UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
DAVID PAUL FISHER
DEBTOR CASE NO. 93-60310
MAXIE HIGGASON, TRUSTEE PLAINTIFF
VS. ADV. NO. 93-6041
DAVID PAUL FISHER and
TAMARA CORNETT FISHER DEFENDANTS
This matter is before the Court on cross-Motions for Summary Judgment concerning the debtor's transfer of real estate to defendant Tamara Cornett Fisher, his former wife. This matter was submitted on the record on April 29, 1994. All parties have submitted briefs. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(F) & (H).
This matter was initiated by the filing of the plaintiff's Complaint on October 8, 1993. Therein he alleged a voidable transfer of real estate pursuant to 11 U.S.C.'544(b) and that the transfer was voidable as a preferential conveyance. The defendants filed their Answer on November 16, 1993. The plaintiff filed his Motion for Summary Judgment on March 3, 1994, alleging violations of 11 U.S.C. ''547(b), 548 and 544(b). The defendants filed their Motion for Summary Judgment on March 4, 1994. They contend that the transfer was neither fraudulent nor preferential.
The record in this case reveals the following facts: the defendants had entered into a Property Settlement and Separation Agreement on February 25, 1993, which provided that the debtor would receive the marital residence. In return he was to pay his wife $30,000.00 over a period of five years from the entry of the Decree of Dissolution of Marriage. The Agreement further provided that the debtor was to pay $348.16 per month as child support, pay all the medical and dental expenses of the couple's two children (13 and 14 years old at the time), and pay half the cost of their college educations.
A Decree of Dissolution of Marriage was entered on May 5, 1993. On July 13, 1993, the defendants executed a deed whereby the debtor transferred the marital residence to his ex-wife in return for being released from any and all child support obligations set out in the Property Settlement and Separation Agreement. The defendants had purchased the residence in 1990 for $55,000.00, and this is its apparent current value.
The debtor filed his Chapter 7 petition in this Court on August 3, 1993. He testified that he had had an altercation with an individual named Tommy Hart in February 1993. Sometime after he executed the July 13, 1993 deed but before he filed his bankruptcy petition, he learned that Mr. Hart had threatened to sue him. He testified that he consulted with his attorney about filing for bankruptcy before actually being sued. Upon being advised that this was possible, he filed. (D. Fisher depo., pp. 7-8). Defendant Tamara Fisher testified that she told the debtor about Mr. Hart's threat and that this took place after the July 13, 1993 deed was executed. (T. Fisher depo., pp. 7-8).
Both defendants testified that at the time they executed the deed, the debtor was not having financial problems. Tamara Fisher testified that the debtor was current on his child support payments. (D. Fisher depo., p. 13; T. Fisher depo., p. 7). The debtor's schedules show a total of $33,987.65 in liabilities and $5,631.00 in assets. If the debtor had retained the residence at the time of filing, those schedules would still have shown his liabilities to be greater than his assets ($33,987.65 + $30,000.00 owed to wife = $63,987.65 in liabilities; $5,631.00 + $55,000.00 = $60,631.00 in assets). This is without taking any exemptions into account.
According to a Motion for Relief from Stay filed by creditor Cumberland Security Bank on August 23, 1993, the debtor was in default upon two promissory notes, not having made a payment on either one since March 1993. In addition, the Motion stated that the debtor had allowed the insurance to lapse on one of the automobiles securing one of the notes, and the insurance policy had been cancelled in October 1992.
The plaintiff seeks to avoid the transfer of the residence pursuant to the "strong-arm powers" afforded him by 11 U.S.C.'544. Section 544(b) confers upon the trustee, with certain restrictions, the power to avoid any of the debtor's transfers that are voidable for fraud or any other reason under applicable state or federal law. The trustee may only act upon the rights of at least one unsecured creditor holding an allowable claim, against whom the transfer was invalid under such law. See 15 Collier on Bankruptcy, v. 4, '544.03. The debtor has several unsecured creditors holding allowable claims.
The plaintiff seeks to avoid the transfer as preferential pursuant to 11 U.S.C.'547(b). Section 547(b) provides that
...the trustee may avoid any transfer of an interest of the debtor in property--
1. to or for the benefit of a creditor;
2. for or on account of an antecedent debt owed by the debtor before such transfer was made;
3. made while the debtor was insolvent;
(A) on or within 90 days before the date of filing of the petition; or
(B) between 90 days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
5. that enables such creditor to receive more than such creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
The burden of proving the avoidability of the transfer is on the trustee pursuant to'547(g).
The debtor is presumed to have been insolvent during the 90 days preceding the filing of his petition pursuant to'547(f). Federal Rule of Evidence 301, made applicable in bankruptcy by FRBP 9017, provides that
a presumption imposes on the party against whom it is directed the burden of going forward with evidence to rebut or meet the presumption, but does not shift to such party the burden of proof in the sense of the risk of nonpersuasion, which remains throughout the trial upon the party on whom it was originally cast.
