Ostrander v. Hebert

UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS WESTERN DIVISION ) In re: ) Chapter 7 ) Case No.19-30768-EDK ) LEROYR. CLINK ) TERRYR. CLINK, ) ) Debtors. ) ) ) DAVIDW. OSTRANDER, ) Adversary Proceeding CHAPTER 7TRUSTEE, ) No.21-03007 ) Plaintiff, ) ) v. ) ) PATRICIA M. HEBERT, ) ) Defendant. ) ) MEMORANDUM OF DECISION BeforetheCourtisamotiontodismiss(the“MotiontoDismiss”)anadversaryproceeding filedbytheChapter7trustee,DavidW.Ostrander(the“Trustee”),inthebankruptcycaseofLeroy R. Clink and Terry R. Clink (the “Debtors”) against Patricia M. Hebert (“Hebert”). In the complaint,theTrusteeallegesthatcertainpaymentsmadetoHebertbytheDebtorsviacreditcard transactions constitute fraudulent transfers that the Trustee may avoid and recover for the benefit of the bankruptcy estate. Because the Court concludes that the complaint contains sufficient allegations tostatea plausibleclaim,the Motionto Dismisswill be denied. I. FACTS ANDPOSITIONSOFTHE PARTIES The following recitation of facts is taken from the allegations in the complaint, matters of recordin the underlying bankruptcycase, documentsreferenced in and attached to the complaint, and othermatters of which the Courtmaytake judicial notice.1 The Debtors filed a voluntary petition under Chapter 7 of the United States Bankruptcy Code (the “Bankruptcy Code” or the “Code”)2 on September 26, 2019 (the “Petition Date”) and indicated intheir Statement of Financial Affairsthat within2years prior tothe PetitionDate they paidHebertforlegalservicesprovidedtotheDebtors’daughterinconnectionwiththedaughter’s divorce. The Trustee determined that from October 2017 through July 2018, the Debtors made ten payments to Hebert, totaling $62,860.46, by either charging the payments directly to the Debtors’creditcardaccountsorbyusingconveniencecheckstodrawonthecreditcardaccounts. OnApril29,2021,theTrusteefiledtheinstantadversaryproceedingagainstHebertassertingthat thepaymentstoHebertarerecoverableasfraudulenttransfers,asthepaymentsweremadewithin 2 years of the Petition Date, the Debtors did not receive reasonably equivalent value for the transfers, and at the time the payments were made, the Debtors were insolvent or were rendered insolvent and had either the intent to incur, belief they would incur, or should have reasonably believed they would incur debts beyond their ability to pay as the debts came due.3 Specifically, 1 While a court generally may not consider documents that are extrinsic to the complaint in ruling on a motion to dismiss, there are exceptions “for documents the authenticity of which are not disputed by the parties;forofficialpublicrecords;fordocumentscentraltoplaintiffs'claim;orfordocumentssufficiently referredtointhecomplaint.” Alt.Energy,Inc.v.St.PaulFire&MarineIns.Co.,267F.3d30,33(1stCir. 2001)(quotingWattersonv.Page,987F.2d1,3(1stCir.1993)). 2 See 11 U.S.C. §§ 101 et seq. All statutory references are to provisions of the Bankruptcy Code unless otherwisestated. 3TheTrusteealsoassertsthattheDebtorsowedonecreditor(whohasfiled4proofsofclaimtotalingmore than$74,000.00)approximately$12,128atthetimethefirstpaymenttoHebertwasmade. theTrusteeassertsthatthepaymentstoHebertconstitutefraudulenttransfersthattheTrusteemay avoid under § 544(b) pursuant to Mass. Gen. Laws ch. 109A, §§ 5(a)(2), 5(a)(8), 6(a), and 8 (Counts I and II) and under §548(a)(1)(B) (Count III), which avoided transfers the Trustee can recover andpreserve forthe benefit of the bankruptcyestate under §§550and 551. Requesting dismissal of the adversary proceeding, Hebert argues that the Trustee cannot avoidthepaymentsbecausetheywereneithermadebytheDebtorsnorwithfundsthattheDebtors hadapropertyinterestin. First,Hebertassertsthatthecreditcardissuersmadethepaymentsand nottheDebtorsthemselves. Therefore,Hebertsays,theDebtorswerenotthe“transferors”ofthe payments. Hebert further argues that the payments cannot constitute fraudulent transfers because the Debtors did not transfer any of the Debtors’ property that otherwise would have become propertyof the bankruptcy estate ascontemplatedbythe Bankruptcy Code or statelaw.4 II. DISCUSSION TodecideamotiontodismissforfailuretostateaclaimforreliefunderFed.R.Civ.Proc. 