CASE NO. BK02-43392, A03-4077.United States Bankruptcy Court, D. Nebraska.
March 13, 2007
MEMORANDUM
TIMOTHY MAHONEY, Chief Judge
Trial was held in North Platte, Nebraska, on January 29, 2007, regarding the Complaint filed by Philip M. Kelly, Trustee. Jeanelle R. Lust appeared for Philip M. Kelly and Kent Person appeared for Barton Damrow and Lynse Schmidt. This memorandum contains findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052 and Federal Rule of Civil Procedure 52. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(H).
BACKGROUND
Dennis Damrow filed a Chapter 7 bankruptcy petition on December 18, 2002. In January of 2000, Dennis R. Damrow, and his then-spouse, Sherry Damrow, transferred two vehicles to their college-age children for no consideration. In November 2001, Dennis Damrow sold stock in a closely held corporation for $75,000. He endorsed the check and delivered it to his spouse. She employed the services of an attorney and set up an irrevocable trust for the benefit of the two children. The proceeds of the sale of stock were transferred by her into the trust. The two children were named as trustees and beneficiaries. Neither Mr. Damrow nor his spouse retained any ownership interest or control over the assets in the trust.
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The transfers described above took place within four years of the date Mr. Damrow filed his bankruptcy petition. The Chapter 7 trustee has sued the children, in their trustee and individual capacities, to avoid the transfers of the vehicles and the proceeds of the sale of stock pursuant to 11 U.S.C. § 544 and the Nebraska Uniform Fraudulent Transfer Act (UFTA), Neb. Rev. Stat. §§ 36-701 through -712. The Nebraska statute allows such an action to be brought within four years after the transfer was made. Neb. Rev. Stat. § 36-710.
One section of the Nebraska statutes, § 36-706(a), provides that a transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer and the debtor was insolvent at the time of the transfer. Neb. Rev. Stat. § 36-706(a). The creditor, or the trustee in this case, must prove by clear and convincing evidence both the “reasonably equivalent value” and the “insolvency” prongs of the statute in order to avoid the transfer as a fraudulent transfer. West GateBank v. Eberhardt, 202 Neb. 762, 277 N.W.2d 104 (1979). However, where the transfer is between close relatives without adequate consideration, the burden is upon the parties to the transaction to establish that it was done in good faith. Schulze v. Jensen, 191 Neb. 253, 214 N.W.2d 591 (1974).
The term “insolvency” is defined in Neb. Rev. Stat. § 36-703. At § 36-703(a) the debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.
Under subsection (b), a debtor who is generally not paying his debts as they become due is presumed to be insolvent.
After consideration of the facts which will be listed below, and the application of the Uniform Fraudulent Transfer Act, I find that, with regard to the motor vehicle transfers, the trustee has failed to present sufficient evidence to permit me to find that the motor vehicles were transferred at a time when Mr. Damrow was insolvent. On the other hand, there is no question the proceeds of the sale of stock were transferred, to the trust and therefore the children, at a time when Mr. Damrow was insolvent and the transfers were made by him without receiving a reasonably equivalent value in exchange for the transfers. Therefore, the transfer of the proceeds of the sale of stock is avoided and a money judgment will be entered in favor of the trustee and against defendants Sherry Damrow, Barton Damrow and Lynse Schmidt.
FINDINGS OF FACT
1. In 1999, shareholders in Carter Feeders, Inc., an entity in which the debtor owned a certain amount of stock, and which the debtor managed, believed, after investigation, that Mr. Damrow had mismanaged the business and had used corporate funds for his own benefit. They did not bring suit against him but did request an accounting.
2. Before the claim of the Carter Feeders, Inc., shareholders was liquidated, Mr. and Mrs. Damrow, in January of 2000, transferred two vehicles to their two children, Barton Damrow and Lynse Damrow (now Schmidt). These vehicles were vehicles that the children had been in
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possession of and driving for several years. The children were both college students and used the vehicles to get to and from school, jobs, etc.
3. The children did not pay the parents for the transfer of the vehicles.
4. At the time of the vehicle transfers in January of 2000, although Mr. Damrow was a guarantor on significant obligations, and although the shareholders of Carter Feeders, Inc., believed Mr. Damrow owed money to them or to the corporation, no lawsuits had been filed and no collection activities had been initiated. Mr. Damrow’s various business operations were still ongoing, and he was apparently current with most of his required payments.
5. On this record, it cannot be said that he was insolvent under Neb. Rev. Stat. § 36-703(a) or (b) in January of 2000.
6. In January of 2001, both the First National Bank of Omaha, which was owed $10,000,000 by Mr. Damrow individually and his businesses, and Adams Bank and Trust, which was owed $3,000,000, had begun collection activity. Damrow Cattle Company, the business of Mr. Damrow, was in bankruptcy and the banks were enforcing their rights against the personal and real property of Mr. and Mrs. Damrow. Mr. Damrow did not have sufficient assets at that time to completely pay the debts owed to the banks. He was, therefore, insolvent as that term is defined in Neb. Rev. Stat. § 36-703(a).
