Harden v. Harrison (In re Harrison)

627 B.R. 832

IN RE: Christopher S. HARRISON, Debtor.

Holmes P. Harden, Trustee, Plaintiff

v.Brandy Harrison and Christopher S. Harrison, Defendants.

Case No. 19-05730-5-SWH

Adversary Proceeding No. 20-00113-5-SWH

United States Bankruptcy Court, E.D. North Carolina, Fayetteville Division.

Signed February 22, 2021

George F. Sanderson, III, The Sanderson Law Firm, PLLC, Raleigh, NC, for Plaintiff.

Kathleen O'Malley, Janvier Law Firm, Rebecca F. Redwine, Benjamin E.F.B. Waller, Jason L. Hendren, Hendren Redwine & Malone, PLLC, Raleigh, NC, for Defendants.

ORDER GRANTING MOTION TO DISMISS PURSUANT TO RULE 12(b)(6)

Stephani W. Humrickhouse, United States Bankruptcy Judge

The matter before the court is the Motion to Dismiss Pursuant to Rule 12(b)(6) (the "Motion to Dismiss") filed by Defendant Christopher S. Harrison (the "debtor") on December 2, 2020. Dkt. 17. The debtor filed supporting memorandum of law contemporaneously with the motion. Dkt. 18. An Amended Motion to Dismiss was filed later that day. Dkt. 19. Defendant Brandy Harrison ("Mrs. Harrison") filed a response in support of the Motion to Dismiss on December 7, 2020. Dkt. 23. Plaintiff Holmes P. Harden, the chapter 7 trustee, filed a memorandum of law in opposition to the Motion to Dismiss on December 23, 2020. Dkt. 28. The debtor filed a reply on January 7, 2021, Dkt. 29, and Mrs. Harrison filed a response to the debtor's reply on January 11, 2021, Dkt. 30. A hearing was held on January 14, 2021 by video conference. At the conclusion of the hearing, the court took the matter under advisement.

BACKGROUND

The debtor filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on December 13, 2019, which was later converted to a case under chapter 7 of the Bankruptcy Code on September 22, 2020.¹ On Schedules A/B, the debtor listed an interest in a Guardian Whole life insurance policy (policy no. 6449446) with a cash value at the petition date of $814,917 (the "Life Insurance Policy"). Mrs. Harrison, the debtor's wife, was listed as the beneficiary on the Life Insurance Policy on the petition date. On Schedule C, the debtor claimed as exempt the $814,917 cash value of the policy pursuant to N.C. Gen. Stat. § 1C-1601(a)(6) and N.C. Const. Art. X § 5.²

This adversary proceeding was filed by the trustee on September 2, 2020 seeking to avoid the transfer of the beneficial interest in the Life Insurance Policy. The trustee alleges that on September 23, 2019 Mouzon Bass III ("Mr. Bass") caused Ebenconcepts, Inc. ("Ebenconcepts"), the debtor's former employer, to assign the debtor the Life Insurance Policy as part of the consideration for Mr. Bass receiving shares in Ebenconcepts. At the time of the assignment, Ebenconcepts was the named beneficiary of the Life Insurance Policy. Under the terms of the Life Insurance Policy, the debtor, as assignee, had the right to change the beneficiary designation. Sometime between the assignment of the Life Insurance Policy on September 23, 2019 and the filing of the bankruptcy petition on December 13, 2019, the debtor changed the beneficiary on the Life Insurance Policy to Mrs. Harrison.

The trustee asserts two claims for relief: (1) avoidance of transfer pursuant to 11 U.S.C. §§ 548 and 550, and (2) avoidance of transfer pursuant to 11 U.S.C. § 544 and N.C. Gen. Stat. § 39-23.4(a)(1)-(2), -23.5(a). The debtor filed the pending Motion to Dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) asserting that the complaint should be dismissed for failure to state a claim upon which relief can be granted. The defendants contend that when the debtor changed the beneficiary on the Life Insurance Policy, there was no transfer of an interest in property of the debtor that could be avoided under either bankruptcy or state law. For the reasons explained below, this adversary proceeding will be dismissed.

