Velde v. Morrison (In re McMartin)
| Decision Date | 21 March 2019 |
| Docket Number | Adversary No. 18-07023,Bankruptcy No. 17-30558 |
| Citation | 599 B.R. 622 |
| Parties | IN RE: Ronald G. MCMARTIN, Jr., Debtor. David G. Velde, Trustee, Plaintiff, v. Scott Morrison, as Trustee of the Morrison Family Trust, Defendant. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
Matthew R. Burton, Morrison Sund, PLLC, Minnetonka, MN, Andrea M. Hauser, Leonard O'Brien Spencer Gale & Sayre Ltd, Minneapolis, MN, for Plaintiff.
Robert C. Fleming, Fleming, DuBois & Fleming, Cavalier, ND, for Defendant.
Plaintiff David G. Velde, Chapter 7 Trustee, filed a Complaint seeking to avoid a $ 22,000 payment Debtor Ronald G. McMartin, Jr., made to Defendant Scott Morrison, as Trustee of the Morrison Family Trust, on an obligation owed by McM, Inc. Doc. 1.1 The Trustee alleges the payment is a voidable transfer under 11 U.S.C. §§ 544 and 548 and N.D.C.C. § 13-02.1-04(1)(b), and he seeks to recover the transfer under 11 U.S.C. § 550. Specifically, he prays for judgment in the sum of $ 22,000 plus costs and disbursements. Id. at 4.
Morrison filed an Answer admitting that Debtor paid the sum of $ 22,000 to Morrison on an obligation owed by McM, Inc. He denied liability to the bankruptcy estate for the transfer.
The Court tried this case on December 12, 2018.
Beginning in 1995, Debtor and various entities in which he held an ownership interest leased land from Morrison Family Trust. At issue in this case is a payment pursuant to a lease between Morrison Family Trust and McMartin Family Partnership signed in September 2012. See Ex. 1. Under the agreement, Morrison Family Trust leased 110 acres of farmland (the Farmland)2 to McMartin Family Partnership for a term of five years, 2013 through 2018. Id. Debtor signed the lease as the general partner of, and on behalf of, McMartin Family Partnership.3 Id. The agreement obligated McMartin Family Partnership to pay $ 22,000 annually by February 1 to Morrison Family Trust. Id. McMartin Family Partnership agreed Id. at 3.
On February 2, 2017, Debtor paid Morrison Family Trust $ 22,000 for rent under this cash lease agreement.4 Ex. 3. Debtor made this payment from his personal account even though McM, Inc. (formerly McMartin Family Partnership) was the lessee. Morrison accepted the check and assumed Debtor—or any entity in which Debtor held an interest—had the right to farm the land.
Within a week or two after Debtor remitted the 2017 rent check to Morrison Family Trust, Debtor informed Morrison he was establishing a new entity to sublease the Farmland and proposed transferring the lease to Elkhorn Farms, LLP.5 Morrison agreed to the sublease as long as the terms were the same as those in the existing lease.6 Morrison insisted that Debtor draft the new agreement with the same terms.
McM, Inc. filed a voluntary Chapter 7 bankruptcy petition on February 10, 2017.
On March 22, 2017, Morrison Family Trust formally leased the Farmland to Elkhorn Farms. Specifically, Morrison on behalf of Morrison Family Trust and Kenneth H. Johnson and Al R. Johnson on behalf of Elkhorn Farms executed a two-year (2017 and 2018 farming seasons) cash lease agreement to rent the Farmland. Ex. 2. Aside from the modified term of the lease and the new lessee, the remainder of the provisions of the agreement are identical to those in the agreement between Morrison Family Trust and McMartin Family Partnership, including the $ 22,000 annual rate for the use of the Farmland. Ex. 2. Elkhorn Farms drafted the lease using the Morrison Family Trust/McMartin Family Partnership lease as a template.
On April 26, 2017, Elkhorn Farms paid Debtor $ 22,500. Ex. 4. The check Elkhorn Farms issued to Debtor notes it is for "Land Rent Reimbursement" in the memo line. The payment stub attached to the check lists the description of the Farmland, which matches the legal descriptions of the Farmland in the cash lease agreement between Morrison and McMartin Family Partnership and the cash lease agreement between Morrison and Elkhorn Farms. See Exs. 1, 2, 4.
Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on September 11, 2017.
