Hankins v. CKK Props. (In re Hankins)

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IN RE MARK HANKINS DEBTOR

MARK HANKINS, derivatively on behalf of the Chapter 13 Trustee PLAINTIFF v. CKK PROPERTIES, LLC DEFENDANT

No. 21-20019

ADV. No. 21-2003

United States Bankruptcy Court, E.D. Kentucky, Covington Division

May 23, 2022

MEMORANDUM OPINION

Plaintiff/Debtor Mark Hankins sold his home to Defendant CKK Properties, LLC prepetition. Despite having almost $40, 000 in equity in the property, Hankins received no funds at closing. CKK also did not satisfy Hankins' mortgage debt on the property in connection with the purchase; instead, it purchased Hankins' residence "subject to" the mortgage and promised to make monthly payments on Hankins' loan while he remained personally liable on that debt.

Hankins filed this case against CKK with derivative standing to act on behalf of his chapter 13 bankruptcy estate. The primary issue litigated at the trial held on February 24 and March 8 2022, concerned whether Hankins received reasonably equivalent value for challenged transfers to CKK. The Court requested and received limited post-trial briefing. Because Hankins proved that the sale of the residence to CKK constituted a constructively fraudulent transfer Hankins' chapter 13 estate is entitled to damages from CKK.

I. Procedural Background and Findings of Fact.^[1]

A. Hankins files his first chapter 13 bankruptcy case.

Hankins purchased a home in 2013 located at 2732 Shamu Drive in Hebron, Kentucky (the "Shamu Property") with a loan secured by a mortgage ultimately serviced by Nationstar Mortgage LLC d/b/a Mr. Cooper ("Nationstar"). In January 2019, Hankins was behind on his mortgage payments. He engaged attorney Aaron Beck to file a bankruptcy case. Hankins' confirmed chapter 13 plan in that case required him to make contractual post-petition mortgage payments directly to Nationstar. Hankins failed to do so and Nationstar moved for relief from the automatic stay. Hankins and Nationstar resolved the motion via an agreed order entered in October 2019, which allowed Nationstar to foreclose on the Shamu Property if Hankins did not pay the arrears and maintain his mortgage payments pursuant to the agreed order's terms.

B. Hankins lists the Shamu Property for sale, drawing CKK's interest, and dismisses his first bankruptcy case to enable a sale to CKK.

Around this same time, Hankins listed the Shamu Property for sale. He offered potential buyers a carpet and paint credit given damage Hankins' pets caused to the home's interior. CKK, through its agent Lori Matthews, contacted Hankins with interest in buying the Shamu Property. Hankins and Matthews began communicating through a series of text messages and emails, including about the terms of a potential sale of the Shamu Property to CKK. Plaintiff testified that it was through these messages that Matthews became aware of "everything" in his life, including his credit history and his inability to make his mortgage payments. Neither party moved the text or email exchanges into evidence at trial.^[2] At trial, Hankins' former bankruptcy attorney, Beck, testified that he and Matthews discussed CKK's interest in purchasing the Shamu Property from Hankins. Beck told Matthews that the bankruptcy court likely would not approve a sale to CKK on the proposed terms. While no purchase agreement was introduced into evidence, the witness testimony included that the agreement contained two significant terms: (1) CKK agreed to make payments to Nationstar on Hankins' mortgage debt, and (2) CKK granted Hankins a month-to-month tenancy in the Shamu Property for up to five months after the closing at the rental rate of $800 per month.

Gery Conner, a member of CKK, testified that CKK subsequently conditioned an offer to purchase the Shamu Property on Hankins' dismissal of his bankruptcy case. Hankins voluntarily dismissed his case in January 2020 and agreed to sell the Shamu Property to CKK.

On February 18, 2020, before the sale was consummated, Nationstar filed a state court complaint to foreclose on the mortgage on the Shamu Property based on payment deficiencies.

C. Hankins receives no funds at the closing for the sale of the Shamu Property to CKK.

On February 26, 2020, Hankins appeared at the office of Novakov Law, PLLC, and attorney Linda Novakov, for a closing on the Shamu Property's sale to CKK. Novakov routinely performs real estate closings. No CKK representative attended the closing. Novakov took all actions necessary to close the sale transaction. She prepared the deed, the closing statement, and other closing documents, and acted as the escrow agent (through an affiliated entity, Blue Moon Title Agency ("Blue Moon")).

