Case No. 97-17458-SSM, Adversary Proceeding No. 98-1082United States Bankruptcy Court, E.D. Virginia
November 11, 1998
Joseph W. Morris, Elaine K. Morris, Arlington, Plaintiffs pro se
Henry Counts, Jr., Esquire, Alexandria, VA, of Counsel for the defendants
MEMORANDUM OPINION
STEPHEN MITCHELL, Bankruptcy Judge
A hearing was held in open court on October 13, 1998, on the post-trial motion of the defendants for relief from this court’s judgment entered August 25, 1998 — denying the debtor a discharge and imposing a judgment against the debtor and his wife, jointly and severally, in favor of the trustee for certain of the funds used by the debtor to purchase a house held by him and his wife as tenants by the entirety — and on the motion of the plaintiffs to increase the amount of that judgment. After receiving additional evidence and hearing the contentions of the parties, the court took both motions under advisement.[1]
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Background
The relevant facts are set forth in detail in the findings of fact made orally on the record at the conclusion of the trial held on August 21 and 24, 1998, and will only be briefly summarized.
Salman K. Abu-El-Hawa (“the debtor”) filed a voluntary petition under chapter 7 of the Bankruptcy Code in this court on October 7, 1997. Joseph W. and Elaine K. Morris are judgment creditors who held a claim against the debtor, on the date of filing, in the amount of $10,780.00. On March 20, 1998, they filed a timely complaint objecting to the debtor’s discharge and seeking to avoid, as a fraudulent transfer, the debtor’s use of individually-owned assets to purchase a house owned by himself and his wife, Fadia El-Hawa (“Mrs. El-Hawa”), as tenants by the entirety.
The house, which was located at 436 Orchard Street, N.W., Vienna, Virginia, was purchased by the debtor and his wife on April 28, 1997. Title was taken as tenants by the entirety with common-law right of survivorship. The purchase price was $206,900, of which $144,000 was paid by the proceeds of a purchase-money mortgage loan made to the debtor and his wife by First Republic Mortgage Corp. At settlement, the debtor and his wife were credited with a $2,000 deposit, and paid an additional $58,981.94 to close. Those funds came
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from a withdrawal from a First Union National Bank checking account which was shown on the account statements as being solely in the debtor’s name. Mrs. El-Hawa testified, however, that she also had signature authority over the account.
The funds used to close derived from two deposits that had been made to the account the prior month. The first was a $46,985.00 wire transfer on March 31, 1997, from Arab Supply Trading Corporation, Saudi Arabia. The debtor testified that Arab Supply Trading is owned by the father of his employer, Saleh Mustafa. Both the debtor and his wife testified that the funds were a gift to them for the specific purpose of purchasing the house. The second deposit to the account was in the amount of $19,803.70 on March 24, 1997. The evidence as to the source of the second deposit was contradictory. Both the debtor and his wife testified at trial that the funds were a gift to Mrs. El-Hawa from her mother in the amount of $18,000. That sum, the account statement shows, was deposited in the account on February 11, 1997, but was withdrawn the same day. The debtor and his wife testified that the funds were withdrawn because Mrs. El-Hawa did not trust her husband and wanted to hold on to them until the closing. As noted, the subsequent deposit on March 24, 1997 (one month prior to the closing) is for an amount $1,803.70 greater than the $18,000 gift to which the debtor’s wife testified. Moreover, in an examination under oath conducted by the United States Trustee in connection with the bankruptcy case, the debtor testified that the money used to purchase the house came in part from the sale of an automobile for which he had received $19,500. Additionally, answers by the debtor and his wife to interrogatories state that the balance of the purchase price, over and above the funds from Mr. Mustafa, came, variously, from a personal injury settlement and from gifts by Ahmed al-Hawa, uncle to the children.
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About six months prior to the purchase of the house, the Morrises obtained a judgment against the debtor in the General District Court of the City of Alexandria in the amount, including costs and attorneys fees, of $10,380. The debtor became aware of the judgment at the latest on October 18, 1996, when he filed a notice of appeal. Additionally, he was told that the reason his mortgage from First Republic carried a relatively high rate of interest — 10.8% for a one-year ARM — was because his credit was bad as a result of the judgment. Thus, he was aware, when he purchased the house, of the outstanding judgment.