The defendants may therefore rebut the'547(f) presumption, and they attempted to do so by presenting testimony that the debtor had "no financial problems" before the transfer.
The Bankruptcy Code defines insolvency at 11 U.S.C.'101(32)(A) as a
...financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of--
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;
The debtor's own schedules are more than sufficient evidence of insolvency. They show a negative balance, whether the debtor had retained possession of his residence or not. This "balance sheet test" is the classic method of determining solvency. See Matter of Taxman Clothing Co., Inc., 905 F.2d 166, 169 (7th Cir. 1990) and In re Perry, 158 B.R. 694, 697 (Bkrtcy.N.D.Ohio 1993). In addition, there is no question that the transfer took place within 90 days of the filing of the debtor's petition.
The defendants' primary contention, however, is that the child support obligation was not an "antecedent debt", and that Tamara Fisher was not a creditor of the debtor. This is so, they argue, because an entity must possess a right to payment in order to be considered a creditor under the Code definitions of "creditor" and "claim". They contend that Tamara Fisher's "claim for future child support was not only contingent and unmatured at the time of filing of the bankruptcy, but it was totally unearned". (Defendants' Brief, p. 10).
This contention was addressed in a case involving the trustee's attempt to avoid a payment made by the debtor pursuant to a state court civil contempt order. In In re Mantelli, 149 B.R. 154 (9th Cir.BAP 1993), the debtor's ex-wife, to whom the payment had been made,
argue[d] that she was not a 'creditor' as defined by the Code because the contempt order did not give [her] a 'right to payment.' While [she] is correct that she could not have forced [the debtor] to pay the $3830.00 based upon the contempt order, she overlooks that she had a $3830.00 claim as a result of the damages caused by [the debtor's] acts. Under the contempt order [the debtor] had the option of serving five days in prison or satisfying [her] $3830.00 claim. He chose the latter.
Section 101(10)(A) defines 'creditor' as an 'entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor....' Section 101(5) defines a 'claim' as a:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured....'
From the exhaustive definition above it is clear that the intent of Congress was that a 'claim' should be defined broadly, encompassing even a contingent right to payment.
At p. 156. This Court agrees that the definition of a "claim" encompasses a contingent right to payment, and that such a claim stands in the same posture as any other in regard to the bankruptcy estate.
The defendants further contend that the nondischargeable nature of the child support obligation gave Tamara no right to payment when the debtor filed his bankruptcy petition. They state that since she had no claim against the debtor at the time he filed his petition, she will not receive a pro rata share of the bankruptcy estate. They go on to argue that she did not receive more by virtue of the transfer than she would have if the transfer had not been made. This is so, they contend, because absent the transfer she would still be entitled to child support payments, reimbursement for medical and dental expenses, and other benefits from the debtor.
This argument misconstrues the purpose of'547. As stated by the court in In re Lovett, 106 B.R. 551 (Bkrtcy.C.D.Ill. 1988),
...one of the purposes of Section 547 is to promote the equal treatment of creditors. ... In In re Kayajanian, 27 B.R. 711 (Bkrtcy.S.D.Fla. 1983), the court rejected the creditor's position that a payment it received prior to the debtor's bankruptcy did not constitute a preference because its debt was nondischargeable, stating:
'The test of a preference is whether or not a transfer or payment will have the effect to pay on one claim a larger dividend out of the estate of the debtor than the estate will pay on other claims of the same class. Collier on Bankruptcy (15th ed.) par. 547.37.
The purpose of Section 547(b) is to provide a ratable distribution amongst creditors. The fact that a nondischargeable debt may be paid outside the estate after bankruptcy does not create a priority which in effect is inconsistent with and contrary to the scheme of ratable distribution of the estate. ... '
At page 552.
In sum all of the elements of a'547(b) preferential transfer have been demonstrated in this matter. The transfer was made within 90 days of filing of the bankruptcy petition, while the debtor was insolvent, to a creditor on account of an antecedent debt, which enabled her to receive more than she would have if the transfer had not been made. The plaintiff has carried forward his burden of establishing that there is no genuine issue as to any material fact regarding the preferential nature of the transfer of the debtor's residence pursuant to 11 U.S.C. '547(b).
Because the preferential conveyance issue is dispositive of the case, it will not be necessary for the Court to further explore the fraudulent conveyance issues.
It is therefore the opinion of this Court that the plaintiff's Motion for Summary Judgment should be sustained, and that the defendants' Motion for Summary Judgment should be overruled. An order in conformity with this opinion will be entered separately.
By the Court -
Maxie Higgason, Esq., Trustee
Marcia Smith, Esq.