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Purchase of an annuity the day before bankruptcy filing does not create an exempt asset -- Matter of Sosa

United States Court of Appeals, Fifth Circuit.

In The Matter Of: Andres Alejandro SOZA; Mary Rachel C.
Buzo, Debtors.

Andres Alejandro Soza; Mary Rachel C. Buzo, Appellees,

v.

Joseph M. Hill, Appellant.

No. 06-21004.

Sept. 12, 2008.

Ira D. Joffe, Law Offices of David W. Barry, Houston, TX,
for Appellees.

Timothy L. Wentworth, Cage, Hill & Niehaus, Houston, TX,
for Appellant.

Appeal from the United States District Court for the
Southern District of Texas.

Before JONES, Chief Judge, and WIENER, and CLEMENT, Circuit
Judges.

EDITH H. JONES, Chief Judge:

*1 The question presented in this bankruptcy appeal is
whether an annuity purchased by a debtor couple the day before they sought
bankruptcy relief is, under the facts here presented, exempt under Texas law,
Tex. Ins. Code Ann. § 1108.051, or non-exempt because it was "a premium payment
made in fraud of a creditor ...." Tex. Ins. Code Ann. § 1108.053. According to
the debtors' repeated representations to the bankruptcy and district courts,
this annuity was purchased not simply "to maximize the debtors' exemption
claims" but to manipulate an inheritance that the debtor Andres Alejandro Soza
("Soza") may ultimately share with his siblings. Because the debtors' purpose in
purchasing this annuity had nothing to do with the rehabilitative goal of
Texas's exemption laws, they could not legitimately claim the exemption.
Accordingly, the judgment of the district court, reversing the bankruptcy
court's denial of exemption, must itself be reversed, and the case is remanded
for further proceedings.

On October 13, 2005, Soza and his wife, Mary Rachel C.
Buzo, transferred $30,000 into a Mutual of Omaha annuity. The next day they
filed a voluntary Chapter 7 bankruptcy petition.FN1 Joseph Hill was appointed
Trustee of their bankruptcy estate. The debtors' bankruptcy schedules listed
just under $30,000 in unsecured debt and $340 in non-exempt property. The
debtors identified the annuity as an asset valued at $30,000, and they claimed
an exemption pursuant to § 1108.051 of the Texas Insurance Code.

The trustee objected to the exemption because the statute
does not apply to "a premium payment made in fraud of a creditor." Tex. Ins.
Code Ann. § 1108.053. Relying on the debtors' petition and schedules, the
trustee argued that their conversion of non-exempt property into an exempt
annuity on the eve of bankruptcy amounted to "constructive fraud" detrimental to
the creditors. In response, the debtors contended that the law permits them to
maximize their exemptions, and there was no proof that they intended to defraud
the creditors.

At the hearing on the trustee's objection, the debtors
asserted for the first time that the money with which they purchased the annuity
had recently been inherited from Soza's father. Their attorney represented to
the court that the debtors used the inheritance to purchase the annuity for
safekeeping until they could decide how the inheritance was to be distributed
among Soza and his siblings. The attorney said his clients feared that unless
the inheritance was placed out of reach of the creditors by means of an annuity,
the trustee would attempt to litigate the debtors' share of ownership or would
pursue Soza's siblings for the transfer of their shares. Alternatively, counsel
feared he would have to delay the bankruptcy filing by one year to avoid the
fraudulent transfer provision of the Bankruptcy Code. 11 U.S.C. § 548(a)(1)
(2005), amended by Pub.L. No. 109-8, § 1402, 119 Stat. 23, 214 (effective Oct.
17, 2005).

The bankruptcy court and counsel for the trustee were taken
aback by these representations, which were contrary to the debtors' sworn
schedules identifying the annuity as their property. The court rejected the
debtors' untimely attempt to offer the will and Soza's testimony about it.
Nevertheless, all parties recognized a looming issue over the true ownership of
the inheritance. The court proceeded, however, to adjudicate the objection
without reference to the inheritance claim. The court held that § 1108.053 of
the Texas Insurance Code, although somewhat ambiguous, proscribes constructive
as well as actual fraud on creditors. It found, based on the pleadings and
undisputed facts, that the debtors' conversion of non-exempt property into an
exempt annuity on the eve of bankruptcy amounted to constructive fraud. The
court denied the exemption.

*2 The debtors appealed to the district court, reiterating
their claim about the inheritance in their brief:

The check was received in August 2005 and would have been
shared with [Soza's] eight siblings and the children of the deceased brother,
but with the uncertainty of the October changes to the bankruptcy law, [Soza]
did not want to delay the bankruptcy a year to avoid the possibility of the
trustee trying to undo payments to family members.

The district court upheld the bankruptcy court's refusal to
consider this as an untimely contention, but it reversed the bankruptcy court
and approved the exemption under Texas law. Like the bankruptcy court, the
district court found no explicit textual guide to whether the statute depends on
actual or intended fraud of a creditor or whether "something less than intent is
sufficient" to violate the provision. Soza v. Hill (In re Soza), 358 B.R. 903,
907 (S.D.Tex.2006). The court's reasoning proceeded in three steps. First, the
court noted that the timing of the annuity purchase, standing alone, was not
sufficient to prove actual intent to defraud creditors. Second, the court
analogized the "constructive fraud" interpretation of the statute with the Texas
Uniform Fraudulent Transfer Act ("TUFTA") provisions that invalidate a debtor's
transfers made for less than reasonably equivalent value. See Tex. Bus. & Com.
Code Ann. § 24.005(a)(2). Because the annuity here was purchased for full value,
constructive fraud as defined in TUFTA could not exist. Third, the court held
that in the absence of a fiduciary duty relationship arising from other
circumstances, the common law doctrine of constructive fraud does not apply to
debtor-creditor relations in Texas. Relying, finally, on the principle that
Texas interprets debtors' exemptions broadly, the court concluded that even if
constructive fraud is covered by § 1108.053, the trustee had not borne his
burden of proof.

Now finding themselves the appellees, the debtors no longer
assert that the payment for the annuity sprang from an inheritance in which Soza
owns a potentially small share. Instead, they vigorously defend the district
court's opinion and criticize the trustee for having failed to present evidence
to support his attack on the exemption. The debtors do not, however, disavow
their counsel's representation to both lower courts that the annuity was
purchased not to provide them a future stream of income, but to remove its
corpus from the bankruptcy court in order to avoid the uncertainty of bankruptcy
litigation involving them or Soza family members. This clever strategy, taken
together with other facts, provides a more complex backdrop for application of
the Texas annuity exemption laws than the simple eve of bankruptcy transfer on
which the bankruptcy and district court opinions were predicated. Although these
circumstances might not sustain a finding of actual intent to defraud the
debtors' creditors, and the trustee did not so argue in the lower courts, they
highlight the importance of determining whether the exception to annuity
exemptions for a "premium payment made in fraud of a creditor" includes
intentional fraud as well as something less than intentional fraud.

[1] [2]  At
first glance, what the Legislature intended to describe as "fraud of a creditor"
seems unclear in the context of life insurance policies and annuities obtained
by debtors. There is no controlling Texas case law to provide guidance.FN2 Read
in context with other Texas fraudulent transfer statutes, there is little doubt
that § 1108.053 must include intentional fraud as well as conduct less than
intentional fraud. The Texas legislature added the "in fraud of a creditor"
exception to the Texas Insurance Code's exemption statute for life insurance and
annuity benefits in 1991. See Act of June 15, 1991, ch. 609, § 1, 1991 Tex.
Sess. Law Serv. 609 (recodified at Tex. Ins. Code. Ann. § 1108.053). This was
two years before the exemption was broadened to include annuity contracts
purchased by an individual. See Act of Sept. 1, 1993, ch. 685, § 20.20, 1993
Tex. Sess. Law Serv. 685 (recodified at Tex. Ins. Code. Ann. § 1108.051). As of
1991, at least three fraudulent conveyance provisions in state law required a
showing of actual intent to defraud. One of these appears in the Texas Property
Code, which prohibits a debtor from converting non-exempt personal property into
exempt property " with the intent to defraud, delay, or hinder" a creditor. Tex.
Prop. Code Ann. § 42.004(a) (emphasis added).FN3 Since at least 1987, the Texas
Family Code has provided that an agreement between spouses to partition marital
property "is void with respect to the rights of a pre-existing creditor whose
rights are intended to be defrauded by it." Tex. Family Code Ann. § 4.106(a)
(emphasis added). Significantly, Texas adopted the TUFTA in 1987, and it states
that a debtor's transfer "is fraudulent as to a creditor" if made with " actual
intent to hinder, delay, or defraud any creditor of the debtor" or if made for a
lack of "reasonably equivalent value" under certain additional conditions. Tex.
Bus. & Comm. Code Ann. § 24.005(a)(1)-(2) (emphasis added). Under TUFTA,
transfers made with either actual intent to defraud a creditor or something less
than actual intent ( i.e., transfers made "without receiving a reasonably
equivalent value") are included as "fraudulent" transfers.

*3 [3]  The
language of these sister statutes indicates that the Texas Legislature clearly
knew how to distinguish between provisions defining as fraudulent a transfer
made with intent to defraud a creditor and provisions defining a lesser standard
than intent to defraud. Because Tex. Ins. Code § 1108.053 uses the general
phrase "in fraud of a creditor" rather than specific language requiring intent
to defraud we conclude that it encompasses both intentional fraud and conduct
less than intentional fraud. The Texas Supreme Court has endorsed this approach
to interpretation in holding that "[i]t is a rule of statutory construction that
every word of a statute must be presumed to have been used for a purpose.
Likewise, we believe every word excluded from a statute must also be presumed to
have been excluded for a purpose." Laidlaw Waste Systems (Dallas), Inc. v. City
of Wilmer, 904 S.W.2d 656, 659 (Tex.1995) (internal quotations and citations
omitted).

[4]  Still,
exactly what conduct less than intentional fraud amounts to fraud on creditors
under § 1108.053 is unclear. The parties and the courts below repeatedly
describe this "something less than intention" standard as "constructive fraud."
This term is a practical shorthand, but, since it appears nowhere in the
statutes, it lacks substantive content and is not susceptible to precise
definition.FN4 The TUFTA describes one species of "constructive fraud" in
stating that transfers made "without receiving a reasonably equivalent value"
are deemed in fraud of creditors. See also Tex. Bus. & Comm. Code Ann. §
24.006(a). Section 1108.053 of the Texas Insurance Code contains no such
limitation, nor does § 1108.053 reference TUFTA's definition of "constructive
fraud." There is, therefore, no reason to conclude that the more general
language of § 1108.053 is limited by TUFTA's definition of "constructive fraud."
In fact, it would be improper to construe § 1108.053 by attributing a limitation
that appears only in another statutory provision. The Texas Supreme Court so
held in Laidlaw: "When the Legislature employs a term in one section of a
statute and excludes it in another section, the term should not be implied where
excluded." 904 S.W.2d at 659.

*4 [5] [6] [7] 
Ultimately, Texas courts will have to determine how much less than actual intent
to defraud suffices to deny exemptions for insurance policies and annuities
under § 1108.053. For present purposes, we glean some assistance from the
non-exclusive list of eleven factors, commonly known as "badges of fraud", that
courts may consider in determining whether a debtor actually intended to defraud
creditors under TUFTA.FN5 It may appear contradictory to consider facts used to
infer actual intent to defraud in order to determine "constructive" fraud. Any
contradiction, however, is illusory. Factors relevant to determining actual
intent to defraud, a higher culpability standard, should be equally probative
where something less than actual intent will suffice. When analyzing facts under
TUFTA, this court has noted that "[s]ince direct proof of fraud often is not
available, courts may rely on circumstantial evidence to establish the
fraudulent intent." Roland v. United States, 838 F.2d 1400, 1402-03 (5th
Cir.1988). Not all, or even a majority, of the "badges of fraud" must exist to
find actual fraud. Indeed, "[w]hen several of these indicia of fraud are found,
they can be a proper basis for an inference of fraud." Roland, 838 F.2d at 1403.

[8]  Like TUFTA,
the Bankruptcy Code also unwinds transfers made "with actual intent to hinder,
delay or defraud" creditors, 11 U.S.C. § 548(a)(1), and may deny discharge on
similar grounds. 11 U.S.C. § 727(a)(2). In this connection, courts have
identified various "badges of fraud" that tend to evidence a transfer made with
intent to defraud under § 548 and § 727:

(1) the lack or inadequacy of consideration; (2) the
family, friendship or close associate relationship between the parties; (3) the
retention of possession, benefit or use of the property in question; (4) the
financial condition of the party sought to be charged both before and after the
transaction in question; (5) the existence or cumulative effect of the pattern
or series of transactions or course of conduct after the incurring of debt,
onset of financial difficulties, or pendency or threat of suits by creditors;
and (6) the general chronology of events and transactions under inquiry.

*5 Chastant v. Chastant (In re Chastant), 873 F.2d 89, 91
(5th Cir.1989) (quoting Schmit v. Schmit (In re Schmit), 71 B.R. 587, 590
(Bankr.D.Minn.1987)). See also, e.g., Max Sugarman Funeral Home, Inc. v. A.D.B.
Investors, 926 F.2d 1248, 1254-55 (1st Cir.1991); Salomon v. Kaiser (In re
Kaiser), 722 F.2d 1574, 1582 (2d Cir.1983); FDIC v. Sullivan (In re Sullivan),
204 B.R. 919, 940 (Bankr.N.D.Tex.1997); In re Moore, 177 B.R. 437, 442
(Bankr.N.D.N.Y.1994); Beckman v. Staats (In re Beckman), 104 B.R. 866, 870
(Bankr.S.D.Ohio 1989).

[9]  Taking all
the surrounding circumstances in this case into consideration, several of the
"badges of fraud" are evident here. We conclude that, even if actual intent to
defraud was lacking, the debtors' annuity purchase constituted a premium payment
made "in fraud of a creditor." Tex. Ins. Code § 1108.053. They purchased the
annuity on the eve of bankruptcy. Assuming the payment came from their
non-exempt property, the annuity was in an amount that would have covered all of
the debtors' listed debts, and the purchase deprived the creditors of all but
$340 in non-exempt assets.

Significantly, the debtors retained full control of the
property-an annuity can always be cashed out. And while this feature is true of
all annuities, and thus would not ordinarily be proof of any fraud, here, the
temporary and contingent nature of the purchase was conceded. The debtors
claimed the annuity as their property on the bankruptcy schedules, yet their
counsel assured both lower courts, to the contrary, that the payment was funded
by an inheritance to which Soza's entitlement was uncertain. Their counsel also
represented to both lower courts that the annuity was purchased in order to
place litigation over Soza's and his siblings' property interests in the
inheritance beyond the reach of the bankruptcy court.FN6

In 1993, Texas law was modified for the first time to
permit personal annuities to be shielded from the claims of creditors. Texas
cases have to date upheld annuities sharing the characteristics that they were
not self-settled and they were intended to provide payments for the debtors and
their families in the future. See In re Foster, 360 B.R. 210, 215
(Bankr.E.D.Tex.2006) (exempting annuity created to disburse state lottery
winnings); In re Alexander, 227 B.R. 658, 661 (Bankr.N.D.Tex.1998) (exempting
annuity created to pay out structured tort settlement). Not so here. The purpose
of these debtors' purchase was to remove a disputed inheritance from an inquiry,
necessary to bankruptcy administration, that would have determined the debtors'
property rights in that inheritance. The annuity was a sham to stave off
litigation, not a shield authorized by Texas law to enable the debtor to gain a
fresh start.FN7

[10] [11]  No
doubt Texas law encourages the broad construction of its exemption laws,
especially those provisions that lack limitations based on fraud of creditors.
See, e.g., NCNB Tex. Nat'l Bank (In re Volpe), 943 F.2d 1451, 1453 (5th
Cir.1991) ("Texas courts apply a liberal rule of construction to state exemption
statutes.") (citing cases); Hickman v. Hickman, 149 Tex. 439, 234 S.W.2d 410,
414 (1950) ("[O]ur exemption statutes should be liberally construed in favor of
express exemptions, and should never be restricted in their meaning and effect
so as to minimize their operation upon the beneficent objects of the statutes.
Without doubt the exemption would generally be resolved in favor of the
claimant."). No doubt courts must recognize that some pre-bankruptcy planning is
permissible, and that the mere conversion of assets from exempt to non-exempt
property on the eve of bankruptcy does not by itself suffice to prove an intent
to defraud creditors. First Tex. Sav. Assoc., Inc. v. Reed (In re Reed), 700
F.2d 986, 990-91 (5th Cir.1983).FN8 The exemption provided by the instant Texas
statute, however, contains its own limitation designed to prevent fraud on
creditors, and its standard is set at something less than intent to defraud.
Here, there is considerably more than mere timing to condemn the expedient use
of an annuity to thwart the bankruptcy court from determining the extent of the
debtors' interest in property.

CONCLUSION

*6 Under Texas Insurance Code § 1108.053, the annuity
purchased by these debtors represented a payment made in fraud of a creditor,
and the debtors could not claim an exemption for the annuity. On remand,
however, the bankruptcy court will have to explore the extent to which Soza has
an ownership interest in the alleged inheritance.

REVERSED and REMANDED.

WIENER, Circuit Judge, specially concurring:

I concur in the result reached by the panel majority, but I
write separately because, with respect, I disagree with part of its methodology
for getting there. Both the panel majority and I agree that applicability of
section 1108.053 of the Texas Insurance Code is not limited to instances of
actual fraud, i.e., intentional fraud, principally because the words used in the
Texas FamilyFN1 and PropertyFN2 Codes to limit their coverages to intentional
fraud are absent from the Insurance Code.FN3 It is at this point, however, that
the method of statutory construction I would employ, and the substantive content
I would give to the Insurance Code's "in fraud of a creditor" provision,
diverges from the panel majority's method and content.

The panel majority relies on three state statutes-the Texas
Uniform Fraudulent Transfers Act ("TUFTA"),FN4 the Texas Family Code, and the
Texas Property Code-to determine how the non-intentional "fraud of a creditor"
(which we agree is embraced by the Insurance Code) should be defined. But it is
obvious to me that neither the Texas Property Code nor the Texas Family Code
offers any guidance here because they address only actual, i.e., intentional,
fraud and can therefore tell us nothing about the definitional elements of
non-intentional fraud for purposes of the Insurance Code-the core issue in this
case.

The only Texas statute among the three relied on by the
panel majority that addresses anything other than actual (intentional) fraud is
TUFTA. Therefore, of the statutes cited by the panel majority, only TUFTA is
even potentially informative of the meaning of constructive or non-intentional
"fraud of a creditor." Yet TUFTA's definition of "fraudulent as to a creditor"
expressly recognizes only (1) intentional fraud (not applicable here) and (2) a
transfer lacking "reasonably equivalent value" (plus other factors).FN5 The
panel majority nevertheless purports to use TUFTA's indicia of intent to cobble
together a version of non-intentional fraud,FN6 while ignoring the definition of
non-intentional fraud expressly provided in TUFTA-a transfer without reasonably
equivalent value. Either TUFTA should be used to inform the analysis, in which
case we should accept its definition of non-intentional fraud for purposes of
the Insurance Code, or it should not be so used, in which case we would have no
alternative but to resort to the common law. We cannot do both because,
logically, TUFTA cannot simultaneously be both (1) the panel majority's starting
point and (2) the point at which the panel majority departs from TUFTA. Yet the
panel majority's opinion schizophrenically uses TUFTA both ways at once.

*7 The panel majority's opinion tries to finesse this
inconsistency by stating: "Section 1108.53 of the Texas Insurance Code contains
no such limitation, nor does § 1108.53 reference TUFTA's definition of
‘constructive fraud.’ "FN7 But this defeats the purpose of turning to TUFTA for
guidance in the first place. The panel majority uses TUFTA's "fraudulent as to a
creditor" to define "in fraud of a creditor" in the Insurance Code; but the
exclusive definition of a non-intentional fraudulent transaction in TUFTA, is
"[a] transfer made ... without receiving reasonably equivalent value." So,
unless the panel majority is willing simply to force-feed TUFTA's
receiving-reasonably-equivalent-value genre into the Insurance Code, there is no
constructive-fraud nexus to be found between the two statutes.

In response to this objection, the panel majority
pronounces the Insurance Code's provision to be more "general" than TUFTA's. To
me, it borders on circularity to say simply that the Insurance Code's provision
is more "general" than TUFTA's, so TUFTA does not restrict the Insurance Code.
For the panel majority to use TUFTA to inform its analysis of the Insurance
Code, there must be a substantial degree of similarity-if not identity-between
the two provisions. To baldly declare that such exists, and then inexplicably
dismiss any differences that actually exist, begs the question totally.

As I understand the panel majority's method of statutory
interpretation, it proceeds thusly: "(1) We don't know what X means, so to
assist our understanding we turn to Y, which we assume is close to X; (2) Y
requires that either A or B be present; (3) we conclude, though, that X requires
neither A nor B because X is not sufficiently close to Y." Can it really be
maintained that Y has been used to meaningfully define X in this way? With X
being the Insurance Code's "in fraud of a creditor," Y being TUFTA, A being
intentional fraud, and B being a transfer made without receipt of reasonably
equivalent value, the panel majority is exposed as saying that "we don't know
what ‘in fraud of a creditor’ is, so we turn to TUFTA; TUFTA requires either
actual intent to defraud or engaging in a transfer without receipt of equivalent
value; ergo, absent actual intent, whatever else ‘in fraud of a creditor’ might
mean, it does not require a transfer without equivalent value." Go figure!

Again, I agree with the conclusion that Soza's premium was
a payment made "in fraud of a creditor." But I can only justify providing
content to the Insurance Code's fraud provision by giving "fraud" its common law
meaning, not by torturing other incompatible statutes. Sutherland says:

*8 All legislation must be interpreted in the light of the
common law and the scheme of jurisprudence existing at the time of its
enactment. Where there is a limitation by statute which is capable of more than
one construction the statute must be given that construction which is consistent
with common law. And where an operative word is not defined in a statute the
common law meaning controls.FN8

As there is reasonable doubt about what the Texas
legislature meant to include when it provided an exception for "fraud of a
creditor" in the Insurance Code-something the panel majority's opinion already
acknowledges-I see the Texas common law as the only defensible starting place
for interpreting the statute at issue.

Further, I do not believe that the phrase "of a creditor"
creates a new term of art, but simply cabins the universe of frauds to which
this exception to the Insurance Code's exemption applies. I conclude, therefore,
that the interpretation of the "well-defined words and phrases in the common
law" should comport with the presumption that "[c]ommon-law meanings are assumed
to apply even in statutes dealing with new and different subject matter ... in
the absence of evidence to indicate a contrary meaning."FN9

For openers, Texas common law recognizes that there are two
types of fraud-"actual" and "constructive."FN10 Actual fraud, which is not at
issue in this case, requires " intentional breaches of duty that are designed to
injure another or to obtain an undue and unconcientious [sic] advantage."FN11
Constructive fraud (being all non-intentional varieties of actionable fraud and
therefore clearly at issue here) involves "breaches that the law condemns as
‘fraudulent’ merely because they tend to deceive others, violate confidences, or
cause injury to public interest."FN12

Texas courts have recognized in a general sense that
"[c]onstructive fraud, as a concept, has fuzzier edges and is less susceptible
of easy definition" than actual fraud.FN13 Even though the contours of actual
fraud have been neatly staked out,

no such case has done the same for constructive fraud. Nor
is such a case possible, because the whole need for a doctrine of constructive
fraud rests on the lack of a well-defined common law tort to cover the conduct
at hand. The best the [Texas] [S]upreme [C]ourt has been able to do is remark
that "constructive fraud is the breach of some legal or equitable duty."FN14

Consistent with this definitional ambiguity, some Texas
case law appears to have read this formulation of constructive fraud to require
a confidential or fiduciary relationship.FN15 A review of the cases reveals
that, consistent with the flexible nature of equity, Texas has not construed
constructive fraud so narrowly.FN16 For example, although an intermediate Texas
appellate court in Hubbard v. Shankle noted in its constructive fraud inquiry
that no fiduciary relationship existed, it also explicitly referenced the
absence of an additional "legal or equitable duty."FN17 The state appellate
court in Jean v. Tyson-Jean noted that a reasonable trier of fact could have
concluded that there was no "breach ... [of] fiduciary duty ... or conduct ...
that was unfair to the community estate."FN18

Among the Texas cases that I have examined,FN19 Shwiff v.
Priest comes closest to requiring a confidential or fiduciary relationship to
support a finding of constructive fraud.FN20 The Shwiff opinion, however,
contains no reasoning beyond a mere citation to a case dealing with the duties
owed by the spouses to community property as support for its contention that a
fiduciary duty is required; and even this holding was not essential to the state
court's conclusion that there was no constructive fraud,FN21 as the court also
found that there had been no harm.FN22

*9 Although "a decision by an intermediate appellate state
court is a datum for ascertaining state law which is not to be disregarded by a
federal court," we are empowered to reach the conclusion that we believe the
state's highest court would reach if we are "convinced by other persuasive data
that the highest court of the state would decide otherwise."FN23 And, the
clearest pronouncement on constructive fraud by the Texas Supreme Court is not
limited by the necessity of a fiduciary or confidential relationship.FN24 As
noted above, its other cases hint at the expansive nature of the concept. A
survey of Texas case law reveals that a fiduciary or confidential relationship
is not a prerequisite for a finding of constructive fraud; there need only be a
violation of a legal or equitable duty, determined according to a flexible and
fact-specific approach.