Under the constructive fraud transfer provision of section 548 of the Bankruptcy Code, a trustee can avoid a debtor's transfers made within two years of the petition date if the debtor did not receive a reasonably equivalent value in exchange. 11 U.S.C. § 548(a)(1)(B). The trustee bears the burden of proof by a preponderance of the evidence. Doeling v. O'Neill (In re O'Neill ), 550 B.R. 482, 507 (Bankr. D.N.D. 2016) (citations omitted). To succeed on his claim under section 548(a)(1)(B), the Trustee must show:
(1) an interest of the debtor in property; (2) was voluntarily or involuntarily transferred; (3) within [two years] of filing bankruptcy; (4) where the debtor received less than reasonably equivalent value; and (5) debtor was insolvent at the time of the transfer or became insolvent as a result thereof.
Id. at 507–08 (citing Sullivan v. Welsh (In re Lumbar ), 457 B.R. 748, 753 (8th Cir. BAP 2011) ; Schnittjer v. Houston (In re Houston ), 385 B.R. 268, 272 (Bankr. N.D. Iowa 2008) ).
Morrison concedes that the Trustee met his burden of proving all the elements except the fourth. He asserts that the Trustee cannot show Debtor received less than reasonably equivalent value.
"Whether a transfer is made for reasonably equivalent value is a question of fact." In re O'Neill, 550 B.R. at 509 (citations omitted). In the Eighth Circuit, courts consider three factors in analyzing reasonably equivalent value: whether (1) value was given; (2) it was given in exchange for the transfer; and (3) what was transferred was reasonably equivalent to what was received." Meeks v. Don Howard Charitable Remainder Trust (Inre S. Health Care of Ark., Inc. ), 309 B.R. 314, 319 (8th Cir. BAP 2004) . " ‘There is no bright line rule used to determine when reasonably equivalent value is given.’ " In re O'Neill, 550 B.R. at 510 ). Rather, courts consider the entire situation and base their analysis on the totality of circumstances. Jacoway v. Anderson (In re Ozark Rest. Equip. Co. ), 850 F.2d 342, 345 (8th Cir. 1988) ; Sullivan v. Schultz (In re Schultz ), 368 B.R. 832, 836 (Bankr. D. Minn. 2007) (citation omitted). "Ultimately, a ‘determination of reasonably equivalent value is fundamentally one of common sense, measured against market reality.’ " In re O'Neill, 550 B.R. at 511 (quoting Ahlgren v. Dailey (In re Schnoor ), 510 B.R. 868 (Bankr. D. Minn. 2014) ).
"The question of reasonably equivalent value is answered by determining whether the debtor received value that is substantially comparable to the worth of the transferred property or, phrased another way, whether the debtor received a fair exchange in the marketplace for the goods transferred." Id. at 510 (footnotes and internal quotation marks omitted). "When determining whether the value transferred was reasonably equivalent to what was received, ‘the important elements to consider are (1) fair market value and (2) whether there was an arm's length transaction.’ " In re Schnoor, 510 B.R. at 874 (quoting In re Lindell, 334 B.R. at 249 ).
The Bankruptcy Code defines "value" as "property in satisfaction or securing of a present or antecedent debt of the debtor[.]" 11 U.S.C. § 548(d)(2)(A).
By this very definition, any consideration going toward satisfying a debt must be toward a debt of the debtor in bankruptcy , to constitute "value" in itself. In re Richards & Conover Steel Co., 267 B.R. at 612 (). If an indirect benefit to the debtor derived from the satisfaction of the debt of another is offered in defense as the "value," it must be "fairly concrete." In re Minn. Util. Contracting, Inc., 110 B.R. 414, 420 (D. Minn. 1990). The party claiming to have delivered such value must quantify it, as to the debtor. In re Southern Health Care of Ark.,Inc., 309 B.R. 314, 319–320 (8th Cir. BAP 2004) ; In re Richards & ConoverSteel Co., 267 B.R. at 614.
Stoebner v. Ritchie Capital Mgmt., L.L.C. (In re Polaroid Corp. ), 472 B.R. 22, 67 (Bankr. D. Minn. 2012) (emphasis in original). In re Richards & Conover Steel, Co., 267 B.R. at 613–14 (quotation omitted).
Morrison offers alternative arguments for his claim that Debtor received reasonably equivalent value for the $ 22,000 payment Debtor made to Morrison on behalf of McM. First, Morrison asserts that Debtor received a direct benefit in exchange for his payment because Debtor "wrote the rent check and was leasing the land in his own name since there was no prohibition on sub-leasing in the written contract." Doc. 31 at 1. Under this theory, Morrison argues Debtor received reasonably equivalent value because he received the right to farm the land.
The evidence belies this assertion. The lease was not in Debtor's name, and Morrison presented no evidence of a sublease between Debtor and McM. Simply put, Debtor did not receive the use of the land upon his payment to Morrison. McM did. Although it is understandable that Morrison did not appreciate the legal...
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