12(b)(6), made applicable to this adversary proceeding by Fed. R. Bankr. P. 7012(b), the Court must accept the averments in the complaint as true and determine whether those alleged facts are sufficient to “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007); see also Langadinos v. Am. Airlines, Inc., 199 F.3d 68, 69 (1st Cir. 2000).5 To assess plausibility, the Court must consider whether “the complaint warrant[s] 4BasedontheissuesraisedandargumentsmadebyHebertinHebert’sBriefSupportingDismissalandat thehearingontheMotiontoDismiss,theCourtwillconsiderHeberttohaveconcededtheTrustee’sability toestablishtheotherrequiredelementsofafraudulenttransferforpurposesoftheMotiontoDismiss. 5 Although the Motion to Dismiss does not contain a specific reference to Rule 12(b)(6), Hebert acknowledgesinabriefsupportingthemotionthatRule12(b)(6)istheapplicablelegalstandard. dismissal because it failed in tototo render plaintiff’s entitlement to reliefplausible.” Rodriguez- Reyes vs. Molina-Rodriguez, 711 F.3d 49, 55 (1st Cir. 2013) (quoting Bell Atlantic Corp. v. Twombly, 550U.S.554, 569n.14(2007)). A. Transfers Allowing the recovery of fraudulent transfers protects creditors from prepetition transactionsundertakenbythedebtorwhichdepletethepoolofassetsavailabletosatisfycreditors’ claims. DeGiacomo v. Sacred Heart Univ. Inc.(In re Palladino), 942 F.3d 55, 58 (1st Cir. 2019) (citing 5 Collier on Bankruptcy ¶ 548.01 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2017)). To that end, both §§ 544(b)(1) and 548(a)(1)(B) require that the payments to Hebert constitutedtransfersoftheDebtors’interestinpropertyinordertoberecoverablebytheTrustee. There is no dispute that the payments to Hebert were made by charges to or convenience checks from the Debtors’ credit card accounts. Hebert argues that because the credit card issuers transferred the funds, the payments were not made by the Debtors. The Trustee counters that the Debtors’creditcardissuersdidnotindependentlydecidetopayHebert;instead,theDebtorsmade the payments by taking affirmative action to incur debt on the Debtors’ credit cards via charges and/or conveniencechecksmade out to Hebert. Notably, in specifying that a trustee may avoid any transfer of property of the debtor, the plain language of both §§ 544(b)(1) and 548(a)(1)(B) does not limit the Trustee’s avoidance powers to transfers where the Debtors act as the “transferors.” And § 101(54) of the Bankruptcy Codebroadlydefines“transfer”toincludeindirect,absolute,orconditionalmodesofpartingwith property or an interest in property. 11 U.S.C. § 101(54). Neither party disputes that the Debtors made arequest totheircredit cardissuers toborrowfunds witha directionto forwardthose funds to Hebert. Since “transfer” includes indirect modes of disposition and neither §§ 544(b)(1) nor 548(a)(1)(B) limit the Trustee’s avoidance power to transfers made by a debtor, the Court finds Hebert’s focus on the transferor to be misplaced. As the Trustee asserts, and Hebert does not dispute, the Debtors’ credit card issuers forwarded funds to Hebert solely because the Debtors directed them to do so. The Debtors exercised control over disbursement and thereby utilized an indirect mode to voluntarily part with funds borrowed from their credit card issuers when they requestedtoincur debt anddirectedthat the borrowedfunds be providedtoHebert. B. Interestof theDebtor inProperty Thequestionremains,however,astowhetherthepaymentstoHebertconstitutedtransfers of the Debtors’ interest in property. An “interest of the debtor in property” is not defined in the Bankruptcy Code. The Supreme Court has found that the phrase “an interest of the debtor in property,” for purposes of avoidance actions, is coterminous with “property of the estate” as definedby§541(a)(1),“whichincludesalllegalorequitableinterestsofthedebtorinpropertyas of the commencement of the case” wherever located and by whomever held. Begier v. Internal Revenue Service, 496 U.S. 53, 58 and n. 3 (1990). A debtor’s property interests as of the date of atransferaredeterminedbystatelaw. Butnerv.UnitedStates,440U.S.48,54(1979). However, whilestatelawcreatesunderlyingpropertyinterests,federalbankruptcylawdeterminestheextent to which a property interest is property of the bankruptcy estate. In re TelexFree, LLC, 941 F.3d 576, 584 (1st Cir. 2019) (citing Butner, 440 U.S. at 55); Rine v. Rine Auctioneers Inc. v. Douglas Cty. Bank &Tr.Co.