After purchasing the house, the debtors moved in and began making monthly mortgage payments in the amount of $1,357.13 per month. A payment summary obtained from First Republic and admitted at trial showed that payments in that amount were made in June, July, August, October, and November 1997. The payment summary also showed a payment of $14,714.26 credited on September 4, 1997. The debtor testified that all mortgage payments were made out of the checking account. The debtor’s bank statements showed payment of a check in the amount of the regular monthly mortgage payment for June, July, and August 1997, as well as for October and November 1997, but showed no payment — either in the regular payment amount or the $14,714.26 reflected on the mortgage company payment summary — in September 1997. The debtor emphatically denied that he had made, or that anyone had made for him, a $14,714.26 mortgage payment in September 1997. The effect of the payment, as shown on the mortgage company’s payment summary, was to reduce the principal from $144,636.75 to $131,224.22, a paydown of $13,412.53.
It was in the context of this evidence that the court found (a) that the $46,985.00 wire transfer from Saleh Mustafa was intended as a gift to enable the debtor and his wife to
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purchase the property, such that the use of the funds for that purpose did not constitute an avoidable transfer; (b) that the remaining $11,996.94 used to close the purchase was derived from the debtor’s separate property (most probably from the sale of the automobile), such that one-half of that amount was an avoidable gift from the debtor to his wife; (c) that an extraordinary payment of $14,714.26 was made in September 1997 with actual intent to hinder, delay, and defraud creditors such that the amount — $13,357.13 — in excess of the normal mortgage payment constituted an avoidable transfer. The court had ruled, earlier in the trial, that the plaintiffs lacked standing in their own right to bring an avoidance action, but, with the consent of the chapter 7 trustee, the court allowed prosecution of the avoidance claim (Count II) for the benefit of the chapter 7 trustee. Accordingly, the court entered a judgment in favor of the chapter 7 trustee against the debtor and his wife on account of the avoidable transfers in the amount of $18,855.60, and imposed a lien against the tenancy by the entireties property to secure that judgment. The court found that the plaintiffs had not sustained their burden of proof with respect to denial of discharge under § 727(a)(7). The court, however, found that the extraordinary mortgage payment in September 1997, having been made with actual intent to hinder, delay, or defraud creditors, was sufficient to bar the debtor’s discharge under § 727(a)(2), Bankruptcy Code. Additionally, the court ruled that the debtor’s schedules were knowingly false in several material respects, so as to require denial of discharge under § 727(a)(4).[2] A judgment reflecting the court’s ruling was signed on August 24, 1998, and was
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entered on the docket on August 25, 1998. The defendants’s motion for relief was filed on August 28, 1998, and the plaintiff’s motion to alter or amend was filed on September 3, 1998.
The New Evidence
Each side has presented the court with additional evidence. The debtor’s evidence relates to the alleged $14,714.26 extraordinary mortgage payment in September 1997. The plaintiffs’ evidence concerns the ownership of the bank account into which the $46,985.00 wire transfer from Saleh Mustafa was deposited.
A.
Addressing first the $14,714.26 payment shown on the mortgage company’s “Servicing Worksheet” that was admitted as evidence at trial, it is now abundantly clear that no such payment was in fact made. On or about July 25, 1997, the debtor’s wife wrote and signed her husband’s name to a check drawn on the First Union checking account payable to First Republic Mortgage Corp for the August 1997 mortgage payment. The words
stated the amount of the check as $1,357.13 (the normal mortgage payment) but the figures, as a result of an error by the debtor’s wife, reflected an amount of $13,357.13. The mortgage company and the bank both treated the instrument as a $13,357.13 item, and it was processed in the mortgage company’s records in that amount. Since there was not even remotely that much money in the checking account, however, the bank did not pay the check and returned it to the mortgage company. Because of an internal processing error, the mortgage company did not deduct the credit, and when First Republic received the next check (in the correct amount of $1,357.13) it added that amount to the erroneous $13,357.13 to arrive at the $14,714.26 shown on the trial exhibit. The company has since corrected its records, and a revised
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payment summary, properly authenticated at the hearing on the motion to alter or amend by its senior accountant, reflects that the debtor made only a single $1,357.13 payment in each of the months the loan was held by First Republic before it was sold. Debtor’s counsel represented that he had not objected to the original exhibit used at trial because he had contacted First Republic’s general counsel and had been assured that the exhibit was accurate. It was only after the trial that the mortgage company admitted that the original loan servicing worksheet was in error and corrected its records.
