KSB

Judge Somers

08-05232 Morris v. Groves (Doc. # 39)

Morris v. Groves, 08-05232 (Bankr. D. Kan. Aug. 19, 2009) Doc. # 39

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Case 08-05232 Doc# 39 Filed 08/18/09

SO ORDERED.
SIGNED this 18 day of August, 2009.


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Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Designated for on-line use; not designated for print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

THOMAS L. SHORT,
DEBTOR.

J. MICHAEL MORRIS, Trustee,
PLAINTIFF,
v.
ANTHONY GROVES,
DEFENDANT.

CASE NO. 07-12844
CHAPTER 7

ADV. NO. 08-5232

MEMORANDUM OPINION AND ORDER
DENYING TRUSTEE'S COMPLAINT FOR TURNOVER AND
GRANTING IN PART TRUSTEE'S SECTION 548 COMPLAINT


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In this adversary proceeding, the Chapter 7 Trustee, J. Michael Morris (hereafter Trustee)
seeks to recover from Anthony Groves (hereafter Mr. Groves) unpaid rent for occupancy of one
unit of Debtor Thomas Short's duplex. Trial was held on May 14, 2009. The Trustee appeared
by J. Michael Morris, Klenda, Mitchell, Austerman & Zuercher, L.L.C. Defendant Mr. Groves
appeared by William A. Wells, of Young, Bogle, McCausland, Wells & Blanchard, P.A. There
were no other appearances. The Court has jurisdiction.1
FINDINGS OF FACT.

The trial witnesses were Debtor and Defendant Groves. Their testimony was forthright,
not evasive, and consistent. Although neither understood the foreclosure and bankruptcy
processes, it was clear that both parties acted with good intentions and there was absolutely no
hint of fraud or other wrongful conduct in the lease transaction.

 Debtor at the time of filing was the owner of a duplex located in Wichita, Kansas.
Debtor resided in the back unit. Beginning in November 2006, Mr. Groves, a workplace friend
of the Debtor, rented on a month to month basis the front duplex unit from Debtor for $450 per
month, payable in advance. Both Debtor and Mr. Groves testified that there was a written lease,
but it could not be found at the time of trial. Mr. Groves timely paid his rent and otherwise
performed his duties as a tenant.

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). There is no objection to
venue or jurisdiction over the parties.

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The property was mortgaged to Beneficial Mortgage Bank. In about May, 2007, Debtor
determined that because he was unable to continue to make the monthly mortgage payments,
Beneficial would soon take back the property. After Mr. Groves made the May rent payment,
Debtor informed Mr. Groves that he need not make future rent payments. Debtor reasoned that
since he was not paying Beneficial, it would be unfair to require Mr. Groves to pay Debtor.

A default journal entry of judgment in a foreclosure action filed by Beneficial against
Debtor was filed on October 4, 2007. The sheriff's sale was held on November 7, 2007. Debtor
filed for relief under Chapter 7 on November 19, 2007. Debtor claimed the property as his
homestead. The schedules list the property as having a value of $60,000, subject to a secured
claim of $88,699. The evidence corroborated those amounts. Based upon the schedules, the
Trustee established that Debtor was insolvent from May 2007 through the date of filing.

Debtor continued to reside in the property during the redemption period, which ran to
February 2008. Mr. Groves, at the request of the Trustee, vacated the premises in early February
2008. No rent had been paid after May 3, 2007. Mr. Groves testified that he would have moved
sooner if asked to do so.
TRUSTEE'S CLAIMS.

The Trustee, in his amended complaint, seeks to recover rent for the period June 2007
through February 7, 2008 at the rate of $450 per month. The amount sought $3,708.57,
comprised of $3,600 for the period June through January, plus the pro rata amount of $108.57 for
February 1 through 7. In Count I, the Trustee prays for turnover under the theory that the rent
was due the Debtor pursuant to the lease and not paid. In Count II, he alleges that Debtor's

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statement that he would not collect rent after May was a gift to Groves and a transfer of property
of the estate which may be avoided as a fraudulent conveyance under 11 U.S.C. § 548(a)(1)(B).

