Feldman v. Carbone (In re Carbone)

615 B.R. 76

IN RE Bruno Marco CARBONE Debtor

Lynn E. Feldman, Trustee Plaintiff

v.Bruno Marco Carbone and Melissa Carbone, Defendants

Case No. 18-13852 (JKF)

Adv. No. 18-00239 (JKF)

United States Bankruptcy Court, E.D. Pennsylvania.

Signed February 6, 2020

Robert J. Birch, Robert J Birch, Esquire, Blue Bell, Pa, for Plaintiff.

Joseph L. Quinn, Ross, Quinn & Ploppert, P.C., Pottstown, PA, for Defendants.

OPINION

Jean K. Fitzsimon, United States Bankruptcy Judge.

Introduction

The Trustee has sued the Debtor and his wife to avoid and recover the Debtor's prepetition transfer of his home. The Trustee maintains that the transfer constitutes a fraudulent conveyance under applicable non-bankruptcy law. The Defendants filed an Answer to the Complaint asserting that the transfer was legitimate. Now before the Court is the Trustee's Motion for Summary Judgment. The Motion is opposed. For the reasons which follow, the motion will be denied.¹

Causes of Action

The Trustee brings this action under the Pennsylvania Uniform Voidable² Transfer Act (the Act), 12 P.S. § 5101, et seq. (made available to trustees by 11 U.S.C. § 544(b)(1) ). Her claims are based, alternatively, on the actual fraud provision of the Act, 12 P.S. § 5104(a)(1), and the constructive fraud provision, § 5104 (a)(2). The Trustee bears the burden of proof on this claim and may meet that burden by a preponderance of the evidence. Id. § 5104(c).

Applicable Standard

Motions for summary judgment are governed by Rule 56 of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."). Pursuant to Rule 56, summary judgment should be granted when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). For purposes of Rule 56, a fact is material if it might affect the outcome of the case. See Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The moving party has the burden of demonstrating that no genuine issue of fact exists. Celotex Corp. v. Catrett , 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).

The court's role in deciding a motion for summary judgment is not to weigh evidence, but rather to determine whether the evidence presented points to a disagreement that must be decided at trial, or whether the undisputed facts are so one sided that one party must prevail as a matter of law. See Anderson v. Liberty Lobby, Inc. , 477 U.S. at 251–252, 106 S.Ct. at 2512. In making this determination, the court must consider all of the evidence presented, drawing all reasonable inferences therefrom in the light most favorable to the nonmoving party, and against the movant. See Halsey v. Pfeiffer , 750 F.3d 273, 287 (3rd Cir. 2014).

To successfully oppose entry of summary judgment, the nonmoving party may not simply rest on its pleadings but must designate specific factual averments through the use of affidavits or other permissible evidentiary material that demonstrate a triable factual dispute. Celotex Corp. v. Catrett , 477 U.S. at 324, 106 S.Ct. at 2553. Such evidence must be sufficient to support a jury's factual determination in favor of the nonmoving party. Anderson, supra , 477 U.S. at 249, 106 S.Ct. at 2511. Evidence that merely raises some metaphysical doubt regarding the validity of a material fact is insufficient to satisfy the nonmoving party's burden. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 586, 106 S.Ct. 1348, 1355–56, 89 L.Ed.2d 538 (1986). If the nonmoving party fails to adduce sufficient evidence in connection with an essential element of the case for which it bears the burden of proof at trial, the moving party is entitled to entry of summary judgment in its favor as a matter of law. Celotex Corp. v. Catrett , 477 U.S. at 322, 106 S.Ct. at 2552.