7. In November of 2001, Mr. Damrow sold his shares in Carter Feeders, Inc., to First National Bank of Holdrege. He received $75,000 for the shares. He immediately transferred those funds, by the endorsement of the check from the bank or otherwise, to his former spouse, Sherry Damrow. She then transferred the proceeds of the sale of stock to an irrevocable trust for the benefit of the two children and named the two children as trustees.
8. Neither the children, as trustees or in their individual capacity, nor Sherry Damrow, gave Dennis Damrow reasonably equivalent value in exchange for the transfer of the stock sale proceeds.
9. In November of 2001, when the transfer of the proceeds of the sale of stock to the trustees of the irrevocable trust occurred, Sherry Damrow and the children were aware of the severe financial difficulty Mr. Damrow was in. Sherry Damrow knew about it because her home had been foreclosed upon and her personal property, including motor vehicles, had been taken by one or more banks. The children knew about it because they had been told that their home was being foreclosed.
10. The children as trustees then distributed most of the funds to the children in their individual capacity and loaned the balance to Dennis Damrow to be used for his attorney fees and other expenses. The proceeds held in trust were exhausted within a year from the creation of the trust.
LEGAL CONCLUSIONS
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As described above, the Nebraska Uniform Fraudulent Transfer Act permits the avoidance of transfers of property from an individual who is insolvent and who does not receive reasonably equivalent value in exchange for the transfer. Such a transfer may be avoided by one or more of the transferor’s creditors. The Chapter 7 trustee may act on behalf of such creditor to bring the avoidance action. 11 U.S.C. § 544(a) and (b)(1). Under § 544, the trustee may avoid the transfer by using applicable law, in this case, the Nebraska UFTA, Neb. Rev. Stat. § 36-701, et seq.
To avoid the transfer, the trustee must prove that the transferor, Dennis Damrow, was insolvent at the time the transfer was made and Mr. Damrow did not receive reasonably equivalent value for the exchange. As recited in the preamble and the findings of fact, with regard to the transfer of the two vehicles, the trustee has failed to present sufficient evidence to show that Mr. Damrow was insolvent at the time of the transfers. Therefore, judgment will be entered in favor of defendants Barton Damrow and Lynse Schmidt with regard to the transfer of the vehicles.
Concerning the proceeds of the stock sale, Mr. Damrow was insolvent at the time of the transfer and did not receive reasonably equivalent value in exchange for the transfer. Therefore, the trustee may, under 11 U.S.C. § 544 and Neb. Rev. Stat. § 36-708(a)(1), avoid the transfer and recover the proceeds or obtain a money judgement against the transferees unless the transferees qualify for an exception to that remedy.
Neb. Rev. Stat. § 36-709(b) states that if the transfer is voidable under subdivision (a)(1) of § 36-708, the creditor may recover judgment for the value of the asset transferred or the amount necessary to satisfy the claim, whichever is less. The judgment may be entered against the first transferee or against the person for whose benefit the transfer was made or any subsequent transferee other than a good faith transferee who took for value. Neb. Rev. Stat. § 36-709(b)(1) and (2).
Sherry Damrow is the first transferee of the proceeds of the sale of stock. She is not a good faith transferee who took for value. She gave no value in exchange for the transfer and had knowledge of the financial condition of the transferor, Dennis Damrow. She therefor cannot be said to have accepted the transfer in good faith. However, the complaint does not list her as a transferee who should be found liable for the amount transferred. No judgment shall be entered against her.
Judgment may be entered against the children as subsequent transferees. Under Neb. Rev. Stat. § 36-709(b)(2), the children are subsequent transferees who did not take in good faith nor for value. Whether they are deemed simply a subsequent transferee or a second subsequent transferee because they individually accepted the transfer from the trustees of the irrevocable trust, they are still liable because there does not exist a prior good faith transferee who took for value and they themselves are not good faith transferees who took for value. See U.S. v. Estate of Kime, 950 F. Supp. 950 (D. Neb. 1996).
CONCLUSION
The transfer of the vehicles is not avoided because of the fact finding that Dennis Damrow, the transferor, was not insolvent on the date of the transfer. The transfer of the $75,000 proceeds
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from the sale of Mr. Damrow’s stock is found to be void as a fraudulent transfer under the Nebraska Uniform Fraudulent Transfer Act, Neb. Rev. Stat. §§ 36-701 to -712. Judgment shall be entered against the subsequent transferees, Barton Damrow and Lynse Schmidt, for the total amount of the transfers, $75,000.
Separate judgment to be filed.