Defendant Groves contends that he owes no rent because there was no lease after May,
2007. After that date, he contends he was a guest of the Debtor. He argues that he should have
no liability to the Trustee because he did nothing wrong and would have vacated the premises
earlier if he had been asked to do so.

ANALYSIS AND CONCLUSIONS OF LAW.

At trial, the Trustee conceded that he has no claim under a contract theory against Mr.

Groves for rent owed to Debtor. He agrees that because Debtor forgave the payment of rent after

May 4, 2007, the Trustee, standing in the shoes of the Debtor, has no claim against Mr. Groves

for such rent. The Court agrees, and the Trustee is denied the relief he seeks under Count I.

As to Count II, the Trustee contends that each element of a fraudulent conveyance under

11 U.S.C. § 548(a)(1)(B) is present. That subsection provides:

(a)(1) The trustee may avoid any transfer (including any transfer to
or for the benefit of an insider under an employment contract) of
an interest of the debtor in property, or any obligation (including
any obligation to or for the benefit of an insider under an
employment contract) incurred by the debtor, that was made or
incurred on or within 2 years before the date of the filing of the
petition, if the debtor voluntarily or involuntarily-


* * *
(B)(i) received less than a reasonably equivalent value in exchange
for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or
such obligation was incurred, or became insolvent as a result of
such transfer or obligation;

This subsection is the constructive fraud provision and applies to transfers by insolvent debtors
even where there is no actual fraud. “It permits avoidance if the trustee can establish (1) that the

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debtor had an interest in property; (2) that a transfer of that interest occurred within one year
[now two years] of the filing of the bankruptcy petition; (3) that the debtor was insolvent at the
time of the transfer or became insolvent as a result thereof; and (4) that the debtor received ‘less
than a reasonably equivalent value in exchange for such transfer.’”2 In this case, the allegedly
fraudulent transfer arises from Debtor’s allowing Mr. Groves to occupy the duplex without
paying rent from June 1, 2007 to February 7, 2008. The evidence fully satisfies elements two
and three - the events occurred less than two years before Mr. Short filed for bankruptcy and Mr.
Short was insolvent from May 2007 to the date of filing. The question is whether Mr. Grove’s
actions constitute a “transfer” for which Mr. Groves received less than a reasonably equivalent
value.

Transfer is broadly defined by § 101(54) as meaning “(A) the creation of a lien; (B) the
retention of title as a security interest; (C) the foreclosure of a debtor's equity of redemption; or

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing
of or parting with-- (i) property; or (ii) an interest in property.”3 This definition was intended by
Congress to be as “broad as possible.”4
The most obvious transfer in this case is Mr. Short’s renting of the duplex to Mr. Groves
in November 2006. Mr. Groves received the right to occupy the duplex unit owned by the
Debtor, hence Mr. Short’s occupancy interest was transferred to Mr. Groves. However there is
no suggestion that the lease initially was for less than a reasonably equivalent value - monthly

2 BFP v. Resolution Trust Corp., 511 U.S. 531, 535 (1994).

3 11 U.S.C. § 101(54).

4 S. Rep. No. 95-989, 95th Cong. 2d Sess. 27 (1978).

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rent of $450 paid in advance. As a basis for recovery under § 548(a)(1)(B) the Trustee therefore
focuses on later events, staring in May, 2007, where the application of the definition of transfer
is not as straight forward. When Debtor informed Mr. Groves in May, 2007 that no more rent
would be required, the occupancy was not terminated, and Mr. Groves continued to reside in the
duplex with Debtor’s consent. This event either resulted in the continuation of the lease with a
reduction in rent or the termination of the lease with continued occupancy, in which case under
Kansas law a month to month tenancy was created.5 In either event, the transfer of the
occupancy, initially made in November 2006, was not terminated. The primary change was the
consideration for the occupancy. The question is whether, as contended by the Trustee, this
change was a transfer for less that adequate consideration within the meaning of § 548(a)(1)(B).