Klein v. Sporting Goods, Inc., is an excellent example of
this flexible approach.FN25 There, the owner of a gun store, the Gun Exchange,
had pledged his inventory as security for a bank loan. He was also indebted to
unsecured trade creditors. After the bank gave notice of its intention to
foreclose on the inventory, the store owner (1) incorporated a second company,
the Gun Store, (2) secured a line of credit from a different bank, and (3) had
the new corporation purchase the inventory of his former business, the Gun
Exchange. He had the new corporation pay more than market value for the
inventory to avoid personal liability to the first bank, which held his personal
guarantee in addition to a security interest in the inventory. The unsecured
trade creditors were paid nothing after the owner transferred all assets of the
Gun Exchange to his new corporate alter ego, the Gun Store. The trade creditors
commenced suit against the now judgment-proof Gun Exchange.

Relying on a theory of constructive fraud, the trade
creditors, with whom no fiduciary relationship is evident from the opinion or
from the typical trade creditor-debtor relationship, sought to have the
corporate fiction of the Gun Exchange disregarded and to make the owner
personally liable for its debts. On appeal, the court had little difficulty
affirming the jury's finding of constructive fraud. It noted that although the
corporate fiction will typically insulate shareholders, officers, and directors
from liability, "when the corporate form has been used as part of a basically
unfair device to achieve an inequitable result," such insulation disappears.FN26
The court further noted that the Texas Business and Commerce Code imposes a duty
of good faith on all covered dealings and that the complex machinations of the
Gun Store owner failed that test. As the duty of good faith was violated, and
"[c]onstructive fraud is the breach of some legal or equitable duty which,
irrespective of moral guilt, the law declares fraudulent," the court affirmed
the finding of constructive fraud.FN27 Using corporate forms "as a method to
avoid creditors .... was legally and factually sufficient to support the jury's
finding of constructive fraud."FN28

As no special relationship between the debtors and their
creditors in the instant case appears from the record, such legal duties as, for
example, good faith and fair dealing, do not provide a basis for a finding of
constructive fraud.FN29 Taking all the surrounding circumstances in this case
into consideration, however, I am convinced that, under Texas common law, the
debtors' annuity purchase violated an equitable duty. The factors recounted in
the panel majority opinion are worth repeating here. The debtors purchased the
annuity on the eve of bankruptcy, an equitable proceeding.FN30 Although the
nature of the federal proceeding does not alter our Erie inquiry, it does inform
the circumstances in which a Texas court would determine whether an equitable
duty exists. Assuming the annuity was acquired with the debtors' non-exempt
property, it was in an amount that would have covered all of the debtors' listed
debts, leaving the creditors with only $340 in non-exempt assets. The debtors
also retained control of the property because it appears this annuity, like
almost all, could be cashed out. And even though this feature is common to
annuities, and thus cannot be proof of fraud in the ordinary case, here, the
debtors conceded the temporary and contingent nature of the purchase.FN31

*10 Klein provides support for the proposition that the
debtors violated an equitable duty, yet because of the duty of good faith in
that case, it is not on all fours with the present situation. At least one Texas
court of appeals has, however, decided a case similar to Klein without reference
to a legal or equitable duty of good faith. In Speed v. Eluma International,
Inc., the owner of a corporation claimed that the corporation was in arrears on
rent owed to him, giving him a lessor's lien on which he immediately foreclosed,
permitting him to transfer the entirety of the corporation's assets to a third
party for a prearranged sum.FN32 This deal structure was used to circumvent a
temporary restraining order that the creditors of the company had obtained to
enjoin the very sale that the owner carried out through a different mechanism.
The court concluded that this violated an equitable duty and refused to reverse
the jury's finding of constructive fraud.FN33

As in Klein and Speed, the annuity in the instant case has
been used to achieve an inequitable result through machinations that have
deprived the creditors of satisfaction for their claims and the bankruptcy court
of the ability to adjudicate ownership of assets that might belong to the
estate. Under the foregoing common law interpretation of the Insurance Code's
constructive fraud provision, the bankruptcy court was justified in looking
through the sham of the annuity to the real source of the money, just as the
courts in Klein and Speed used constructive fraud to prevent inequity. But this
justification, I emphasize, is found in Texas common law, not in some tortured
construction of dissimilar Texas statutes. It is for these reasons that, with
respect, I specially concur in the panel majority's judgment.

FN1. The debtors filed for bankruptcy just before the
Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") came into
effect. Pub.L. No. 109-8, 119 Stat. 23 (2005) (codified as amended in scattered
sections of 11 U.S.C.). BAPCPA governs cases filed on or after October 17, 2005.
Since the debtors filed their bankruptcy petition before October 17, 2005,
pre-BAPCPA law governs this case.

FN2. The district court discussed three non-bankruptcy
cases involving the predecessor to § 1108.051: Marineau v. Gen. Am. Life Ins.
Co., 898 S.W.2d 397 (Tex.Ct.App.1995), Sun Life Assurance Co. of Canada v. Dunn,
134 F.Supp.2d 827 (S.D.Tex.2001), and Leibman v. Grand, 981 S.W.2d 426
(Tex.Ct.App.1998). They are all clearly distinguishable from this case and none
of them assists us with interpreting the phrase "in fraud of a creditor."
Marineau addressed whether the proceeds of an insurance policy that was
purchased with embezzled funds could be placed in a constructive trust for the
owner of the embezzled funds. The Texas exemption statute then applicable did
not even contain an "in fraud of a creditor" exception. See Marineau, 898 S.W.2d
at 401 (citing Act of Mar. 12, 1987, ch. 5, § 1, 1987 Tex. Sess. Law Serv. 5).

Similarly, Sun Life addressed whether the proceeds of an
insurance policy could be placed in a constructive trust for a beneficiary of
the policy whose share of proceeds was wrongfully reduced in violation of a
divorce decree. Sun Life never mentions, let alone interprets, the "in fraud of
a creditor" exception at issue here.

Finally, Leibman addressed whether sufficient evidence was
presented at trial to establish that a debtor had made annuity premium payments
in fraud of a creditor. The court determined that there was sufficient evidence
to uphold the trial court's finding that the debtor had made payments with
intent to defraud his ex-wife. The court provided no analysis of the phrase "in
fraud of creditor."

FN3. The "intent to defraud" language has been in §
42.004(a) since at least 1984. See Act of Jan. 1, 1984, ch. 576, § 1, 1983 Tex.
Sess. Law Serv. 3524.

FN4. Because "constructive fraud" appears neither in §
1108.053 nor in Texas's other statutes regarding fraud on creditors, it seems
highly unlikely that the Texas Legislature intended to refer to common law
"constructive fraud" cases as an interpretive standard for "in fraud of a
creditor."

FN5. Section 24.005(b) of the Texas Business & Commerce
Code states:In determining actual intent under [§ 24.005(a)(1)], consideration
may be given, among other factors, to whether:

(1) the transfer or obligation was to an insider;(2) the
debtor retained possession or control of the property transferred after the
transfer;(3) the transfer or obligation was concealed;(4) before the transfer
was made or obligation was incurred, the debtor had been sued or threatened with
suit;(5) the transfer was of substantially all the debtor's assets;(6) the
debtor absconded;(7) the debtor removed or concealed assets;(8) the value of the
consideration received by the debtor was reasonably equivalent to the value of
the asset transferred or the amount of the obligation incurred;(9) the debtor
was insolvent or became insolvent shortly after the transfer was made or the
obligation was incurred;(10) the transfer occurred shortly before or shortly
after a substantial debt was incurred; and(11) the debtor transferred the
essential assets of the business to a lienor who transferred the assets to an
insider of the debtor.

FN6. In ruling based on the "untimely" assertion by the
debtors of their dubious ownership of the inheritance with which they purchased
the annuity, we are not deciding the question of ownership. That remains to be
decided on remand. Rather, we deem the admissions to the lower courts as binding
on what the debtors intended as the purpose of this annuity.

FN7. We do not here imply or hold that other types of
annuities would fail the "in fraud of a creditor" test. This case is limited to
its particular, above-described facts.

FN8. Note that in In re Reed actually dealt with the denial
of discharge under the Bankruptcy Code, for which actual intent to defraud
creditors is the standard. 11 U.S.C. § 727(a)(2). In re Reed expressly declined
to consider whether under Texas property law, an exemption would be denied for
the acquisition of personal property acquired with the intention of defrauding
creditors. In re Reed, 700 F.2d at 990 n. 2 (citing predecessor to Tex.
Prop.Code Ann. § 42.004(a)).

FN1. TEX. FAM. CODE ANN. § 4.106(a) (Vernon 2007).

FN2. TEX. PROP. CODE ANN. § 42.004(a) (Vernon 2007).

FN3. TEX. INS. CODE. ANN. § 1108.053 (Vernon 2007).

FN4. TEX. BUS. & COM. CODE ANN. § 24.005(a) (Vernon 2007).

FN5. See id. § 24.005(a).

FN6. As the panel majority seems to acknowledge by saying
"exactly what conduct less than intentional fraud amounts to fraud on creditors
under section 1108.053 is unclear .... Ultimately Texas courts will have to
determine how much less than actual intent to defraud suffices to deny
exemptions," this case was ripe for certification to the Texas Supreme Court.
TEX. CONST. art. V, § 3-c; TEX.R.APP. P. 58. It is quizzical to me that it was
not certified, given its clear fit into the certification jurisprudence. See
Arizonans for Official English v. Arizona, 520 U.S. 43, 76, 117 S.Ct. 1055, 137
L.Ed.2d 170 (1997) ("Certification procedure ... allows a federal court faced
with a novel state-law question to put the question directly to the State's
highest court, reducing the delay, cutting the cost, and increasing the
assurance of gaining an authoritative response."). Because I agree with the
result reached by the panel majority, and believe the Texas Supreme Court would
as well, I do not insist that certification is required here, even though that
would be my preference.

FN7. The panel majority also attempts to draw a distinction
between "constructive fraud," a well-defined common law term, and a new,
nebulous concept that it labels "less-than-intentional" fraud, which is neither
fish nor fowl, i.e., neither common law constructive fraud nor TUFTA's statutory
version of constructive fraud. It does this, in part, to claim that the common
law definition of constructive fraud is inapposite, because the Insurance Code's
statutory regime has created a new creature of non-intentional fraud. As a
result, Texas law, at least in this circuit, now has four flavors of fraud-(1)
actual, (2) common law constructive, (3) TUFTA's
lack-of-reasonably-equivalent-value-plus-other-factors, and (4) the Insurance
Code's innominate fourth variety. As I explain below, I believe, as do
commentators on statutory construction, see, e.g., 2B SUTHERLAND STATUTES AND
STATUTORY CONSTRUCTION § 50:3 (7th ed.2008), that when a statute does not define
a word, and that word has a well-accepted common law meaning, the legislature is
presumed to have had that common law meaning in mind. Even if this were not so,
I would find it questionable for the panel majority's opinion to manufacture an
entirely new species of Texas fraud and then make no effort to situate it among
the other three varieties, except to say that it is none of the other types, and
that Texas will just have to work it out. If we decide that every Texas statute
that uses the term "fraud," unqualified by the requirement that it be
intentional, spawns a new species of fraud, Texas law is in for a multi-faceted
treatment in this circuit.

FN8. 2B SUTHERLAND STATUTORY CONSTRUCTION § 50:1 (7th
ed.2008) (footnotes omitted); see id. § 50:3 ("Although a statute may define the
way in which a particular word is used, the common-law background and origin of
the word may be useful to a proper understanding of the statute in cases of
reasonable doubt."). If common law meanings of words can inform a statute's
interpretation even when a definition of a term is provided by the legislature,
they can, a fortiori, be used to define an undefined term. Texas appears to
follow this approach. See TEX. GOV'T CODE ANN. § 312.002(b) (Vernon 2007) ("If a
word is ... used as a word of art, the word shall have the meaning given by
experts in the particular trade, subject matter, or art."); TEX. GOV'T CODE ANN.
§ 311.011(b) (Vernon 2007) ("Words and phrases that have acquired a technical or
particular meaning, whether by legislative definition or otherwise, shall be
construed accordingly."). This last point is important, of course, because Texas
law governs how we interpret the Insurance Code. In re Trautman, 496 F.3d 366,
368 (5th Cir.2007) ("This court [in interpreting a Texas bankruptcy exemption in
the Insurance Code] must interpret the statute as a Texas court would.").
Formally, it appears Texas Government Code section 311.011 applies because
section 1108.053 of the Texas Insurance Code was acted on by the 60th or
subsequent Texas legislature. See Font v. Carr, 867 S.W.2d 873, 881 n. 4
(Tex.App.-Houston 1993, writ dism'd w.o.j.).

FN9. 2B SUTHERLAND STATUTORY CONSTRUCTION, supra note 8, §
50:3.

FN10. See In re Estate of Kuykendall, 206 S.W.3d 766, 770
(Tex.App.-Texarkana 2006, no pet.); Cotten v. Weatherford Bancshares, Inc., 187
S.W.3d 687, 702 (Tex.App.-Fort Worth 2006, pet. denied); Flanary v. Mills, 150
S.W.3d 785, 795 (Tex.App.-Austin 2004, pet. denied); Chien v. Chen, 759 S.W.2d
484, 494-95 (Tex.App.-Austin 1988, no writ). It would be farcical to maintain
that the absence of the phrase "constructive fraud" from the statute itself
precludes a conclusion that the Texas legislature intended for it to be
included. Things called constructive are almost always unmentioned or
incomplete; otherwise they would be actual, rather than constructive.

FN11. Chien, 759 S.W.2d at 495 (emphasis in original).

FN12. Id. (emphasis in original). I have left unaddressed
the panel majority's problematic use of indicia of intent, the central inquiry
of actual fraud, to determine whether constructive fraud is present. The panel
majority says "Factors relevant to determining actual intent to defraud, a
higher culpability panel standard, should be equally probative where something
less than actual intent will suffice." This need not be the case. Although
proscriptions of intentional fraud tend to police bad motives, proscriptions of
constructive fraud police a set of non-intentional activities that nevertheless
violate public policy. Not all constructive frauds are actual frauds, and it may
be that not all actual frauds are constructive frauds (as under TUFTA's
conceptualization of non-intentional fraud).But even if all actual frauds are
constructive frauds because proof of an intent to deceive is always violative of
public policy, it does not follow logically that all half-actual frauds are
constructive frauds. Indeed, the question why half-proof of intent (under some
lesser combination of the "badges of fraud" than would be necessary for an
inference of intent) suffices to prove constructive fraud is left wholly
unexamined in the panel majority's opinion.I have also left unaddressed the
panel majority's use of the United States Bankruptcy Code to inform its
elaboration of Texas state law without any demonstration of the persuasiveness
of this authority. The flaw of this approach should be obvious to the reader.
(Texas is not an "opt-out" state, so the debtors in question had the option of
electing federal or state exemptions. In re Perry, 345 F.3d 303, 308 n. 5 (5th
Cir.2003). As the debtors have relied on state exemptions under 11 U.S.C. §
522(b)(3) (Supp. V 2005), state law governs and we wear our Erie hats. In re
Trautman, 496 F.3d 366, 369 (5th Cir.2007)).

FN13. Rosen v. Matthews Const. Co., Inc., 777 S.W.2d 434,
437 (Tex.App.-Houston 1989), rev'd on other grounds, 796 S.W.2d 692 (Tex.1990).

FN14. Id. at 437-38 (quoting Archer v. Griffith, 390 S.W.2d
735, 740 (Tex.1965)).

FN15. See, e.g., Hubbard v. Shankle, 138 S.W.3d 474, 483
(Tex.App.-Fort Worth 2004, pet. denied) ("Constructive fraud is the breach of a
legal or equitable duty that the law declares fraudulent because it violates a
fiduciary relationship."); Jean v. Tyson-Jean, 118 S.W.3d 1, 9 (Tex.App.-Houston
2003, pet. denied) (same); In re Estate of Herring, 970 S.W.2d 583, 586 n. 3
(Tex.App.-Corpus Christi 1998, no pet.) (same); Shwiff v. Priest, 650 S.W.2d
894, 902 (Tex.App.-San Antonio 1983, writ ref'd n.r.e.) (same); Thames v.
Johnson, 614 S.W.2d 612, 614 (Tex.Civ.App.-Texarkana 1981, no writ) (same);
Carnes v. Meador, 533 S.W.2d 365, 370 (Tex.Civ.App.-Dallas 1975, writ ref'd
n.r.e.) (same).

FN16. See, e.g., Vickery v. Vickery, 999 S.W.2d 342, 377
(Tex.1999) ("Constructive fraud is most frequently found in a breach of a
fiduciary or confidential relationship." (emphasis added)); Johnson v. Brewer &
Pritchard, P.C., 73 S.W.3d 193, 204 (Tex.2002) (noting that a constructive fraud
claim "is derivative, at least in part, of the breach of fiduciary duty claim."
(emphasis added)); Seaside Indus., Inc. v. Cooper, 766 S.W.2d 566, 568
(Tex.App.-Dallas 1989, no writ) ("We need not decide if the [defendants]
violated a legal duty. Constructive fraud also arises when an equitable duty is
violated .... By taking a ‘flexible fact-specific approach focusing on equity,’
[a] court upheld the finding of a sham to perpetrate a fraud." (emphasis in
original)) (citation omitted) (quoting Castleberry v. Branscum, 721 S.W.2d 270,
273 (Tex.1986), superceded by statute on other grounds, TEX. BUS. CORP. ACT art.
2.21(A)(2) (Vernon 2007)); Hudspeth v. Stoker, 644 S.W.2d 92, 94 (Tex.App.-San
Antonio 1982, writ ref'd.) ("[C]onstructive fraud usually involves a breach of
trust or confidential relationship ...." (emphasis added)); see also 32 C.J.S.
Fraud § 7 (2008) ("[A]lthough there is authority to the contrary, it has been
held that constructive fraud does not require the existence of a fiduciary or
confidential relationship." (footnote omitted)).

FN17. 138 S.W.3d at 483.

FN18. 118 S.W.3d at 9 (emphasis added).

FN19. I would be remiss if I did not note that only the
trustee saw fit to discuss some of the cases examined here; the debtors' brief
contains no analysis of the case law on constructive fraud in Texas. Further,
the precedents in this circuit interpreting the requirements for constructive
fraud under Texas law, In re Monnig's Department Stores, Inc., 929 F.2d 197, 201
(5th Cir.1991), Permian Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 644
(5th Cir.1991), and Brooks, Tarlton, Gilbert, Douglas & Kressler v. U.S. Fire
Insurance Co., 832 F.2d 1358, 1369 (5th Cir.1987), were completely ignored by
both parties. In In re Monnig's, while discussing the requirements for a
constructive trust, this court said that constructive fraud " usually involves a
breach of trust or confidential relationship." 929 F.2d at 201 (emphasis added).
Permian quoted the Archer formulation. 934 F.2d at 644. In Brooks, we noted that
"[t]he benchmark of constructive fraud, as defined by Archer, is the existence
of a fiduciary relationship," but this was not essential to our holding, which
concerned interpretation of the word "fraud" in an insurance contract. 832 F.2d
at 1369.We have also apparently drawn a distinction between constructive fraud
and breach of fiduciary duty. Cf. Bombardier Aerospace Employee Welfare Benefits
Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348, 358 n. 45 (5th Cir.2003)
("[O]ur precedent interpreting Texas law as it relates to constructive trusts
has not been altogether consistent. In some cases, we have interpreted Texas law
as requiring a showing of actual fraud or breach of fiduciary duty .... More
recently, we held that it was sufficient under Texas law for a plaintiff to show
merely constructive fraud ...."). Some of the confusion over the concept of
constructive fraud appears to result from our confusion over its cousin, the
constructive trust. The imposition of a constructive trust is not at issue in
this case because the Texas Insurance Code provides its own remedy for "fraud of
a creditor," namely, denial of the exemption. TEX. INS. CODE ANN. § 1108.053.We
did say, in an unpublished opinion, that Texas "appellate courts frequently
intimate that [constructive fraud] occurs only where there is a fiduciary
relationship between the parties." Joslin v. Personal Investments, Inc., No.
M03-40200, 2004 WL 436001, at *5 (5th Cir. Mar.8, 2004) (unpublished). In
another unpublished opinion, we also upheld a district court's dismissal of
constructive fraud claims because no fiduciary or "special" relationship existed
between the parties. Independence Hill, Ltd. v. Puller Mortgage Assocs., Inc.,
33 F.3d 1378 (5th Cir. Aug.10, 1994) (table). Consistent with Fifth Circuit Rule
47.5.4, we are not bound by these determinations, which are equivocal in any
event. Furthermore, both should be rejected on the facts of this case and as a
correct interpretation of Texas law.

FN20. 650 S.W.2d at 902-03. Connell v. Connell, 889 S.W.2d
534, 542 (Tex.App.-San Antonio 1994, writ denied), also appears to equate
constructive fraud with breach of fiduciary duty, but whether this was essential
to the holding of the case, rather than simple dicta, is difficult to discern
from the opinion.

FN21. Shwiff, 650 S.W.2d at 902.

FN22. Id. at 903.

FN23. First Nat'l Bank of Durant v. Trans Terra Corp.
Int'l, 142 F.3d 802, 809 (5th Cir.1998) (internal quotation marks omitted).

FN24. See Archer v. Griffith, 390 S.W.2d 735, 740
(Tex.1965). Cases like Vickery v. Vickery, 999 S.W.2d 342 (Tex.1999), also
demonstrate how flexible the concept of constructive fraud can be in Texas when
they use words like "most frequently" and "ordinarily."

FN25. 772 S.W.2d 173, 175 (Tex.App.-Houston 1989, writ
denied).

FN26. Id. at 175. The Texas legislature has abolished
shareholder liability as the remedy for constructive fraud. See Willis v.
Donnelly, 199 S.W.3d 262, 271-72 (Tex.2006). Although the Texas legislature has
decided that constructive fraud should no longer result in the same remedy, the
elaboration of what constitutes constructive fraud by Texas courts should not
have been disturbed by this legislative action. This is also why constructive
fraud cases from other areas of the law, like domestic relations, are useful
elaborations of the concept. Constructive fraud as a concept, like many of the
broad remedies of equity, can be found in diverse substantive fields of law.

FN27. Klein, 772 S.W.2d at 175.

FN28. Id. at 176.

FN29. See El Paso Natural Gas Co. v. Minco Oil & Gas, Inc.,
8 S.W.3d 309, 312-13 (Tex.1999).

FN30. See In re Grimland, Inc., 243 F.3d 228, 234 (5th
Cir.2001) ( "[T]he bankruptcy court is a court of equity and it must undertake
an analysis of equitable considerations."); In re AWECO, Inc., 725 F.2d 293, 300
(5th Cir.1984) ("Equitable considerations should be preeminent in the exercise
of bankruptcy jurisdiction.").

FN31. In a related context, we recently said: Exempting all
money traceable to a [whole-life insurance policy, exempt under section 1108.51
of the Texas Insurance Code] would allow people to use such policies merely to
avoid creditors. People could place their money in a whole-life policy ....
Sometime later-presumably even after only a few days-they could withdraw some of
the money, or even all of it, forever shielding the money from creditors. That
can't be the law. Less insidiously, someone desiring to have a whole-life policy
actually for insurance reasons nonetheless could put her extra money into the
policy simply to shield it from creditors. That also can't be the law. In re
Trautman, 496 F.3d 366, 370 (5th Cir.2007). Similarly, it surely cannot be the
law here that whether in an effort to "maximize the debtors' exemptions" or to
prevent litigation of their share of a possibly disputed inheritance that the
debtors are permitted to shield all but $340 from their creditors. "We certainly
have no quarrel with [the] contention that the federal courts should bend every
effort to prevent the bankruptcy statutes from being used as a cloak for fraud."
Piedmont Ice & Coal Co. v. Am. Serv. Co., 130 F.2d 78, 80 (4th Cir.1942).

FN32. 757 S.W.2d 794, 797-98 (Tex.App.-Dallas 1988, writ
denied), disapproved of on other grounds by Donwerth v. Preston II
Chrysler-Dodge, Inc., 775 S.W.2d 634 (Tex.1989).

FN33. Id. at 798; see id. at 797 . ("[T]he [Texas] [S]upreme
[C]ourt upheld a finding of constructive fraud when a contract debtor
manipulated corporate assets so that a contract creditor's claim could be not be
satisfied out of corporate assets." (citing Castleberry v. Branscum, 721 S.W.2d
270 (Tex.1986), superceded by statute on other grounds, TEX. BUS. CORP. ACT art.
2.21(A)(2) (Vernon 2007))).

Corporation gives no protection to family home - In re Levitsky

United States Bankruptcy Court, D. Maryland.

In re Leon R. LEVITSKY, Debtor.

Lori S. Simpson, Chapter 7 Trustee, Plaintiff

v.

Leon R. Levitsky and Jane Lambert, Defendants.

Manufacturers and Traders Trust Company, Plaintiff

v.

Leon R. Levitsky, et al., Defendants.

Bankruptcy No. 04-16203-JS.  Adversary Nos. 04-2024, 05-1254.

