Zanderman, Inc. v. Sandoval ( 1998 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
In Re: CARLOS M. SANDOVAL,
Debtor.
ZANDERMAN, INCORPORATED,
Plaintiff-Appellee,
v. No. 96-2391
CARLOS M. SANDOVAL,
Defendant-Appellant,
and
UNITED STATES TRUSTEE,
Party in Interest.
Appeal from the United States District Court
for the District of Maryland, at Greenbelt.
Peter J. Messitte, District Judge.
(CA-96-1143-PJM, BK-95-11965-DK, AP-95-1269)
Argued: May 7, 1998
Decided: August 10, 1998
Before WILKINSON, Chief Judge, WILLIAMS, Circuit Judge, and
FRIEDMAN, United States District Judge for the
Eastern District of Virginia, sitting by designation.
_________________________________________________________________
Affirmed by per curiam unpublished opinion.
_________________________________________________________________
COUNSEL
ARGUED: Carlos M. Sandoval, Waldorf, Maryland, for Appellant.
Joseph Ermin Schuler, BARRETT & SCHULER, Washington, D.C.,
for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
On April 5, 1995, Carlos Sandoval filed a bankruptcy petition
under Chapter 11 of the Bankruptcy Code. First Union Bank of Vir-
ginia* claimed that Sandoval fraudulently transferred property in vio-
lation of 11 U.S.C. § 727, and therefore should not be entitled to a
discharge. The bankruptcy court found, based on the facts before it,
that Sandoval had engaged in a fraudulent transfer, and therefore,
denied Sandoval's discharge. The district court affirmed the bank-
ruptcy court. Likewise finding no error in the court's ruling, we
affirm.
I.
Sandoval is a lawyer licensed to practice law in Virginia who was
previously one of two shareholders in the Martinez and Sandoval law
firm. The firm had a line of credit with First Union, which was guar-
anteed by Sandoval, and borrowed money. The firm defaulted on the
loan around July or August 1994, and on September 22, 1994, its
unsecured creditors filed an involuntary Chapter 7 petition in Bank-
ruptcy Court. On October 7, 1994, First Union obtained a confessed
judgment against Sandoval in Fairfax Circuit Court for $47,649.39.
_________________________________________________________________
*Zanderman, Inc., the plaintiff-appellee in this action, is the successor
in interest to First Union Bank of Virginia.
2
On October 27, 1994, the debtor filed a motion to set aside the judg-
ment, and on October 28, 1994, First Union docketed the judgment
in the Circuit Court for Prince George's County, Maryland.
In early November 1994, Sandoval transferred his individually held
interests in his residence (located in Charles County, Md) and his
automobile to himself and his wife as tenants by the entirety. The
deed was recorded in Charles County, Maryland on December 6,
1994. Sandoval alleges that the transfer took place pursuant to an oral
pre-nuptial agreement between himself and his wife whereby they
agreed that all property would be transferred to joint ownership no
later than their first wedding anniversary, November 4, 1994. After
the transfer of the property, Sandoval filed a Motion to Set Aside the
Judgment of the Circuit Court, which was denied on December 16,
1994.
First Union docketed its judgment in Charles County, Maryland in
January 1995. On April 5, 1995, Sandoval filed a bankruptcy petition
under Chapter 11 of the Bankruptcy Code. On June 23, 1995, First
Union filed a complaint in bankruptcy court objecting to Sandoval's
dischargeability of debt. Sandoval filed an answer, and a motion to
dismiss, or, in the alternative, for summary judgment.
On February 27, 1996, the bankruptcy court heard oral argument
on the complaint and pending motions and denied Sandoval's motion.
On March 4, 1996, the bankruptcy court conducted a hearing and
ruled from the bench finding, inter alia, that Sandoval had engaged
in conduct that constituted a fraudulent transfer under the Bankruptcy
Code (Code), 11 U.S.C. § 727(a)(2)(A), and therefore, Sandoval's
discharge was denied. Sandoval appealed the court's decision to the
district court. After conducting a hearing on September 9, 1996, the
district court affirmed the bankruptcy court. This appeal follows.
