Sullivan v. Welsh (In re Lumbar)

Citation:
Case No. 11-6018 (B.A.P. 8th Cir., Oct. 12, 2011)
Tag(s):
Ruling:
The Bankruptcy Appellate Panel for the 8th Circuit reversed and remanded the bankruptcy court's ruling in favor of the Debtor's parents on a fraudulent transfer action, in which the bankruptcy court held that the Debtor could not fraudulently transfer property that would qualify as exempt. The Court held that while state law determines the nature of a debtor's interest in property, it does not determine whether a transfer of that interest is fraudulent under § 548. Under the Bankruptcy Code, "transfer" is defined very broadly to include parting with an interest in property. Therefore, the bankruptcy court's ruling that exempt property cannot be subject of a fraudulent transfer was reversed, and the matter was remanded to the bankruptcy court for resolution of factual questions regarding the remaining elements of the fraudulent transfer claim.
Procedural context:
The chapter 7 trustee appealed the bankruptcy court's ruling that the Debtor could not fraudulently transfer property that would qualify as exempt.
Facts:
The debtor and her then-husband entered a contract for deed to purchase a house from the debtor's parent's. The contract for deed was recorded. The debtor's parents then transferred their interest in the contract to their separate trust. The deed transferring the interest was also recorded. The debtor failed to make the balloon payments under the contract, but the debtor's parents took no action. The debtor and her husband filed for divorce, and a few months later the debtor's parents served a notice of cancellation of the contract, and demanded payment of the balance ($188,246.15) within 60 days. After obtaining a temporary injunction against the debtor and her parents, restraining cancellation of the contract, the debtor's former spouse obtained a loan sufficient to purchase the property in his own name. The debtor's husband then sued the debtor and her parents for unjust enrichment, civil conspiracy, fraud, misrepresentation, and other torts. The parties ultimately executed a settlement and release, whereby the debtor's father would pay the debtor's former husband $85,000; the debtor's former husband and the debtor would quitclaim the property to the debtor's parents; and the debtor and her former spouse agreed that their marital property would be owned solely by the debtor. Pursuant to the settlement, the debtor executed a quit claim deed of her interest in the property to her parents, reciting "total consideration for this transfer [was] $500 or less." Less than one year after executing the quit claim deed to her parents, the debtor filed her chapter 7 bankruptcy. The chapter 7 trustee filed an adversary proceeding against the debtor's parents and their trust to avoid the transfer of the debtor's interest in the property as a fraudulent transfer. The bankruptcy court held that under Minnesota law, exempt homestead property is not capable of being fraudulently transferred. The bankruptcy court went on to hold that this principle applied to fraudulent transfer provisions under the Bankruptcy Code.
Judge(s):
Federman, Venters, and Saladino

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