(Inre Rine & Rine Auctioneers,Inc.), 74F.3d854,857-58 (8thCir. 1996)). Property interests are created, and their extent is defined, “by existing rules or understandings that stem from an independent source such as state laws.” Haverhill Manor, Inc. v.Comm’rofPub.Welfare,368Mass.15,23(1975)(quotingRegentsofStateColls.v.Roth,408 U.S. 564, 577 (1972)). While the Court has not discerned, and neither party has cited to, any Massachusetts authority specifically addressing whether a debtor has a property interest in funds borrowedfromacreditcardissuerwhoforwardsthosefundsdirectlytoathirdpartyatthedebtor’s direction, “property” is broadly defined as “anything that may be subject to ownership” for purposesoftheMassachusettsUniformFraudulentTransferAct,M.G.L.ch.109A,§2. Generally, in determining whether a transfer constitutes a transfer of “an interest of the debtor in property,” most courts have applied a dominion/control test, which the Trustee asks the Court to apply here. See Parksv.FIA CardServs., N.A.(Inre Marshall),550F.3d1251(10thCir. 2008). Pursuantto the dominion/control test, “a transfer of property will be of ‘an interest of the debtor in property’ if the debtorexercised dominionor control over the transferredproperty.” Id. at 1255. Hebert, relying on the First Circuit’s focus in Palladino on the purpose behind fraudulent transferlaws–toprotectcreditorsfromadebtor’sprepetitiontransactionsthatdepletethepoolof assets later available to satisfy creditors’ claims – implores this Court to apply a “diminution of estate” test. See Palladino, 942 F.3d at 58. Pursuant to the diminution of estate test, “a debtor’s transferofpropertyconstitutesatransferof‘aninterestofthedebtorinproperty’ifitdeprivesthe bankruptcy estate of resources which would otherwise have been used to satisfy the claims of creditors.” Marshall,550F.3dat1256. AccordingtoHebert,thefundsborrowedandtransferred directly from the credit card issuers to Hebert could not be reached or collected by any creditor and would not have been available to pay creditors’ claims in this bankruptcy case. Therefore, Hebert argues, there was no diminution of the Debtor’s estate and the payments to Hebert were not fraudulent transfers. As discussed in Marshall, the majority view is that when a debtor transforms an offer of credit into loan proceeds disbursed to pay another creditor at the debtor’s direction, the debtor exercises control of the funds and deprives the bankruptcy estate of those funds despite never havingpossessionthereof. Marshall,550F.3dat1256(citingMeoliv.MBNAAm.Bank,N.A.(In re Wells), 382 B.R 355 (B.A.P. 6th Cir. 2008); Mukamal v. Bank of Am. (In re Egidi), 386 B.R. 884 (Bankr. S.D. Fla. 2008); Yoppolo v. Greenwood Trust (In re Spitler), 213 B.R. 995 (Bankr. N.D. Ohio 1997)). In Marshall, the Tenth Circuit, deciding that the debtors had exercised dominion or control over the funds at issue (funds borrowed from one credit card account to pay the balance on another account), stated that the transaction was “essentially the same as if [the] debtors had drawn on their [existing] line of credit, deposited the proceeds into an account within their control, and then wrote a check,” holding that “[i]n both scenarios, debtors obtained an interest in the loan proceeds even if the interest was only fleeting.” 550 F.3d at 1256-57. And, even in applying the diminution of the estate test, the Marshall court held that the proceeds from the line of credit “were an asset of the estate for at least an instant” before they were transferred “(perhapsonlyananosecond)later.” Id.at1258andn.6. Whileacknowledgingthenetzeroeffect ontheestateduetotheaccrualofadditionaldebt,theMarshallcourtequatedtheabilitytocontrol disbursementoftheproceedstophysicalcontroloftheproceedsandfoundthatabalancetransfer between credit cards constituted a transfer of “an interest of the debtor in property” that deprived the estate ofthose funds. Hebert argues that the Tenth Circuit, in