Tavenner v. Smoot

• Decision Date: 04 June 2001
• Docket Number: No. 00-1912,00-1912
• Parties: (4th Cir. 2001) LYNN LEWIS TAVENNER, Plaintiff-Appellee, v. KENNETH R. SMOOT, Defendant-Appellant, and KATINA SMOOT, a/k/a Katina Lombardo; CORY R. SMOOT; GINA SMOOT; HOME CHECK SERVICES; GLASS APPLE, INCORPORATED, Defendants. Argued:
• Court: U.S. Court of Appeals — Fourth Circuit

Page 401

257 F.3d 401 (4th Cir. 2001)

LYNN LEWIS TAVENNER, Plaintiff-Appellee, v. KENNETH R. SMOOT, Defendant-Appellant and KATINA SMOOT, a/k/a Katina Lombardo; CORY R. SMOOT; GINA SMOOT; HOME CHECK SERVICES; GLASS APPLE, INCORPORATED, Defendants.

No. 00-1912

UNITED STATES COURT OF APPEALS FOR THE FOURTH CIRCUIT

Argued: June 4, 2001

Decided: July 16, 2001

Appeal from the United States District Court for the Eastern District of Virginia, at Richmond. Richard L. Williams, Senior District Judge. [Copyrighted Material Omitted]

[Copyrighted Material Omitted] COUNSEL ARGUED: Brett Alexander Zwerdling, ZWERDLING & OPPLE- MAN, Richmond, Virginia, for Appellant. Dion William Hayes, MCGUIRE WOODS, L.L.P., Richmond, Virginia, for Appellee. ON BRIEF: John H. Maddock, III, MCGUIRE WOODS, L.L.P., Rich- mond, Virginia, for Appellee.

Before WILKINS and MOTZ, Circuit Judges, and Irene M. KEELEY, Chief United States District Judge for the Northern District of West Virginia, sitting by designation.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

In this case we must resolve whether a bankruptcy trustee can avoid a transfer of potentially exempt property on the ground that the debtor transferred the property with the intent to hinder, delay, or defraud his creditors under 11 U.S.C. S 548 (1994). For the reasons that follow, we conclude that the trustee may do so.

I.

The parties agree on the essential facts. In 1978, Kenneth Smoot began working for CSX Transportation in Virginia. As a condition of his employment, Smoot joined the United Transportation Union ("the Union"). In the early 1980's, in order to supplement his income dur- ing periods of unemployment or lay-offs from CSX, Smoot estab- lished an unincorporated entity known as Glass Apple, which offered home repair and other services.

In April 1995, after a series of unpleasant dealings with CSX and the Union in Virginia, Smoot transferred his employment with CSX to Ohio. Fifteen months later, Smoot suffered a work-related injury when the flooring of a locomotive engine gave way causing damage to Smoot's knees and body. As a result of the accident, Smoot under- went knee surgery in 1996 and could not work for parts of 1996 and 1997. Due to his health and other personal problems, in June 1997, Smoot left his position with CSX, sold his home in Ohio and returned to Virginia.

CSX and the Union subsequently brought suit against Smoot for violations of the Federal Wiretapping Act, 18 U.S.C.S 2511 (Supp. II 1996), in connection with Smoot's illegal tape-recording of a meet- ing, which had been convened to consider Smoot's grievances against CSX and the Union. Smoot, in turn, filed suit against CSX under the Federal Employer's Liability Act (FELA), 45 U.S.C.S 51 et seq. (1994), seeking compensation for his work-related injury.

In January 1998, Smoot incorporated Glass Apple as a Virginia corporation. Smoot testified at his bankruptcy hearing that he did this in the hope of establishing a family business and a potential source of income for himself and his family because he believed that, due to his injury, he would no longer be able to perform manual labor. The incorporation papers listed Smoot as the President of Glass Apple, his wife Katina as the Vice President, his son, Cory, as the Secretary and Treasurer, and Smoot and his wife as the company's directors. Katina Smoot owned 50% of Glass Apple's stock, and Smoot's two children owned, in equal amounts, the remaining 50%; Smoot himself owned no Glass Apple stock. Through its various divisions, Glass Apple engaged in a diverse set of operations, ranging from home repair to music production to off-shore investment. One of these divisions, Home Check Services, handled the company's finances.

On March 30, 1998, the United States District Court for the North- ern District of Ohio found Smoot liable to CSX and to the Union under the Wiretapping Act. The court took the issue of the amount of damages under advisement. Three months later, Smoot and CSX entered into an agreement settling Smoot's FELA claim against CSX in connection with his 1996 work-related injury. Pursuant to the set- tlement agreement, CSX agreed to pay Smoot $250,000 in exchange for a release of all of Smoot's claims against the railroad. After deducting amounts for advances and other outstanding debts, CSX deposited a net amount of $217,059.25 into a bank account held jointly by Smoot and his wife at a credit union in Ohio. That same day, Smoot wire-transferred $210,000 from the joint account at the credit union to Home Check Services' bank account in Virginia.

