KSB

Judge Somers

06-05337 Nazar v. Wills et al (Doc. # 241)

Nazar v. Wills et al, 06-05337 (Bankr. D. Kan. Oct. 1, 2008) Doc. # 241

PDFClick here for the pdf document.


Dale L. Somers
Case: 06-05337 Doc #: 241 Filed: 10/01/2008

SO ORDERED.
SIGNED this 01 day of October, 2008.


Page 1 of 27

UNITED STATES BANKRUPTCY JUDGE

FOR ONLINE PUBLICATION; NOT FOR PRINT PUBLICATION

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF 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.

CASE NO. 05-17977
CHAPTER 7

ADV. NO. 06-05337


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


 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.1 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.
The Trustee seeks to exercise his power under § 544(b)(1)2 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

1 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.

2 11 U.S.C. § 544(b)(1). All future references to the Bankruptcy Code shall be to the section
only.

2


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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.

FINDINGS OF FACT.3

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.

3 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.

3


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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.

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,4 but no detail as to the exact date5 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.

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

4 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.

5 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.

4


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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.6 At some unknown time, a plan was developed to

6 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

5



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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.

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.

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

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.

6


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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.7
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.

On some unknown date in 2001, MCW’s interests8 in vehicles and equipment9 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

7 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.

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


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

7


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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,10 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 2001.11

 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

10 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.


11 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.

8


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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
9



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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.

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,12 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.

12 The vehicle titles were not changed, but the intent to transfer ownership is unrefuted.
10


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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.

11



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TRUSTEE’S CONTENTIONS.


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.13 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. 33204(
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, 1999,14 provide:

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
13 Collier on Bankruptcy ¶544.09 (Alan N. Resnick & Henry J. Sommer eds.-in-chief, 15th ed.
rev. 2008).
14 L. 1998, ch. 13, §§ 1-13.
12


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(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.”15 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.16

As to the burden of proof, the Kansas Supreme Court looked to a case decided before the
UFTA’s adoption.17 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.”18 “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.”19 “There is nothing in the

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

17 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).
18 Koch Engineering Co. v. Faulconer, 239 Kan. at 107, 716 P.2d at 186.
19 Newell v. Krause, 239 Kan. 550, 557, 722 P.2d 530, 536 (1986).
13


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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.20 Accordingly,
in this case in order to prevail the Trustee must satisfy the burden of proof under Kansas law.

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.”21 Badges of fraud
are circumstances which frequently attend transfers to hinder, delay or defraud creditors.22
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:

(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
20 In re Jackson, 318 B.R. 5, 12 (Bankr. D.N.H. 2004) (avoidance action under New Hampshire
Uniform Fraudulent Transfer Act).
21 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).
22 Koch Engineering Co. v. Faulconer, 239 Kan. at 107, 716 P.2d at 185.
14


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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.23

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.24
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.

23 Id.

24 K.S.A. 33-202.

15



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ANALYSIS AND CONCLUSIONS OF LAW .

A. The K.S.A. 33-204(a)(1) claims.
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.25

1. Whether the transfer was to an insider. This element is present as to both transfers.
25 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.
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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
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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.

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
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debts is greater than all of the debtor’s assets at a fair valuation.”26 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.27 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.

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

27 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.

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an intent to have MCW, LLC transfer its interests in Clingan Leasing to the Trust.28 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.

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

28 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.

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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

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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.

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

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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).29 The subsection provides:

(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

29 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.

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transfer, the debtors did not have sufficient assets to cover their obligations.” This position is
inadequate.

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

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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. 33205(
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.
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

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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

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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.

IT IS SO ORDERED.
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