Jenkins v. Ward (In re Jenkins)

IN RE MATTHEW ALAN JENKINS, Debtor.DIANNA LEE JENKINS, Appellant, v. JAMES T. WARD, TRUSTEE FOR MATTHEW ALAN JENKINS, Appellee.

3:12-cv-851-RJC

UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NORTH CAROLINA CHARLOTTE DIVISION

Signed: September 6, 2013

ORDER

THIS MATTER comes before the Court on the Notice of Appeal (Doc No. 1), filed December 26, 2012 of Dianna Lee Jenkins (Appellant), her Supporting Brief (Doc. No. 3), and James T. Ward's (Appellee or Trustee) Responsive Brief. (Doc. No. 6).¹ The Court reviews the Order issued by the Bankruptcy Judge, (Order) Case No. 12-05033 (Bankr. Doc. No. 64).

I. BACKGROUND

In March 2010, Federated (Creditor) obtained a default judgment against Matthew Jenkins (Debtor). (Bankr. Doc. No. 55-1 at 2). The Debtor was served with a writ of execution in July 2010, but it was determined that the Debtor had no assets upon which to execute. Therefore, the writ was returned unexecuted. (Id.). The Debtor appealed the judgment to the North Carolina Appellate Court and final judgment was entered in November 2011. (Id.).

On April 11, 2012, the Debtor filed a pro se voluntary petition for relief pursuant to Chapter 7 of Title 11 of the Bankruptcy Code. (Bankr. Doc. No. 34-1). On June 8, 2012, Appellee, as trustee, filed an amended complaint alleging that Appellant Dianna Lee Jenkins was a recipient of fraudulent conveyances made by the Debtor and was in possession of property of the estate. (Bankr. Doc. No. 34). Specifically, Appellee sought to recover some or all of the alleged $400,000 that Debtor had received in lawsuit proceeds during a two year period, which had been deposited into the bank account of Appellant (his wife). (Id.). As of September 14, 2012, amended bankruptcy papers indicate that Debtor acknowledged collecting $226,031.33 in lawsuit settlement proceeds during the two years before the date of petition. (Bankr. Doc. Nos. 55-5 at 9; 80 at 5-6).

On October 29, 2012, Appellee filed a motion seeking partial summary judgment for the fraudulent conveyance claims asserted in the Complaint. (Bankr. Doc. No. 55) On November 13, 2012, Appellant responded. (Bankr. Doc. No. 63). On November 28, 2012, the Bankruptcy Court conducted a hearing at which Appellant was not present. On December 12, 2012, the Bankruptcy Court granted summary judgment as to Appellee's claims for actual fraud and partial summary judgment for constructive fraud. (Bankr. Doc. No. 64: Order). In the Order, the Bankruptcy Court held that Appellant was liable to Appellee for the value of the transfers made to her in the amount of $226,031.33 (Order at 20).

II. STANDARD OF REVIEW

28 U.S.C. § 158(a) provides district courts with jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. 28 U.S.C. § 158(a). On appeal, a district court reviews a bankruptcy court's findings for clear error, and reviews its conclusions of law denovo. In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992). Findings of fact are clearly erroneous when, in light of the complete evidentiary record, the reviewing court "is left with the definite and firm conviction that a mistake has been committed." McGahern v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1166 (4th Cir. 1997). Conversely, where there exist "two permissible views of the evidence, the fact finder's choice between them cannot be erroneous." Anderson v. Bessemer City, 470 U.S. 564, 574 (1985).

Finally, the existence of a final order is predicated on the bankruptcy court having constitutional authority to enter such judgment. Where, as here, the Court finds that the bankruptcy court lacks such authority to enter a final judgment, the ruling of the bankruptcy court is treated as proposed findings and recommendations for a final ruling by the district court. Stern v. Marshall, 131 S. Ct. 2594, 2601-02 (2011). 28 U.S.C. § 157(c)(1) establishes that "any final order or judgment shall be entered by the district judge after considering the bankruptcy judge's proposed findings and conclusions and after reviewing de novo those matters to which any party has timely and specifically objected."