Sept. 30, 2008.

Jennifer J. Karangelen, Neuberger, Quinn, Gielen, Rubin &
Gibber, Kristin Case Lawrence, Bishop, Daneman & Simpson, LLC, Baltimore, MD,
for Plaintiff Lori S. Simpson.

Michael Scott Cohen, Cumberland, MD, for Plaintiff
Manufacturers and Traders Trust Company.

Leon R. Levitsky, pro se.

MEMORANDUM OPINION GRANTING CHAPTER 7 TRUSTEE'S COMPLAINT
FOR TURNOVER OF PROPERTY OF THE ESTATE, UPHOLDING LIEN OF CIT GROUP CONSUMER
FINANCE, INC., AND AVOIDING LIEN OF MANUFACTURERS AND TRADERS TRUST COMPANY AS
TO THE SAID PROPERTY

JAMES F. SCHNEIDER, Bankruptcy Judge.

Before the Court are two adversary proceedings that relate
to the debtor's residence ("the Property"). The first, Adversary Proceeding No.
04-2024, brought by Lori S. Simpson, the Chapter 7 Trustee, asks the Court to
declare that the Property is includable as property of the debtor's estate, even
though it is titled in the name of a corporation, and to grant other relief. The
second, Adversary Proceeding No. 05-1254, brought by Manufacturers and Traders
Trust Company ("M & T"), seeks a declaratory judgment against CIT Group Consumer
Finance, Inc. ("CIT") as to the priority of recorded liens on the Property. In
that proceeding, the parties have filed cross-claims and counterclaims.FN1 The
Court having issued an order setting the order of proof, trial was held on the
Trustee's complaint, at the conclusion of which this Court held that the
debtor's residence was property of the estate. The Trustee then presented her
case in the second adversary proceeding to establish the invalidity of the liens
of both CIT and M & T. At the close of the Trustee's case, CIT and M & T filed
the instant motions for judgment. Counsel for CIT informed the Court that were
its motion to be denied, it would put forward its own case, while counsel for M
& T stated that it had no further case to put forward. For the reasons set
forth, the motion for judgment filed by CIT will be granted, that of M & T will
be denied, and the lien of M & T will be avoided.

FN1. On May 19, 2005, these adversary proceedings were
consolidated by consent order [P. 22]. Thereafter, all pleadings were filed in
Adversary Proceeding No. 05-1254.

THE PARTIES

1. Leon R. Levitsky ("Levitsky," or "the debtor") is a
resident of the State of Maryland.

2. Jane A. Lambert ("Jane") is the debtor's wife.

3. Lori S. Simpson ("Trustee") is the debtor's Chapter 7
Trustee.

4. Contemporary Magic Kingdom, Inc., t/a CMK Company
("Contemporary"), is a corporation organized under the laws of the State of
Maryland by Levitsky, and holds record title to the Property.

5. Associated Enterprises Ltd. is a defunct corporation
organized by Levitsky under the laws of Great Britain on the Isle of Man. When a
subpoena was sent to Associated in this action, it was returned two months later
with a sticker that stated simply, "Gone Away."

6. JP Morgan Chase Bank, N.A. ("JP Morgan") is a
corporation organized under the laws of the United States and was a holder of a
deed of trust on the Property.

7. Manufacturers and Traders Trust Company ("M & T"), is a
commercial bank chartered under the laws of the State of New York, registered
and qualified to do business in the State of Maryland, and claims to hold a
first lien on the Property.

8. CIT Group Consumer Finance, Inc. ("CIT") was assigned
the deed of trust from JP Morgan and claims to hold a lien on the Property.

9. The Internal Revenue Service ("IRS") asserts a secured
claim against the debtor in the amount of $462,190.85, a priority claim in the
amount of $10,252.78, and an unsecured claim in the amount of $347,890.76, for a
total claim in the amount of $820,334.39. Claim No. 50.

FINDINGS OF FACT

1. The debtor has been in continuous possession of the
Property from September 1983 to the present. It is his personal residence, a
waterfront property identified as Lots E and F in the subdivision known as
"Arundel on the Bay," located at 1315 Magnolia Avenue, Annapolis, Maryland
21403. In a 2001 financial statement, the debtor valued the Property and its
contents at $1 million. Trustee's Exhibit 4. The Trustee's investigation
disclosed that the Property is titled in the name of CMK Company, Inc., a
purported trade name of Contemporary. The debtor's ownership of Contemporary was
not disclosed in either his Schedule A or B (listing, respectively, real and
personal property). However, CMK, Inc. was listed as an unsecured non-priority
creditor in Schedule F, and as a party to an executory contract with the debtor
in Schedule G. Bankruptcy Schedules, Trustee's Exhibit No. 20.

2. On March 2, 1982, Levitsky separated from his first
wife, Carol Leigh Levitsky ("Carol"), left their marital home and moved into an
apartment with Jane.FN2

FN2. Carol and Levitsky were not divorced until May 31,
2000. Divorce decree of the Circuit Court for Anne Arundel County, Maryland,
dated May 31, 2000, Trustee's Exhibit No. 152. Levitsky and Jane were married on
June 2, 2000. Deposition of Jane Lambert, July 19, 2006, at 7.

3. In April 1982, one month after he separated from Carol,
Levitsky purchased the Property and titled it in the trade name of Contemporary,
the corporation he created in order to put the house that he purchased for
himself and Jane beyond the reach of creditors, particularly Carol.FN3

FN3. 3Levitsky testified that the corporate name was based
on his romantic ideal that the Property would serve as the perfect residence for
him to enjoy his "magical relationship" with Jane. Tr. at 62:11, where Levitsky
agrees with Trustee's opening statement at 10:16.

4. Evidence of Levitsky's motivation to shield the home
from Carol manifested itself in the following actions taken by the debtor .FN4

FN4. Carol filed a secured claim [Claim No. 11] in the
amount of $641,795.90, representing the net judgment against Levitsky entered by
the Circuit Court for Anne Arundel County in her divorce proceeding, and a
priority claim [Claim No. 12] for unpaid support obligations in the amount of
$10,363.65. In a separate adversary proceeding, Adv. Proc. 04-02395, this Court
found part of her claim to be non-dischargeable, when Levitsky sold their
interest in real property owned by their Prince George's Doctor's Hospital Joint
Venture without reimbursing her.

A. The timing of the purchase of the Property in 1983
occurred shortly after the separation from Carol.

B. His relationship with Jane created the potential for a
financially unfavorable divorce.

C. A handwritten notation in a letter written by James K.
Stitcher, the debtor's accountant (now deceased), with additional notations made
by the debtor in his own handwriting, indicated that Levitsky set up
Contemporary "[i]n order to get [the home] out of his wives (sic) grasp." Memo
from James Stitcher, Trustee's Exhibit No. 61.FN5

FN5. The following is the complete text of the
memorandum:RE: Dr. Levitsky Condemnation Replacement

Since our last discussion regarding your [illegible] of the
use of the Magnolia Avenue property, as the replacement property, due to the
fact the property was put into a corporation which did not exist at the time of
the condemnation, certain additional facts have emerged as a result of my recent
discussion with Dr. Levitsky. They are as follows:

1. The Magnolia property was acquired from Mr. Benbasset in
1983 and owned by him as an individual until he subsequently transferred it to
the corporation.

2. The sale was financed by a down payment of $37,500.00
plus made by Dr. Levitsky and a personal loan made by Dr. Levitsky from Maryland
National Bank.

3. Shortly after purchasing the property, a contractor was
hired to perform renovations to the property.

4. The deed was not recorded at that time due to the fact
that permanent financing had not been obtained and there was no sense of to
record since the parties maintained an on-going business and personal
relationship existent to this day.

5. We are providing you with signed letters from Mr.
Benbasset and Mr. Cailuette attesting to aforementioned.

6. Dr. Levitsky was engaged in a divorce action during 1983
and wished protect his property rights relative to this property. In order to do
so, when he obtained permanent financing on the property he decided to put the
property into a corporation in order to get it out of his wives [sic] grasp.

7. The corporation in this issue, had no cash, therefore
the down payment had to have been made by Dr. Levitsky. The sales price was
$167,500. But the permanent financing was for $130.00. Furthermore, the
corporation would not have been sufficiently credit-worthy to obtain this loan
on its own.

8. 6. Additionally the improvements were contracted for and
paid for by Dr. Levitsky and almost completed by the time the deed was.

As a result of the foregoing, our position is that Dr.
Levitsky in fact owned the property prior to its transfer to a corporation. He
wholly owned and paid for this property. This property qualifies as replacement
property in the matter under consideration.

Should you continue to disagree with this position, write
this case up as disagreed and we shall proceed to amend our 1981 tax court
proceedings to include this issue. This matter has been discussed with legal
council [sic] and they believe our position has merit.

Id.

D. Levitsky had no explanation for his decision to place
the ownership of his residence in a corporate name.

E. The Property was the sole asset of Contemporary.

5. Levitsky has resided in the Property for nearly 25 years
but paid no rent to the corporation, except for the one payment of approximately
$36,000, that he paid shortly before the petition date, which he denominated as
"arrears." FN6 Despite being so far in arrears, Contemporary never sought to
evict Levitsky. Trial Transcript ("Tr.") at 193.

FN6. The Trustee sued Contemporary in a separate adversary
proceeding, Adv. Proc. 06-01285, in order to recover fraudulent conveyances.

6. A $3,610 figure recorded as "rent" on the books of the
corporation was actually money lent to Contemporary by Maryland National Bank
("MNB").

7. The only written leases on the Property between Levitsky
and Contemporary that were entered into evidence, purportedly executed in 1983,
were crude forgeries that contained a telltale 2006 facsimile date with the
debtor's signature written in ink. Facsimile copy of lease, Trustee's Exhibit
No. 147.

8. For many years, the corporation had only $5 in its bank
account.

9. Levitsky paid all expenses accruing from the ownership
of the Property from his personal checking account or from the operating
accounts of his personal secretaries. These payments included real estate taxes
and homeowner's insurance, as well as corporate expenses, such as SDAT filing
fees and accounting expenses. Travelers invoices and checks, Trustee's Exhibit
No. 27; 2003 tax bill for Property, and checks paying taxes, Trustee's Exhibit
No. 28; and checks paying water bills for Property, Trustee's Exhibit No. 29.FN7

FN7. Levitsky routinely commingled funds between himself
and Contemporary. Post-petition, Levitsky opened a checking account in the name
of Contemporary but used it to pay personal expenses. One check, No. 1032, was
written by Contemporary to Levitsky but payable to the order of "Me." Tr. at
402.

10. Levitsky obtained homeowner's insurance, listing
himself as the beneficiary and personally received payment of claims for damage
to the Property. Hartford Homeowner's Policy, Trustee's Exhibit No. 17;
Travelers Homeowners Insurance Policy, Trustee's Exhibit No. 18;
Correspondence/documentation regarding flood damage to Property, Trustee's
Exhibit No. 19; and Chubb Homeowner's Insurance Policy, Trustee's Exhibit No.
21.

11. On Schedule B (Personal Property) filed with his
bankruptcy petition, Levitsky scheduled a $140,000 insurance claim for storm
damage to the Property resulting from Hurricane Isabel.

12. On his personal income tax returns, Levitsky deducted
interest payments paid on the mortgage on the Property.

13. Levitsky stopped filing tax returns for Contemporary
after his divorce from Carol became final.

14. Despite the fact that the Property was titled in the
name of the corporation, Levitsky claimed the Property as tax exempt when he
filed for a state homestead property tax exemption that was available only to
individual homeowners. Trustee's Exhibit No. 12.

15. During an audit by the IRS, Levitsky defended his
non-payment of capital gains taxes resulting from the sale of different piece of
real property, on the ground that he had used monies from that sale to purchase
the Property, even though the defense was available only to an individual
purchaser. Trustee's Exhibit No. 64.

16. In his Last Will and Testament, Levitsky devised to
Jane "any interest which I may possess at the time of my death in [the
Property]," thereby treating it as his own. Article V. B., Last Will and
Testament dated October, 1994, Trustee's Exhibit No. 3.

17. Levitsky was the sole shareholder FN8 and sole director
of Contemporary. Although he originally disputed at depositions that he was also
president of the corporation, Levitsky suddenly remembered at trial that he was.
Tr. at 130:5.

FN8. A t various times during his trial, Levitsky testified
that there were other shareholders of Contemporary, including his son, Jeffrey
Levitsky and someone named Britt Day. This was inconsistent with his prior
deposition testimony. Levitsky offered no proof, other than his own testimony,
of the existence of these other shareholders. Contemporary kept no stock
register. The evidence offered by the Trustee established that Levitsky was the
sole shareholder of Contemporary. Tr. at 152-59.

18. There are no other current officers or directors of
Contemporary, although the corporate bylaws required that there be four
officers, namely a president, vice president, secretary and treasurer, and that
the president and secretary could not be the same person. M & T Exhibit No.
14.FN9

FN9. At one time, Helen DeWire was listed as secretary.
Before her death, she was Levitsky's secretary at his medical offices.

19. Contemporary never had any employees or conducted any
business.FN10

FN10. Levitsky testified that Contemporary was engaged in
the fishing and shrimping industry, but was unable to produce any evidence other
than his own self-serving testimony that he had imported fish and shrimp from a
warehouse in Mexico for several years until the warehouse was destroyed by fire.
Tr. at 211:20 et. seq., see also Levitsky's opening statement at Tr. at 54:3 et
seq. Despite many opportunities to provide such information at depositions,
Levitsky never mentioned any involvement of Contemporary in the fishing and
shrimping industries until his debut on the witness stand at trial. However, he
listed a shrimp packing plant worth $500,000 among his personal assets in a 1992
loan application. Uniform Residential Loan Application dated October 9, 1992,
Statement of Assets, Liabilities and Net Worth as of January 10, 1992, Trustee's
Exhibit No. 6.

20. On May 25, 1982, Levitsky registered the trade name
"CMK Company" in the Circuit Court for Prince George's County, Maryland,
identifying himself as president of Contemporary. SDAT Certified copy of Tradename Designation for registration of trade name CMK Company by Contemporary
Magic Kingdom, Inc. dated May 25, 1982 and received by the Maryland State
Department of Assessments and Taxation ("SDAT") on July 19, 1982 or 1983, M & T
Exhibit No. 19.

21. Levitsky engaged an attorney (now deceased) named Paul
M. Nussbaum ("Nussbaum"),FN11 who incorporated an entity entitled Title Nominee,
Inc. ("Title Nominee"), of which Nussbaum was president, for the sole purpose of
purchasing the Property, in order to assign the contract of sale to a different
entity chosen by Levitsky. The contract between the sellers and Title Nominee
was dated August 25, 1983. Nussbaum file, Trustee's Exhibit No. 93, pp. K094-96.

FN11. Not to be confused with a Maryland attorney of the
same name currently practicing law in Baltimore.

22. Title Nominee assigned the sale contract to "CMK Company, a Maryland
Corporation."

23. On September 7, 1983, CMK took title to the Property by
deed from Roseanne Druian and the Magnolia Way Joint Venture for consideration
of $167,500. Deed dated September 7, 1983, recorded among the Land Records of
Anne Arundel County at Liber No. 3642, folio 666, Trustee's Exhibit No. 1-A.

24. In order to purchase the property, Levitsky arranged
for the payment of a $50,000 deposit from L Enterprises, another of his
corporations. He also arranged to obtain a loan from MNB to Contemporary in the
amount of $130,000. On the promissory note from Contemporary to MNB, Levitsky
wrote, "I'm a one man corporation." Corporate certificate of authority to
borrow, dated September 17, 1983, Trustee's Exhibit No. 93, K045. He
simultaneously executed a deed of trust from CMK Company, which he signed as
president. Purchase Money Deed of Trust dated September 30, 1983, recorded among
the Land Records of Anne Arundel County at Liber No. 3642, folio 668, Trustee's
Exhibit No. 1B. Levitsky personally guaranteed the loan. The sum of $3,610
remained after closing costs and was entered on the books of Contemporary as
rent from Levitsky, despite the fact that the figure represented the residue of
the loan from MNB to Contemporary.

25. Levitsky and Jane resided together in the Property
until their separation in 2002.

26. On September 29, 1983, Levitsky filed "CMK Company" as
a trade name in the Circuit Court for Anne Arundel County, Maryland.FN12 M & T
Exhibit No. 20.

FN12. Levitsky testified that he preferred to use various
permutations of the name "CMK" when conducting transactions because it sounded
more professional than Contemporary Magic Kingdom. The Trustee has contended
that Levitsky actually used the various permutations (including "CMK, Inc.,"
"CMK Company, Inc.," "CMK," and "CMK1") in order to confuse creditors. In order
to avoid confusion, in referring to the corporate entity created by Levitsky,
this opinion will employ the term "Contemporary" in place of the full corporate
moniker of "Contemporary Magic Kingdom, Inc.".

27. Between October 3, 1991 and February 19, 2004, the
corporate charter of Contemporary was in forfeiture status with the SDAT.
Trustee's Exhibit No. 108.

28. On October 28, 1997, Tega Cay Properties, LLC ("Tega
Cay") sued Levitsky in the Court of Common Pleas for York County, South
Carolina, styled Tega Cay Properties, LLC, et al. v. Levitsky, et al., Case No.
97-CP-46-1974. The complaint alleged that Levitsky was a minority investor and
an active manager of Tega Cay; that he improperly filed a Chapter 7 bankruptcy
petition in the District of Maryland in 1995, purportedly on behalf of Tega Cay;
and that this Court (Mannes, C.J.) dismissed the petition as having been filed
in bad faith and sanctioned Levitsky because he had filed the petition for the
improper purpose of delaying a corporate shareholders meeting.

29. On March 18, 1998, Contemporary obtained a loan in the
amount of $450,000 from Associated, an entity incorporated by Levitsky on the
Isle of Man, and not licensed to do business in the State of Maryland.

30. The evidence indicated that Levitsky controlled
Associated. He had previously formed an offshore trust called the Meridian
Management Trust ("Meridian"), and then had Meridian form a corporation known as
the Mendoza Corporation ("Mendoza") on the island of Nevis. Levitsky then
transferred approximately $680,000 worth of Crestar stock to Mendoza, which
Mendoza sold without tax consequences and invested the proceeds to fund a
tax-free annuity payable to himself. Mendoza also lent some of the proceeds to
Levitsky through Associated, an affiliate of Meridian. Funds held by Mendoza in
the amount of $450,000 were in fact disbursed through Associated pursuant to a
loan agreement whereby Contemporary was the supposed borrower.FN13

FN13. Approximately $157,000 of the $450,000 "borrowed"
from Associated was used by Levitsky to pay off the loan from MNB. He cannot
account for the $300,000 amount remaining from the transaction. James Stitcher,
the debtor's accountant, reported to the IRS that the figure was loaned to
Levitsky. There is no evidence that Levitsky ever repaid it.

LIENS ON THE PROPERTY

31. On September 16, 1998, First National Bank of Maryland
("FNB") made a $100,000 loan to CMK Company, Inc., in exchange for a promissory
note for the same amount. The note was signed, "LEON R. LEVITSKY, SIGNING AS
PRESIDENT CMK COMPANY, INC.". FNB recorded its mortgage among the Land Records
of Anne Arundel County, Maryland in Liber 8713, folio 551. Trustee's Exhibit 1
L. FNB later sold the note to M & T.

32. In 2001, Jane decided to build a dance studio, and
Levitsky agreed to pay for it with a loan based on the equity in the Property,
which had greatly increased in value. However, he was unable to obtain credit
using his own name because of the pending lawsuit brought by Tega Cay.
Accordingly, he arranged a more complicated financing transaction. On May 21,
2001, Bank One, N.A. ("Bank One"), made a loan in the amount of $680,000 to
Jane, who delivered a promissory note for the same to Bank One and also signed a
deed of trust. Simultaneously, Contemporary executed and delivered to Jane a
deed to the Property for no consideration. The deed was signed by "Leon
Levitsky, President CMK Company." Trustee's Exhibit 1Q.

33. Bank One was later acquired by JP Morgan Chase Bank,
N.A., one of the parties to this action, which assigned the deed of trust to
CIT.

34. Bank One engaged Mark Reges ("Reges") and Central
Processing Services, LLC ("CPC") to conduct the settlement.

35. Reges and CPC erred in the recording of Bank One's deed
of trust. They mistakenly treated the Bank One deed of trust with Jane as one
for the refinance of the Property, rather than as a purchase money deed of
trust. While transfer taxes are required to be paid on a purchase money deed of
trust, they need not be paid on an interspousal refinancing deed of trust.
Accordingly, Reges and CPC did not verify that appropriate transfer taxes were
paid. However, because Jane was married to Levitsky rather than to Contemporary,
there was no interspousal exemption. Accordingly, the Clerk of the Circuit Court
for Anne Arundel County declined to accept the deed for recording.

36. A second error committed by Reges and CPC involved the
coordination of the payout of prior lenders, the loans to which were secured by
the Property. The settlement sheet from the May 21, 2001 settlement indicated
that $146,299.49 was disbursed to First Liberty National Bank, $458,470.90 was
disbursed to Associated, and $50,334.79 was disbursed to Jane for the purpose of
starting a dance studio. The disposition of funds supposedly disbursed to
Associated is unknown. It is undisputed that FNB received no disbursement. Reges
relied on an abstractor's summary that identified Levitsky by mistake as the
secured party, rather than FNB.

*6 37. Accordingly, as part of the settlement transactions,
Levitsky signed a certificate of satisfaction of the FNB loan and either Reges
or Levitsky recorded in the land records the certificate that stated that the
loan from FNB had been satisfied.FN14

FN14. The certificate of satisfaction, recorded in Liber
0434, folio 368 of the Land Records of Anne Arundel County, stated as
follows:That Leon R. Levitsky does hereby acknowledge that the indebtedness
secured by a certain Deed of Trust/Mortgage made by CMK Company and recorded
among the Land Records of Anne Arundel County, Maryland in Liber 8713, Folio
551, which encumbers the real property described in Exhibit A hereto, has been
fully paid and discharged, that Leon R. Levitsky was, at the time of
satisfaction, the holder of the Deed of Trust Note/Mortgage, and that the lien
of the Deed of Trust/Mortgage is hereby released....

Id. It was signed by Levitsky. Trustee's Exhibit 1N.
Beneath his signature was a notarization executed by Jonathan S. Bach, a CPC
employee. Under the notary seal appeared the following statement, signed by
Reges: "THIS IS TO CERTIFY that the within instrument was prepared by or under
the supervision of the undersigned, an Attorney duly admitted to practice before
the Court of Appeals of Maryland."

38. It is undisputed that the certificate was incorrect in
describing Levitsky as the holder FN15 of the deed of trust.

FN15. "Holder" is defined in the Maryland Commercial Code
as "(a) The person in possession of a negotiable instrument that is payable
either to bearer or to an identified person that is the person in possession;
(b) The person in possession of a negotiable tangible document of title if the
goods are deliverable either to bearer or to the order of the person in
possession; or (c) The person in control of a negotiable electronic document of
title." Md. Comm. Law Code Ann. § 1-201(20). The deed of trust is a negotiable
instrument; however, because it was not payable to bearer or to Levitsky, he did
not qualify as a holder under the law.

39. By 2002, Levitsky and Jane had separated. At the time
of this opinion, they have not obtained a final decree of divorce.

40. On August 2, 2002, as part of a marital property
settlement between Levitsky and Jane, Jane conveyed her interest in the Property
back to Contemporary by quitclaim deed. Trustee's Exhibit No. 139, Quitclaim
Deed Exhibit 2 to Jane Lambert Deposition.

41. By the time Reges and CPC discovered that the Bank One
deed of trust had not been properly recorded, they had lost the original deed of
trust. Consequently, CPC obtained a replacement deed from Contemporary to Jane,
and a replacement deed of trust from Jane to Bank One.

42. Levitsky refused to pay the transfer taxes, and
pressured by Bank One to have the deed recorded, Reges paid the transfer taxes
out of his own pocket. The replacement deed and replacement deed of trust were
recorded among the Land Records of Anne Arundel County, Maryland on December 17,
2002 at Liber No. 12273, folios 773 and 776, respectively. However, by that
date, Jane had already deeded the Property back to Contemporary, although that
deed was not then recorded.

43. On June 13, 2003, the Court of Common Pleas in South
Carolina (Nicholson, J.) ruled against Levitsky in the Tega Cay litigation and
awarded the plaintiff $6.7 million in compensatory damages and $3.3 million in
punitive damages.FN16 (On April 28, 2005, by order [P. 38] entered in Tega Cay
Properties, LLC v. Leon R. Levitsky, Adversary Proceeding No. 04-2082-JS, this
Court declared $5.1 million of the judgment to be nondischargeable.)

