UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
ALVIN E. WRIGHT
DEBTOR CASE NO. 89-00457
SUSAN M. JOHNSON, TRUSTEE PLAINTIFF
VS. ADV. NO. 90-0051
ALVIN E. WRIGHT, MARY ROSE WRIGHT,
BRANDON MARK STIFF, MAREN BROOK STIFF,
MONETTE WRIGHT and KAREN LEAH STIFF DEFENDANTS
This matter is before the Court on the Motion of the trustee for Summary Judgment that transfers by the debtor to his children and grandchildren are avoidable by the trustee. The trustee contends that pursuant to FRCP 56 there are no genuine issues of material fact and that she is entitled to judgment as a matter of law. 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)(H).
This proceeding was initiated by the filing of the trustee's Complaint on March 5, 1990. Defendants Alvin E. Wright and Mary Rose Wright filed their Answer on April 9, 1990. The guardian ad litem appointed for the infant defendants, Brandon Mark Stiff and Maren Brook Stiff, filed his Answer on their behalf on May 17, 1990. On the same date the guardian ad litem filed a Motion to Dismiss the First, Second, Third, Fourth, and part of the Fifth Causes of Action of the trustee's Complaint alleging that certain transfers are avoidable under 11 U.S.C.'548(a)(1) or (2), said transfers having occurred outside the applicable statute of limitations period.
Defendants Monette Wright and Karen Leah Stiff filed their Answer on May 29, 1990, as well as a Motion to Dismiss the First, Second, Third, Fourth, and part of the Fifth Causes of Action of the trustee's Complaint on the same grounds as alleged by the guardian ad litem. An Order sustaining the guardian ad litem's Motion to Dismiss was entered on June 14, 1990. An Order sustaining the Motion to Dismiss of defendants Monette Wright and Karen Leah Stiff was entered on July 2, 1990. The trustee's Motion for Summary Judgment was filed on November 2, 1990. Defendants Alvin E. Wright and Mary Rose Wright filed their Response to Motion for Summary Judgment on November 13, 1990.
Defendants Monette Wright and Karen Leah Stiff filed their Objection to the Motion for Summary Judgment on November 13, 1990, and the guardian ad litem filed his Objection on the same date. The guardian ad litem filed his Supplemental Response on December 5, 1990. The trustee and defendants Alvin E. Wright and Mary Rose Wright stipulated on December 13, 1990, that no consideration was paid by Brandon Mark Stiff or Maren Brook Stiff for the transfer of real property as set forth in paragraph 4 of the trustee's Complaint.
There are six transfers of real property which are the subject of this action. The transfers were made to the children and grandchildren of the debtors between June 1987 and February 1988 for little or no consideration. In each case, the debtors retained a life estate in the property. The trustee maintains that each of these transfers is voidable pursuant to KRS 378.030, 378.020, and 378.010, and 11 U.S.C.'544(b).
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. Pikeville National Bank is such a creditor of the debtor.
The Court must therefore look to applicable Kentucky law concerning fraudulent transfers. KRS 378.010 renders any gift, conveyance, assignment, or transfer made with intent to delay, hinder or defraud creditors void as against such creditors. KRS 378.020 states that any gift, conveyance, assignment, or transfer made by a debtor without valuable consideration shall be void as to all his then existing creditors.
KRS 378.030 provides for an action on a fraudulent conveyance or transfer and for the creation of a lis pendens on the subject property. The trustee alleges that certain "badges of fraud" are present in this case, including inadequate consideration, the grantor's retained possession of property, and transfer of property between close family members. Bank of Josephine v. Hopson, 516 S.W.2d 339 (1974).
Other "badges of fraud" include fictitiousness of consideration and false statements, concealment or failure to record, insolvency of the grantor, the transfer of all of the debtor's property when he is financially embarrassed or insolvent, and failure of the parties to testify. Magic City Coal & Feed Co. v. Lewis, 164 Ky 454, 175 S.W. 992. As the trustee points out, the existence of "badges of fraud" creates an inference that the transfer is void as to creditors, Gallagher v. Ping's Trustee, 87 S.W.2d 130 (1935), and places the burden upon the transferees to prove that the transfers were made for valid consideration and in good faith. Griggs v. Crane's Trustee, 200 S.W. 317 (1918). The trustee maintains that the existence of "badges of fraud" renders the transfers of the subject property avoidable under either KRS 378.010 or 378.020.
The standard of proof of fraud in Kentucky is clear and convincing evidence. Keck v. Wacker, 413 F.Supp. 1377, 1383 (E.D. Ky 1976). Therefore in order for the trustee to avoid any transfers as fraudulent, she must do so by clear and convincing evidence; to merely create an inference will not suffice. Defendants Alvin E. and Mary Rose Wright have offered testimony to the effect that the transfers were intended as estate planning devices. (Alvin and Mary Rose Wright depo., pp. 35-36). In addition, they have testified that they retained property valued in excess of $850,000.00 which they mortgaged to Pikeville National Bank. (Alvin and Mary Rose Wright depo., pp. 22-26). This testimony goes to the intent and solvency of the debtor, material facts in this case.
On the other hand, Alvin Wright testified that his coal business began to experience problems in 1987 and that thereafter several of his creditors filed lawsuits against him. Pikeville National Bank had filed a lawsuit in early 1987 and as a consequence thereof his home was sold. A deficiency of some $80,000.00 was left after the sale of the house. (Alvin and Mary Rose Wright depo., pp. 7-11). The record in this case indicates that as of the time of the first conveyance to his daughter Monette Wright in June 1987, Alvin Wright had unsecured debts totalling more than $71,000.00.
As concerns the application of KRS 378.020 herein, this statute states clearly that any gift, conveyance, assignment, or transfer made by a debtor without valuable consideration shall be void as to his then existing creditors. Intent is not an issue in regard to this provision, except as concerns subsequent creditors. In Myers Dry Goods Co., et al. v. Webb, et al., 297 Ky 696, 181 S.W.2d 56, the court held that even a voluntary conveyance is good as against subsequent creditors, unless it was executed as a cover for future fraudulent schemes or was executed with the fraudulent intent to hinder and delay those thereafter extending him credit. As to existing creditors, Kentucky cases have held that the purpose of the fraudulent conveyance statute (KRS 378.020) is to put creditors, at the time of the conveyance, in the same position they would have enjoyed had title remained or been taken in the name of the debtor. McMurray v. McMurray, Ky., 410 S.W.2d 139.
As indicated above, there were creditors to whom Alvin Wright was indebted at the time he conveyed the subject property to his daughters and grandchildren. Such being the case, the only issue is whether the conveyances were for valuable consideration. Defendants Alvin and Mary Rose Wright and the guardian ad litem on behalf of the infant defendants have already stipulated that no consideration was paid by the infant defendants for the transfer of real property as set forth in paragraph 4 of the trustee's Complaint. Nothing in the testimony of any of the other defendants, upon whom the burden has been placed to show that valuable consideration was given, demonstrates that any more than the nominal consideration recited in the deeds of conveyance was given.
In view of the record and the proof offered in this case, it is the opinion of this Court that the trustee has carried forward her burden of demonstrating that there is no genuine issue as to any material fact and that she is entitled to judgment as a matter of law that the subject conveyances are avoidable pursuant to KRS 378.010, 378.020, and 11 U.S.C.'544(b). It is therefore the opinion of this Court that the trustee's Motion for Summary Judgment should be SUSTAINED.
By the Court -
John T. Hamilton, Esq.
Eddy Coleman, Esq.
Gail M. Bunch, Esq.
Gene Lynn Humphries, Esq.
Susan M. Johnson, Esq., Trustee