UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

PIKEVILLE DIVISION

IN RE:

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

MEMORANDUM OPINION

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.

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.

Dated:

By the Court -

____________________________________

Judge

Copies to:

John T. Hamilton, Esq.

Eddy Coleman, Esq.

Gail M. Bunch, Esq.

Gene Lynn Humphries, Esq.

Susan M. Johnson, Esq., Trustee

mwright.opi