FN16. In a 35-page final order, Judge Nicholson stated:...
I find and conclude as follows: (1) Dr. Levitsky's deliberate and unrepentant
fraud, fraudulent concealment and breach of his fiduciary duties, which the
plaintiffs demonstrated time and time again through the course of trial, leave
no doubt that Dr. Levitsky's actions were intentional and malicious, for which
he is fully culpable. (2) Dr. Levitsky's conduct was not an isolated incident,
but a continuous pattern of fraud and deceit over a period of at least seven
years. (3) There can be no doubt from the almost incredible efforts expended by
Dr. Levitsky in concealing his fraud that he was fully aware of his acts and
they were fully intentional. (4) The continuing pattern of fraudulent behavior
and breach of fiduciary duty with Dr. Levitsky bespeaks, at last to the
plaintiff, that Dr. Levitsky['s] past conduct was similarly egregious. Dr.
Levitsky's attempt to engage the mayor in fraudulent kickback scheme serves as a
prime example. (5) Dr. Levitsky's continuous disrespect for the courts of this
state and other states, coupled with his abuse of the discovery process in this
proceeding has demonstrated that a firm and significant award of punitive
damages is necessary to deter future similar conduct. (6) The malfeasance of Dr.
Levitsky caused actual damages in excess of $6 million to the plaintiff, even
when conservatively calculated. Dr. Levitsky's fraud and breach of his fiduciary
duties are clearly related to the actual harm which was caused by Dr. Levitsky's
malfeasance. (7) Dr. Levitsky has deliberately concealed and obfuscated his net
worth from this Court. Therefore, the Court cannot precisely determine his net
worth and ability to pay. Since Dr. Levitsky has been the cause of this
information not being available, it is appropriate not to consider this factor.
Wilhoit v. WCSC, Inc., 298 S.C. 34; 358 S.E.2d 397 (Ct.App.1987). However, the
Court notes that the financial information which has been submitted shows that
Dr. Levitsky has substantial income from investments and holds substantial
property, so that the Court can fairly conclude that his net worth is at least
$5 to $7 million dollars. (9) Finally the Court cannot overemphasize that Dr.
Levitsky has continuously thumbed his nose at the judicial process, not only in
this Court, but in several other state and federal courts. There needs to be an
end to this abuse of the judicial process and punitive damages are available to
end this misconduct." Final Order at 33-34. Judge Nicholson also found that,
quite similar to leases which Dr. Levitsky produced in this case, "many of the
documents presented by Dr. Levitsky in support of his position were fraudulently
created and backdated."

Id.

44. On June 20, 2003, Levitsky recorded the quitclaim deed
from Jane to Contemporary among the Land Records of Anne Arundel County at Liber
No. 13234, Page 177. Trustee's Exhibit No. 139.

45. At the time of all of the foregoing transactions,
Contemporary's corporate charter had been forfeited. On February 19, 2004, less
than one month before the petition date, Levitsky filed articles of revival on
behalf of Contemporary, in response to the pending enforcement by Tega Cay of
the $10 million South Carolina judgment. He revived the company charter in the
name of "Contemporary Magic Kingdom, Inc.," but did not mention "CMK Company."
Articles of Revival for Contemporary Magic Kingdom, Inc., filed February 20,
2004, Trustee's Exhibit 110, CIT Exhibit No. 65, M & T Exhibit No. 23.

46. Simultaneously, Levitsky attempted to register the
trade name "CMK." However, because of a mark made by accident on the
application, the trade name was registered as "CMK 1." Trade Name Application
for CMK 1 filed February 19, 2004 [T00202213]. Trustee's Exhibit 109; see also
Tr. at 266:5.FN17

FN17. According to the procedures and practices of SDAT,
when the number ‘1’ appears by itself in a corporate name or trade name, it is
recorded by the Roman Numeral ‘I.’ Thus, on the SDAT records, the trade name
appeared as "CMK I."

47. In 2004 and again in 2005, CIT prepared to bring
foreclosure proceedings against the Property. CIT engaged Nation's Title Agency
of Maryland to perform a title search. Commitment for Title Insurance, effective
date Oct. 4, 2005 (McGinnis Dep. Exhibit 2B), and Commitment for Title
Insurance, effective date Oct. 4, 2005 (McGinnis Dep. Exhibit 2C), Trustee's
Exhibits 129 and 130. In both instances, the title reports listing outstanding
liens on the property failed to disclose that any lien existed in favor of
either FNB or M & T.

48. On March 16, 2006, after the bankruptcy petition was
filed, Levitsky filed with SDAT a "Trade Name Amendment or Cancellation
Application," which sought to retroactively change the trade name of CMK 1 to
CMK. Trade Name Amendment Application filed March 16, 2006, amending T00202213
to CMK, Trustee's Exhibit No. 115. SDAT accepted Levitsky's statement that the
"1" was a mistake, and changed the file to read "CMK." However, Levitsky has not
requested permission to use the trade name "CMK Company" from SDAT since the
revival of the corporation.

49. On February 23, 2005, the Trustee's counsel, Kristin
Case Lawrence, sent an email to SDAT seeking to verify to registration of the
trade name "CMK Company." On February 28, 2005, SDAT replied: "There is no
record of this name on file." On March 14, 2006, the Trustee received from SDAT
a certification that "there is no record of a trade name by the name CMK
Company." Trustee's Exhibit No. 114.

50. However, SDAT sells its records to Lexis Nexus, a
search of which would have alerted the Trustee to the registration of the trade
name. M & T's Exhibit No. 22.

51. At this time, Contemporary is not in good standing as a
Maryland corporation. SDAT Certification regarding current standing of
Contemporary Magic Kingdom, Inc., Trustee's Exhibit No. 120. The corporation has
not filed a personal property tax return with SDAT for 2006, nor has it paid its
2005 personal property return filing fee. Trustee's Exhibit No. 120.

52. Since the inception of this case, Levitsky has been
non-cooperative with the Court, the Trustee, or his creditors. In his testimony
at this trial, his answers were evasive and his behavior was obstructive. On
several occasions, he accused the Trustee of stealing his personal property and
documents. He did not appear at the hearing on Tega Cay's motion to convert his
case to Chapter 7 [P. 11], later filed a motion to reconsider the conversion [P.
167], and then appealed the denial of reconsideration [P. 221 ]. He has not
complied with reasonable requests for discovery. Tega Cay has had to file
motions to compel the corporations he owns to provide a representative for
Federal Rule 30(b)(6) depositions [P.157], as well as motions to compel the
production of tax returns [P. 298]. At depositions held by the Trustee, he
refused to answer the Trustee's questions unless they were ended with the
phrase, "End of Question." When the Trustee's counsel complied, his answers
remained evasive. See Exhibit C to P. 199, pp. 10-12, 14. He did not bring
required documents to his deposition. Id., at 15. The Trustee had to file a
request for assistance by the U.S. Marshal to obtain needed documents from the
debtor's house, where they were kept in approximately 60 separate boxes and
trash bags. Tr. at 314:3. The Trustee also found approximately 90 boxes of
similar documents, but only because the storage facility at which they were kept
called her in an effort to receive payment on an unpaid bill. Tr. at 315:14.

PROCEDURAL HISTORY

1. On March 12, 2004 ("the petition date"), Levitsky filed
the instant bankruptcy case in this Court as a Chapter 13 proceeding.

2. On June 1, 2004, the case was converted to Chapter 11 by
consent order [P. 52]. The order also provided for the appointment of a Chapter
11 trustee. Accordingly, by order dated July 29, 2004 [P. 91], this Court
approved the appointment by the U.S. Trustee of Lori Simpson, Esquire, as
Chapter 11 Trustee.

3. By order [P. 158] entered on October 6, 2004, this Court
granted the motion of a creditor, Tega Cay Properties LLC ("Tega Cay"), to
convert the instant case to a Chapter 7 proceeding. By order [P. 178] entered on
October 20, 2004, Lori Simpson was appointed Chapter 7 Trustee.

4. On September 2, 2004, the Trustee filed Adversary
Proceeding No. 04-2024-JS, against Levitsky and Jane, from whom he was
separated. Complaint for Declaratory Judgment, Turnover of Property to the
Estate, To Avoid and Recover Fraudulent Transfer, and to Sell Property Pursuant
to 11 U.S.C. § 363.

5. On November 29, 2004, this Court granted the Trustee a
default judgment against Jane by order [P. 14].

6. On January 31, 2005, the Trustee filed a motion for
summary judgment [P. 16] against Levitsky, to which Levitsky filed an opposition
[P. 17] on February 18, 2005. This Court denied the motion by order [P. 24]
entered on May 18, 2005.

7. On March 11, 2005, M & T filed Adversary Proceeding No.
05-1254-JS against Levitsky, Contemporary, the Trustee, Associated,FN18 JP
Morgan, and Jane seeking a declaratory judgment that the lien of M & T on the
Property was valid and that the certificate of satisfaction was void.

FN18. On April 28, 2005, M & T attempted to voluntarily
dismiss Associated Enterprises from the suit and also filed an answer to the
counterclaim. However, the dismissal notice was defective and Associated remains
as a party to these proceedings.

8. On April 4, 2005, the Trustee filed an answer and a
counterclaim against M & T, and a crossclaim against Associated and JP Morgan
Chase Bank, N.A. [P. 11]. Answer to Complaint, Counterclaim by Lori Simpson
against Manufacturers and Traders Trust Company to Determine Validity, Priority,
and Extent of Liens, to Avoid and Recover Transfers, and for Declaratory Relief,
Crossclaim to Determine Validity, Priority, and Extent of Liens, to Avoid and
Recover Transfers, and for Declaratory Relief.

9. On June 29, 2005, as successor to J. P Morgan, CIT filed
an answer to M & T's complaint, a counterclaim against M & T and a cross-claim
against Associated [P. 36]. Answer to Complaint of Manufacturers and Traders
Trust Company, Counterclaim by CIT Group Consumer Finance Inc. against
Manufacturers and Traders Trust Company, Crossclaim by CIT Group Consumer
Finance Inc. against Associated Enterprises Limited.

10. On the same date, CIT also filed an answer to the
Trustee's cross-claim, as well as a counterclaim for declaratory judgment [P.
37]. Answer to Counterclaim, Answer to Crossclaim, Counterclaim by CIT Group
Consumer Finance Inc. against Lori Simpson, Trustee.

11. On January 20, 2006, CIT filed a motion for summary
judgment [P. 76] as to the Trustee's claim or in the alternative, on its
counterclaim.

*9 12. On January 24, 2006, M & T filed a motion for
summary judgment [P. 80].

13. On January 24, 2006, the Trustee filed a motion for
summary judgment [P. 82].

14. On March 29, 2006, a hearing was held on the parties'
cross motions for summary judgment. All of the motions were denied by orders [P.
111, 112 and 113] entered on April 5, 2006. The grounds for the denial of
summary judgment were that issues of material fact were in dispute, including
whether the Property allegedly subject to the liens was property of the
bankruptcy estate (a determination of which would either endow this Court with
the subject matter jurisdiction to determine the validity and priority of liens
or preclude it from so doing); the effective dates of various transfers; whether
Contemporary was a valid corporation having the legal capacity to take title to
the Property and to encumber and/or transfer it; whether it operated under a
valid trade name; and whether any of the transfers in question were fraudulent.
Transcript of March 29, 2006 Hearing, 61-2 [P. 123].

15. On October 16, 2006, the IRS filed a motion to
intervene [P. 250], which was opposed by CIT and M & T. On October 20, 2006, the
motion was granted by order [P. 260].

16. On November 21, 2006, the Trustee filed a cross-claim
[P. 272] against the IRS, to which the IRS filed an answer [P. 273] on December
4, 2006. The IRS then filed a motion to continue the trial [P. 318], which was
denied. On February 21, 2008, the IRS filed a motion [P. 353] to be dismissed as
a party from the litigation, which this Court granted by order [P. 359] on
February 27, 2008.

17. On October 20, 2006, this Court granted the Trustee's
motion to set the order of proof at trial by allowing her to proceed first on
her turnover complaint, and by allowing her to present her evidence that the
liens of M & T and CIT were avoidable. Order [P. 259].FN19

FN19. The order provided, in pertinent part:ORDERED that
the Court will first hear evidence and argument on the issue of whether the
Annapolis House is property of the estate, with the order of proof as follows:
(1) Trustee to present her case; (2) any party disputing that the Annapolis
House is property of the estate to present its case; (3) any rebuttal; and it is
further

ORDERED that, if there is a determination that the
Annapolis House is property of the estate, the Court will then hear evidence and
argument on the validity and priority of liens with the order of proof as
follows: (1) M & T to present its case; (2) CIT to present its case; (3) the
Trustee to present [her] case; (4) any other party disputing either lien would
then put on their cases; (5) any rebuttal.

Order [P. 259] dated October 20, 2006.

18. On February 19, 2008, Levitsky filed a motion to
continue the trial for approximately six months [P. 348]. The motion was denied
by order [P. 350] entered on February 21, 2008. The Court notes, however, that
Levitsky essentially achieved his goal of a six-month postponement because of
the time it has taken the Court to analyze the four days of trial testimony,
nearly 200 exhibits, multiple deposition transcripts, and a large, divergent
body of case law.

19. Trial on both adversary proceedings was held on
February 25, 26, and 28, 2008, and March 3, 2008. On February 28, 2008, this
Court ruled from the bench in Adv. Proc. No. 04-2024, that the Property was
property of the debtor's bankruptcy estate.

20. After the ruling, M & T presented its case and the
Trustee presented hers, after which M & T and CIT moved for judgment. At that
point, the Court suspended the proceedings in order to consider the motions.

CONCLUSIONS OF LAW

Subject matter jurisdiction

1. This Court has subject matter jurisdiction to determine
whether the Property is included in the debtor's bankruptcy estate. This is a
core matter pursuant to 28 U.S.C. § 157(b)(2)(K). Venue is appropriate under 28
U.S.C. § 1409.

Property of the estate

2. Property of the estate includes "all legal or equitable interests of the
debtor in property," "wherever located and by whomever held," "as of the commencement of the case." 11 U.S.C. § 541(a).
"This definition of
estate property is broad and will reach to bring within the estate every
conceivable interest that the debtor may have in property." In re Osterwalder,
---B.R. ----, 2008 WL 704412 (Bankr.N.D.Ohio March 14, 2008).

3. Assets owned by a corporation in which a debtor is a
stockholder are not property of the debtor, but that of the corporation.
Kreisler v. Goldberg, 478 F.3d 209, 214 (4th Cir.2007) ("The fact that a parent
corporation has an ownership interest in a subsidiary, however, does not give
the parent any direct interest in the assets of the subsidiary."). Thus, the
assets of a non-debtor corporation do not become assets of the bankruptcy estate
of a stockholder of the corporation, even when the individual owns all of the
stock. It is only the interest in stock held by an individual debtor in a
corporation that is property of the debtor's bankruptcy estate, because it
represents the debtor's equitable ownership interest in the corporation.
McCormick v. Frisch, 199 Md. 181, 85 A.2d 793, 794 (1952) ("A share of stock of
a corporation represents an aliquot portion of the net capital assets.... It is
merely the evidence of the holder's ownership of the stock and of his rights as
a stockholder to the extent therein specified.").

4. In the instant case, in seeking to bring into the
bankruptcy estate the debtor's residence which is titled in the name of the
non-filing corporation (and which is the sole asset of the debtor's solely-owned
corporation), the Trustee bears the burden of proving that the corporation is a
fraud, created by the debtor to hinder, delay and defraud creditors, and that
the debtor disregarded corporate formalities in using the corporation for his
own personal benefit. The Trustee is not seeking to pierce the corporate veil in
the usual sense of holding a stockholder individually liable for the debts of
the corporation. Rather, she contends that because the debtor has fraudulently
treated the corporate property as his own, reverse veil piercing permits her to
administer the Property for the benefit of the debtor's creditors.

5. For purposes of determining whether any given property
is an asset of the bankruptcy estate, a debtor's interest in property is
determined by state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914,
918, 59 L.Ed.2d 136 (1979). Therefore, this Court must look to the law of
Maryland to determine the extent of the debtor's interest in the Property held
by the corporation and whether the Trustee has carried her burden of proof so
that the debtor's residence may be administered as property of the estate, even
though it is titled in a corporate name.

6. In Maryland, "courts will pierce the corporate veil only
when necessary to prevent fraud or enforce a paramount equity." Bart Arconti &
Sons, Inc. v. Ames-Ennis, Inc., 275 Md. 295, 310-11, 340 A.2d 225, 234 (1975),
citing Damazo v. Wahby, 259 Md. 627, 633, 270 A.2d 814, 817 (1970); and Gordon
v. SS Vedalin, 346 F.Supp. 1178, 1181 (D.Md.1972). However, in none of the cases
cited was the corporate veil allowed to be pierced in order to enforce corporate
debts against an individual, in the absence of proof of actual fraud. In
reversing the judgment entered against corporate insiders in Bart Arconti, the
Maryland Court of Appeals held that the mere shifting of corporate assets from
one insolvent entity to another in order to evade legal obligations did not
justify holding the corporate insiders liable by veil piercing. Likewise, in
Damazo, the Court of Appeals reversed the trial court that held a corporate
insider individually liable for commissions due a broker engaged to sell
property titled in the names of two corporations. The appeals court stated that
"[t]he fact that Damazo controlled and operated the corporations would not of
itself justify piercing the corporate veil or make him liable for that which the
corporations owed." 270 A.2d at 817. The court commented on the lack of evidence
that Damazo "used or intended to use the corporations as instruments to
perpetrate a fraud," or that he failed to observe "the separate identities of
Damazo and the corporations." Id. Indeed, all of the corporate formalities of a
business that was a going concern were followed.FN20

FN20. At 270 A.2d 816-17, the Court of Appeals stated:...
Damazo always used a corporation to hold title to and operate a property he
bought. Both [corporations] were fully formed and legally existing corporate
entities in good standing. Although their capitalizations were small, each
corporation owned substantial assets in its own right and each maintained its
own financial records. The stock of each was fully issued and separate minutes
books were kept. Damazo recognized, respected and used the corporate entities as
such. Those who dealt with Damazo knew this and knew that corporations owned the
properties. The exclusive listing agreement Wahby [the broker] obtained was
executed for [the corporations] expressly by Damazo as president and Wahby's
subsequent agency was based on an extension of that agreement.

Id.

In Gordon v. SS Vedalin, the U.S. District Court for the
District of Maryland (Northrop, D.J.) applying Maryland law, held that one
bidding at an auction on behalf of a corporate purchaser was not individually
liable for costs of resale when the corporate purchaser defaulted. The court so
held regardless of the fact that the individual had established the corporation
so that he could conduct a business despite the existence of personal judgments
pending against him and despite the fact that he never properly capitalized the
corporation. This was held "not enough to pierce the corporate veil," where the
corporation was created in order to purchase a ship and was not therefore a
manufacturing business that required start-up capital to operate. In addition,
even though the court found that "there was significant doubt from the evidence
that the legal niceties of corporate existence, such as the formal issuance of
stock and corporate meetings, were regularly, if ever, observed," and that "proof of the existence of the corporation as a separate entity and not as the
mere alter ego of Harold Johnson is tenuous at best," the court refused to
pierce the corporate veil, stating that, "under Maryland law, the corporate
entity cannot be disregarded in this case." Gordon, at 1181. It duly noted that
articles of incorporation had been drafted by a lawyer and were filed with the
SDAT. The missing elements required to pierce the veil were fraud on the part of
the targeted individual or the need to protect a paramount equity. But see Nat'l
City Bank of Minneapolis v. Lapides ( In re Transcolor Corp.), 296 B.R. 343,
369-70 (Bankr.D.Md.2003), where this Court found fraud on the part of the
individual corporate insider and imposed liability.

7. This remedy of veil piercing has been applied in
Maryland when a corporation was used by its sole owner for his personal gain to
defraud the creditors of the corporation. See, e.g., Colandrea v. Colandrea, 42
Md.App. 421, 437, 401 A.2d 480 (Md.App.1979) (piercing corporate veil when
former spouse received ownership of corporation in divorce settlement with
agreement to pay other spouse over time, and then transferred all assets of that
corporation to a new corporation and defaulted on the payment plan).

8. The Trustee has cited no case in Maryland where reverse
veil piercing was applied to impute individual ownership to property ostensibly
held by a corporation in order to satisfy the debts of the individual, and none
has been found. However, bankruptcy courts in other jurisdictions have held that
when a debtor in bankruptcy treats a corporation as his alter ego, the corporate
assets become part of the bankruptcy estate. Kendall v. Turner (In re Turner),
335 B.R. 140, 147 (Bankr.N.D.Cal.2005) (in allowing judgment creditors to
recover fraudulent conveyances, the court found that a corporation and limited
liability company were alter egos of the debtor who created them with no
business purpose and fraudulently transferred to them his residence as a means
of shielding it from creditors); Mass v. Bell Atlantic Tricon Leasing Corp. (In
re Mass), 178 B.R. 626 (M.D.Pa.1995); see also Smith v.. Richels (In re
Richels), 163 B.R. 760 (Bankr.E.D.Va.1994); Halverson v. Schuster (In re
Schuster), 132 B.R. 604, 612 (Bankr .D.Minn.1991); Hovis v. United Screen
Printers, Inc., (In re Elkay Inds., Inc.), 167 B.R. 404, 410 (D.S. C.1994); and
The Cadle Co. v. Brunswick Homes, LLC ( In re Moore), 379 B.R. 284, 295 (Bankr.N
.D.Tex.2007).

9. The facts found in the Turner case are similar to those
in the instant case, albeit in a different procedural context. In Turner, the
debtor set up a Bahamian trust and a Nevada corporation in order to take title
to his house. He directed the trust and the corporation to transfer the property
to his wife within one year of his filing bankruptcy. The Chapter 7 trustee
sought to avoid the transfer as fraudulent, with the implication that because
the debtor operated the corporation as his alter ego, the house was property of
the bankruptcy estate. The court found that while asset protection is not per se
illegal, "entities may not be created with no business purpose and personal
assets transferred to them with no relationship to any business purpose, simply
as a means of shielding them from creditors." Turner at 147. In viewing the
corporation and trust as the debtor's alter egos, the court disregarded it "to
prevent injustice." Id.

10. The Mass case is also instructive because the
procedural context is similar to that of the present case. In Mass, the married
debtors were sole owners of a corporation supposedly engaged in the business of
dry cleaning. Mass, at 627-28. However, the corporation observed few corporate
formalities and took only one action during its existence, that of entering into
an equipment lease that the debtors personally guaranteed. The court granted the
trustee's complaint for turnover of money in the corporate bank account over the
objection of the equipment lessor which by that time had obtained a judgment
lien and garnishment against the corporate bank account. Id. at 630. The court
applied a reverse veil-piercing theory to declare that the account "rightfully
belong[ed] in the debtors' estate," and concluded that the equipment lessor
"should not enjoy a preferential treatment as the only business creditor to have
contracted with a sham corporation." Id. at 630-31.

11. Other courts have held, and this Court agrees, that
"that there is no logical basis upon which to distinguish between a traditional
veil piercing action and an outsider reverse piercing action. In both instances,
a claimant requests that a court disregard the normal protections accorded a
corporate structure to prevent abuses of that structure." C.F. Trust, Inc. v.
First Flight L.P., 266 Va. 3, 10-11, 580 S.E.2d 806, 810 (2003), adopted by the
Fourth Circuit after certification of question, 338 F.3d 316 (4th Cir.2003),
aff'g 140 F.Supp.2d 628 (E.D.Va.2001); see also Cent. Nat'l Bank & Trust Co. of
Des Moines v. Wagener, 183 N.W.2d 678, 682 (Iowa 1971) ("it cannot be accepted
in this jurisdiction ... that assets may be traced from a corporation to an
individual but not vice versa"); Minich v. Gem State Developers, Inc., 99 Idaho
911, 917, 591 P.2d 1078, 1084 (1979) ("court can find no reason in law or logic
to limit the application of the alter ego doctrine ..." to traditional veil
piercing but not reverse veil piercing). Indeed, federal courts have implied
state law recognition of reverse-veil piercing from recognition of the ability
to pierce a corporate veil. See Moore, 379 B.R. at 289 (discussing, somewhat
disapprovingly, Zahra Spiritual Trust v. U.S., 910 F.2d 240, 243 (5th Cir.1990),
which made that implication).

12. The facts of the instant case are replete with fraud on
the part of the debtor and require this Court to apply the doctrine of reverse
veil piercing.

A. There is no question that Levitsky created Contemporary
as a sham corporation for the sole purpose of hindering, delaying and defrauding
his creditors, in particular, his former wife, Carol, by shielding the Property
within a corporate shell. Finding of Fact No. 4. For a discussion of factors
constituting a sham corporation, see Comptroller v. SYL, Inc., 375 Md. 78, 825
A.2d 399 (2003) (describing an out-of state holding company as a sham
corporation for state taxation purposes as having "no real economic substance as
[a] separate entit[y]" no full-time employees and ostensible part-time employees
were actually officers and directors, and where corporate offices "were little
more than mail drops." 825 A.2d at 415. B. Levitsky named the corporation "Contemporary Magic Kingdom," a name that had no reference to the Property or to
any corporate purpose, the effect of which, the Court has determined, was to
purposely mislead and confuse creditors and the general public. He then had the
corporation take title to the Property using its trade name, CMK Company, which
likewise was confusing and bore no connecting reference to the Property. Finding
of Fact No. 3.

C. Throughout its duration, the corporation was the
debtor's alter ego and had no business purpose, kept virtually no records, had
no corporate existence and received no income, other than the one and only time
Levitsky allegedly paid it overdue rent for the privilege of residing in the
Property. Findings of Fact Nos. 5-9, 17-19.

