Opinion
CASE NO. 1:05-bk-70065M, AP NO. 1:06-ap-07111.
April 22, 2008
MEMORANDUM OPINION
On January 5, 2005, Pennywise RV Sales Service, Inc. ("Pennywise, Inc.") filed a voluntary petition for relief under the provisions of Chapter 7. On January 12, 2005, John David Talley and Penney D. Talley filed a voluntary joint petition under the provisions of Chapter 7. Renee S. Williams was the duly appointed Trustee in each case.
In their bankruptcy schedules, the Talleys listed a 100% stock ownership, valued at zero, in Pennywise, Inc. Pennywise, Inc. scheduled a tax identification number, common among corporate debtors. In the Statement of Financial Affairs, Pennywise, Inc. showed the Talleys as owners of the corporate debtor, and John Talley is listed as President of Pennywise, Inc.
The Business Income and Expenses schedule for Pennywise, Inc., for the twelve months prior to the date the petition was filed lists zero activity. The statement of financial affairs in the Talley case does not reflect any income received from any source in 2004 and shows current income for both debtors to be zero while expenses on Schedule J are listed at $2909.26.
The corporate schedules reflect no business activity for the year previous to the date of the filing of the petition, yet among the creditors scheduled are the Arkansas Department of Finance and Administration holding a claim for unpaid sales tax for the year 2003-2004 and the Internal Revenue Service holding a claim for 941 taxes.
The schedule of assets in both cases contain some but not all of the same assets, including a 1968 Eagle bus and a 1983 MCI bus. The Talleys' petition reflects no tax liability to any agency of state, local or federal government while Pennywise, Inc., lists $13,389.75 for 941 taxes to the IRS; $10,516.19 to the Columbia County Tax Collector for property taxes, and $7185.54 to the Arkansas Department of Finance and Administration for sales tax due for the years 2003 and 2004.
The Trustee of Pennywise, Inc., filed this proceeding on August 2, 2006, against John David Talley and Penney D. Talley seeking to recover money or property of the estate under several theories. On the date of trial, the Trustee dismissed all allegations against Penney D. Talley. In his opening statement at trial and at a supplemental hearing in which oral arguments were presented, counsel for the Trustee narrowed the causes of action to the following: constructive fraudulent transfer pursuant to 11 U.S.C. § 548(a)(2)(B); turnover of personal property in the debtor's possession pursuant to 11 U.S.C. § 542; judgment for property of the estate disposed of post-petition; and equitable subordination of Talley's claims pursuant to 11 U.S.C. § 510(c).
Trial on the merits of this proceeding was held at Texarkana, Arkansas, on September 5, 2007. At the conclusion of the trial the matter was taken under advisement.
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E), (H), (O) (2000). The Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
THE FACTS
Pennywise, Inc., conducted its business activities in a confusing and convoluted fashion. Although the owners of Pennywise, Inc., created a sub-chapter `S' corporation, Talley stated that no assets were ever transferred to the corporation, and that the tax returns filed on behalf of the corporation reflected no business activity. (Tr. at 140.) He also stated that Pennywise RV and Charter Tours was a division of the RV corporate business.
Unless otherwise stated, references to a transcript pertain to the transcript of the Court's hearing held September 5, 2007.
Talley testified that he currently resides in Magnolia, Arkansas, and is employed by Pennywise RV World, which is located in Magnolia, Arkansas, but in a different physical location from the Debtor, Pennywise, Inc. He stated Pennywise, Inc., ceased operation on January 5, 2005, when the bankruptcy case was filed. (Tr. at 14.) The new business commenced operation in March 2005. The new business, the same type of company as Pennywise, Inc., is owned by John Talley's wife, Penney, but the record does not reflect whether the new business is incorporated.
John Talley's individual case scheduled, among other property, a 1968 Eagle bus valued at $22,000.00, a 1983 MCI bus valued at $8000.00, and a 1997 4-wheeler valued at $700.00. Pennywise, Inc.'s schedules also list a 1968 bus with a value of $30,000.00 and a 1983 MCI bus valued at $8000.00. The 1968 Eagle bus and 1983 MCI bus are collateral for a debt to Peoples Bank. Talley stated that the 1968 Eagle bus was still "in our possession" but the 1983 MCI bus has been sold. (Tr. at 23.)
FRAUDULENT TRANSFERS
The Trustee relies on the Bankruptcy Code's fraudulent transfer statute to avoid transfers evidenced by twelve checks written on the corporation's two bank accounts from February 2004 to January 2005. Pennywise, Inc. maintained business checking accounts at Farmers Bank Trust (Farmers Bank) and at Peoples Bank. The account at Farmers Bank was held in the name of Pennywise RV Sales Service, Inc. The account at Peoples Bank was held in the name of David Talley DBA Pennywise RV Sales; checks written on the account bore the name of Pennywise RV Charter Tours.