DISCUSSION

I. Standard of Review

Under Federal Rule of Civil Procedure 12(b)(6), as made applicable to adversary proceedings through Federal Bankruptcy Rule 7012, a defendant may move to dismiss a case for failure to state a claim upon which relief may be granted. A complaint must contain an assertion of facts that, when accepted as true, "state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ; Ashcroft v. Iqbal , 556 U.S. 662, 678-79, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). "The purpose of a Rule 12(b)(6) motion is to test the sufficiency of the complaint." Edwards v. City of Goldsboro , 178 F.3d 231, 243 (4th Cir. 1999). A Rule 12(b)(6) motion should be granted if, "after accepting all well-plead allegations in the plaintiff's complaint as true and drawing all reasonable factual inferences from those facts in the plaintiff's favor, it appears certain that the plaintiff cannot prove any set of facts in support of his claim entitling him to relief." Id. at 244.

II. Claim One: Avoidance of Transfer pursuant to 11 U.S.C. §§ 548 and 550

The principal issue before the court is whether the change in beneficiary designation constituted a transfer of an interest of the debtor in property.

Section 548 of the Bankruptcy Code permits a trustee to "avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor" that was made or incurred within 2 years prior to the petition date if the debtor

(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted; or

(B)

(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)

(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

11 U.S.C. § 548(a)(1). The Bankruptcy Code defines "transfer" as "each mode ... of disposing of or parting with – (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54)(D) ; Ivey v. First Citizens Bank & Trust Co. (In re Whitley) , 848 F.3d 205, 208 (4th Cir. 2017).

Section 548 not only requires a "transfer," but a "transfer of an interest of the debtor in property." Ivey v. First Citizens Bank & Trust Co. , 539 B.R. 77, 83 (M.D.N.C. 2015), aff'd , 848 F.3d 205 (4th Cir. 2017). Construing these phrases together illuminates that a transfer alone is not necessarily fraudulent if it was not a transfer of the debtor's property. Id. Thus, a transfer is not subject to avoidance "if it did not or could not diminish the estate." Id. Although the Fourth Circuit does not require actual harm to establish a fraudulent transfer, "the actual or potential effect of a transfer is relevant." Id. at 85 (discussing Tavenner v. Smoot , 257 F.3d 401 (4th Cir. 2001) ).

The phrase "an interest of the debtor in property" is generally held to be the equivalent of "property of the estate." 5 Collier on Bankruptcy P. 548.03[2][a] (Richard Levin & Henry J. Sommer eds., 16th ed. 2020) (citing Begier v. IRS , 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (finding that "property of the debtor" is best understood as "property that would have been part of the estate had it not been transferred before the commencement of the bankruptcy proceedings")). Property of the bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

Assets become property of the estate upon commencement of the case, and "exemptions represent the debtor's attempt to reclaim those assets."

Reeves v. Callaway , 546 Fed. App'x. 235, 240 (4th Cir. 2013) (discussing Schwab v. Reilly , 560 U.S. 770, 785, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010) ). Under this system where property is not exempt until a debtor claims an exemption in it, "creditors can be harmed by transfers of potentially exempt property because it is not a foregone conclusion that such property will be exempt from the estate." Tavenner , 257 F.3d at 407.

In their respective attempts to persuade the court, the parties either cite to or attempt to distinguish the case of Russell v. Owen , 203 N.C. 262, 165 S.E. 687 (1932). In that case, the North Carolina Supreme Court held that the beneficiary of a life insurance policy acquires a vested interest from the time the insurance takes effect, if the contract contains no reservation of the right to change the beneficiary, assign the policy, or divert the proceeds. Id. at 688. However, when the right of a beneficiary is subject to be changed under the terms of the contract, "the interest of the beneficiary is not property but a mere expectancy which cannot ripen into a vested interest before the death of the insured." Id. at 689. Under the terms of the Life Insurance Policy, the debtor retains the right to change the beneficiary designation. Thus, in accordance with Russell v. Owen , until after the death of the debtor, the beneficiary does not have a property right, but only a mere expectancy. See also Mackenzie...