D. The corporation was dormant and defunct for long periods
of time until shortly before Levitsky filed the bankruptcy petition. Finding of
Fact No. 45. The revival of the defunct corporate charter on the eve of
bankruptcy served no purpose other than to hinder, delay and defraud the
debtor's personal creditors, including Carol, the IRS, and the Trustee, by
shielding the Property from the efforts of his creditors to satisfy their
obligations against the Property, which is his personal residence.FN21 Finding
of Fact No. 5.

FN21. Under Maryland law, it does not matter that Carol had
not obtained a final judgment at the time of the incorporation, because
Levitsky's extramarital conduct rendered her a future creditor, and Levitsky had
actual intent to defraud her. Under such circumstances, Levitsky's transactions
were fraudulent. See Md. Comm. Law Code § 15-207 ("Every conveyance made and
every obligation incurred with actual intent, as distinguished from intent
presumed in law, to hinder, delay, or defraud present or future creditors, is
fraudulent as to both present and future creditors.").

E. In his sole ownership of the stock of Contemporary,
Levitsky ignored corporate formalities and dealt with the Property as his own,
living there virtually rent-free for much of its 25-year ostensible ownership of
the Property. Findings of Fact Nos. 1 and 5. The Court notes that, assuming the
debtor resided on the Property subject to a valid lease, which is questionable
under the circumstances, such a lease was rejected as a matter of law by the
debtor's failure to assume it, pursuant to Section 365 of the Bankruptcy Code.

F. Other than the Property, Contemporary possessed no other
assets. Finding of Fact No. 4.

G. Levitsky used the Property titled in the name of
corporation to obtain personal loans and used the borrowed money for
non-corporate purposes, based upon the equity of the corporation in the
Property. In addition, he laundered the money for his personal benefit and to
avoid the payment of taxes through offshore shell corporations that he created
and controlled and even sheltered from his creditors the ostensible rental
payment of more than $30,000 that Levitsky transferred to the corporation
shortly before bankruptcy, thus defrauding his personal creditors. Findings of
Fact Nos. 28-36.

H. The debtor's fraudulent intent may be inferred from his
causing the corporation to transfer the Property to Jane for no consideration by
an unrecorded deed at a time when he owed money to his former wife, Carol and to
Tega Cay. Findings of Fact Nos. 4 and 32.

I. In short, the Property is in actuality property of the
debtor's estate because he has treated the Property as his own throughout the
time that it was titled in the corporate trade name and because he has used the
sham corporation to hinder, delay and defraud his creditors.

13. In the instant case, the application of reverse
veil-piercing will not prejudice creditors of the corporation. See Moore, 379
B.R. at 295, Stoebner v. Lingenfelter, 115 F.3d 576, 579-80 (8th Cir.1997)
(reverse piercing only appropriate when none of corporation's creditors will be
prejudiced). CIT and M & T are the only creditors of Contemporary, other than
possibly Levitsky himself. Both have purported liens on the Property, which are
equally valid or invalid inside or outside of bankruptcy. Thus, the disregard of
Contemporary as a corporate entity and the treatment of the Property as property
of the bankruptcy estate will have no adverse impact on or cause prejudice to
either CIT or M & T.FN22

FN22. In light of the parties' apparent agreement that the
Property is worth well over one million dollars, CIT's interest will also be
protected assuming that the Trustee accedes to M & T's alleged first lien
position.

14. Having determined that the Property is property of the
estate, this Court has subject matter jurisdiction under 26 U.S.C. § 1334 to
require its turnover by the debtor to the Trustee, and also to determine the
priority of the liens of M & T and CIT as to the Property.

15. CIT and M & T are precluded by the doctrine of
collateral estoppel from rearguing that the Property is not property of the
estate, having argued and lost on the issue. See Colandrea v. Wilde Lake Cmty.
Ass'n, Inc., 361 Md. 371, 761 A.2d 899, 908 ("If a proceeding between parties
does not involve the same cause of action as a previous proceeding between the
same parties, the principle of collateral estoppel applies, and only those facts
or issues actually litigated in the previous action are conclusive in the
subsequent proceeding ... When the principle of collateral estoppel applies,
facts or issues decided in the previous action are conclusive only if identical
to facts or issues presented in the subsequent proceeding.").

16. Although not argued by the Trustee as grounds for
relief, the Court notes the following alternative grounds that might have been
claimed to authorize the Chapter 7 Trustee to take possession of the Property.

A. The first of these is found in the case of In re Bonham,
226 B.R. 56 (Bankr.D.Ala.1998), where the bankruptcy court granted a trustee's
motion to substantively consolidate the Chapter 7 debtor's estate with her
closely-held, non-filing corporations that had been used to defraud creditors in
a Ponzi-type scheme. Quoting J. Stephen Gilbert, Substantive Consolidation in
Bankruptcy: A Primer, 43 VAND. L.REV.. 207, 218, the court differentiated
substantive consolidation from the similar result obtained under state law alter
ego doctrines by stating:

... Substantive consolidation more closely resembles the
bankruptcy rule of subordination because competition for the consolidated assets
is between creditors alone. Thus, substantive consolidation ignores artificial
legal structures but looks only to the combined assets of the consolidated
entities for satisfaction of all claims against the collective group.

Bonham, 226 B.R. at 77. Contra, Maiz v. Virani, 311 F.3d
334, 343-45 (5th Cir.2002) (turnover proceeding may not be used to adjudicate
whether a corporation is an individual judgment debtor's alter ego); and Morse
Operations, Inc. v. Robins LeCoq, Inc. (In re Lease-A-Fleet), 141 B.R. 869
(Bankr.E.D.Pa.1992) (involuntary consolidation of debtor's case with that of
non-debtor corporation was not appropriate in the absence of extraordinary
circumstances).

B. A second case in which a Chapter 7 trustee obtained
possession of a debtor's corporate property without piercing the corporate veil
is Fowler v. Shadel, 400 F.3d 1016 (7th Cir.2005). In that case, the Seventh
Circuit held that where, as here, the debtor who was the sole shareholder of a
corporation failed to exempt his interest in the corporate stock, the trustee
acceded to the debtor's interest in the stock and therefore had the right to
liquidate the assets of the corporation, even though the corporate assets
themselves (in that case, trucks) were not property of the debtor's bankruptcy
estate. 400 F.3d at 1018-19.

The Priority and/or Avoidance of the Liens of M & T and CIT

17. The liens of M & T and CIT are not invalid on the
ground that the 1983 deed from the Magnolia Way Joint Venture did not
effectively convey good title of the Property to Contemporary. The Trustee's
assertion to the contrary is based upon the deed's recitation that the Property
was being conveyed to "CMK Company, a Maryland Corporation," at a time when
there was no such corporation or trade name recorded among the land records.
However, it must be remembered that the trade name of "CMK Company" was recorded
in the land records on September 29, 1983, 22 days after the deed was executed
and 21 years before the petition date. While the failure to record a deed might
have resulted in its invalidation during the period between execution and
recordation, Maryland courts have not invalidated deeds when such a mistake in
corporate formalities is later corrected. See, e.g., Zulver Realty Co. v.
Snyder, 191 Md. 374, 379, 62 A.2d 276, 279 (holding that deed was valid when the
deed was conveyed to grantee corporation which formally incorporated after the
conveyance). In light of the brief period between the execution of the deed and
the proper recordation of the trade name, and the long duration between the
recordation of the trade name and the filing of the bankruptcy petition, the
liens may not be invalidated based on the late-filing of the trade name.

18. The liens of M & T and CIT are not invalid on the
ground that the corporate charter of Contemporary Magic Kingdom, Inc., had been
forfeited for almost seven years when FNB made the loan to "CMK Company." While
it is true that Bank One made its loan at a time when the charter had been
forfeited for nearly a decade, courts have employed concepts of estoppel to
prevent a bankruptcy trustee from using her strong-arm powers to void a lien
obtained in the name of a corporation whose charter was forfeited. See Exchange
Nat'l Bank v. A.J. Rackers, Inc. (In re A.J. Rackers, Inc.), 167 B.R. 168,
175-76 (Bankr.W.D.Mo.1994); Matter of Pubs, Inc. of Champaign, 618 F.2d 432 (7th
Cir.1980) (interpreting the Bankruptcy Act). In A.J. Rackers, a bank made a
secured loan to a corporation approximately one month after its charter had been
forfeited without knowledge of the forfeiture by either party. Rackers, at 170.
Subsequently, without having its charter reinstated, the corporation operated
its heating and air conditioning repair and installation business for the next
seven months before it closed its doors and wound down its affairs. Although the
court found that the activities of a business which has forfeited its corporate
charter are limited to winding down the operation, it held the loan to be valid
because the corporation was a "corporation by estoppel." Despite the proposition
that, "as a general rule, the trustee is not bound by estoppel," the court was
persuaded that under the Uniform Commercial Code, there was proper attachment by
estoppel that the trustee could not overcome. Id. at 175.

19. Like Missouri, Maryland recognizes the concept of
"corporation by estoppel." See Cranson v. Int'l Bus. Mach. Corp ., 234 Md. 477,
487, 200 A.2d 33, 38 (1964) (to prevent creditor from pursuing claim against
president of corporation personally when creditor had dealt with the corporation
as though it were a corporation even though it had failed to incorporate).
Accordingly, had Levitsky not personally guaranteed the loans in question, and
assuming that M & T and CIT for some reason could not pierce the corporate veil,
both would be estopped from denying the existence of Contemporary and from
pursuing their claims against Levitsky personally.

20. Finding persuasive the reasoning in Rackers and Pubs,
this Court holds that while a trustee is not estopped from challenging the
perfection of a lien by estoppel, a trustee is estopped from challenging the
attachment of a security interest, when that attachment occurred through
estoppel. Rackers, at 175.

21. The Court also notes that in this case, unlike Rackers,
the corporate charter was revived by the time the bankruptcy petition was filed.
While the circumstances surrounding that corporate revival are suspicious,
(having been revived one month prior to the filing of the petition after more
than a decade of dormancy), there is no evidence that the revival was
ineffective, at least with regard to the corporate name.

22. Pursuant to Section 544(a)(3),FN23 a Chapter 7 trustee
possesses all of the lien avoidance powers that would be bestowed by state law
upon a hypothetical purchaser of property who purchased the property on the date
the bankruptcy petition was filed. See 11 U.S.C. § 544(a)(3); Rinn v. First
Union Nat. Bank of Md., 176 B.R. 401, 25 UCC Rep. Serv.2d 1057 (D.Md.1995). This
Court (Derby, J.) has previously invalidated a lien on the personal property of
a corporation when the allegedly secured party filed a financing statement that
referred to the debtor by its trade name. Greenbelt Coop., Inc. v. Werres Corp.
(In re Greenbelt Coop.), 124 B.R. 465, 470 (Bankr.D.Md.1991) (citing In re
Bumper Sales, Inc., 907 F.2d 1430 (4th Cir.1990)); see also Lawrence Bach, Trade
Name Filing: Should It be Sufficient to Perfect A Security Interest Under U.C.C.
Section 9-402?, 35 CASE W. RES. L. REV 51 (1985). As noted, that case dealt with
personal and not real property, and was decided based upon provisions of the
Uniform Commercial Code. FN24

FN23. Section 544(a) provides, as follows:(a) The trustee
shall have, as of the commencement of the case, and without regard to any
knowledge of the trustee or of any creditor, the rights and powers of, or may
avoid any transfer of property of the debtor or any obligation incurred by the
debtor that is voidable by-

(1) a creditor that extends credit to the debtor at the
time of the commencement of the case, and that obtains, at such time and with
respect to such credit, a judicial lien on all property on which a creditor on a
simple contract could have obtained such a judicial lien, whether or not such a
creditor exists;

(2) a creditor that extends credit to the debtor at the
time of the commencement of the case, and obtains, at such time and with respect
to such credit, an execution against the debtor that is returned unsatisfied at
such time, whether or not such a creditor exists; or

(3) a bona fide purchaser of real property, other than
fixtures, from the debtor, against whom applicable law permits such transfer to
be perfected, that obtains the status of a bona fide purchaser and has perfected
such transfer at the time of the commencement of the case, whether or not such a
purchaser exists.

11 U.S.C. § 544(a).

FN24. In Greenbelt Coop., the debtor corporation operated a
furniture store known to consumers as SCAN or SCAN Furniture, but was
incorporated under the name "Greenbelt Cooperative, Inc." Id . at 467. An
equipment lessor entered into what was effectively a purchase-money loan for
forklifts with the corporation, but filed a financing statement under the name
Scan Furniture. Judge Derby granted the complaint brought by the
debtor-in-possession to avoid the lessor's lien on the forklifts and held that
because the trade name "SCAN Furniture" was not remotely similar to the
corporate name "Greenbelt Cooperative, Inc.," the debtor-in-possession could use
the trustee's strong-arm powers under 11 U.S.C. § 544(a)(1) to avoid the lien.
Id. at 471.

23. In order to properly distinguish Greenbelt Coop., it is
necessary to briefly describe the history of the methods by which Maryland
allows corporations to record trade names. Before 1991, the law required that
trade names be filed in every county in which the trade name was used. Upon
filing, the clerks of court forwarded the trade names to SDAT, which maintained
a trade name master list. The filing of a trade name gave the corporation the
right to use the trade name forever, but not the exclusive right. In 1991, the
General Assembly enacted important revisions to the law that became effective on
July 1, 1991. First, trade names were required to be filed with SDAT, and were
given statewide effect. Second, once registered properly, trade names were to be
exclusive, that is, no one but the filer was allowed to use them. Third, trade
names were to last for only 10 years, instead of in perpetuity.

24. The current statute governing the recordation of trade
names is found in Sections 1-401 through 1-415 of the Business Regulation
Article of the Maryland Code. The following quoted sections are relevant to the
instant case:

1-401. Definitions.

(c) Mark. "Mark" means a name, symbol, word, or combination
of 2 or more of these that a person:

(1) places on goods that the person sells or distributes, a
container of the goods, a display associated with the goods, or a label or tag
affixed to the goods to identify those goods that the person makes or sells and
to distinguish them from goods that another person makes or sells; or

(2) displays or otherwise uses to advertise or sell
services that the person performs to identify those services that the person
performs and to distinguish them from services that another person performs.

* * *

1-401(f) Trade name.-"Trade name" means a name, symbol,
word, or combination of 2 or more of these that a person uses to identify the
business or occupation of the person and to distinguish it from the business or
occupation of another person.

1-402. Effect of Subtitle.

This subtitle does not affect adversely a right or the
enforcement of a right in a mark acquired in good faith at any time at common
law.

1-403. Records.

The Secretary of State shall keep a public record of the
marks registered under this subtitle.

1-404. Registration authorized.

(a) In general.-If a person uses a mark in the State, the
person may register the mark in accordance with this subtitle.

(b) Exceptions.-A person may not register a mark that:

* * *

(5) is likely, when applied to the goods or services of the
person, to confuse or deceive because the mark resembles:

(i) another mark registered in the State; or

(ii) a mark or trade name that another person has used in
the State and has not abandoned.

(d) Registration of trade name prohibited.-A person may not
register a trade name that is not a mark.

1-410. Term and renewal of registration.

(a) Term of registration.-Unless registration of a mark is
renewed for a 10-year term as provided in this section, the registration expires
on the tenth anniversary of its effective date.

1-412. Cancellation of registration.

(a) The Secretary of State shall cancel a registration of a
mark if:

(1) the registrant asks that it be canceled;

(2) the registrant fails to renew it;

(3) a court of competent jurisdiction orders that it be
canceled on any ground; or

(4) a court of competent jurisdiction finds that:

(i) the mark is abandoned;

(ii) the registrant does not own the mark;

(iii) the registration was granted improperly; or

(iv) the registration was obtained fraudulently.

Id.FN25

FN25. The status of prior recorded trade names is ambiguous
under the new law, and SDAT was uncertain how to treat them. For a period, it
maintained the trade names filed after the 1991 change in the same file as those
filed before it. However, because the primary purpose for searching trade name
records is to determine whether a name has already been registered, and because
the pre-1991 trade names were non-exclusive (and arguably lasted forever), SDAT
decided that it would no longer be worthwhile to keep the pre-1991 records open
to the public. Accordingly, it removed the pre-1991 trade name files from the
records open to the public, although SDAT employees continued to have access to
them. The records are now available only on microfilm. They are not viewable
either in an online search of the SDAT database nor if a party went to the SDAT
counter in person. Online search capabilities of SDAT allow a party to access
any trade name by search using its initial letters followed by a percentage
sign. For example, one could search for all trade names beginning with the
letters CMK, by searching for CMK%. However, an online search for CMK% would not
yield CMK Company because that trade name was filed before 1991. A party may
also search online for all of the trade names of a Maryland-registered
corporation by its "Department ID number." However, once again, such a search
would not disclose any trade name registered before 1991. The website does not
inform one that it will not permit access to trade names filed before 1991. In
order to compel SDAT to produce the old trade names, a party must appear in
person at the office of SDAT and request a clerk to search the microfilm records
for a specific trade name. Due to a lack of institutional memory, there is a
good chance that most SDAT clerks are unaware of the existence of the old trade
name files. Thus, there is no method by which the Trustee could obtain the trade
name, CMK Company from SDAT without specifically asking a knowledgeable clerk to
search the microfilm records. However, a search of the Lexis-Nexus database,
which is available to private parties for a fee, would have revealed the
existence of the old trade names.

25. The holding in Greenbelt Coop. is not applicable here,
not only because the instant case deals with real property, but because the
facts of the instant case differ from Greenbelt Coop. in two ways. First,
Greenbelt Coop. was decided before the 1991 change in the Maryland trade name
recordation law, and there was no finding that the trade name "SCAN Furniture"
had been filed with the clerks of the circuit courts in the counties in which
the forklifts were located. In the instant case, "CMK Company" was ultimately
recorded properly as a trade name. Second, in the instant case, a hypothetical
purchaser would have knowledge of the trade name "CMK Company," because that was
the name used on all the deeds in the chain of title as far back as 1983.

26. Maryland courts have been unforgiving of a purchaser's
mistake of law. See Cooke's Lessee v. Kell, 13 Md. 469, 493, 1859 WL 3857 at *
16 (Md.1859) ("If registration laws do not give notice to the community which
will bind it, then they are of no use whatever ..."); see also Janusz v.
Gilliam, 404 Md. 524, 536, 947 A.2d 560, 567 (May 9, 2008), quoting Hoffman v.
Chapman, 34 A.2d 438, 441, 182 Md. 208, 213 (1943) ("[t]he general rule is
accepted in Maryland that a mistake of law in the making of an agreement is not
a ground for reformation ..."). The system of recording trade names employed by
SDAT comports with the law of Maryland. Accordingly, a purchaser of a home in
Maryland is charged with knowledge of the recording system of the jurisdiction
in which she is purchasing a home, including the system of recording trade
names, if for some reason the home is titled in a trade name.

27. When conducting a title search, a purchaser is
obligated to look back as far as is reasonable under the circumstances. Coe v.
Hays, 105 Md.App. 778, 786, 661 A.2d 220, 224 (1995) (finding that, based on
expert testimony, a title search going back 99 years was sufficient and that 60
years would have also been sufficient to convey marketable title).

28. From the deeds in the chain of title to the Property, a
hypothetical purchaser would realize that there was a deed to "CMK Company"
which existed as far back as 1983. Accordingly, a hypothetical purchaser would
be on notice that it would be necessary to search the pre-1991 trade name
records to find that trade name.

29. The Trustee cites the recent opinion the Maryland Court
of Appeals for the proposition that the burden of risk of a clerk's mistake is
on the party recording, not on the purchaser. See Greenpoint Mortgage Funding,
Inc. v. Schlossberg, 390 Md. 211, 234-35, 888 A.2d 297, 311 (2005) ("Indexing
mistakes should be at the risk of the person who had the ability to insure that
the document was indexed correctly-the filer."). Here, unlike Greenpoint
Mortgage, the trade name CMK Company was properly recorded in the Anne Arundel
County Circuit Court under the laws in existence at the time of recordation.
SDAT may have provided an incorrect answer to the Trustee's question when it
advised her that no such trade as "CMK Company" existed; but the Trustee asked
the wrong question. As a hypothetical purchaser, the Trustee is charged not only
with knowledge of the recording laws, but also with the knowledge of the
recording practices of SDAT. Those practices apparently include not informing
inquirers about trade names registered before July 1, 1991, unless the inquirer
specifically asks for them.

30. For these reasons, the Trustee cannot use her §
544(a)(3) powers to avoid the lien of CIT on the theory that a hypothetical
purchaser would not have notice of the trade name "CMK Company."

31. Maryland is a race-notice jurisdiction. See Md. Real
Prop.Code Ann. § 3-203.FN26 Accordingly, when a grantor conveys a deed or deed
of trust to one purchaser or lender, and then subsequently conveys a deed or
deed of trust on the same property to another purchaser or lender who takes
without notice of the first deed or deed of trust, the first purchaser or lender
who properly records its interest in the land records will defeat the other
purchaser or lender's interest.

FN26. Section 3-203 of the Real Property Article of the
Maryland Code provides as follows:Every recorded deed or other instrument takes
effect from its effective date as against the grantee of any deed executed and
delivered subsequent to the effective date, unless the grantee of the subsequent
deed has: (1) Accepted delivery of the deed or other instrument: (i) In good
faith; (ii) Without constructive notice under § 3-202; and (iii) For a good and
valuable consideration; and (2) Recorded the deed first.

Md. Real Prop.Code Ann. § 3-203.

32. While it is true that Jane conveyed her interest in the
Property back to Contemporary before Bank One recorded its deed of trust,
Contemporary also delayed recording the transfer to Jane. Because it delayed
recording the reconveyance, Contemporary would not have been able to defeat Bank
One's unrecorded deed of trust, even had it taken back the Property without
knowledge of the deed of trust. Of course it did not, because Bank One recorded
its deed of trust before Contemporary recorded the deed. Therefore, a
hypothetical purchaser analyzing the chain of title to the Property would have
had notice of this entire series of events.

33. The Trustee argued that the Replacement Deed of Trust
between Jane and Bank One was actually a new deed of trust that Jane did not
have authority to execute because she had already transferred the Property back
to Contemporary. This Court disagrees, and so do the Maryland cases that have
held replacement deeds to be valid. See, e.g., Bugg v. Md. Transp. Auth., 31
Md.App. 622, 358 A.2d 562, 586 (1976). Generally, courts will only invalidate a
replacement deed when there is some indicia of fraud. See, e.g., RKB Investments
v. Maxfield ( In re B.L. Jennings, Inc.), 373 B.R. 742 (Bankr.M.D.Fla.2007).
While there are plenty of indicia of fraud present in this case, the Replacement
Deed of Trust itself has none of these; rather, it was executed and recorded to
replace the original deed of trust rejected by SDAT because it mistakenly
purported to be a refinancing deed of trust. The addition of the words "Purchase
Money" on the top of the Replacement Deed of Trust corrected that error and
served to effectuate the intent of all parties to the original deed of trust.
Accordingly, because the Replacement Deed of Trust properly replaced the
original deed of trust, it therefore relates back in time to the date of the
deed of trust it replaced. There might be a different result if the deed from
Jane to Contemporary was recorded prior to the recordation of the replacement
deed of trust.

34. Nevertheless, even were the Replacement Deed of Trust
in fact a new deed of trust, it is still effective even if Jane had no authority
to convey it, because it was recorded by Bank One before Contemporary recorded
the deed from Jane. As a race-notice jurisdiction, Maryland law holds that when
the owner of real property conveys a deed to one party and later a deed of trust
to a different party, the first party takes the property subject to the deed of
trust if the holder of the deed of trust records first. Thus, assuming the
Replacement Deed of Trust was in fact a new deed of trust, it is still effective
because Bank One obtained it without knowledge of the deed back to Contemporary,
and Bank One recorded first. Md.Code Ann., Real Prop § 3-203. Therefore, the
trustee's argument that the Replacement Deed destroyed the lien of CIT fails.