Walters v. Stevens, Littman, Biddison, Tharp & Weinberg,LLC(InreWagenknecht),971F.3d1209(10thCir.2020),subsequentlydisavowedits Marshall decision in favor of applying the diminution of estate test to determine whether prepetition payment of the debtor’s legal fees by the debtor’s mother with the mother’s funds, which the mother considered a loan to debtor, was a preferential transfer. Based on the mother’s attestation that she agreed to make the loan to the debtor for the sole purpose of paying the legal fees and would not have made the loan for any other purpose, the Court found that the debtor did not exercise control or dominion over the proceeds since the debtor had no ability to direct their distribution. Id. at 1214. Because the funds never passed to the debtor or through the debtor’s account and the debtor had no role in delivering the funds to the recipient, the Court held that the loanproceeds wouldnot have beenavailable tosatisfycreditors’ claimsand therefore“the policy behindthe avoidance power is not implicated.” Id. (quotingBegier, 496U.S. at 58). Rather than reject the dominion/control test, the Court in Wagenknecht first considered the debtor’s inability to control distribution of the loan proceeds and seemingly applied both tests to determine an interestofthedebtorinpropertywasnottransferredbythedebtor’smother’spayment. Idat1215. ThefactsinthiscasearereadilydistinguishablefromWagenknechtsincenopartyhasallegedthat the credit card issuers conditioned approval of the Debtors’ requested transactions on the identity of theintended recipient. In some situations, § 541(a) incorporates “property in which the debtor did not have a possessory interest.” United States v. Whiting Pools, Inc., 462 U.S. 198, 205 (1983). The First Circuit has held that “[w]hen determining whether certain funds are considered ‘aninterest of the debtor in property,’ the ability of the debtor to exercise control over the property can be determinative.” Rileyv.Nat’lLumberCo.(InreReale),584F.3d27,31(1stCir.2009)(citations omitted); see also Howison v. Milo Enters., Inc. (In re Freaky Bean Coffee Co.), 494 B.R. 771, 781-782 (1st Cir. 2013) (considering debtor’s lack of exercise of control to determine that debtor did not have an interest in the funds at issue while noting that other courts have applied a diminution of the estate test). “[T]he ability to exercise control over the property is sufficient to establishownership.” Grayv.TravelersIns.Co.(InreNeponsetRiverPaperCo.),231B.R.829, 833 (B.A.P. 1st Cir. 1999) (citation omitted); see also Sigmon v. Royal Cake Co., Inc. (In re Cybermech, Inc.), 13 F.3d 818, 820-821 (4th Cir. 1994) (dominion and control are sufficient to demonstrate an interest in property). The Debtors requested loan proceeds from their credit card issuers and directed that the proceeds be disbursed to Hebert. Hebert does not allege that the credit card issuers could have stopped a transaction or payment or could have redirected the loan proceeds. The Debtors’ exercise of control over the disbursement of the credit card proceeds created an interest of the Debtors in the proceeds that the Debtors transferred to Hebert. This Court agrees with the majority view, as represented by the Marshall decision, that the Debtors’ ability to exercise control over the credit card convenience check proceeds by directing their disbursement is determinative in this case of whether an interest of the Debtors in property was transferred to Hebert. Ill. CONCLUSION For the foregoing reasons, the Court rules that the Trustee, in the complaint, has stated a plausible claim that within 2 years prior to the Petition Date, the Debtors transferred an interest of the Debtors in property to Hebert. The veracity of the Trustee’s allegations, the value that the Debtors received in exchange for the payments to Hebert, and the Debtors’ financial circumstances as of the time of each transfer are factual issues reserved for another day. Accordingly, the Court will deny the Motion to Dismiss. A separate order in conformity with this Memorandum will issue forthwith. By the Court Dated: September 30, 2022 Lhe kei . MS Elizabeth D. Katz United States Bankruptcy Judge