III. DISCUSSION

Appellant has lodged several objections, ranging from general to specific, to the bankruptcy judge's order granting summary judgment. Appellant objects to the award of summary judgment in favor of Appellee for three general reasons: first, that the decision was inconsistent with the facts presented; second, that genuine issues of material fact existed, and, third, that Appellee was not entitled to judgment as a matter of law. The Court reviews these issues de novo. Appellant also provided numerous specific objections.² They are as follows:

(1) The Court erred by entering final judgment without jurisdiction;

(2) The Court erred in finding Appellant to be the initial transferee;

(3) The Court erred by failing to determine that the lawsuit proceeds were "assets" as defined by North Carolina law;

(4) The Court erred by ruling that the Debtor's lawsuit proceeds were "transferred" under North Carolina law;

(5) The Court erred in finding actual intent to hinder, delay or defraud;

(6) The Court erred by finding that the lawsuit proceeds were concealed or removed beyond the reach of creditors;

(7) The Court erred in the amount of the judgment awarded.

The Court reviews the findings of the Bankruptcy Judge de novo as to all of these issues.

A. Constitutionality of Final Order

Although this Court recognizes that bankruptcy judges are uniquely capable of adjudicating most effectively the myriad of matters related to bankruptcy proceedings, the Constitution reserves to Article III courts the authority to make final decisions in certain matters. Among the matters reserved to Article III courts are actions for fraudulent conveyance such as the one brought here. In Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), the Court explained that, although a core proceeding, a fraudulent conveyance action is akin to a common law contract suit rather than an intertwined component of federal regulation. Therefore, the right to a jury trial under the Seventh Amendment attaches. Id. at 54-56, 64-65. The Court in Stern redoubled its commitment to this holding by distinguishing from bankruptcy proceedings those actions "at common law that simply attempt [ ] to augment the bankruptcy estate [which are] the very type of claim that we held in . . . Granfinanciera must be decided by an Article III court. Stern, 131 S. Ct. at 2616.

The Court in Stern, however, did not divest bankruptcy courts of their jurisdiction to hear non-core matters that are otherwise related to a case under Title 11. Under 28 U.S.C. § 157(c)(1), the bankruptcy judge oversees discovery, takes evidence, and submits proposed legal and factual findings to the district court, which then reviews de novo those matters to which objection is made, and issues a final decision. Accordingly, this Court reviews the Bankruptcy Judge's findings and recommendations de novo as to those matters to which the Appellant has lodged specific objections.

B. Initial Transferee

11 U.S.C. § 550(a)(1) establishes that the initial transferee of property of a debtor may be held liable for return of that property or its value in an action brought by the trustee. Appellant argues that she is not an initial transferee as she did not exercise dominion and control over the property. To support such claim, Appellant cites Bowers v. Atlanta Motor Speedway, Inc. (In re Southeast Hotel Properties), 99 F.3d 151 (4th Cir. 1996). Bowers established that "in order to constitute the 'initial transferee' of property under § 550(a) of the Bankruptcy Code, a person or entity must have exercised legal dominion and control over the property." Id. at 156.

Appellant lodges two objections to the Bankruptcy Court's findings. First, Appellant maintains that the Bankruptcy Judge erred in finding that Appellant exercised legal dominion and control over the funds. Second, Appellant objects that the Bankruptcy Judge ignored the required test and incorrectly found that the Bowers court carved out an "equitable exemption."³

These objections are inapposite. First, Appellant presents a narrow definition of "exercise" that does not square with existing precedent. The evidentiary record in this case demonstrates that Appellant exercised legal dominion and control over the funds. She actively maintained the bank account in which the funds were held. (Bankr. Doc. 55-5 at 10). More importantly, despite having the legal right to do with those funds as she pleased, she allowed the Debtor to make use of them. (Id.; Bankr. Doc. No. 55-7 at 18-19).

In Bonded Fin. Servs., Inc. v. European Am. Bank, the Seventh Circuit held that "the minimum requirement of status as a 'transferee' is dominion over the money or other asset, the right to put the money to one's own purposes." 838 F.2d 890, 891 (7th Cir. 1996). While the Fourth Circuit expanded on Bonded to include a requirement that the transferee have "exercised" legal dominion and control over the money, it has otherwise consistently followed the description in Bonded of legal dominion and control as the ability to use funds as a party pleases. Unlike a "mere conduit" of the type described in Bowers, Appellant had the legal authority to prevent the Debtor from using the funds, but declined to do so. The authority to prevent another from using the funds for their purposes distinguishes an initial transferee from a 'mere conduit.' The latter are often financial institutions that receive and hold money as a matter of course, but lack the authority to prevent access to the funds by another with legal rights to use them. These facts are central to the distinction between an 'initial transferee' and a 'mere conduit.' Under Bowers, Appellant falls into the former classification. Once the funds were placed into an account in her name and under her maintenance, she possessed the legal right to use them as she pleased, including...