FOR THE NORTHERN DISTRICT OF CALIFORNIA
WILLIAM H. PORTER, No. 1-91-10661
JEFFRY G. LOCKE, Trustee,
v. A.P. No. 91-1234
LEO BECNEL, et al.,
Memorandum of Decision
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.
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
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
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.
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
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 _______________________