Lowe v. Internal Revenue Serv. of the U.S. (In re Rouquette)

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IN RE: MICHAEL ZEPH ROUQUETTE AND, ETTA DAWN ROUQUETTE, Debtors.

JOHN PATRICK LOWE CHAPTER 7 TRUSTEE, Plaintiff. v. INTERNAL REVENUE SERVICE OF UNITED STATES OF AMERICA, Defendant.

No. 21-51507-CAG

Adversary No. 22-05033-CAG

United States Bankruptcy Court, W.D. Texas, San Antonio Division

December 9, 2022

CHAPTER 7

ORDER GRANTING PLAINTIFF JOHN PATRICK LOWE, CHAPTER 7 TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AGAINST DEFENDANT INTERNAL REVENUE SERVICE (ECF NO. 12) ^[1]

CRAIG A. GARGOTTA CHIEF UNITED STATES BANKRUPTCY JUDGE

Came on to be considered the above-numbered adversary proceeding and in particular, Plaintiff John Patrick Lowe Chapter 7 Trustee's ("Trustee") Motion for Summary Judgment against Internal Revenue Service, United States of America ("Defendant") (ECF No.12) ("Motion for Summary Judgment") filed on August 19, 2022, the parties' responses, and supporting evidence. For the reasons herein the Court finds that Trustee's Motion for Summary Judgment should be GRANTED.^[2]

Jurisdiction

The Court has subject matter jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b). This proceeding involves the Chapter 7 Trustee's assertion of a cause of action under 11 U.S.C. § 548.^[3] Trustee asserts that this matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B), (H), and (O). Trustee has consented to this Court's jurisdiction to enter a final order. (ECF No. 7). Defendant has consented to this Court's jurisdiction to enter a final order. (ECF No. 9). As such the Court finds that it has the requisite statutory authority to enter a final order in this proceeding.

Legal Standard for Summary Judgment

Summary judgment is appropriate "if 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); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Federal Rule of Bankruptcy Procedure 7056 applies Federal Rules of Civil Procedure 56 to adversary proceedings. If summary judgment is appropriate, the Court may resolve the case as a matter of law. Celotex, 477 U.S. at 323; Blackwell v. Barton, 34 F.3d 298, 301 (5th Cir. 1994). The Fifth Circuit has stated "[t]he standard of review is not merely whether there is a sufficient factual dispute to permit the case to go forward, but whether a rational trier of fact could find for the non- moving party based upon evidence before the court." James v. Sadler, 909 F.2d 834, 837 (5th Cir. 1990) (citing Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).

When the movant has produced competent and sufficient evidence, "its opponent must do more than simply show there is some metaphysical doubt as to the material facts" for the court to deny summary judgment. Id. The "adverse party must set forth specific facts showing that there is a genuine issue for trial." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986) (citing Fed.R.Civ.P. 56(e)) (internal quotations omitted). The inquiry is whether "there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Id. Conversely, if the record "taken as a whole, could not lead a rational trier of fact to find for the non-moving party, then there is no genuine issue for trial." LeMaire v. Louisiana, 480 F.3d 383, 390 (5th Cir. 2007).

Factual and Procedural Background

Trustee seeks a determination that Debtors' prepetition payment of their estimated taxes constitutes a fraudulent transfer under § 548(a)(1)(B). Trustee alleges in his First Amended Complaint the following operative facts:

Debtors made five transfers to the Defendant in the six months before the chapter 7 petition was filed. All five transfers were for estimated tax payments for the Debtors' year 2021 federal income tax liability. Trustee argues that the transfers removed assets from the bankruptcy estate that could have paid claims of the Debtors' bankruptcy estate because Debtors' 2021 tax liability was not yet due on the date of Debtors' chapter 7 petition. Therefore, the effect of the transfers was to reduce estate assets and not to reduce the Debtors' liabilities.

Trustee argues the transfers are constructively fraudulent transfers because the transfers total $26,000.00 for an estimated tax liability of $8,552.00. As such, the effect of the transfers was to deplete the Debtors' assets by $26,000.00 and to reduce Debtors' liabilities by only $8,552.00. Moreover, Trustee argues the remainder-$17,448.00-was a deposit and a transfer for no consideration. Trustee alleges the Debtors transferred the money to Defendant, making that money unavailable to pay allowed claims in the case.

Defendant filed a proof of claim in the amount of $232,283.86 in Debtors' bankruptcy case on February 4, 2022. Defendant filed its Answer on May 12, 2022, admitting, for the most part, Trustee's allegations in the First Amended Complaint but denying that the estimated tax payments were fraudulent transfers.

Stipulation of Facts

The parties entered into a Joint Stipulation of Facts. (ECF No. 11). The Joint Stipulation stipulates to the following facts for purposes of summary judgment:

1. Debtors Michael and Etta Dawn Rouquette filed a chapter 7 bankruptcy petition on December 8, 2021.

2. Between June 15, 2021 and December 6, 2021, Debtors made estimated tax deposits totaling $26,000.00 toward their expected 2021 tax year Form 1040 individual income tax liability. Specifically, the Debtors made deposits of:

a. $2,000.00 on or about June 15, 2021;

b. $4,000.00 on or about July 15, 2021;

c. $5,000.00 on or about October 15, 2021;

d. $4,995.00 on or about December 6, 2021; and

e. $10,005.00 on or about December 6, 2021.

3. All five transfers were made from the Debtors' account xxxx-8169 at Randolph Brooks Federal Credit Union containing the Debtors' property.

4. Based on Debtors representations in their bankruptcy petition, Debtors were insolvent at the time of the transfers.

5. 26 U.S.C. § 6654(d) requires estimated tax payments in the lesser of 90% of the current year's (2021) tax liability or 100% of the previous year's liability. The Debtors' previous year's liability, for the year 2020, was $8,552.00.

6. As of the date of the Stipulation, Debtors have not yet filed their 2021 return. Their extension request shows an estimated tax liability of $21,000. This estimated tax liability is supported by reported earnings, non-employee compensation, and unemployment income totaling $177,443.

Discussion

Trustee filed his Motion for Summary Judgment on August 19, 2022. (ECF No. 12). Trustee seeks relief on the following causes of action:

Fraudulent Transfer Under 11 U.S.C. § 548(a)(1)(B)

Trustee argues that he is entitled to judgment on Count I of the First Amended Complaint, which alleges a fraudulent transfer to the IRS that is avoidable under 11 U.S.C. § 548. Trustee's First Amended Complaint against the Internal Revenue Service seeks to avoid and recover five transfers the Debtors made in the year 2021 towards an estimated year 2021 federal income tax liability as constructively fraudulent transfers under §§ 548 and 550.^[4] The First Amended Complaint in Count II also seeks the disallowance of the IRS's proof of claim in the case because being the transferee of avoidable transfers which have not been returned to the estates, the IRS's claim should be disallowed under § 502(d).^[5]

Section 548(a)(1)(B) provides in relevant part that:

(1) The trustee may avoid any transfer . . . of an interest of the debtor in property . . . that was made . . . within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily- . . .

(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[.]

"'Section 548 and fraudulent transfer law generally attempt to protect creditors from transactions which are designed, or have the effect, of unfairly draining the pool of assets available to satisfy creditors' claims, or which dilute legitimate creditor claims at the expense of false or lesser claims.'" Redmond et al v. SpiritBank (In re Brooke Corp.), 541 B.R. 492, 507 (Bankr. D. Kan. 2015) (quoting 5 Collier on Bankruptcy, ¶ 548.01[1][a] at 548-11 (Alan N. Resnick & Henry J. Sommer, eds. in-chief, 16th ed. 2015)). "Section 548 covers two classes of transactions. 'The first class of improper transactions-those made with actual intent-have been condemned for over 450 years.' In the second class, the 'unfairness stems from a disparity of exchange coupled with the debtor's lack of other assets. . . . In these cases, fraud is presumed.'" Id. (quoting 5 Collier on Bankruptcy, ¶ 548.01 at 548-10).

The First Amended Complaint seeks the avoidance and recovery of five transfers, in the total amount of $26,000.00, from the Debtors to the Defendant. Trustee seeks the avoidance of the transfers as constructively fraudulent transfers under §§ 548 and 550.

To obtain the relief he seeks, Trustee must prove that:

a. the transfers were the transfers of an interest of the Debtors in property;

b. the transfers were made within two years before the date of the filing of the petition;

c. the Debtors received less than a reasonably equivalent value in exchange for the transfers; and

d. the Debtors were insolvent or became insolvent as a result of the transfers.

§ 548(a)(l)(B)(i) and (ii).

The Debtors were insolvent when the case was commenced on December 8, 2021. Their petition discloses...