II.
"Because the district court sits as an appellant court in bankruptcy,
our review of the district court's decision is plenary. In other words,
we apply the same standard of review as the district court applied to
the bankruptcy court's decision." Bowers v. Atlanta Motor Speedway,
Inc., 99 F.3d 151, 154 (4th Cir. 1996) (citations omitted). Therefore,
3
"[w]e review the bankruptcy court's factual findings for clear error,
while we review questions of law de novo." Loudon Leasing Dev. Co.
v. Ford Motor Credit Co., 128 F.3d 203, 206 (4th Cir. 1997). If the
Court determines that the appellant intended to challenge a specific
factual finding of the lower court but did not due to an error in his
pleading style, the Court may excuse the error and allow a factual
challenge. See In re Ford, 773 F.2d 52, 55 (4th Cir. 1985), aff'g 53
B.R. 444 (W.D. Va. 1984).
III.
The primary issue in this case is whether the District Court cor-
rectly determined that Sandoval engaged in a fraudulent transfer. The
Bankruptcy Code, 11 U.S.C. § 727(a)(2), provides, inter alia, that
The court shall grant the debtor a discharge, unless--
***
(2) the debtor with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody of
property under title 11 has transferred, removed, destroyed,
mutilated or concealed --
(A) property of the debtor, within one year
before the date of the filing of the petition; or
(B) property of the estate, after the date of the
filing of the petition.
Id.When discharge is challenged under Section 727, the Court must
determine whether the debtor had an actual intent to defraud his or her
creditors. See In re Woodfield, 978 F.2d 516, 518 (9th Cir. 1992);
Ford, 53 B.R. at 449. The question of whether a debtor has the requi-
site intent is a question of fact. Ford, 773 F.2d at 55.
Direct evidence of fraudulent intent is rare. Therefore, the court can
rely on certain indicia of fraud to determine whether a transfer was
4
fraudulently conducted under Section 727. Woodfield, 978 F.2d at
519. For example, (1) if there is a lack of consideration for the trans-
fer, (2) if there is a family relationship between the parties, (3) if there
is some retention of the property for personal use, (4) if the financial
condition of the debtor before and after the transfer is suspicious, (5)
if there is an existence of a pattern or series of transactions after the
onset of the financial difficulties or pendency of threat of suit by cred-
itors, or (6) if there is a suspicious chronology of events and transfers.
Id. at 518 (recognizing the "badges of fraud" indicative of a fraudu-
lent transfer); Matter of Chastant, 873 F.2d 89, 91 (5th Cir. 1989).
The presence of just one of the above listed factors can warrant a
court's conclusion that a transfer was fraudulently made, and, cer-
tainly, the presence of several factors "can lead inescapably to the
conclusion that the debtor possessed the requisite intent." See In re
Penner, 107 B.R. 171, 175 (Bankr. N.D. Ind. 1989) (citations omit-
ted).
The transfer of property challenged in this case reveals many of the
so-called badges of fraud. First, Sandoval, an insolvent debtor,
received no consideration for the transfer of his house and automobile
to tenants by the entirety. Second, Sandoval, as an attorney, was more
than likely aware that property held as tenants by the entirety is nor-
mally exempt from bankruptcy. Third, Sandoval continued to use the
house and cars after the property was transferred from individual
ownership to ownership by Sandoval and his wife as tenants by the
entirety. Finally as to timing, the transfer occurred one month after
entry of the judgment in Circuit Court and when bankruptcy proceed-
ings were imminent. The court was unpersuaded by the excuse
offered by Sandoval, i.e., the pre-nuptial agreement, as are we. There-
fore, based on the weight of the evidence and the existence of several
indicators of fraud, the bankruptcy court's determination that Sando-
val intentionally transferred the property with the intent of hindering,
delaying or defrauding his creditors was not clearly erroneous.