35. The Trustee also seeks to use her Section 544(a)(3)
hypothetical purchaser powers to prevent M & T from asserting a lien on the
Property, on the theory that a hypothetical purchaser would have had no inquiry
notice that the certificate of satisfaction of M & T's lien had been either
fraudulently or mistakenly recorded. It is black letter law that a certificate
of satisfaction recorded by mistake does not release a mortgagee from a lien or
from the obligations that the lien secures. Numerous state court opinions have
held in cases where a certificate of satisfaction was fraudulently entered onto
the land records, the lien survived, even against an innocent purchaser. See,
e.g., Leedom v. Spano, 436 Pa.Super. 18, 34, 647 A.2d 221, 229 (1994) (innocent
purchasers took property subject to lien even though fraudulent lien release was
filed by unidentified individual in land records); Sunrise Sav. & Loan Ass'n of
Fla. v. Giannetti, 524 So.2d 697, 700 (Fla.Dist.Ct.App.1988) ("where a mortgage
has been cancelled because of the fraudulent conduct of an intervening third
party, without authority or consent of the mortgagee, the result is [that the
mortgagee's lien survives]") (citing Zimmer v. Fryer, 190 La. 814, 183 So. 166
(1938)); Luther v. Clay, 100 Ga. 236, 248, 28 S.E. 46, 49-50 (1897) (bona fide
purchaser took real property subject to lien on which certificate of
satisfaction had been fraudulently filed by mortgagor); Keeler v. Hannah, 52
Mich. 535, 536, 18 N.W. 346, 346 (1884) (original mortgagee's lien was effective
against subsequent mortgagee even though mortgagor had filed fraudulent release
of first mortgage and subsequent mortgagee had no knowledge of fraud); Crecelius
v. Home Heights Co., 217 S .W. 508, 512 (Mo.1919) (deed of trust fraudulently
released by third party was still effective against bona fide purchaser);
Scardone v.. Sozzi, 108 N.J. Eq. 415, 155 A. 376 (N.J. Ch.1931) ("Between a
mortgagee whose mortgage has been discharged of record solely through the
unauthorized act of another party, and a purchaser who buys the title in the
belief, induced by such cancellation, that the mortgage is satisfied and
discharged, the equities are balanced, and the rights in the order of time must
prevail") (citations omitted).FN27 The only exception is where the certificate
of satisfaction was mistakenly recorded because of the lienholder's own
negligence. One bankruptcy opinion went so far as to hold that anytime a
certificate of satisfaction is mistakenly recorded due to anyone's fault other
than that of the affected lienholder, the lien is still effective even against a
bona fide purchaser. See Home Sav. & Loan. Co. v. O'Reilly (In re O'Reilly), 30
B.R. 562, 564 (Bankr.N.D.Ohio 1983). Indeed, when the mistaken release of a lien
was entirely due to the fault of the holder of the released lien, one bankruptcy
court allowed § 544(a)(3) to avoid the lien. See Collins v. Bank of New
England-West, N.A. (In re Daylight Dairy Prods., Inc.), 125 B.R. 1, 4-5
(Bankr.D.Mass.1991) (allowing trustee to use § 544(a)(3) where bank had
mistakenly recorded a certificate of satisfaction of its own lien).

FN27. An exhaustive list of similar decisions is contained
at 35 A.L .R.2d 948 (1951 & Supp.2002).

36. However, under Maryland law, a properly-recorded
certificate of satisfaction acts to release property from any lien contained
thereon. Md. Real Prop.Code Ann. § 7-103(a).FN28 Two Maryland decisions,
seemingly unique in the nation, hold that when one purchases property without
notice that a certificate of satisfaction was mistakenly recorded, the purchaser
takes the property free and clear of any lien that was mistakenly released. Van
Schaik v. Van Schaik, 35 Md.App. 19, 26, 369 A.2d 133, 137 (1977) ("[I]f a
release of mortgage is mistakenly recorded, that release is effective as to
subsequent bona fide purchasers ..."); FN29 and Bond v. Dorsey, 65 Md. 310, 316,
4 A. 279, 281 (1886) ("Of course, the mortgage cannot be restored as against one
who has in good faith purchased the property after the cancellation, or has
advanced money upon it upon the faith of a clear record title"). These opinions
permit a bona fide purchaser to take title to real property free and clear of a
lien mistakenly released as a result of a third party's negligence. Accordingly,
even though the lien of M & T was allegedly released as a result of the
negligence of a third-party, under the authority of the cases cited, the Trustee
is empowered to avoid the lien of M & T for the reason that a bona fide
purchaser could do so in Maryland.

FN28. Section 7-103(a) of the Real Property Article of the
Maryland Code provides as follows:The title to any promissory note, other
instrument, or debt secured by a mortgage, both before and after the maturity of
the note, other instrument, or debt, conclusively is presumed to be vested in
the person holding the record title to the mortgage. If the mortgage is duly
released of record, the promissory note, other instrument, or debt secured by
the mortgage, both before and after the maturity of the promissory note, other
instrument, or debt, conclusively is presumed to be paid as far as any lien on
the property granted by the mortgage is concerned.

Md. Real Prop.Code Ann., § 7-103(a).

FN29. In Van Schaik, owners of real property sold it to
their son and daughter-in-law, subject to a purchase-money mortgage which they
sold to a third-party bank. The bank later attempted to reassign the mortgage
back to the original owners, but instead mistakenly released the mortgage. The
son and daughter-in-law sold part of the real property to a third party who had
no notice that the release had been mistakenly recorded. When one of the
original owners (the other had since died) discovered the release, she filed a
bill of complaint seeking to vacate the release. In affirming the trial court's
grant of the vacatur of the release as to the son and daughter-in-law, the Court
of Special Appeals of Maryland also held that the released mortgage did not
apply to the land that was sold to the bona fide purchaser. 35 Md.App. at 26-27,
369 A.2d at 137-39. Thus, the decision held, in disagreement with every other
state that has decided the issue, that even though the original lienholder's
lien was mistakenly released by a third party, the lien was ineffective as to a
bona fide purchaser.

37. M & T argued that a hypothetical purchaser would be put
on inquiry notice that the certificate of satisfaction was mistakenly recorded,
in support of which M & T noted that the certificate was signed by Levitsky, and
not by an employee or agent of M & T. This Court disagrees. In order to be
precluded from the status of a bona fide purchaser, there must be "circumstances
which ought to have put a person of ordinary prudence on inquiry," in which case
a purchaser "will be presumed to have made such inquiry and will be charged with
notice of all facts which such an investigation would in all probability have
disclosed if it had been properly pursued." Fertitta v. Bay Shore Dev. Corp.,
266 Md. 59, 72, 291 A.2d 662, 669 (1972). M & T asserted that while the
certificate of satisfaction did not disclose the status of Levitsky as president
and/or sole shareholder of Contemporary/CMK Company, his status was readily
ascertainable based on four different documents recorded in the Land Records of
Anne Arundel County, including the deed of trust between Levitsky and FNB as
referenced by the certificate, which the certificate purportedly released. On
the other hand, the Trustee argued that a hypothetical purchaser would not be on
notice that the certificate was fraudulently or mistakenly recorded. In so
arguing, the Trustee relies on the two title searches conducted by title
agencies employed by CIT that certified that there were no mortgages recorded on
the Property, other than that of CIT. The Trustee also argued that a
hypothetical purchaser would have had no reason to believe that FNB had not
assigned the deed of trust to Levitsky after he had fully paid the mortgage. The
Trustee noted that the certificate was certified as properly executed by a
Maryland attorney, Mark Reges, whose signature is notarized.

38. Subsection (b) of Section 3-105 of the Maryland Real
Property Code, which governs the release of deeds of trust, mortgages or liens,
authorizes the assignee of a lien to record a certificate of satisfaction
without the necessity of recording the actual assignment of the lien.FN30
Therefore, a reasonable title searcher could believe that M & T assigned its
deed of trust to Levitsky, who released it as the assignee, as the two CIT title
searchers apparently believed. A title searcher would note that the certificate
of satisfaction was signed and certified by a member of the Maryland bar
experienced in real estate transactional law. Additionally, the existence of
later loans accompanied by the certificate of satisfaction of the M & T lien
would indicate to a prudent title searcher that the loan had been paid off by
the CIT loan. Accordingly, the Court disagrees with M & T's contention that a
hypothetical purchaser would have inquiry notice that M & T's loan had not been
paid off.

FN30. Section 3-105(b) provides, as follows:(b) A release
may be endorsed on the original mortgage or deed 62 of trust by the mortgagee or
his assignee, the trustee or his successor under a deed of trust, or by the
holder of the debt or obligation secured by the deed of trust. The mortgage or
the deed of trust, with the endorsed release, then shall be filed in the office
in which the mortgage or deed of trust is recorded. The clerk shall record the
release photographically, with an attachment or rider affixed to it containing
the names of the parties as they appear on the original mortgage or deed of
trust, together with a reference to the book and page number where the mortgage
or deed of trust is recorded. When the mortgage or deed of trust, with the
attached release, is filed for the purpose of recording the release, the clerk
shall retain the mortgage or deed of trust in his office and not permit it to be
withdrawn for 25 years, after which time he may destroy it. If, however, the
clerk preserves a photographic copy of the release, he may permit the original
mortgage or deed of trust with the release to be withdrawn.

Id.

39. In response to the argument of M & T that, despite the
release, it retains an equitable lien, courts have repeatedly refused to enforce
equitable liens against the powers of a hypothetical purchaser accorded to a
bankruptcy trustee by Section 544(a)(3). See, e.g., Barclays American/Mortgage
Corp. v. Wilkinson (In re Wilkinson), 186 B.R. 186 (Bankr.D.Md.1995) (Keir, J.)
(Defect in execution of mortgage barred lender from asserting an equitable lien
against a Chapter 13 debtor in possession); Wolf v. Mahrdt ( In re Chenich), 100
B.R. 512, 515 (9th Cir. BAP1987) (hypothetical bona fide purchaser "takes title
to the real property free from all equitable liens") (quotations omitted).
Indeed, the only equitable liens enforced in the context of Section 544(a)(3)
are those of a first-in-time lender against a second-in-time lender. See, e.g.,
In re Price, 97 B.R. 264, 266 (Bankr.E.D.N.C.1989) (substituting trustee in
place of first lender and allowing trustee to occupy first lien position); First
Am. Nat'l Bank v. Miller (In re Miller), 286 B.R. 334, 343-44
(Bankr.E.D.Tenn.1999) (same). Similarly, if it is found that an agent of CIT
negligently released the lien of M & T, M & T may have an equitable lien on the
proceeds of CIT's lien, under a theory of unjust enrichment. However, such a
claim was not a part of M & T's motion for judgment and therefore it is not
appropriate to rule on it now.

40. By avoiding the lien of M & T, which was recorded prior
to that of CIT, the Trustee succeeds to the former lien position of M & T, ahead
of that of CIT.

Standard of review

41. The Court will grant CIT's motion for judgment and deny
that of M & T. Judgment as a matter of law is appropriate when, "without
weighing the credibility of witnesses, there can be but one reasonable
conclusion as to the correct judgment ... If, however, evidence viewed in a
light most favorable to the nonmovant indicates that more than one conclusion is
plausible, judgment as a matter of law is improper." In re Byrd Foods, Inc., 253
B.R. 196, 199 (E.D.Va.2000), citing Siegfried Construction, Inc. v. Gulf Ins.
Co., 203 F.3d 822 (4th Cir.2000)(table) (unpublished). See Federal Rule of Civil
Procedure 52(c), made applicable herein by Federal Bankruptcy Rule 7052. The
Court will grant CIT's motion, because weighing all of the evidence in favor of
the Trustee, the Court finds that a conclusion in the Trustee's favor is
implausible. Because a decision in favor of M & T is implausible, and because M
& T has stated that it does have any further evidence to present, the Court will
enter judgment against M & T, thereby allowing the Trustee to avoid its lien
against the Property.

WHEREFORE, in Adversary Proceeding No. 04-2024, this Court
will enter a decree in favor of the Trustee declaring that the Property is
includable as property of the debtor's estate, and will require that the debtor
turn over the said Property to the Trustee forthwith. In Adversary Proceeding
No. 05-1254, this Court will declare that the lien of M & T is avoidable by the
Trustee, who will take priority over the recorded lien of CIT; and that the
Trustee will be authorized to sell the Property for the benefit of the general
unsecured creditors of the bankruptcy estate of Leon R. Levitsky, including M &
T, subject to the prior lien of CIT.

ORDER ACCORDINGLY.

Labels: Alter Ego, asset protection, corporate veil, fraudulent transfer, reverse alter ego, veil piercing

Transfers to Irrevocable Children's Trust Survive Fraudulent Transfer Attack -- In re Wills

This is another trust case that may effect asset protection planning, and which has a more favorable outcome for the debtors where the bankruptcy trustee was not able to prove that transfers to an irrevocable children's trust were fraudulent transfers.

In re Wills, 2008 WL 4498802 (Bkrtcy.D.Kan., Slip Copy, October 1, 2008)

United States Bankruptcy Court,

D. Kansas.

In re James D. WILLS and Melinda K. Wills, Debtors.

Edward J. Nazar, Trustee, Plaintiff,

v.

James D. Wills, Melinda K. Wills, the James D. Wills and Melinda K. Wills Irrevocable Family Trust, Clingan Leasing, Robert W. Clingan, Jr., and Clingan Tires, Inc., Defendants.

Bankruptcy No. 05-17977. Adversary No. 06-05337. Oct. 1, 2008.

Elizabeth A. Carson, Bruce Bruce & Lehman LLC, Wichita, KS, for Plaintiff.

David G. Arst, Wichita, KS, J. Gregory Swanson, Swanson Law Office, J. Douglas Miller, Miller Law Firm, Liberal, KS for Defendants.

MEMORANDUM OPINION AND ORDER FOLLOWING TRIAL ON TRUSTEE'S AMENDED COMPLAINT FOR AVOIDANCE OF FRAUDULENT TRANSFER AND FOR TURNOVER

DALE L. SOMERS, Bankruptcy Judge.

*1 The matter before the Court is the Trustee's Amended Complaint for Avoidance of Fraudulent Transfer and for Turnover of Property. The Court has jurisdiction.FN1 Following a two day trial, at which the Plaintiff Chapter 7 Trustee, Edward Nazar (hereafter Trustee), appeared by Elizabeth A. Carson of Bruce, Bruce & Lehman, L.L.C. and all defendants appeared by David G. Arst of Arst & Arst, P.A., and the receipt of post-trial briefs, the case was placed under advisement. Having heard the evidence, received the exhibits, and considered the briefs, the Court is now ready to rule. For the reasons stated below, the Court denies the Complaint, except, based upon the concession of the Debtors, the Court finds that the contract rights for the Ute Lake Property and any postpetition payments received by the Trust with respect to those rights are property of the bankruptcy estate.

FN1. This Court has jurisdiction over the parties and the subject matter pursuant to 28 U.S.C. §§ 157(a) and 1334(a) and (b), and the Standing Order of the United States District Court for the District of Kansas that exercised authority conferred by § 157(a) to refer to the District's bankruptcy judges all matters under the Bankruptcy Code and all proceedings arising under the Code or arising in or related to a case under the Code, effective July 10, 1984. Furthermore, this Court may hear and finally adjudicate this matter because it is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(H) and (E). There is no objection to venue or jurisdiction over the parties.

The Trustee seeks to exercise his power under § 544(b)(1) FN2 of the Bankruptcy Code to avoid transfers that at least one of the Debtors' unsecured creditors allegedly could have avoided under K.S.A. 33-204 and -205 of the Kansas Uniform Fraudulent Transfer Act (UFTA). He seeks to recover from The James D. Wills and Melinda K. Wills Irrevocable Family Trust (hereafter Trust) two sets of transfers made to the Trust, one by the Debtors in January 2001 and one by MCW, LLC sometime between January and December 2001. He also seeks to recover from defendants Clingan Tires, Robert W. Clingan, Jr., and/or Clingan Leasing some assets involved in the second transfers to the Trust that were later transferred from the Trust to Clingan Tires.

FN2. 11 U.S.C. § 544(b)(1). All future references to the Bankruptcy Code shall be to the section only.

FINDINGS OF FACT.FN3

FN3. The Findings of Fact are based primarily upon the bankruptcy pleadings, the testimony, and those portions of the exhibits brought to the Court's attention during trial. Unfortunately, the testimony elicited by the Defendants and the Trustee, who has the burden to prove fraud by clear and convincing evidence, was often imprecise. Although the Court has independently reviewed some of the voluminous exhibits, this examination has not been exhaustive. The Court does not believe that when counsel fails to direct the Court to a particular portion of an exhibit which supports counsel's argument, it has a duty to examine all the exhibits in minute detail to identify evidence supporting counsel's position.

Debtors, James (Jim) and Melinda Wills, filed a voluntary petition under Chapter 7 on October 12, 2005. They are longtime residents of Liberal, Kansas and have two children, twins Drew and Morgan, born in 1993. Jim Wills also has two sons of a previous marriage; one son, Todd, is married and has a masters degree. The other son, Ty, is estranged from the Wills. At the time of filing, both Debtors were employed by Clingan Tires, Jim as general manager and Melinda as Secretary. Melinda's parents are the principal owners of the business. Debtors' Schedule I reports monthly income of $6,548.58. The schedules report assets of $982,226.92, which include rental real estate valued at $526,000 and a homestead valued at $225,000. Total liabilities scheduled are $998,803.58, which include an unsecured priority claim of $15,124.02 to the United States, $815,641 in secured claims, and unsecured claims of $168,038 .56, $80,000 of which is a business debt. Assets claimed as exempt are valued at approximately $454,601 and include the homestead and $183,101 in pension plans and similar exempt assets.

In 1997, Jim Wills, after his employment as president of National Carriers, a cattle hauling business, started a new business, Amigo Carriers, LLC (hereafter Amigo), also a cattle hauling business. James Kimball, through Kimball Livestock & Grain, invested about $70,000, and was a "partner" in the business. An operating line of credit and financing for purchase of rolling stock was provided by Citizens State Bank, now Sunflower Bank (hereafter Bank). In 1998, the Amigo loan balance was $1,200,0000. Amigo's 2000 tax return reported rolling stock having a cost basis of $936,392.

*2 Although there is testimony that James Kimball and Jim Wills "signed the [Amigo] loans," the record is silent as to whether James Kimball had personal liability and, if so, when it ceased. On May 1, 1999, Jim Wills agreed to buy out James Kimball's interest for $63,825.50. Wills became the sole owner of the business. Jim Wills testified that Melinda was added to the Amigo notes at that time,FN4 but no detail as to the exact date FN5 or the amount of the obligation was provided. Amigo did not prosper and in April 2001 ceased operations. There is no evidence that Jim Wills contested personal liability for the Amigo debt.

FN4. The Trustee argues that Melinda "had no obligation on the Amigo Carriers loan prior" to 2000, when the Bank "required additional collateral and the personal guaranty of James and Melinda Wills." Doc. 225. This argument is not supported by the record. The 2000 guaranty was of the debts of MCW and, as stated above, James Wills testified that Melinda had liability for the Amigo loan in 1999.

FN5. The attachments to the Bank's motion for relief from stay include Third Party Pledge Agreements executed by MCW in 1999 providing that mortgages of MCW's properties secure the obligations of James and Melinda Wills to the Bank.

Debtors have been engaged in ownership and rental of real property for a number of years. In 1999, Debtors formed MCW Rentals, LLC (hereafter MCW), which became the owner of the properties. MCW is owned 35% by each Debtor and 30% by Debtors' twin children and Todd. Bank also financed MCW. The appraised value of the properties in 2001 was $843,000 or $863,000 or $874,000. In 2000 and 2001, MCW owned about 16 units and generated in the neighborhood of $12,000 per month income, resulting in about $6,500 gross profit per month. As of January 31, 1999, a financial statement of MCW shows real estate valued at $817,500, subject to mortgages of $459,423.17. MCW also held interests in vehicles and equipment which were leased to Clingan Tires.

Mark Taylor, vice president of Bank, handled the Amigo and MCW loans. He was in close contact with Jim Wills during 2000 and 2001. On May 5, 2000, Mark Taylor wrote to Jim and Melinda Wills stating that the Amigo loan was 26 days past due, the Amigo checking account was overdrawn, and the Bank required additional collateral, either from the MCW rental properties or a mortgage on the Wills' home. In December 2000, the Bank believed there was equity in MCW Rentals. The only activity which the Court finds was in response to the May letter is the Wills' December 4, 2000, personal guarantee of the debts of MCW; that guaranty was secured by mortgages on the MCW properties.FN6 At some unknown time, a plan was developed to terminate Amigo's business, sell Amigo's assets, and to apply the proceeds to the Amigo Bank debt. Amigo ceased business as of April 30, 2001, when it had obligations to the Bank, employees, and the IRS. In 2003, Jim Wills made arrangements with the IRS for him to make monthly payments of $500 to satisfy a $15,000 tax liability of Amigo. Those payments were made, and the IRS claim in this case is for penalties.

FN6. There is testimony that the Bank was given a second mortgage on some MCW rental properties, but the amounts, the debt secured, and the dates are not apparent. It is possible that this testimony is referring to the Wills' guaranty of the MCW debt to the Bank.The record does not evidence details concerning the Wills', Amigo's, or MCW's obligations to the Bank. At one time, the Bank loaned approximately $1,200,000 to finance Amigo, but there was no testimony on the amount of the loan on the dates of the transfers to the Trust or the deficiency resulting after the liquidation of the Amigo loan. A financial statement of MCW as of January 31, 1999, lists a debt of $459,423.17 to the Bank and mortgages in the same amount, but there was no testimony of the amount of this debt on the dates of transfers to the Trust, except to the extent that the obligation is reflected in the conflicting financial statements bearing dates close to the times of the transfers.

The only loan documents in evidence are the attachments to the Bank's motion for relief from stay. Case no. 5-17977, Doc. 5. No notes of MCW or Amigo are attached, and the motion asserts only a claim against the Wills. Three notes executed by the Wills are attached: A note dated February 11, 2003 (long after the transfers to the Trust) in the original amount of $374,629.85, for which the payoff was alleged to be $74,050.46 as of November, 2005; a note dated December 10, 2001 in the original principal amount of $202,000, alleged to have a payoff of $274,166.60 as of September 2, 2005; and a note dated December 10, 2001 in the amount of $56,055.18, the entire principal and interest was claimed to be due. The notes state they are for "business" and to "refi Amigo oper exp." Mark Taylor testified the sometime before November 14, 2003, the Bank internally wrote off $202,000, leaving a balance of $342,244.14, but the obligor on the note is not identified. There is no evidence that the write off was before or soon after the transfers to the Trust. The Trustee states the "Amigo Carrier loan was paid off with a $202,000 charge off and a rewrite of the MCW loans" (Doc 225), but the Court cannot locate evidence to support this statement.

In the fall of 2000, Melinda and Jim Wills discussed the establishment of an irrevocable family trust. Melinda's maternal grandparents and parents had established trusts. Her grandparents used their trust to assure that property passed to their daughter and grandchildren, rather than to their daughter's husband, who might have remarried. The Wills have a blended family which includes Jim's two children from a prior marriage, one of whom is estranged. A trust for the sole benefit of the twins born of the marriage between Jim and Melinda was a means to assure that Melinda's estranged stepson had no claim to the assets transferred to trust and to pass personal property that has been in Melinda's family to the twins.

*3 Debtors met with an attorney, Greg Swanson, in the fall of 2000. They discussed the reasons why they wanted an irrevocable trust. There was no discussion of their financial situation and no advise concerning protection of their assets from creditors was sought or given. In early 2001, Mr. Swanson prepared The James D. Wills and Melinda K. Wills Irrevocable Family Trust, dated January 21, 2001 (hereafter Trust). The sole beneficiaries are Drew and Morgan Wills, who were seven at the time. On January 21, 2001, the assets identified by the Wills were transferred into the Trust. Those assets were: 81 shares of Clingan Tires stock; 1/3 interest in a cabin in Breckenridge, CO; a boat; a 1986 BMW; educational funds for the benefit of the Drew and Morgan at Edward Jones under the Uniform Gifts to Minors Act and the Kansas 529 Learning Quest Program; a 2001 Dodge service truck; a gun collection; Waterford crystal; specific items of furniture; and specific items of jewelry. The Trustee did not present testimony of the value of these assets on the date of transfer, either in absolute terms or as a percentage of Debtors' assets.FN7 The transfers did not include many of Debtors' valuable assets, including, for example, Debtors' interest in MCW, LLC, which held rental properties appraised at approximately $850,000; Jim Wills' National Carriers' stock, valued by the Debtors in December 2000 at $28,155; or the family residence, valued at approximately $200,000. Rather, the assets appear to have been selected not because of their monetary value but for their sentimental value-to assure that Melinda's children rather than her step children become the owners of property she had received from her family.

FN7. In response to interrogatories, the Debtors stated the then current value of the assets transferred in January 2001 was approximately $166,180, $114,179 of which was the value of the twin's educational accounts. In their post-trial brief, Debtors assert that in December 2000, shortly before the initial transfer, those assets were worth $141,252, which was about 12% of the Debtors' total assets.

On some unknown date in 2001, MCW's interests FN8 in vehicles and equipment FN9 which were being leased to Clingan Tires, were transferred to the Trust. For some period of time these assets had been owned jointly by Melinda and her brother, Robert Clingan, Jr., d/b/a/ Clingan Leasing, and, on an unknown date, prior to January 31, 1999, Melinda had transferred her interests to MCW. Although counsel for all the parties refer to these transfers to the Trust as having been made in December 2001, the Court finds the evidence does not support this position. Titles for four of the leased vehicles showing the Trust's interest,FN10 which are included in the Trustee's exhibits, although stating an application date of December 21, 2001, also state the purchase date was January 20 2001, the same date as the first transfers to the Trust by Debtors. On December 26, 2001, cash rental revenues of $25,587.03 were transferred to the Trust checking account. These funds, which the Court finds are in an amount of approximately ten month's rental income, had been held because of the delay in setting up the Trust's checking account. The precise transferor is unknown, and to simplify the analysis, the Court will assume that it was MCW, LLC. Based upon the foregoing, the Court therefore finds that Debtors' may have intended to transfer MCW, LLC's interest in the leased vehicles as early as January 2001, even though the paper work for the transactions was not completed until later, approximately December 2001. FN11

FN8. Debtors' counsel referred to this transfer as having been made by Melinda (e.g., Doc. 228, p. 5), but this is clearly erroneous.

FN9. The Trustee offered no testimony as to the value of the interests transferred by MCW at the time of the transfers.

FN10. Exh. Nos. 19, 20, 22, and 24. The title for one vehicle, Exh. No. 21 bears a purchase date of December 20 2001 and a title application date of February 6, 2002.