B.
The additional evidence proffered by the plaintiffs is that the only signature card First Union has on file for the checking account contains the debtor’s signature alone and not his wife’s. A computer printout of the bank’s records with respect to the account, however, does contain a notation, dated May 20, 1998, “INFO CAN BE GIVEN TO SADIA [sic] ABUHAWA, SHE’S BEING ADDED TO ACCT PER EM#034339.”
Discussion A.
Under Federal Rule of Civil Procedure 60(b), as incorporated by Federal Rule of Bankruptcy Procedure 9024, relief from a judgment or order may be granted, among other reasons, for
(1) mistake, inadvertence, surprise, or excusable neglect;
(2) newly discovered evidence which by due diligence could not have been discovered in time to move for a new trial under Rule 59(b)[.]
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For the stated grounds, the motion must be made within one year of the judgment in question. Additionally, a party seeking relief from a judgment under Rule 60(b) must make a threshold showing of “timeliness, a meritorious defense, a lack of unfair prejudice to the opposing party, and exceptional circumstances.” Dowell v. State Farm Casualty Automobile Ins. Co., 993 F.2d 46, 48 (4th Cir. 1993).
Federal Rule of Civil Procedure 59(a), as incorporated by Federal Rule of Bankruptcy Procedure 9023, allows a court, on motion made within ten days of the entry of judgment, to grant a new trial for, among, other reasons, newly-discovered evidence:
(2) in an action tried without a jury, [the court may grant a new trial] for any of the reasons for which rehearings have heretofore been granted in suits in equity in the courts of the United States. On a motion for a new trial in an action tried without a jury, the court may open the judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law or make new findings and conclusions, and direct the entry of a new judgment.
(emphasis added). Finally, under Federal Rule of Civil Procedure 59(e), as also incorporated by Federal Rule of Bankruptcy Procedure 9024, a party, without moving for a new trial, may move within ten days to alter or amend a judgment. A motion to alter or amend a judgment under Rule 59(e) requires showing that relief is proper (1) to accommodate an intervening change in controlling law; (2) to account for new evidence not available at trial; or (3) to correct a clear error of law or prevent manifest injustice. Hutchinson v. Staton, 994 F.2d 1076, 1081
(4th Cir. 1993).
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B.
The defendants’ motion, although styled a motion for relief from the judgment under Rule 9024, is functionally a motion for new trial under Rule 9023, since it was filed within ten days of the entry of the judgment and asserts the existence of evidence not reasonably available at the time of the original trial. In this case, the evidence — the corrected accounting records of First Republic Mortgage Corporation — was not reasonably available at the time of the trial. For one thing, First Republic did not acknowledge its original mistake until after the trial. Additionally, the defendants’ attorney had specifically inquired of First Republic prior to the trial and was assured that the loan servicing worksheet was correct. Because he had no independent evidence to attack the accuracy of the worksheet,[3] counsel felt he had no basis to object to its admissibility at trial. The court concludes that the new evidence, in the form of the corrected loan payment summary and the testimony as to how the original error had occurred, was not reasonably available at the time of the trial, was plainly material, and warrants the reopening of the record.