According, we affirm the denial of his discharge pursuant to 11
U.S.C. § 727(a)(2).
IV.
Sandoval additionally claims that the bankruptcy court erred in
rejecting his asserted defenses regarding the transfer of property.
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First, Sandoval alleges that the alleged lack of value of the property
is relevant to whether he fraudulently transferred the property under
Section 727. The bankruptcy court held and the district court affirmed
that whether the transfer actually injures the creditor (First Union in
this case) is irrelevant to whether the debtor fraudulently transferred
the assets. We agree.
We find no statutory authority for the debtor's argument that the
lack of value of property is a valid defense to fraudulent transfer. Fur-
thermore, the clear weight of authority in the circuits provides that
lack of value is not a valid defense. The Ninth Circuit addressed this
issue in In re Adeeb, 787 F.2d 1339, 1343 (9th Cir. 1986), and held
that lack of injury to creditors is irrelevant for the purpose of denying
a discharge in bankruptcy. Similarly, the Eleventh Circuit in In re
Davis, 911 F.2d 560, 561 (11th Cir. 1990), held that whether transfer-
ring the assets actually reduced the assets available to the debtor's
creditors was irrelevant in deciding whether to discharge the debts.
See also In re Smiley, 864 F.2d 562, 567 (7th Cir. 1989); Future Time.
Inc. v. Yates, 26 B.R. 1006, 1009 (M.D. Ga. 1983) (finding fact that
debts on residence exceeded value does not shield debtor from fraud-
ulent transfer liability when he purposefully transferred residence to
wife to avoid discharge), aff'd, 712 F.2d 1417 (11th Cir. 1983);
McGalliard v. McGalliard, 183 B.R. 726, 731-732 (Bankr. M.D.N.C.
1995) (noting that major difference between § 536(a)(6) and
§ 727(a)(2) is that § 536 focuses on whether there is an injury to the
creditor).
Sandoval urges the Court to rely instead on In re MacDonald, 50
B.R. 255 (Bankr. D. Mass. 1985). In MacDonald , the court adopted
the no value defense finding that the lack of value in the residence
and vehicle essentially excused the transfer. Similarly, Sandoval relies
on In re Whitcomb, 140 B.R. 396 (Bankr. E.D. Va. 1992), which fol-
lowed MacDonald and held that since the debtor transferred entireties
property and entireties property is exempt under Virginia law, it had
no value and therefore was not fraudulently transferred. We agree
with the district court and the bankruptcy court, and decline to follow
either the MacDonald or Whitcomb cases on this issue. First, both of
these cases are distinguishable from this case since in both cases the
debtors held the property as tenants by the entirety prior to transfer.
Furthermore, to the extent that either MacDonald or Whitcomb stand
6
for the broader proposition advanced by Sandoval-- that a lack of
value in transferred property automatically excuses a debtor that
would otherwise be liable for a fraudulent transfer under Section 727
-- we respectfully disagree, and instead follow the greater weight of
authority cited above.
Accordingly, we find that whether the property has actual value is
irrelevant to the issue of whether the debtor had a fraudulent intent
when he transferred property subject to bankruptcy proceeding, and
that injury in fact need not be specifically shown to trigger 11 U.S.C.
§ 727(a)(2)(A). We find no reason to carve an exception out of the
clear language of Section 727, and agree with the bankruptcy court
and the district court that regardless of the value of the property trans-
ferred by the debtor, the debtor should not be rewarded for fraudulent
actions.
