Memorandum of Decision Re: Fraudulent Transfer

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re WILLIAM H. PORTER,                                       No. 1-91-10661      Debtor. ___________________________/ JEFFRY G. LOCKE, Trustee,      Plaintiff,    v.                                                                              A.P. No. 91-1234 LEO BECNEL, et al.,      Defendants. ______________________________/
Memorandum of Decision
I. Introduction      Debtor William Porter is a medical doctor. Prior to his bankruptcy, he was engaged in bitter divorce proceedings with his former wife.      In August of 1990, Porter purchased a parcel of unimproved real property from defendants Leo Becnel and Benjamin Byrd. The purchase price was inflated for tax purposes to $725,000.00, but stripped of the tax machinations the sale was for $600,000.00 of which $150,000.00 was paid in cash and defendants took back a note secured by the property for the remaining $450,000.00. Even at the $600,000.00 figure, Porter probably paid more than the property was worth.      The nominal purchaser was Porter's professional corporation, William H. Porter, M.D., although the distinction between Porter and his corporation was not always observed.      Largely due to problems related to the divorce proceedings, Porter became delinquent in his payments to Becnel and Byrd. Just two weeks before he filed his bankruptcy petition, Porter deeded the property back to Becnel and Byrd in lieu of foreclosure in return for cancellation of the $459,000.00 then due on the note.      Porter's discharge has been denied based on this transaction. In this adversary proceeding, the Trustee seeks to avoid the deed in lieu of foreclosure as a fraudulent transaction and recover $150,000.00 in damages from Becnel and Byrd.      At the conclusion of the Trustee's case, Becnel and Byrd moved for judgment on the grounds that he did not prove Porter's insolvency and on the grounds that the transfer was made by Porter's corporation and not Porter himself. The court took the motion under submission and now denies it.
II. Insolvency
     Porter's schedules show debts of almost $1 million and assets of only $467,500.00. In addition, the primary scheduled asset was $425,000.00 in proceeds from the sale of the former marital residence, and the Trustee was only able to recover a portion of that in litigation with Porter's former spouse. Unless rebutted, the evidence in the court's own files establishes insolvency.
III. Disregard for Corporate Entity
     The basis of the Trustee's successful discharge action against Porter was that he made the transfer to Benel and Byrd with the intent to frustrate his former wife in their divorce proceedings. As a court of equity, this court may disregard the corporate entity and treat the transfer as that of Porter himself if Porter dominated the corporation, there are no corporate creditors prejudiced by such treatment, and it is necessary to prevent an injustice. See 9 Witkin, Summary of California Law (9th Ed.), Corporations, section 13. It appears from the evidence submitted by the Trustee that the court can disregard the corporate status without prejudicing any innocent parties and must do so to prevent Porter from achieving his ends of stripping his estate out of spite.
IV. Money Damages or Return of Property
     Having resolved the issues raised by Becnel and Byrd in their motion for judgment, the court proceeds to comment on what it perceives as the interesting part of the case, which is the Trustee's remedy if a fraudulent transfer is found. There is scant authority to assist the court in resolving several important issues.      The Trustee argues that the court should use its discretion under section 550(a) of the Bankruptcy Code to award a money judgment instead of ordering the return of the property. However, the court is not inclined to do so for two reasons. First, the court does not know the value of the property at the time it wad deeded back to Becnel and Byrd; there are indications in the evidence that Porter, in his eagerness for tax shelter, may have overpaid when he purchased. Second, Becnel and Byrd still have the property and it can be returned to the estate in the same condition as when it was transferred.
V. Lien of Transferors
     If the court orders the property turned over to the Trustee, Becnel and Byrd would be entitled to liens pursuant to section 548(c) of the Code and section 550(d)(1) of the Code so long as they acted in good faith. While Byrd volunteered information indicating possible lack of good faith as to the original sale, there was no evidence of bad faith as to the deed in lieu of foreclosure which is the transfer now at issue. There was no evidence that Becnel or Byrd wanted to assist Porter in thwarting any creditors, or that they had any sort of arrangement whereby Porter could redeem the property at a later date. Accordingly, the court will give Becnel and Byrd a lien if it orders the property returned.      The size of the lien becomes an issue if the property is ordered transferred to the estate. It should be at least $459,000.00, which was the amount owed on the date of the transfer. The question remains as to whether it should be increased by the interest which would have accrued between that date and today.      The only case on point which the court has found is In re General Industries, Inc., 79 B.R. 124 (Bankr.D.Mass.1987). In that case, the court undid a foreclosure as a fraudulent transfer and gave the foreclosing creditor a lien for the amount owed on the date of the sale. Without analysis, the court started the interest running again as of the date of reconveyance back to the estate.      The result reached in General Industries seems correct. It seems unfair to allow interest to accrue during the time that Becnel and Boyd had full ownership of the property and the Trustee was unable to sell it and cut off the accruing interest. In fairness to Becnel and Byrd, however, the court will not infer any "profit" to Becnel and Byrd during that time which would offset their lien. See General Industries at 137. Becnel and Byrd are entitled to an additional lien pursuant to section 550(d)(1) for any property taxes they paid and improvements they made after the property was deeded back to them.
VI. Conclusion
     Unless Becnel and Byrd introduce sufficient evidence to the contrary, the court will find that the debtor was insolvent when he gave them his deed in lieu of foreclosure and that the court may disregard the corporate entity. The Trustee has presented a prima facie case for an avoidable transfer.      If the Trustee prevails, he will recover the property itself and not monetary damages. Becnel and Byrd shall have a lien on the property for $459,000.00 plus any expenses for property taxes and improvements made to the property after they obtained the deed from Porter. The lien shall accrue interest at the legal rate from and after the date the property is deeded to the Trustee.      A status conference shall be held on August 31, 1992, at 2:00 P.M., to set a hearing on the presentation of defendants' case.      Upon entry of a judgment, this memorandum shall constitute the court's findings and conclusions as to the issues addressed.
Dated: August 11, 1992                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy