Schlant v. Smierciak (In re Creeley)

644 B.R. 264

IN RE Kevin C. CREELEY, Debtor.

Mark J. Schlant, Trustee in Bankruptcy for Kevin C. Creeley, Plaintiff,

v.Marie E. Smierciak, Defendant.

BK 21-10522 CLB

AP 21-1030 CLB

United States Bankruptcy Court, W.D. New York.

Signed September 23, 2022

Mark J. Schlant, Esq., 1600 Main Place Tower, 350 Main Street, Buffalo, New York 14202, Chapter 7 Trustee.

Thomas Denny, Esq., Law Office of Thomas Denny, 331 Alberta Drive, Suite 214, Amherst, New York 14226, Attorney for Kevin C. Creeley and Marie E. Smierciak.

DECISION & ORDER

Carl L. Bucki, Chief U.S.B.J.

The Chapter 7 trustee moves for summary judgment in an adversary proceeding brought under 11 U.S.C. § 548 to avoid a pre-petition transfer from the debtor to the mother of his minor child. The primary issue is whether the satisfaction of a moral duty provides reasonably equivalent value for an allegedly fraudulent transfer. A further question is whether the debtor retains an exemption under 11 U.S.C. § 522(d)(11)(D) for property traceable to a payment on account of personal bodily injury.

The parties do not dispute the essential facts of this case. Kevin Creeley and Marie Smierciak are the parents of a teenage daughter who presently resides with her mother. Creeley and Smierciak were never married to each other. Rather than to seek a determination of support obligations in state court, the mother accepted an informal arrangement of financial assistance from the father. On or about December 28, 2020, Creeley recovered the net sum of $26,329.94 as a settlement of a personal injury claim. Two days later, he gave $8,000 of those proceeds to Smierciak, to enable her to purchase an automobile. By mid-January of 2021, Creeley had spent all but $4,500.23 of his settlement. By May, essentially all of the proceeds were dissipated.

Kevin Creeley filed a petition for relief under Chapter 7 of the Bankruptcy Code on May 17, 2021. Schedules filed with that petition show no non-exempt assets with which to satisfy the claims of creditors. Three months later, the trustee commenced the present adversary proceeding against Marie Smierciak for a return of the $8,000 that she had received. In his amended complaint, the trustee seeks to avoid the transfer as a fraudulent conveyance under 11 U.S.C. § 548. Alternatively, to the extent that the $8,000 represents the repayment of an obligation owed by the debtor, the trustee asks to avoid the transfer as a preference under 11 U.S.C. § 547.

Both Creeley and Smierciak are represented by the same counsel. Marie Smierciak answered the trustee's complaint on October 10, 2021, and on December 17, the trustee filed the present motion for summary judgment. Subsequently, Kevin Creeley amended his schedules to claim an exemption in property traceable to the personal injury settlement. The trustee has also objected to that exemption. After the presentation of argument on three separate occasions, the matter is now ready for decision.

Claim to Recover Fraudulent Conveyance

In relevant part, section 548(a)(1) of the Bankruptcy Code provides as follows:

"The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation incurred ... by the debtor, that was made or incurred on or 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, or became insolvent as a result of such transfer or obligation ...."

Smierciak here concedes that she received $8,000 from the debtor less than two years prior to commencement of this bankruptcy case and at a time when the debtor was insolvent. However, she disputes the lack of equivalent consideration and contends that the payment satisfied a moral and legal duty to provide for the care of a dependent child. Smierciak represents that the daughter needs access to reliable transportation. The defendant asserts that the payment was based on an understanding that the $8,000 would be used to purchase an automobile that would facilitate care for the debtor's dependent.

The defendant misreads the requirements for liability under 11 U.S.C. § 548. This statute does not necessarily limit exposure in every instance where the debtor receives consideration. Rather, subdivision (a)(1)(B)(i) applies whenever the debtor "received less than a reasonably equivalent value in exchange for such transfer." Value is then defined in 11 U.S.C. § 548(d)(2)(A) to mean "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or a relative of the debtor." (Emphasis added). Support for a dependent child may constitute consideration, but for purposes of section 548, value excludes payment on account of an unperformed promise of support.

In interpreting section 548(d)(2)(A), courts have distinguished support obligations from "unperformed promises of support." See Nathan v. Libra (In re Libra) , 584 B.R. 550, 562–64 (Bankr. E.D. Mich. 2018). The defining difference is whether the payment satisfies an obligation established by judicial directive, by agreement or by custom and practice. In the present instance, the defendant presents no evidence of any obligation of the debtor to pay the cost of a vehicle. Smierciak concedes the absence of any court order or written agreement to provide support. This is not an case where the debtor disbursed funds to satisfy a defined and extant liability. Nor is Creeley's payment of $8,000 like the expenditures in Brick v. Conti (In Re Conti) , 572 B.R. 73 (Bankr. W.D.N.Y. 2017), where this Court found that the debtor derived reasonably equivalent value from the cost of his continuous, ongoing and regular maintenance of a family residence.

The record in this case shows that Creeley regularly paid a variety of bills for the direct or indirect benefit of his daughter. Due to the ongoing nature of these expenditures, the trustee had reason to accept the defendant's position that they satisfied a support obligation. In contrast, the special payment of $8,000 was extraordinary and not consistent with any custom or prior practice. At best, the distribution fulfills only what 11 U.S.C. § 548(d)(2)(A) identifies as an "unperformed promise to furnish...