The Court finds that there was a transfer for no consideration. The definition of transfer
was intended to be as broad as possible. “The hallmark of a ‘transfer’ is a change in the rights of
the transferor with respect to the property after the transfer.”6 The termination of a debtor’s
executory contract is a transfer.7 Reduction of the amount due to debtor on commercial
promissory notes is a transfer.8 In this case, staring in June 2007 there was a change in the rights
of the Debtor under the lease with respect to Mr. Groves’ occupancy of a portion of Debtor’s real

5 K.S.A. 58-2570 (c); K.S.A. 58-2545.

6 Barber v. Dunbar (In re Dunbar), 313 B.R. 430, 435 (Bankr. C.D. Ill. 2004).

7 Metro Water and Coffee Services, Inc. v. Rochester Community Baseball, Inc. (In re Metro
Water and Coffee Services, Inc.), 157 B.R. 742 (Bankr. W.D.N.Y. 1993) (holding termination of debtor’s
concession services contract with baseball team was a transfer for purposes of § 548).

8. Grochocinski v. Reliant Interactive Media Corp. (In re General Search.com), 322 B.R. 836,
(Bankr. N.D. Ill. 2005).
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property. Before June 2007 Debtor was entitled to $450 per month for the occupancy; after June
2007 he had no right to payment since he told Mr. Groves that no future payments were required.

There is no doubt that the Debtor did not receive reasonably equivalent value for the
transfer. Each month or day Mr. Groves remained in possession after June 1, Debtor was
deprived of income from the property, while Mr. Groves gave up nothing of value. He in
essence received a gift of use of the duplex. In this case, there is no way to assign a value to the
transfer on its initial date, June 1, 2007, as the rent forgiveness was not for a specified period of
time. In essence there was a separate transfer each day the occupancy continued. However, by
definition a fraudulent transfer is a prepetition event. Subsection 548(a)(1) requires that the
transfer be made within two years before the date of filing. Therefore, there can be no fraudulent
transfer after the date of filing on November 19, 2007.

The Court therefore finds that there was an implied fraudulent transfer starting in June
2007 when Debtor terminated his right to receive rent for the occupancy of the duplex. Each day
the occupancy continued without the payment of rent was in essence a separate implied
fraudulent transfer. The Trustee is therefore entitled to avoid the transfers for the period June 1,
2007 through November 19, 2007.

As a remedy, the Trustee seeks a judgment against Mr. Groves under § 550(a)(1) which
provides that “to the extent that a transfer is avoided under section . . . 548 . . ., the trustee may
recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value
of such property, from . . . the initial transferee of such transfer or the entity for whose benefit
such transfer was made.” The Court agrees that in this case recovery of the value of the property
is appropriate and $450 per month is an appropriate value, since no evidence was presented that

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this rate, which was agreed upon by the parties, was not a reasonable rent for the duplex. The
Court also agrees that Mr. Groves is both the initial transferee and the person for whose benefit
the transfers were made. The Trustee is therefore entitled to a judgment against Mr. Groves for
rent at the rate of $450 per month for the period June 1, 2007 through November 19, 2007, in the
amount of $2535.9

 The Court is sympathetic to Mr. Groves’s arguments that it is not fair for the Trustee to
recover, that there was a mutual agreement to change the terms of the lease or terminate the
lease, and the Trustee should have nothing to do with the transaction. The Court agrees that
entry of judgment against Mr. Groves is not in accord with a common understanding of landlord
tenant relationship and finds application of the Code distasteful when applied to this
noncommercial, well intentioned transaction between two friends. The Court finds in favor of
the Trustee only because the Bankruptcy Code leaves no alternative. Congress has made the
policy decision that the value of transfers made by a debtor within the two years before filing for
bankruptcy protection should be returned to the bankruptcy estate for the benefit of the debtor’s
creditors if the debtor did not receive reasonably equivalent value, even if there is no fraud or
wrongdoing. The fact pattern of this case fits what Congress intended.

In conclusion, the Court denies Count I of the complaint for turnover; grants Count II of
the Complaint for fraudulent transfer under § 548(a)(1)(B) as to the forgiveness of rent for the
period June 1, 2007 through November 19, 2007 and rules that the Trustee is entitled to a

9 The amount is calculated as follows. $450 per month for five months (June through October),
plus 19/30 times $450 for the nineteen days in November 2007.

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judgment for $2535 against Defendant Groves; and denies Count II of the Complaint as to the
value of the rent not paid postpetition.

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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