouses, followed by a decision to dissolve their marriage, and now acrimonious disagreement regarding certain facts about those endeavors. Their marriage dissolution (not yet resolved in pending state court litigation) has inevitably complicated the outcomes of those earlier transactions executed during the marriage, especially in the context of the husband's intervening bankruptcy case. In this proceeding, the trustee of the husband's chapter 7 bankruptcy estate is seeking to avoid, as fraudulent, a purported transfer made to the non-debtor wife during the marriage (the “Transfer”).

FACTUAL BACKGROUND³

The debtor, Kevin Goodspeed, and the defendant, Michele Dolan, married in 2002. At that time, Dolan owned a home in St. Paul (the “St. Paul Property”), which was encumbered by a mortgage lien of approximately $56,000, securing a note for $56,000 in favor of Dolan's mother. Goodspeed owned a home located in Robbinsdale (the “Robbinsdale Property”), which was encumbered by a mortgage of approximately $58,000.

In February 2003, Goodspeed refinanced the Robbinsdale Property with a note and mortgage of $113,250 to World Savings, and withdrew approximately $50,000 in equity out of the property and used some of those funds to make repairs to the Robbinsdale Property. He loaned $20,000 of those funds to Dolan's cousin. Dolan was not a co-obligor on the note and mortgage of $113,250 to World Savings for the Robbinsdale Property.

On October 14, 2004, Dolan executed a quitclaim deed creating a joint tenancy in the St. Paul Property with Goodspeed. The deed was recorded on October 15, 2004. On October 20, 2004, Dolan's mother forgave the indebtedness on the St. Paul Property and a satisfaction of mortgage was duly filed. On October 25, 2004, Goodspeed signed a note for $200,000 secured by a mortgage of $200,000 against the St. Paul Property. Dolan was not a co-obligor on the note, but consented to the mortgage.⁴

On November 4, 2004, Dolan and Goodspeed used $125,096 of the mortgage proceeds from the St. Paul Property to purchase real estate located in Shakopee, Minnesota (the “Shakopee Property”). The purchase of the Shakopee Property was a cash purchase; no mortgage loan financing was obtained. The Shakopee Property was titled in Dolan's and Goodspeed's names as joint tenants, and it was unencumbered until 2007, as set forth below.

In April 2006, Goodspeed sold the Robbinsdale Property. In March 2007, the St. Paul Property was appraised at a value of $350,000,⁵ and Goodspeed refinanced the loan and mortgage against the St. Paul Property with Wells Fargo Bank, N.A., increasing the total liability to $280,000, and withdrawing cash of $76,678. Goodspeed was the sole obligor on the promissory note of $280,000 to Wells Fargo Bank, N.A.

Around the same time in 2007, the tax assessed value of the Shakopee Property was $150,300 and Goodspeed took a home equity loan of $121,000 against the Shakopee Property. He was the sole obligor on the note for the home equity loan of $121,000 against the Shakopee Property, and he withdrew cash of $112,330.

On April 5, 2007, the combined cash proceeds of $189,000 from the equity loan on the Shakopee Property and the refinance loan of the St. Paul Property were used (constituting the “Transfer”) to purchase real estate in Hudson, Florida (the “Florida Property”). Before the Transfer, Dolan and Goodspeed had paid off all of their other debts (not including the debt on the Properties) using the remaining cash equity withdrawn from the various Properties.⁶

The Florida Property was titled solely in Dolan's name. Certain expenses for improvements to the Florida Property were charged to the parties' joint account at Wells Fargo in the spring of 2007. The Florida Property was rented in June 2007, and monthly rents were deposited into the parties' joint account at Wells Fargo.

The parties separated in 2010, and on March 8, 2010, Dolan filed a petition for dissolution of marriage.⁷ Goodspeed thereafter received no rental income from the Florida Property. However, Dolan continued to receive rental income from the Florida Property.

The marriage of Goodspeed and Dolan was dissolved pursuant to a “Stipulated Partial Judgment and Decree to Dissolve Marriage” dated April 15, 2013, but there was no order entered identifying the parties' property interests or dividing and awarding marital assets.⁸

DISCUSSION

Governing Bankruptcy Code Provision

In this case, the trustee asserts a fraudulent transfer avoidance action under state law. The Bankruptcy Code allows for avoidance under state law pursuant to § 544(b), which provides:

(b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

11 U.S.C. § 544(b)(1) (emphasis added).

The Predicate Creditor Requirement

Section 544(b) requires both satisfaction of the requirements of the applicable state law and the additional requirement that for any avoidance of a transfer under this section the trustee must show that there is “a creditor holding an unsecured claim that is allowable under section 502 of this title....” Section 502 adds a timing reference, that is, the creditor must be holding the claim as of the date of the filing of the petition. Taken together, these requirements are often referred to as the predicate creditor, and they have been discussed at length by various courts.⁹

The second amended complaint provides the following entries with respect to creditors: Paragraph 22. At all relevant times there existed at least one creditor of the Debtor.

Paragraph 27. The Transfer of the Debtor's interest in the Mortgage Proceeds to the Defendant was made with the intent to hinder, delay or defraud creditors of the Debtor that existed at the time of the Transfer.

These statements are insufficient to establish the existence of a predicate creditor and were denied in the answer. See e.g., In re Petters, 495 B.R. 887, 895–901 (Bankr.D.Minn.2013). Had a Rule 12(b)(6) motion to dismiss been brought, with nothing more, it likely would have been granted.¹⁰ The parties' pre-trial stipulation also does not identify with particularity any creditors of the debtor as of the time of his bankruptcy petition filing. Moreover, nothing was expressly presented and argued at trial specifically to demonstrate the existence of a named, qualified predicate creditor of the debtor, as of the time of the petition, to satisfy these requirements.

However, the petition, schedules, statement of financial affairs and claims docket which were admitted into evidence at trial pursuant to stipulation suggest that a predicate creditor exists. Assuming arguendo then, that the existence of the required predicate creditor is sufficiently established, and to forestall any future potential arguments regarding the predicate creditor requirement, the substantive elements applicable in this adversary proceeding under state law as asserted by the trustee have been reviewed, as set forth below. The ultimate outcome of this case is based on the failure of the insolvency elements under the applicable state law.

Fraudulent Transfer/Constructive Fraud Under MUFTA

In this case, the applicable state law is the Minnesota Uniform Fraudulent Transfer Act (“MUFTA”). Minn.Stat. §§ 513.41 –513.51. The purpose of MUFTA is “to prevent debtors from placing property that is otherwise available for the payment of their debts out of the reach of their creditors.” Reilly v. Antonello, 852 N.W.2d 694, 699 (Minn.App.2014), citing Citizens State Bank Norwood Young Am. v . Brown, 849 N.W.2d 55, 60 (Minn.2014).

In Counts I and II of the amended complaint, the trustee seeks to avoid and recover, for the benefit of the bankruptcy estate, the debtor's Transfer of his alleged interest in the equity from the St. Paul and Shakopee Properties to the defendant (to purchase the Florida Property).

Under Count I, the trustee seeks avoidance of the Transfer pursuant to Minn.Stat. § 513.45(a) as a transfer fraudulent as to present creditors.¹¹ Under Count II, the trustee seeks avoidance of the Transfer as a transfer fraudulent as to present and future creditors pursuant to Minn.Stat. § 513.44(a)(2).

COUNT I

Minnesota Statute § 513.45(a) provides:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was

...