Novakov had a prior business relationship with CKK. She had performed several real estate closings for CKK. She also was its landlord and her self-directed IRA had loaned money to CKK in an amount not disclosed at trial. Conversely, Novakov had not met Hankins prior to the closing, let alone been engaged to do work for him. At the closing, Hankins asked Novakov questions about employment law issues, but Novakov did not give Hankins legal advice; rather, she referred Hankins to other attorneys with expertise in that area. Both Hankins and CKK paid Novakov for preparing documents for the closing and acting as the escrow agent, but she was otherwise financially disinterested in the transaction.

At the hour-long closing, Novakov presented documents for Hankins' review and signature, and Hankins voluntarily signed the closing documents, including the settlement statement (HUD-1) and the warranty deed that transferred the Shamu Property from Hankins to CKK for the stated consideration of $168, 000. The warranty deed, recorded on March 6, 2020, provided that "said Property is conveyed subject to the Mortgage from Mark A. Hankins" assigned to Nationstar. [ECF No. 69-41.] CKK did not, however, execute any agreement with Nationstar by which CKK assumed responsibility for the Shamu Property loan and released Hankins from that debt. Nor did Hankins sign a lease agreement presented to him at the closing.

Hankins understood and agreed that a portion of the purchase price for the Shamu Property would be paid directly to Nationstar to satisfy Hankins' mortgage arrearage. CKK provided funds to Blue Moon in connection with the closing to make the cure payment. Blue Moon wired $16, 064.23 to Nationstar or its agent on February 27, 2020. Nationstar applied these funds to Hankins' account the next day to cure the mortgage arrears and defray related charges and legal fees due and dismissed its foreclosure suit against Hankins. After applying this payment, the principal balance on Hankins' mortgage debt was $112, 032.10.

Other credits to the purchase price in CKK's favor included (1) a $3, 000 paint and carpet credit (consistent with the credit Hankins offered when he listed the Shamu Property); (2) a $248.14 credit for prorated taxes (2020 county real estate taxes attributable to the pre-closing period during which Hankins owned the Shamu Property and which Novakov called a typical credit afforded at a real estate closing); (3) a $23, 500 "holdback" for a "principal reduction"; and (4) a $9, 000 "holdback" for possession.

As to the two "holdback" credits against the purchase price, Conner testified that the $23, 500 withheld from Hankins at the closing represented the $800 monthly rent payment due from Hankins to CKK over 30 months ($24, 000, less $500 so that Hankins would not need to bring money to the closing). According to Connor, CKK required the holdback to protect CKK from the risk that Hankins may fail to make monthly rent payments-as he had fallen significantly behind on his mortgage payments. Conner explained that the $23, 500 holdback also would ensure CKK's ability to make mortgage payments to Nationstar and pay Hankins the $9, 000 holdback credit due to him when he ultimately vacated the Shamu Property. Hankins, on the other hand, testified he did not understand the $23, 500 holdback credit. As to the $9, 000 holdback credit, Hankins understood that CKK would pay Hankins this amount in connection with his departure from the Shamu Property-but it was unclear to Hankins exactly when the payment would be made to him. Novakov testified that she had no input into the credits taken against the purchase price; rather, Novakov received information from CKK regarding the terms of sale, including the credits, and prepared the paperwork consistent with CKK's instructions.

D. Disputes arise shortly after the closing and the parties enter into the Settlement Agreement.

Hankins was immediately dissatisfied with the closing because he left Novakov's office without receiving any funds in exchange for conveying the Shamu Property to CKK. As a result, Hankins refused to provide CKK with either the Nationstar mortgage statements or information that would allow CKK to access the mortgage account and confirm the monthly payment which it had agreed to pay. Starting at the end of April 2020, an affiliate of CKK, JCNK Properties, LLC, began sending monthly checks to Nationstar for $784.84-the amount CKK understood to be Hankins' monthly mortgage payment. But, unbeknownst to CKK, the monthly amount due to Nationstar had increased. Consequently, Nationstar was not receiving full monthly mortgage payments on Hankins' loan, leading to mounting delinquencies.

Although Hankins continued to reside at the Shamu Property after the closing, he did not pay CKK monthly rent. CKK sent Hankins demands for rent in March 2020. CKK then advised Hankins that it would deduct past-due rent owed to CKK from the $9, 000 to be paid to Hankins when he vacated the property. Ultimately CKK sent Hankins a notice on June 18, 2020, purporting to terminate his tenancy in 30 days and demanding that ...