FN11. The Court is aware that under Kansas law the transfer of a titled vehicle is not complete absent compliance with the title laws. However, in this case intent to transfer is the controlling issue.

*4 The Trust transacted business in an open and appropriate manner. It had a separate bank account, its interests in titled property were noted on certificates of title, and it filed income tax returns, prepared by the same accounting firm as had prepared Debtors' returns for twenty years.

The evidence is insufficient to determine whether Debtors were solvent in late 2000 and during 2001. There is a document in the Bank's file showing the Debtors having a net worth of minus $77,800 as of December 31, 2001, but the Court does not find the document persuasive. First, when asked whether it was "an accurate financial statement of the Wills' conditions at that time," Mark Taylor, [the Bank officer on the Debtors' accounts], responded, "Don't know whether I would have said that was an accurate one at that point." Second, it was prepared sometime after January 14, 2003 by the Bank based upon documents in its file. Third, Mark Taylor, also testified that the real property value in the exhibit may have been understated, and, in any event, the Bank believed there was enough equity to restructure the loan. Jim Wills gave the Bank a balance sheet in February 2002, which shows a net worth of minus $54,400 as of December 31, 2001, but that statement was also shown not to be accurate. It values the MCW rental properties at less than their appraised value and may undervalue the Debtors' home, but it also omits the obligation to James Kimball and the IRS. The exhibits also include balance sheets prepared by Debtors as of December 31, 2000, showing a net worth of $500,043 and as of December 31, 2001, showing a net worth of $596,200. Errors in those statements regarding the value of the interest in MCW, LLC held by the Debtors became apparent at trial and, with his post-trial brief, Debtors' counsel submitted corrected balance sheets for these two dates showing net worth of $237,840 and $311,975 respectively. As pointed out in a post-trial reply brief filed by the Trustee, these exhibits probably overvalue the Amigo rolling stock. The evidence regarding the Wills' net worth in 2000 and 2001 is neither clear nor convincing; it is muddled and conflicting.

It is clear that during 2000 and 2001, Debtors were employed and were current on their obligations, except those arising from the failing Amigo business. Those debts were primarily: (1) The Amigo bank loan, which was going to be satisfied at least in part by the sale of assets, (2) an obligation of Amigo to the IRS for approximately $15,000, which Jim Wills in 2003 agreed to pay at the rate of $500 per month; and (3) the obligation to James Kimball for his interest in Amigo. James Kimball testified that when the obligation was incurred he didn't want the debt to be a burden on Jim Wills, never pressured him to pay the debt, and initially gave him a year when no payments of either principal or interest were due. Sometime in 2001 Debtors paid off the $100,000 mortgage on their home. Debtors had positive cash flow of approximately $38,591 in 2000 and $247,675 in 2001.

*5 Jim and Melinda Wills are the trustees of the Trust and were paid a trustee fee of $26,000 from inception in 2001 through January 2006. The Trust authorizes the trustees to use the income and principal of the Trust for "health, maintenance, support, and education" of the beneficiaries. Trust expenditures included the cost of some of the children's activities, such as vacation travel air fares, a birthday party to which friends were invited, attendance at a dance contest, summer camp enrollment, and purchase of band instruments. In a few instances from 2001 through 2004, the Trust paid for clothing and school expenses. There was no testimony that Debtors used the Trust assets for the day to day costs of support of the children. Cash was transferred from the Trust to the education accounts, also owned by the Trust.

In 2003, in exchange for its share of three month's rent, the Trust's interests in the equipment transferred to the Trust in 2001 were transferred, or attempted to be transferred,FN12 to Clingan Tires. Melinda Wills, Robert Clingan, Jr. (who owned a 50% interest in at least some of the leases), and Robert Clingan Sr. examined the leases and agreed that the full value of the equipment had been paid over the life of the leases. The vehicles were high milage and in poor to fair condition. For example, they included delivery trucks with probably 600, 000 to 700, 00 miles.

FN12. The vehicle titles were not changed, but the intent to transfer ownership is unrefuted.

In the summer of 2003, Liberal was hit by tornado and then by a hail storm. Some of the MCW rental properties were seriously damaged. There was only partial insurance coverage. The rental business suffered from both loss of occupancy and the repair costs. Repairs were delayed because of difficulty in finding workers given the widespread damage in the community, thereby increasing the loss of rental income. The Wills' finances did not recover. Although on May 1, 1999, Jim Wills had agreed to buy out James Kimball's interest in Amigo for $63,825.50, he did not pay the debt. Jim Wills testified that if Amigo had succeeded, he would have been happy to pay the obligation. But, since the business failed, he believed it would have been unfair for him to have to pay the obligation to return Kimball's investment, since Jim Wills, as the sole owner, got left with the Amigo debt. In addition, Jim Wills had lost about $50,000 in an unrelated cattle venture with Kimball under circumstances which Jim Wills found questionable. In February 2005, James Kimball and Jim Wills entered into a new agreement for the payment of Jim Wills' buyout of Kimball's interest in Amigo. It provided for the payment of $80,000, with interest at 6.5%, to be paid in quarterly installments.

The Wills made payments to the Bank through 2004. In 2005, the Bank initiated foreclosure proceedings in the District Court of Seward County, Kansas. Shortly before filing for bankruptcy relief on October 12, 2005, Wills attempted to transfer their interest in property located at Ute Lake, New Mexico to the Trust. There are no allegations relating to this transfer in the amended complaint, but it is included in the pretrial order. The Debtors agree that the attempted transfer was of no force and effect and the contract rights for the Ute Lake property and any post filing payment received by the Trust relating to this transaction belong to the bankruptcy estate.

TRUSTEE'S CONTENTIONS.

*6 The Trustee contends the two sets of transfers to the Trust, one by the Debtors in January and the second by MCW, LLC, also in 2001, are avoidable under § 544(b)(1), which provides:

(b)(1) Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

This subsection "gives the trustee the right to avoid any transfer of the debtor ... that is voidable under applicable law by a creditor holding" an allowable unsecured claim.FN13 The applicable state law on which the Trustee relies is K.S.A. 33-204(a)(1) as to the January transfer, K.S.A. 33-204(a)(1) and (2) as to the December transfer, and K.S.A. 33-205(a). Those subsections, which are included in the Kansas Uniform Fraudulent Transfer Act (UFTA) which became effective in Kansas on January 1, 1999,FN14 provide:

FN13. Collier on Bankruptcy ¶ 544.09 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 15th ed. rev.2008).

FN14. L.1998, ch. 13, §§ 1-13.

33-204. Transfers fraudulent as to present and future creditors.

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay or defraud any creditor of the debtor; or

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) intended to incur, or believed or reasonably should have believed that such debtor would incur, debts beyond such debtor's ability to pay as they became due.

33-205(a). A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

The "UFTA is aimed at protecting unsecured creditors in situations where the debtor manipulates property to defeat the creditors' interests." FN15 It does this by creating a right of action when a debtor transfers property with intent to hinder, delay, or defraud a creditor, or transfers property under certain conditions without receiving reasonable equivalent value.FN16

FN15. McCain Foods USA, Inc. v. Central Processors, Inc., 275 Kan. 1, 10, 61 P.3d 68, 75 (2002).

FN16. Id.

As to the burden of proof, the Kansas Supreme Court looked to a case decided before the UFTA's adoption.FN17 It stated that, in Kansas, "[t]he general rule is, of course, that fraud is never presumed and must be established by clear and convincing evidence. The burden of establishing fraud is upon the party asserting it." FN18 "Clear and convincing evidence is not a quantum of proof, but rather a quality of proof; thus, the plaintiff establishes fraud by a preponderance of the evidence, but this evidence must be clear and convincing in nature." FN19 "There is nothing in the Bankruptcy Code to indicate that Congress meant to displace state law standards of proof when the estate seeks to avoid a transaction under section 544" in reliance on state law.FN20 Accordingly, in this case in order to prevail the Trustee must satisfy the burden of proof under Kansas law.

FN17. Id., 275 Kan. at 12-13, 61 P.3d at 77, citing Koch Engineering Co. v. Faulconer, 239 Kan. 101, 716 P.2d 180 (1986).

FN18. Koch Engineering Co. v. Faulconer, 239 Kan. at 107, 716 P.2d at 186.

FN19. Newell v. Krause, 239 Kan. 550, 557, 722 P.2d 530, 536 (1986).

FN20. In re Jackson, 318 B.R. 5, 12 (Bankr.D.N.H.2004) (avoidance action under New Hampshire Uniform Fraudulent Transfer Act).

*7 To prevail under K.S.A. 33-204(a)(1), the Trustee has the burden to prove by clear and convincing evidence that Debtors made the January and December 2001 transfers to the Trust with "actual intent to hinder, delay or defraud" a creditor. Since "[d]irect proof of fraud can seldom be obtained.... The fraudulent purpose may be shown by conduct and appearance of the parties, the details of the transactions, and the surrounding circumstances." FN21 Badges of fraud are circumstances which frequently attend transfers to hinder, delay or defraud creditors.FN22 Subsection (b) of K.S.A. 33-204 enumerates badges of fraud, which may be considered when evaluating whether actual intent to defraud is present for purposes of K.S.A. 33-204(a)(1). It provides:

FN21. Koch Engineering Co. v. Faulconer, 239 Kan. at 106, 716 P.2d at 185, quoting Credit Union of Amer. v. Myers, 234 Kan. 773 syl. ¶ 2, 676 P.2d 99 (1984).

FN22. Koch Engineering Co. v. Faulconer, 239 Kan. at 107, 716 P.2d at 185.

(b) In determining actual intent under subsection (a)(1), consideration may be given, among other factors, to whether:

(1) The transfer or obligation was to an insider;

(2) the debtor retained possession or control of the property transferred after the transfer;

(3) the transfer or obligation was disclosed or concealed;

(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;

(5) the transfer was of substantially all the debtor's assets;

(6) the debtor absconded;

(7) the debtor removed or concealed assets;

(8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;

(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;

(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and

(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.

There is no rigid rule as to the evidentiary value of the badges of fraud. The Kansas Supreme Court has characterized badges as

suspicious circumstances.... They are red flags, and when they are unexplained in the evidence, that may warrant an inference of fraud. Some are weak; others are strong. One weak badge of fraud standing alone, would have little evidentiary value in establishing a fraudulent conveyance. For example, the mere fact that grantor and grantee are related, standing alone, would not support a finding that the conveyance was fraudulent. On the other hand, the concurrence of several badges of fraud are said to make out a strong case. FN23

FN23. Id.

The UFTA defines insolvency as follows:

(a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation.

(b) A debtor who is generally not paying such debtor's debts as they become due is presumed to be insolvent.FN24

FN24. K.S.A. 33-202.

The Trustee submits that the evidence shows the presence of many of the enumerated badges of fraud such that the Court should find fraud by clear and convincing evidence. The Debtors, on the other hand, submit that few of the badges of fraud are present, that they had valid non-fraudulent reasons for the transfers, and the Trustee has not sustained his burden of proof.

ANALYSIS AND CONCLUSIONS OF LAW.

A. The K.S.A. 33-204(a)(1) claims.

*8 The Trustee contends the 2001 transfers to the Trust, by the Debtors and by MCW, LLC were made with actual intent hinder, delay, or defraud a creditor. He relies upon the statutory badges of fraud and other circumstances. The Court will therefore first determine which of the statutory badges of fraud are present with respect to the transfers.

As to the badges of fraud, the Trustee's presentation of evidence, for the most part, did not differentiate between the two sets of transfers. Further, the Trustee made no attempt to differentiate between Jim Wills, Melinda Wills, and MCW, LLC as to the badges of fraud, even though it is clear that some of the assets transferred were the separate property of one of the Debtors and MCW. The Court will proceed to evaluate the evidence under the Trustee's theory of the case.FN25

FN25. The Court questions whether, as a matter of law, the Trustee could prevail under this approach. K.S.A. 33-204(a)(1) addresses transfers which are fraudulent as to a creditor of the owner-transferor of property. There must be a creditor, ownership of property, and a transfer with actual intent to hinder, delay, or defraud. As to ownership of the transferred assets, Melinda appears to have been the sole owner of some assets transferred in January, such as the Clingan stock, the antique furniture, and the jewelry, and Jim Wills appears to have been the sole owner of the gun collection. Further, neither Jim nor Melinda had a direct interest in the property transferred by MCW, LLC. As to the existence of debt, much of the Trustee's evidence concerning the badges of fraud focused upon the debt resulting from the failure of Amigo, but the evidence regarding that debt was not clear as to either Jim or Melinda. The record contains no personal guaranty of either Jim or Melinda of the Amigo debt and no notes of either Debtor executed prior to December 2001, when they executed two notes referencing Amigo that were secured by mortgages of MCW properties and by the third party pledge agreements of MCW and Amigo. The Court, however, does not believe it has the duty to review the voluminous documents in an attempt to disassemble the evidence to determine if the badges of fraud may have been present when analyzed individually as to each Debtor.

1. Whether the transfer was to an insider. This element is present as to both transfers.

2. Whether the debtor retained possession or control of the property transferred after the transfer. This element is present, but only in a limited sense. Debtors retained possession, together with the twins, of the household goods, guns, and jewelry. They retained control of the intangible assets, such as the Clingan stock and the educational accounts. But that control was in the capacity of trustee. There is no evidence that they acted as if the property transferred was not in trust. The Court disagrees with the Trustee's argument that the occasional use of Trust assets for some of the children's expenses, such as vacation travel, purchase of musical instruments, a birthday party, school expenses, and clothing expenses, evidences fraudulent intent. For the most part, the benefits provided to the Trust beneficiaries were luxuries, such air fare for vacation travel to Mexico. It is true that a few of these expenditures, such as the purchase of shoes and clothing, fulfilled a small portion of the Debtors' obligation of support. However, given the absence of evidence that the amounts paid were a significant portion of the annual cost of support of the children and of evidence of a pattern of routine use of Trust property for such purpose, the Court concludes that the Trust expenditures made by the Debtors are not a circumstance evidencing fraudulent intent. The Court finds no evidence that the Debtors disregarded their duties as trustees or used the property for their own personal benefit.

3. Whether the transfers were concealed. The Trustee presented no evidence that the transfers were concealed. Rather, as to those assets for which it was appropriate, such as titled vehicles, there are public records of the transfers. The Trust had a bank account in its own name and filed tax returns, prepared by an independent accountant who had prepared Debtors' returns for twenty years. The Trustee argues that continued use of transferred assets constitutes concealment, but he relies upon dischargeability cases under the Code, not state law fraudulent transfer cases. The Court does not find that use of the transferred assets, as discussed in reference to the preceding forgoing badge of fraud, evidences concealment.

*9 4. Whether before the transfers were made, the debtor had been sued or threatened with suit. This element is not present. Although at the time of the initial transfers, Amigo was failing and after April 2001, Amigo's assets were being liquidated, there is no evidence that the Bank even threatened suit. Rather in 2001 the Bank was confident that there was sufficient equity to pay the Bank loans. There is also no evidence that unsecured creditor James Kimball threatened suit. Debtor Jim Wills made arrangements with the IRS for payments to discharge Amigo's tax obligation.

5. Whether the transfers were of substantially all of the debtors assets. The Trustee does not contend that this element is present. After transfer of the assets to the Trust, the Debtors retained valuable assets, including their interest in MCW, LLC, that owned rental properties appraised at approximately $850,000, Jim's National Carriers stock, valued by Jim at $28,155 in December 2000, and the family home, valued at $225,000 in Debtors' schedules.

6. Whether the Debtors absconded. This element is not present.

7. Whether the debtor removed or concealed assets. This element is not present.

8. Whether the consideration received for the assets was reasonably equivalent to their value. This element is present; the transfers to the Trust were for no consideration.

9. Whether the debtor was insolvent or became insolvent shortly after the transfer was made. As quoted above, insolvency is defined as the condition where "the sum of the debtor's debts is greater than all of the debtor's assets at a fair valuation." FN26 Trustee makes no attempt to apply the definition by enumerating debts and assets; rather he relies primarily upon balance sheets in the Bank's file. However, as stated in the Findings of Fact, the Court is unable to determine from the evidence whether Debtors had a negative net worth on their balance sheet in 2001. There is conflicting evidence as to the Debtors' net worth in 2001. In any event, if Debtors had a negative net worth as of the dates of the transfers, it is clear that negative amount would have been a small percentage of their total assets. Debtors were generally paying their debts as they became due.FN27 Further, Debtors had regular income, and neither they nor the Bank regarded Debtors as being unable to satisfy their debts. The Trustee has not established insolvency as defined by K.S.A 33-202(a), and the presumption of insolvency of K.S.A. 33-202(b) is not satisfied.

FN26. K.S.A. 33-202(a).

FN27. As reflected in the Findings of Fact, the Debtors' outstanding obligations related to the failure of Amigo, but those debts were not "due" until after the Trust was fully funded. In 2001, the Bank was not pressing for payment, James Kimball was not pressing for payment, and there is no evidence that the IRS had attempted to collect Amigo's tax liability from Jim Wills.

10. Whether the transfer occurred shortly before or after a substantial debt was incurred. This element is present, but is not very persuasive as evidencing fraudulent intent. The evidence does establish that in May 2000 the Bank had requested additional collateral, and in December 2000, the Debtors for the first time personally guaranteed MCW, LLC's debt to the Bank. But the evidence also establishes that the Bank believed that there was equity in the primary collateral for the MCW loan, the MCW rental properties. The initial transfers to the Trust were made in January, 2001, shortly after the MCW guaranty. Amigo closed its doors in April 2001, after the transfers to the Trust by the Wills and after the evidence indicates that Debtors may have formed an intent to have MCW, LLC transfer its interests in Clingan Leasing to the Trust.FN28 Thereafter, in December 2001, Melinda and Jim Wills executed two Bank notes, which appear to be for some of the Amigo debt. Although the Trustee argues that this is the first time that Melinda had liability for the Amigo loan, the record does not support this contention, since Jim Wills testified that Melinda became liable for Amigo in 1999. In addition, the 2001 notes, like the 2000 guaranty, were secured by mortgages of MCW properties and the third party pledge agreements of Amigo and MCW. Trustee did not establish that in 2001 the obligations were under collateralized. The only transfers to the Trust which the Trustee established occurred after the December 2001 transactions with the Bank are the December 26, 2001 deposit of $25,587 accumulated rental proceeds and one vehicle, a 2002 Dodge. But as to one of these transfers, the rental proceeds, there is evidence that the intent to transfer had been formed well before December 2001.

FN28. If Debtors were personally liable for the Amigo debt, which appears probable but has not been proven by clear evidence, in January 2001 they may have anticipated additional debt, but in an unknown amount, since the Amigo property had not been liquidated.

*10 11. Whether the debtor transferred the essential assets of the business elements to a lienor who transferred the assets to an insider of the debtor. This element is not present.

In addition to the statutory badges of fraud, the Trustee argues that fraudulent intent is evidenced by the additional circumstances that: (1) At the time of the transfers Jim Wills had no intent to pay Jim Kimball, unless Amigo made money; (2) the trust fund tax liability of Amigo had not been paid; and (3) Debtors' alleged failure to keep adequate records of the Trust. The Court finds no indication of fraud in Jim Wills' attitude toward paying nothing for James Kimball's interest in Amigo unless the business was a success. What investor in a failed business who is personally liable for the business' obligations would not be reluctant to honor an agreement, made before the failure of the business, to buyout a former partner when that partner has no liability for the business debt? In this case, that reluctance was enhanced by Jim Will's loss in an unrelated deal with Jim Kimball under circumstances which Jim Wills found questionable. James Kimball, the Trustee's witness, acknowledged that he did not want the debt to be a burden and did not pressure Jim Wills for payment. The Court also cannot infer fraudulent intent for the transfers to the Trust because of Jim Wills' possible personal liability for Amigo's trust fund tax liability. Rather than evade liability for Amigo's taxes, Jim Wills in 2003, well after the transfers in issue, made arrangements for payment of the debt. He honored that agreement. The Trustee's contention of an implication of fraud based upon allegedly failing to keep adequate Trust records is likewise rejected. There is no evidence that the records were inadequate. Tax returns were prepared and filed by an accountant, so it is clear records were kept.

Based upon the foregoing analysis, the Court finds that the Trustee has not proven actual intent to hinder, delay, or defraud creditors by clear and convincing evidence. The Trustee has established the transfers to the Trust were made for the benefit of Debtors' twins without consideration at a time when the Debtors' financial condition was deteriorating. These badges of fraud are not sufficient to sustain the Trustees' burden to prove his case by clear and convincing evidence, given the failure to prove additional significant badges of fraud, most importantly insolvency. The most bothersome of the badges of fraud is the timing of the transfers in relation to three events relied upon by the Trustee: Debtors' first becoming liable to the Bank as guarantors of the MCW's debt in December, 2001; the closing of Amigo in April 2001; and execution of two notes in December 2001. However, this evidence of timing gives rise to only a weak inference of fraud. As to fraudulent intent, the most relevant time is the fall of 2000 and January 2001. During that time period, the Trust was created, Debtors made their transfers to the Trust, and Debtors may have intended to have MCW, LLC transfer its interests in the Clingan Leasing vehicles to the Trust. Only the first of the three events relied upon by the Trustee predate January 2001.

*11 The Debtors and the Trustee disagree about whether, if the Trustee had established a presumption of fraud based upon the badges of fraud, the burden of proof would have shifted to the Debtors to rebut that presumption. Since the Trustee has not provided evidence from which the Court infers fraud, that issue need not be decided. However, the Court pauses to note that it finds credible Debtors' testimony that they made the transfers for family reasons, not to evade creditors. The attorney who prepared the Trust document testified that the Debtors discussed legitimate family financial reasons for the Trust and did not seek any advice concerning asset protection. It is clear that Melinda wanted to assure that property which she accumulated from her family and in her family's business benefitted her children, rather than Jim Wills' children from a prior marriage. The identity of the assets transferred are consistent with this purpose. After the transfers Debtors retained ownership of a significant portion of their property, a fact that is inconsistent with a plan to defraud creditors. Debtors presented evidence that they had positive net worth throughout 2001. In late 2000, the Bank believed the Wills had sufficient equity. Apart from the Bank debt, in January 2001, Debtors had no significant long term or short term debt, except the unrealized and contingent liability which might result from the failure of Amigo. The Trustee presented no evidence of the amount of that debt, other than the IRS claim, which Jim Wills made arrangements to pay, and the return of equity formerly promised to James Kimball. At the time of the transfers, Wills were paying their obligations as they became due. The Court finds credible Jim Will's testimony that even after the closing of the Amigo business in 2001, he expected to be able to restructure his debt and meet his obligations. It was not until after the damage to the rental units from storms in 2003 that the Wills' financial fate was sealed.

The Court finds that the 2001 transfers were made to the Trust without actual intent to hinder, delay, or defraud creditors within the meaning of K.S.A. 33-204(a)(1).

B. The K.S.A. 33-204(a)(2) claim.

The Trustee alleges that the second set of transfers to the Trust of interests in vehicles, equipment, and cash were fraudulent under K.S.A. 33-204(a)(2)(A).FN29 The subsection provides:

FN29. The Trustee is not pursuing a claim under K.S.A. 33-204(a)(2)(A) with respect to the January 2001 transfers, as he concedes this claim is time barred. See Doc. 211, Order Denying Motion for Partial Summary Judgment, filed April 23, 2008.

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

* * *

(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction;

The Trustee's sole argument in his post-trial brief in support of this claim is as follows: "There was no value given by the trust for the assets and is does appear that near the time of the transfer, the debtors did not have sufficient assets to cover their obligations." This position is inadequate.

*12 The Trustee makes this allegation based upon two false premises. First the Trustee assumes that all of the transfers, other than those made by the Debtors in January 2001, were made in December 2001. As pointed out in the Finding of Fact, it is not clear when the second set of transfers was made, particularly when the important issue is when Debtors formed their intent to transfer, rather than compliance with state law criteria, such as transfer of vehicle titles.

Second, the Trustee assumes that the transfers were made by Melinda, when in fact they were made by MCW, LLC. The statute clearly requires that the transferor be engaged in a transaction for which the assets remaining after the transfer were unreasonably small in relation to the transaction. The Trustee does not identify any transaction in which MCW was engaged.

Further, if the Court were to accept these assumptions as true, the Trustee would not prevail. The only evidence of a debt transaction by Melinda is with the Bank. In December 2000, she guaranteed the obligations of MCW and in December 2001, she executed two notes, which relate to renewal of the Amigo debt. All of these obligations, the guaranty and the notes, were secured by the MCW properties, and the Bank believed there was equity in the properties at the time Melinda's obligation for the MCW debt was incurred. The Trustee did not present evidence of how the transfer impacted Melinda's ability to satisfy her obligations. If, as testified by Jim Wills, Melinda had personal liability to the Bank for the Amigo debt before the execution of these notes, the Trustee has not shown a new business transaction, except for the contingent liability as a guarantor of a secured debt. Since the record is insufficient for the Court to find Debtors were insolvent in December 2001, there is no clear and convincing evidence that after the transfer Melinda's assets were unreasonably small in relation to her obligation to the Bank.

For the foregoing reasons, the Trustee's claim under K.S.A. 33-204(a)(2)(A) as to the transfer of interest in vehicles, equipment, and cash to the Trust is denied.