Analysis of the Actual Fraud Claim

The Motion begins with the claim that the transfer constitutes actual fraud on the Debtor's part. That offense is set forth in § 5104 of the Act which states, in pertinent part:

(a) General rule.-- A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay or defraud any creditor of the debtor;

12 P.S. § 5104(a)(1).

Because there is no dispute over whether the transfer was made,³ the Court may proceed directly to the evidence bearing on the Debtor's state of mind. Since "individuals are rarely willing to admit intent, actual fraud is rarely proven by direct evidence." In re Pennsylvania Gear Corp. , 2008 WL 2370169, at *9 (Bankr.E.D.Pa. April 22, 2008). However, there are factors, commonly referred to as "badges of fraud," which courts consider in determining whether fraud has been proven by circumstantial evidence. Holber v. Dolchin Slotkin & Todd, P.C. (In re American Rehab & Physical Therapy, Inc.) , 2006 WL 1997431, at *15 (Bankr.E.D.Pa. May 18, 2006). The Act provides a non-exhaustive list of such factors for use in determining whether "actual intent" exists:

In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether:

(1) the transfer or obligation was to an insider;

(2) the debtor retained possession or control of the property transferred after the transfer;

(3) the transfer or obligation was disclosed or concealed;

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5) the transfer was of substantially all the debtor's assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

12 P.S. § 5104(b). Courts differ on how to apply these "badges." Compare In re Valley Bldg. & Const. Corp. , 435 B.R. 276, 285 (Bankr.E.D. Pa. 2010) (requiring a finding of "goodly" number of these factors to establish fraudulent intent) with In re Cohen , 142 B.R. 720, 728 (Bankr.E.D.Pa.1992) (stating that a "strong finding" as to just one badge will suffice); see also In re Cook , 126 B.R. 261, 269 (Bankr.E.D.Tex. 1991) quoting In re: Penner , 107 B.R. 171, 176 (Bkrtcy.N.D.Ind.1989) (stating that just one factor can support a finding of fraud and that "[t]he accumulation of several factors can lead inescapably to the conclusion that the debtor possessed a requisite intent.") A leading commentator explains that "[w]hatever badges of fraud a court uses, no particular badge is necessary, nor is any combination sufficient. The matter is always factual—the presence of badges of fraud permits but does not compel a finding of actual intent." 5 Collier on Bankruptcy ¶ 548.04[1][b][ii]

Certainly, the analysis should entail more than just totaling up the number badges for which evidence is adduced. This may be due, in part, to the disparate nature of the factors. One Bankruptcy Court confronted with the same issue, i.e., whether the debtor's conversion of nonexempt into exempt assets was intentional fraud or good faith estate planning,⁴ recognized this. See In re Crater , 286 B.R. 756 (Bankr.D.Ariz. 2002). So before beginning an analysis of the fraud badges, the Crater Court sorted them into three types:

Some of the badges are themselves indicative of concealment, deception or fraudulent intent :

2. The debtor retained possession or control of the property transferred after the transfer;

3. The transfer or obligation was ... concealed;

6. The debtor absconded; and

7. The debtor removed or concealed assets.

A second category of badges consists of three of them that do not implicitly suggest fraud but do suggest there must have been a motivation other than the transaction itself because it was not an economically rational decision for a debtor to make but for its effect to hinder or delay creditors:

1. The transfer or obligation was to an insider;

8. The value of the consideration received by the debtor was [not] reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

11. The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

The third category , however, consists of badges that may be innocent in themselves , or are merely timing factors that become suspicious only when combined with other factors:

4. Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

5. The transfer was of substantially all of the debtor's assets;

9. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; and

10. The transfer occurred shortly before or shortly after a substantial debt was incurred.

Crater , supra , 286 B.R. at 764–65 ; See also In re Glunk , 342 B.R. 717, 733 (Bankr.E.D.Pa.2006) (adopting the Crater analysis). The Court will analyze the evidence similarly.

Direct Indications Of Fraudulent Intent

From this category, the Plaintiff maintains that two badges of fraud exist: the Debtor retained the property even after having transferred it, and he removed assets. For its part, the Court finds that only the first badge is supported by the record: the transferor's retention of the property transferred. The Debtor transferred his home to his wife and to himself . His filings...