As discussed above, in a trial without a jury, the court, at the hearing on a motion for new trial, may “take additional testimony, amend findings of fact and conclusions of law or make new findings and conclusions, and direct the entry of a new judgment.” Fed.R.Civ.P. 59(a) (2). The court will, therefore, amend the findings of fact to delete the finding that the debtor made an extra $13,357.13 mortgage payment in September 1997 with actual intent to
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hinder, delay or defraud creditors. The court will also amend its conclusions of law to delete the conclusion that the amount of that payment constituted an avoidable transfer. Since the finding that the extraordinary payment had been made was the basis for the court’s conclusion that the debtor should be denied a discharge under §727(a)(2), Bankruptcy Code, a discharge will not be denied on that basis. The amended findings, however, do not affect the court’s ruling that the debtor knowingly filed false schedules. Accordingly, the amendment of the findings does not affect the court’s separate ruling denying the debtor a discharge under § 727(a)(4), Bankruptcy Code.
C.
The plaintiffs’ motion to alter or amend contends that Mrs. El-Hawa’s testimony at trial that she had signature authority over the account is belied by the bank’s records showing that the only signature card on file is one with the debtor’s signature alone. Thus, it is argued, under the principles stated in Shaia v. Meyer (In re Meyer), 206 B.R. 410
(Bankr. E.D. Va. 1997) (Tice, J.), the funds belonged to the debtor, and his use of the funds to purchase the tenancy by the entireties real estate was an avoidable transfer under § 548 and § 544(b), Bankruptcy Code.
The court, however, is not persuaded that the lack of a signature card containing Mrs. El-Hawa’s signature undermines the court’s factual findings as to the ownership of the funds in the account. Clearly, if A and B both own a pot of money, and A places it in his own bank account for safekeeping, the mere deposit of the funds into that account does not deprive B of his ownership interest in them. The testimony of the debtor and his wife was that Mr. Mustafa intended the funds as a gift to the two of them for the purchase of the house. The court found
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that testimony credible, notwithstanding the contrary inference that might be drawn from the fact that the account was only in the debtor’s name. (There was no evidence that Mrs. El-Hawa had any bank account in her own name.) It would indeed appear that Mrs. El-Hawa does not have formal signature authority over the account. At the same time, the account notation that information could be given to her and that “SHE’S BEING ADDED TO ACCT” is not fundamentally inconsistent with her trial testimony. Finally, her testimony at the hearing on October 13th that she was the one who signed the monthly mortgage payment checks (albeit using her husband’s name) is consistent with her belief that she was entitled to exercise control over the funds in the account and reflects the reality that the funds in the account were available for their joint benefit. Accordingly, the court declines to alter or amend the judgment so as to conclude that the use of the $46,985.00 gift from Mr. Mustafa to purchase the house constituted an avoidable transfer.
D.
Although not raised by either party, the court does conclude that one other aspect of its findings of fact and conclusions of law was in error. The court, as noted above, found that the remaining $11,996.94 paid at settlement over and above the gift from Mr. Mustafa was the debtor’s sole property. The court held that one-half of that amount constituted an avoidable gift to Mrs. El-Hawa. On further reflection, however, the court concludes that the entire amount of the payment, and not merely one-half, is avoidable under the analysis of Meyer. That case treated the use of funds inherited by the debtor to pay off the mortgage against the property he and his wife owned as tenants by the entirety as a transfer to the tenancy by the entirety, not merely to the wife. Meyer, 206 B.R. at 415-16. Put another way, what has been
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put beyond the reach of (nonjoint) creditors, by being invested in tenancy by the entirety real estate, is the entire $11,996.94. Accordingly, the court on its own motion will amend its findings and conclusions to reflect that $11,996.94 of the funds used to purchase the property were the husband’s separate property and that their use for that purpose constituted an avoidable transfer under § 548(a)(2), Bankruptcy Code, which permits a bankruptcy trustee to avoid any transfer of the debtor’s property occurring within one year of the filing of the bankruptcy petition if the debtor received “less than a reasonably equivalent value in exchange” and the debtor was insolvent on the date the transfer was made or was rendered insolvent by the transfer.[4]
Accordingly, an amended judgment will be entered in favor of the trustee in the amount of $11,996.94, and a lien will be imposed against the property in that amount to secure the judgment.
E.
A separate order will be entered consistent with this opinion.