In August 1998, the Ohio district court ordered Smoot to pay $170,000 in damages to CSX and $180,000 in damages to the Union.

The following month, the district court ordered Smoot to pay CSX an additional $25,000 in attorney's fees.

During the summer and fall of 1998, Smoot made several pur- chases using funds from the Home Check Services bank account, including cars for his wife and daughter and a motorcycle for his son. Smoot also wrote checks from this account to himself and to his son Cory for "wages." In addition, Smoot loaned Cory $10,000 from the Home Check Services account, which Cory used to make a down pay- ment on a house. During this same period, Smoot wrote two checks from the Home Check Services' account made payable to First Union in the amounts of $100,000 and $40,000; these funds were deposited into a First Union bank account held in the name of Glass Apple.

In December 1998, the Union brought suit against Smoot, his fam- ily members, and Glass Apple in the Circuit Court of Chesterfield County, Virginia seeking to set aside these transfers as fraudulent or voluntary and to have these assets made available for satisfaction of its judgment against Smoot. The Union also filed an ex parte petition for attachment. After the Union posted the necessary bond, the Vir- ginia court issued a writ of attachment, ordering the county sheriff to attach by levy the specified property. Shortly thereafter, CSX filed a petition to intervene in the suit.

Before the state court could hold a hearing on its writ of attach- ment, Smoot filed a petition for Chapter 7 bankruptcy. The bank- ruptcy schedules, as amended, claimed an exemption in the amount of $217,000 for the funds Smoot received in connection with the set- tlement of his FELA suit against CSX. Lynn Tavenner was appointed bankruptcy trustee. In January 1999, Tavenner filed this adversary proceeding objecting to Smoot's discharge in bankruptcy and seeking to avoid and recover the transfers made with the checks drawn on the Home Check Services' account on the ground that, inter alia, Smoot transferred the funds with the intent to defraud his creditors. Tavenner also objected to Smoot's claimed exemption of the $217,000.

After holding a hearing on the trustee's objections, the bankruptcy court issued a written opinion declaring that the trustee could avoid the transfers and recover the funds, and denying Smoot a discharge in bankruptcy. The district court upheld the bankruptcy court's deci- sion, and Smoot then appealed to this court.

In bankruptcy actions, we review the district court's judgment and the bankruptcy court's conclusions of law de novo; we review the bankruptcy court's findings of fact for clear error. See Chmil v. Rulisa Operating Co. (In re Tudor Assocs., Ltd., II), 20 F.3d 115, 119 (4th Cir. 1994). In assessing the bankruptcy court's findings of fact, we must give "due regard . . . to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Bankr. Rule 8013.

II.

Indisputably, had Smoot left the proceeds from the settlement of his FELA suit against CSX in his account, he could have exempted those proceeds from his bankruptcy estate under Virginia law, which creates a statutory exemption for money recovered in a personal injury action. See Va. Code Ann. S 34-28.¹ (Michie 1997).1 This case, therefore, presents the novel issue of whether transfers of property that would have been exempt from the bankruptcy estate under state law can be the subject of an avoidance and recovery action by the bankruptcy trustee, and whether a debtor may be found to have trans- ferred such property fraudulently.

A.

Initially, we must determine whether transfers of property that would have been exempt from the bankruptcy estate under state law can be the subject of an avoidance and recovery action by the bank- ruptcy trustee.

As the bankruptcy court noted, in its thorough and well-reasoned opinion, courts hold "divergent views regarding whether transfers of exemptible property can be avoided by trustees." Kapila v. Fornabaio (In re Fornabaio), 187 B.R. 780, 782 (Bankr. S.D. Fla. 1995). Some courts have followed the so-called "no harm, no foul" approach, hold- ing that the trustee cannot avoid the transfer because, absent the trans- fer, creditors could not have reached the property, and thus the transfer did not harm them in any way. See id. at 782-83; Jarboe v. Treiber (In re Treiber), 92 B.R. 930, 932 (Bankr. N.D. Okla. 1988). A majority of courts have rejected this approach, however, noting that under the bankruptcy laws, as revised in 1978, all property, including potentially exempt property, is part of the bankruptcy estate until the debtor claims an exemption for it; consequently, a transfer of poten- tially exempt property could harm creditors because it might not have actually been exempted from the bankruptcy estate. See, e.g., Lasich v. Wickstrom (In re Wickstrom), 113 B.R. 339, 350 (Bankr. W.D. Mich. 1990). For two reasons, we believe that the majority position -- that transfers of exemptible property are amenable to avoidance and recovery actions by bankruptcy trustees -- is better reasoned.

First, S 522(g) of the Bankruptcy Code apparently anticipates this result. See 11 U.S.C. S 522(g) (1994). That statute permits the debtor to exempt property recovered by the trustee under certain circum- stances,...