Second, for the same reasons that we reject Sandoval's "no value"
defense, we reject his contention that the transfer could not have been
fraudulent since the property transferred was exempt from the bank-
ruptcy proceeding prior to transfer. Once again, Sandoval relies on the
Whitcomb case for the supposed proposition that a realizable value is
a prerequisite for a finding under 11 U.S.C. § 727. Aside from our
previous decision not to follow the holdings of either Whitcomb or
MacDonald, the facts of this case are materially different from those
in Whitcomb. That is, in Whitcomb the debtor transferred property that
was already exempt, i.e., entireties property. In this case, Sandoval
took property owned solely by him and subject to a bankruptcy pro-
ceeding and transferred it to entireties property, which is normally
exempt from the bankruptcy proceedings. It is this Court's opinion
that the Whitcomb case stands for the limited proposition that since
entireties property is exempt under Virginia law, a creditor cannot
succeed in barring a discharge under Section 727 where a debtor
transfers entireties property. Therefore, the reasoning in Whitcomb
does not apply here. As set forth above, Sandoval's transfer of his res-
idence and automobile was done with the actual intent of defrauding
his creditors under Section 727 by converting nonexempt property to
exempt property. Therefore, he is precluded from relying on the pres-
ent exempt status of the property to obtain dischargability. See In re
Moreno, 892 F.2d 417 (5th Cir. 1990).
7
Third, Sandoval contends that the purpose of the Bankruptcy Code,
i.e., to give an honest debtor a fresh start, supports a ruling in his
favor. Simply put, since we have determined based on the stipulated
facts and relevant law that Sandoval was correctly judged to have
fraudulently transferred property to avoid discharge, Sandoval's sug-
gestion that the "honest debtor" protection of Code should apply to
him begs the question. Considering the facts in this case, Sandoval
cannot now defend his fraudulent actions under the auspices of the
purpose of the Code to protect "honest" debtors.
Fourth, Sandoval claims that the transfer did involve adequate con-
sideration. However, the court's factual determination that there was
not adequate consideration for the transfer was only one of several
factors that the court identified as bases for its opinion that the debtor
had fraudulently transferred the property. Since Sandoval did not spe-
cifically challenge the factual findings made by the bankruptcy court,
factual challenges such as this are not properly before this Court.
However, assuming Sandoval intended to challenge this finding and
failed to due to an error in his pleading, we readily conclude that the
bankruptcy court's findings were not "clearly erroneous."
In this case, the bankruptcy court relied on the terms of the deed
which expressly stated that there was no consideration for the trans-
fer. Additionally, the bankruptcy court considered the credibility
issues and the believability of the debtor's defense and based its
determination on the testimony at the hearing. The bankruptcy court
found that Sandoval's excuse for the transfer, i.e., the oral pre-nuptial
agreement, "was simply unpersuasive." (J.A. 36.) The district court
affirmed the bankruptcy court's findings which were based on the tes-
timony presented at the hearing. On appeal, Sandoval offers no fac-
tual support for his contention that the transfers were for adequate
consideration, nor does Sandoval offer any basis for his contention
that the bankruptcy court or the district court clearly erred in finding
that there was no consideration. Therefore, we conclude that the fac-
tual finding that the transfer was made without adequate consideration
was not clearly erroneous.
Finally, Sandoval contends, without any authority, that when First
Union recorded its Virginia judgment in Calvert County, Maryland,
that the recordation amounted to a lien and an avoidable preference
8
under 11 U.S.C. § 547, which according to Sandoval obviates the pos-
sibility of a fraudulent transfer. Because First Union never obtained
a lien on the transferred property, we do not reach the merits of the
argument advanced by Sandoval. Under Maryland law, recording a
judgment lien is effective only as to the property of the judgment
debtor in that county, and will not attach to property held as joint ten-
ants unless and after severance and the creation of a separate estate
in title and possession. See Eastern Shore Bldg. and Loan Corp. v.
Bank of Somerset, 253 A.2d 367, 370-71 (Md. 1969). Sandoval trans-
ferred the property to tenants by the entirety in late November 1994.
First Union's judgment was not recorded in Calvert County until Jan-
uary 1995. Therefore, as a matter of law the judgment could not have
attached to the transferred property. Id.V.
For the reasons set forth above, the district court's decision, affirm-
ing the bankruptcy court, is affirmed.
AFFIRMED
9