C. The Trustee's K.S.A. 33-205(a) claim.

The final pretrial order includes a claim that transfers were fraudulent under K.S.A. 33-205(a). That subsection provides:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

The Pretrial Order does not expand upon the Trustee's contention and his trial brief does not separately address the claim. However, a necessary element as to any fraudulent transfer claim under the subsection is that the debtor was insolvent at the time of the transfer or rendered insolvent as a result of the transfer. Since the Trustee has not proven that Debtors were insolvent during 2001, either before or after the transfers were made, the K.S.A. 33-205(a) claim fails.

D. There is no need to address the Trustee's separate arguments concerning the transfer of exempt assets and the educational accounts.

*13 Since the Court holds that the Trustee has not established fraudulent transfers by clear and convincing evidence, it is not necessary to address what effect the Debtors' ability to exempt some of the transferred assets, such as furniture and jewelry, might have on the Trustee's ability to avoid the transfers under § 544. Likewise, the unique characteristics of the two types of educational savings accounts transferred to the Trust, the Leaning Quest 529 accounts and the Uniform Gifts to Minors accounts, are not relevant. Further, since there was no fraudulent transfer, post-petition income received by the Trust cannot be recovered by the Trustee.

E. The Trustee cannot recover on his claim against Clingan Tires, Robert W. Clingan, Jr. and Clingan Leasing.

The Trustee asserts claims against defendants Clingan Tires, Robert W. Clingan, Jr. and Clingan Leasing relating to the equipment and vehicle assets transferred to the Trust. Melinda and her brother Robert W. Clingan, Jr., d/b/a/ Clingan Leasing, were co-owners of the assets, which were leased to Clingan Tires, thereby generating income for the Trust. Melinda and Robert W. Clingan, Jr. testified that in 2003 the leases were terminated and the equipment purchased by Clingan Tires.

The Trustee questions whether the leases were properly terminated and the assets effectively transferred to Clingan Tires. He therefore seeks a determination of the Trust's and other defendants' interests in the equipment and vehicles, to recover the property from Clingan Tires, or to preserve the transfer from Trust for the benefit of the estate. However, all of these theories are premised upon the Court's finding that the transfer of the interests in the equipment and vehicles to the Trust was fraudulent. The Court has found otherwise. Since the transfers were not fraudulent, the Trustee has no claim against these defendants.

CONCLUSION.

For the foregoing reasons, the Court holds that the plaintiff Trustee has not proven that either the January 2001 or December 2001 transfers to the irrevocable Trust established in 2001 for the benefit of the Debtors' minor children were fraudulent under Kansas law. He therefore cannot avoid the transfers under § 544(b)(1), either from the Debtors, the Trust, or any of the additional defendants. However, based upon the Debtors concession, the Court sets aside the attempted transfer to the Trust of the Debtors' interest in property located in Ute Lake, New Mexico, and holds that Debtors' interest and any proceeds from that interest received by the Trust postpetition must be turned over to the Trustee.

The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure which makes Rule 52(a) of the Federal Rules of Civil Procedure applicable to this matter. A judgment based upon this ruling will be entered on a separate document as required by Federal Rule of Bankruptcy Procedure 9021 and Federal Rule of Civil Procedure 58.

*14 IT IS SO ORDERED.

Labels: asset protection, bankruptcy, fraudulent transfer, irrevocable trust, spendthrift provision, spendthrift trust

Sham Trust Case - Dexia Credit Local v. Rogan

Trusts are a vital part of asset protection planning. But of course not all trust planning is legitimate. Follows is a case involving allegations that a sham trust was funded for the primary purpose of defrauding creditors, including allegations of fraudulent transfers.

Dexia Credit Local v. Rogan, 2008 WL 4543013 (N.D.Ill.,
Slip Copy Oct. 9, 2008)

United States District Court, N.D. Illinois, Eastern Division.

DEXIA CREDIT LOCAL, Plaintiff,

v.

Peter G. ROGAN, et al., Defendants.

No. 02 C 8288. Oct. 9, 2008.

Scott T. Mendeloff, Abigail Lynn Peluso, Gabriel Aizenberg,
Howrey LLP, Former AUSA, United States Attorney's Office (NDIL), Chicago, IL,
for Plaintiff.

Howard Michael Pearl, Cornelius Moore Murphy, Monika Maria
Blacha, Winston & Strawn LLP, Neil E. Holmen, Walker Wilcox Matousek LLP, Joseph
Andrew Spiegler, Much Shelist Denenberg Ament & Rubenstein, PC, Phillip Stewart
Reed, Debra L. Bogo-Ernst, John Michael Touhy, Sean Patrick Dailey, Vincent J.
Connelly, Mayer Brown LLP, Michael J. O'Rourke, Brian Michael Dougherty, Limo T.
Cherian, Mitchell Bruce Katten, O'Rourke, Katten & Moody, Chicago, IL, for
Defendants.

MEMORANDUM OPINION AND ORDER

MATTHEW F. KENNELLY, District Judge.

*1 Dexia Credit Local holds a judgment against Peter Rogan
in an amount in excess of $124 million. In August 2008, Dexia filed an ex parte
motion for a temporary restraining order and a preliminary injunction, seeking
an order freezing and turning over various assets in the United States and
abroad that it alleges are Rogan's or in his control or that he fraudulently
transferred. In that motion, Dexia alleged that Rogan, in concert with his
attorney Fred Cuppy and others, had engaged in a longstanding scheme to hinder
Dexia and other creditors from executing against his assets. Dexia filed the
motion ex parte based on its allegations that Rogan had taken steps in the past
to hinder Dexia from collecting, including evading court orders, and that if he
became aware of the motion, Rogan likely would take further steps to evade its
intended effect.

Dexia supported the motion with an extensive and voluminous
factual and legal submission. The Court initially heard Dexia's counsel in
camera, albeit on the record, and made findings that permitted Dexia to submit
its materials ex parte. The Court then took Dexia's motion for a temporary
restraining order under advisement. On or about September 2, 2008, the Court
summoned Dexia's counsel for a further in camera court session. During that
session, the Court advised Dexia's counsel that it intended to grant the
requested temporary restraining orders and asked counsel to prepare and submit
the necessary draft orders. Dexia's counsel did so, and the Court signed the
orders on September 4-5, 2008.

The temporary restraining orders the Court entered barred
Peter Rogan, his wife Judith Rogan, and Cuppy from directly or indirectly making
or allowing transfers or other dispositions of various assets. The orders also
froze assets held by certain institutions and entities that, based on Dexia's
submissions to the Court, appeared to be within Rogan's effective control. These
included assets held by certain trusts established for the benefit of Rogan's
children, Brian Rogan, Robert Rogan, and Sara Caitlin Rogan, as well as accounts
in which funds the trusts had transferred to the children were held. Those
accounts included the children's own accounts at certain banks and brokerage
firms.

Rogan's counsel served the temporary restraining orders
upon the enjoined individuals and upon the institutions and entities holding the
accounts the Court had ordered frozen. Following service of those orders, Brian,
Robert, and Sara Rogan each moved to dissolve the orders. Because the orders had
been entered ex parte in the first place, they were of limited duration. See
Fed.R.Civ.P. 65(b)(2). As a result, Dexia's motion for a preliminary injunction
effectively merged with the requests to dissolve the orders. The Court set the
matter down for hearing on the motion for preliminary injunction and directed
Dexia to post a $50,000 bond, which Dexia promptly did.

Facts

An evidentiary hearing is required on a motion for
preliminary injunction only to the extent that the response to such a motion
identifies genuine issues of material fact. See In re Aimster Copyright Litig. (
Appeal of Deep), 334 F.3d 643, 653-54 (7th Cir.2003); Ty, Inc. v. GMA
Accessories, Inc., 132 F.3d 1167, 1171 (7th Cir.1997). "[A]s in any case in
which a party seeks an evidentiary hearing, he must be able to persuade the
court that the issue is indeed genuine and material and so a hearing would be
productive-he must show in other words that he has and intends to introduce
evidence that if believed will so weaken the moving party's case as to affect
the judge's decision on whether to issue an injunction." Ty, 132 F.3d at 1171.
The Rogan children made written submissions to the Court that raised no dispute
about the lion's share of Dexia's factual contentions. Rather, the factual
component of their submissions focused on their contentions that they are
innocent parties who were unfairly harmed by the temporary restraining order and
would be unfairly harmed by a preliminary injunction.

*2 The Court first reviews the facts relevant to the
appropriateness of enjoining Peter Rogan. The Rogan children have contested none
of those facts. Thus, the Court will review them in summary fashion.

In 1989, an entity that Rogan controlled purchased
Edgewater Medical Center, a hospital on Chicago's north side. The
Rogan-controlled entity managed and administered EMC, and Rogan served as EMC's
chief executive officer.

In 1994, EMC was sold to Northside Operating Company. To
finance the purchase, Rogan caused the Illinois Health Facilities Authority to
issue approximately $41 million in bonds. Though he had sold EMC, Rogan retained
control of the hospital after the sale via a series of transactions, and he then
caused EMC to enter into management contacts with two entities that he also
controlled, Braddock Management LP and Bainbridge Management, Inc. In 1997,
Rogan arranged to refinance the bond debt at a lower interest rate, and to this
end, in June 1988 he secured a letter of credit from Dexia guaranteeing
repayment of the bonds. Dexia contends that both during the due diligence
process that led to its issuance of the letter of credit, and after Dexia issued
the letter of credit, Rogan defrauded Dexia by concealing that a significant
portion of EMC's revenue was obtained by fraudulent means, specifically fraud in
connection with claims for Medicare and Medicaid payments.

Eventually EMC's fraud was discovered, and the government
suspended Medicare and Medicaid payments to EMC. This caused EMC to suffer
financial reverses and, eventually, led Dexia to have to pay $55 million on
EMC's behalf to satisfy obligations to bondholders. Dexia was unable to obtain
reimbursement from EMC. It thereafter sued Rogan, Braddock Management, and
Bainbridge Management for fraud, conspiracy, and other torts. In May 2007, Dexia
obtained a default judgment against Rogan and the entities for actual damages of
approximately $53 million, punitive damages of approximately $53 million,
prejudgment interest of approximately $18 million, and costs of approximately
$11,000.

Dexia then instituted proceedings to attempt to collect its
judgment. Both before and after entry of the judgment, Dexia met with stalling,
resistance, and outright evasion from Rogan and others connected with him. It
ultimately obtained documents and other evidence that led it to file, in
mid-August 2008, its motion seeking imposition of temporary restraining orders
and preliminary injunctions against various persons and entities.

At issue in the present proceedings are trusts that Rogan
established for the benefit of his three children. They include three United
States-based trusts established in 1992 and three Belize-based trusts
established in 1997. In 1992, Rogan's children were ages 14, 11, and 8,
respectively. The trusts were initially funded primarily with ownership
interests in Rogan-controlled businesses.

When EMC was sold to Northside Operating Company in 1994,
the children's trusts, which held stock in a Rogan-controlled entity that owned
the hospital, received a total of approximately $4 million from the sale
proceeds of $31 million. The trusts also owned entities that, in turn, owned the
management companies through which Rogan continued to operate EMC following its
sale. During the period when Rogan operated EMC via these entities-1994 through
1997-the children's trusts received millions of dollars in distributions from
the entities.

*3 In 2002, the federal government instituted litigation
against Rogan under the federal False Claims Act concerning the alleged
submission of false Medicare and Medicaid claims for patients referred to EMC.
In that case, Judge John Darrah found that in the early 1990's, Rogan entered
into a conspiracy with another EMC officer and two physicians to pay the
physicians kickbacks and other improper benefits in return for patient
referrals. These referrals, in turn, resulted in substantial profits for Rogan.
See United States v. Rogan, 459 F.Supp.2d 692, 700 (N.D.Ill.2006). Though the
government's lawsuit directly concerned particular false claims submitted from
1995 through 2000, Judge Darrah found that "[t]he conspiracy was evident in the
early 1990s." Id. Based upon other findings by Judge Darrah, it appears that he
concluded the conspiracy began (albeit on an apparently smaller scale) at least
as early as 1993, see id. (findings concerning dealings between Roger Ehmen and
a Dr. Barnabas)-in other words, before the 1994 sale of EMC to Northside
Operating Company that generated proceeds paid to the children's trusts. Judge
Darrah found that the government proved that from 1995 through 2000, Rogan
caused Edgewater to submit over $19 million in false claims to Medicare and
Medicaid. Id. at 727. As indicated earlier, during at least part of that period,
the Rogan children's trusts received significant distributions from the entities
managing the hospital's operations, whose operations were in turn controlled by
Peter Rogan.

Based upon these facts, which the Rogan children do not
contest, the children's trusts have been funded, in significant part, with
assets that fairly may be considered to be the proceeds of fraud. On the other
hand, Dexia does not appear to contend, and it has not shown at this juncture,
that all of those funds were the proceeds of fraud.

In its submission in support of its motion for temporary
restraining order and preliminary injunction, Dexia offered evidence tending to
show that following the establishment and funding of the children's trusts,
Rogan continued to exercise control over the trusts and the assets they held. In
the current proceedings, the children have not challenged Dexia's contention in
that regard. For this reason, the Court, again, reviews this evidence in summary
fashion.

First, Rogan's personal attorney, Fred Cuppy, played a
direct role in administering the children's trusts. In 1999, Cuppy, in his role
as trustee, received on the trusts' behalf a distribution of a little over $1.2
million from Braddock Management LP; immediately caused the trusts to "loan"
$1.35 million to Boulevard Management, Ltd.; and Boulevard, via the assistance
of Troy Myers (another Peter Rogan attorney), in turn transferred $1.2 million
to Rogan himself. This sum was transferred ostensibly to pay off a promissory
note, though no documents evidencing the note have surfaced. See Dexia Ex. 349 ¶
46 & attached Ex. KK. The Court reasonably may infer, and does infer, that Rogan
and Cuppy used the children's trusts on this occasion to facilitate a
significant payment to Rogan via a circuitous route which, the Court infers, was
employed to try conceal payment to Rogan of what amounted to a very large cash
distribution from entities in which he had no significant ownership interest of
record.

*4 Dexia's evidence also reflects that Rogan controlled and
controls certain investments that appeared on the surface to be owned by the
children's trusts. These include various real estate developments in Savannah,
Georgia. Dexia's evidence also reflects that Cuppy caused the children's trusts
and a Bahamian trust established by Rogan to invest in the same Rogan-related
enterprises. Indeed, in 2002, Cuppy caused an entity that was, on paper, owned
entirely by the children's Belize-based trusts to transfer nearly $1 million to
an entity from which Rogan and Cuppy drew money for Rogan's benefit. Finally,
Dexia has offered evidence tending to show that David Miller, an employee of
Rogan, administered transactions pertaining to assets that, on their surface,
were owned entirely by the children's trusts.

Robert and Sara Rogan submitted signed but unsworn
statements in support of their motion to dissolve the temporary restraining
order and, in effect, in opposition to Dexia's motion to convert that order to a
preliminary injunction. Because the statements are unsworn, they are of no real
benefit to the Rogan children. But even an unsworn statement may be used by an
opposing party, see Fed.R.Evid. 801(d), and the statements are beneficial to
Dexia in certain respects. Specifically, certain of the statements confirm that
the Rogan children have received significant distributions from the trusts. Sara
Rogan stated that she has "received periodic distributions" from a trust, the
last a $25,000 distribution in July 2008; Brian Rogan made a similar statement
(which he later repeated in a sworn affidavit). Robert Rogan says nothing in his
unsworn statement about his receipt of funds from the trusts. It appears from Dexia's submissions and from the arguments of counsel for the children that each
of the children has at least one bank account as well as a securities account.

In later-submitted sworn affidavits, which Dexia has not
sought to dispute and which the Court appropriately may consider, Brian Rogan
recounts his employment history. After graduating from college in 1983, he went
to work for ABF Freight Systems in its management training program, worked there
for a little over two years, and received a salary, which he deposited into a
personal account at Chase Bank. He left ABF to go to work for Hoover Creek
Plantation in a management role, receiving a salary of $60,000, which he
deposited into a personal account at Wachovia Bank on which his mother Judith
Rogan is also, it appears, a signatory. He opened an account at Bank of America
in Chicago in August 2008 when he resumed his education.

Brian states in a sworn affidavit that he has received
distributions from a trust established in his name-in amounts he does not
disclose beyond the reference to $25,000 mentioned above-and that he has
invested that money "in part" in a securities account at TD Ameritrade. He used
funds "given to me from my trust" to pay for his wedding in September 2007. He
states that he has not transferred any funds to Peter Rogan.

*5 Dexia has also submitted its own evidence regarding
benefits the Rogan children have received from the trust, the accuracy of which
the children do not contest. A trust of which Robert Rogan is the beneficiary
purchased and owns the residence into which he moved in 2003; Cuppy was Robert's
primary contact in facilitating the acquisition. Robert has also received from
one or both of the trusts established for his benefit living expenses and funds
for the purchase of a car.

Dexia has also submitted evidence reflecting that between
2004 and 2006, Judith Rogan transferred over $548,000 to her daughter Sara or
for Sara's benefit. Dexia contends, with supporting evidence, that Peter Rogan
has been the sole source of all funds to which Judith has had access. The Rogan
children do not contest Dexia's contention. They likewise have not contested
Dexia's contention that Judith has acted as Peter Rogan's alter ego, a
contention amply supported by evidence Dexia has submitted to the Court. As a
result, it has been established, at least for purposes of the present motion,
that the $548,000-plus that Sarah has received or benefitted from was
transferred, in effect, by Peter Rogan (via Judith Rogan as his alter ego).

Aside from the brief references in the Rogan children's
statements and the evidence regarding Robert Rogan cited above, Dexia has
offered no evidence-at least none the Court can locate in the voluminous
submissions-regarding exactly when the Rogan children received transfers from
the trusts. That is, however, unsurprising; Dexia did not have ready access to
records regarding deposits and withdrawals from the children's accounts, and the
Court was advised during the hearings on the present motion that, with the
exception of Brian Rogan, the Rogan children had not produced any meaningful
quantity of records regarding those accounts. That aside, however, the evidence
submitted is sufficient, at least for purposes of a preliminary injunction
motion, to permit a reference that the transfers from the trusts to the
children, and from Judith Rogan to Sara, occurred in or after 1997, when the
Dexia debt was incurred, and that a significant portion of those transfers
occurred after Dexia filed this lawsuit.

Discussion

1. Preliminary issues

The Rogan children challenge the Court's entry of the
temporary restraining orders without notice. The Court has previously explained
the basis for its determination to enter the orders ex parte and continues to
believe that determination was correct. In any event, however, the Rogan
children have been heard fully on the issue of the restraining orders' extension
and on the motion for preliminary injunction. Their challenge to the ex parte
nature of the restraining orders is now effectively moot.

The Court also rejects the Rogan children's challenge to
the initial entry of the temporary restraining orders without requiring Dexia to
post a bond. The Court subsequently ordered Dexia to post a bond, and Dexia
promptly complied. This challenge is thus likewise moot.

*6 Brian Rogan contends it is inappropriate for the Court
to enter an injunction against him because he is not a party to the underlying
suit. The Court notes initially that it did not enjoin the Rogan children
personally, nor has Dexia asked the Court to do so. Rather, the Court was asked
to preclude financial institutions from transferring certain assets on the
ground that they are, in fact or in effect, Peter Rogan's assets. The requested
orders unquestionably affect the interests of the Rogan children, but the fact
is that they themselves have not been enjoined personally.

In any event, Illinois' statutory provisions relating to
post-judgment collection proceedings, which apply in federal court pursuant to
Federal Rule of Civil Procedure 69(a), specifically permit a court to "enjoin
any person, whether or not a party to the supplementary proceedings, from making
or allowing any transfer or other disposition of, or interference with, the
property of the judgment debtor not exempt from the enforcement of a judgment."
735 ILCS 5/2-1402(f)(2). Illinois Supreme Court Rule 277(a), which governs
citation proceedings, likewise permits a proceeding to be "against the judgment
debtor or any third party the judgment creditor believes has property of or is
indebted to the judgment debtor." That is the primary basis upon which Dexia has
proceeded in this matter-its contention that third parties hold property that
actually is Peter Rogan's, even though it is held under some other guise.

The Rogan children also challenge the propriety of venue in
this District. Again, it is important to note that they are not personally the
object of any restraining order or of the requested preliminary injunction.
Rather, the Court has entered orders directed at persons and institutions
holding assets reasonably believed to be those of Peter Rogan, who has a
judgment against him that was entered in this District. In any event, as Dexia
argues, the Rogan children likely have waived any objection to venue by
intervening in this proceeding. See, e.g., Asbury Glen/Summit Ltd. P'ship v.
Southeast Mortgage Co., 776 F.Supp. 1093, 1096 (W.D.N.C.1991); Commonwealth
Edison Co. v. Train, 71 F.R.D. 391, 394 (N.D.Ill.1976). Even were that not the
case, venue is proper here. Ths current proceedings are supplementary,
post-judgment collection proceedings that arise from the Court's entry of a
judgment against Rogan. The events that gave rise to the "cause of
action"-namely Dexia's collection efforts-took place in this District. So even
if venue must be determined separately for post-judgment proceedings, it has
been established.

2. Merits of Dexia's motion

The Court turns next to the merits of Dexia's motion for a
preliminary injunction. To prevail on its motion, Dexia must show that it has a
likelihood of success on the merits and that it lacks an adequate remedy at law
and will suffer irreparable harm if the injunction is not granted. FoodComm
Int'l v. Barry, 328 F.3d 300, 303 (7th Cir.2003). If Dexia meets these
requirements, the Court must balance the harm to Dexia if an injunction is not
issued against the harm to opposing parties if it is issued, and must also
consider the interests of others, including the public. Id. This balancing
"involves a sliding scale analysis: the greater [the movant's] chances of
success on the merits, the less strong a showing it must make that the balance
of harm is in its favor." Id.

*7 The Rogan children did not challenge Dexia's motion to
enter preliminary injunctions against the domestic and foreign trusts of which
the children are the beneficiaries and have thus forfeited any challenge to
those orders. In any event, the Court properly entered preliminary injunctions
against the children's trusts based on Dexia's contention, not challenged by the
children and on which Dexia has established a reasonable likelihood of success,
that the trusts are alter egos of Peter Rogan.

To pierce the veil of the trusts, Dexia must show that they
and Rogan have such a unity of interest that their separate personalities no
longer exist, and that there are circumstances such that continuing to recognize
their separateness would sanction a fraud or promote injustice. See, e.g., Van
Dorn Co. v. Future Chem. & Oil Corp., 753 F.3d 565, 569-70 (7th Cir.1985). A
trust may be considered to be the alter ego of a judgment debtor if the debtor
used the trust's assets for his own benefit and exercised authority over the
trust's assets. See, e.g., In re Turner, 335 B.R. 140, 147 (Bankr.N.D.Cal.2005),
reaff'd on reconsideration, 345 B.R.2006 (Bankr.N.D.Cal.2006). The factors
considered include whether there was a close personal relationship between the
transferor and the trust; the transferor received consideration for the
transfer; the trust was created to shield the transferor's assets from creditors
and the transfer was made in anticipation of incurring debts or in anticipation
of collection activity; the transferor continued to enjoy the benefits of the
property following transfer; the transferor contributed all or just part of the
trust's assets; and there was commingling of management and record keeping of
the assets of the transferor and the trust. See, e.g., United States v. Schaut,
No. 97 C 4114, 2001 WL 1665314, at *3 (N.D.Ill.Dec.28, 2001); In re Maghazeh,
310 B.R. 5, 18-19 (Bankr.E.D.N.Y.2004); Turner, 335 B.R. at 147.

Even had the Rogan children contested Dexia's request for
preliminary injunctions against the trusts, the Court would have concluded that
Dexia established a reasonable likelihood of success on the merits on its claim
that the trusts are Peter Rogan's alter egos. There is no question that a close
relationship exists between the transferor (Rogan) and the trusts (whose
beneficiaries are Rogan's children) and that Rogan contributed all of the assets
that the trusts hold without receiving any consideration in return. In addition,
administration of the trusts was under the control of Cuppy, Rogan's personal
attorney. The evidence Dexia presented reflects that Cuppy was wearing at least
two hats and that he acted in concert with Peter Rogan and with Rogan's
interests in mind as much as, and perhaps more so than, the interests of the
trust beneficiaries. And in at least some significant instances, recounted
earlier, the trusts' assets were used for the benefit of Rogan himself, without
regard to the interests of the trust beneficiaries. To that extent, at least,
trusts amounted to a facade that effectively allowed Rogan to direct the
disposition of their assets as though he had never parted with them to begin
with.

*8 Based on the current record, there is some question
whether the children's trusts (in possible contrast to certain other trusts
Rogan established) were set up in anticipation of Rogan incurring any particular
debt or in anticipation of any particular collection activity. But there is
evidence, not disputed by the Rogan children, that Cuppy marketed himself as
being in the business of setting up asset protection devices, including offshore
trusts, for persons like Peter Rogan with substantial wealth. It is fair to
infer that Rogan established the children's trusts for that purpose, even if not
to try to evade any particular debt or creditor.

In sum, Dexia provided ample evidence-none of it contested
by the Rogan children-establishing a reasonable likelihood of success on its
contention that the children's trusts were Peter Rogan's alter egos.FN1 For this
reason (