The Trustee alleges that the following checks document fraudulent transfers from Pennywise Inc. to Talley and one other individual:
At the beginning of her case in chief, the Trustee dismissed allegations related to seven checks listed in the complaint on Exhibits A and B. (Tr. At 7.) In addition, the Trustee alleged in her complaint that the following checks were fraudulent transfers but she did not introduce evidence as to their existence or relevance during the trial: Check number 1007 to Carter Federal Credit Union for $2000.00 dated May 18, 2004; Check number 10211 to David Talley for $1000.00 dated September 7, 2004; check number 6182 to David Talley for $5000.00 dated October 18, 2004; check number 10384 to David Talley for $500.00 dated December 20, 2004. The Court infers that the Trustee is no longer pursuing the avoidance of these transfers. Finally, the Trustee presented evidence of the following checks that are listed above but which were not listed in the Trustee's complaint: Farmers Bank check 6182, Peoples Bank check 189030, and Peoples Bank check 189199.
The parties agree this check was mistakenly dated 01/03/2004 but written in 2005. (Tr. At 49.)
Talley does not dispute that he received the funds from checks that were made out to cash or that listed him as payee. Talley regularly received two salary checks a month in the amount of $1539.91 and one other "hourly" check in the amount of $429.40. However, the Trustee proceeds under the theory that the twelve checks at issue were not payroll checks and were unrelated to Talley's employment compensation from Pennywise, Inc.
At the time of the filing of the bankruptcy petition on January 5, 2005, the Bankruptcy Code's statute on fraudulent transfers permitted a trustee to avoid "any transfer of an interest of the debtor in property . . . made . . . within one year before the date of the filing of the petition" if certain conditions are met. 11 U.S.C. § 548(a)(1) (2000).
The applicable provision of the Bankruptcy Code precedes BAPCPA, which amended the fraudulent transfer statute to provide a two-year avoidance period.
The Trustee does not allege an intent to defraud creditors and relies instead on a theory of constructive fraudulent conveyance as provided by the Bankruptcy Code. Pursuant to that theory, a debtor's transfer within one year of bankruptcy may be avoided if the debtor voluntarily or involuntarily "received less than a reasonably equivalent value in exchange for such transfer . . . and . . . 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. . . ." 11 U.S.C. § 548(a)(1)(B)(i)-(ii)(I) (2000).
Even if insolvency cannot be proved, a trustee may still prevail if the debtor received less than reasonably equivalent value for the transferred property and "was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital. . . ." 11 U.S.C. § 548(a)(1)(B)(i)-(ii)(ll) (2000).
Thus, the statute requires a showing that the debtor transferred property within one year of the bankruptcy, that the debtor failed to receive reasonably equivalent value in return, and that at the time of the transfer, the debtor was either insolvent or became insolvent because of the transfers or that the transfer resulted in the debtor's operating with an unreasonably small amount of capital. The Trustee has the burden to prove her case by a preponderance of the evidence. Killips v. Schropp (In re Prime Realty. Inc.), 380 B.R. 529, 536 (B.A.P. 8th Cir. 2007); Meeks v. Don Howard Charitable Remainder Trust (In re Southern Health Care of Arkansas, Inc.), 309 B.R. 314, 319 (B.A.P. 8th Cir. 2004) (citing Pummill v. Greensfelder, Hemker Gale (In re Richards Conover Steel, Co.), 267 B.R. 602, 612 (B.A.P. 8th Cir. 2001)); Burdick v. Lee, 256 B.R. 837, 839-40 (D.Mass. 2001) (citing McColley v. Jacobs (In re North American Dealer Group, Inc.), 62 B.R. 423, 428 (Bankr. E.D.N.Y. 1986);Talbot v. Warner (In re Warner), 65 B.R. 512, 518-19 (Bankr. S.D. Ohio 1986)).
The initial inquiry is whether the debtor received reasonably equivalent value, a question that has three components: whether value was given; whether the value given was in exchange for the transfer; and whether the transfer was reasonably equivalent to what was received. Stalnaker v. Gratton (In re Rosen Auto Leasing, Inc.), 346 B.R. 798, 805 (B.A.P. 8th Cir. 2006); In re Southern Healthcare of Arkansas, Inc., 309 B.R. at 319 (quoting In re Richards Conover Steel, Co., 267 B.R. at 612)). The payment of money is "unquestionably the giving of `value'." In re Southern Healthcare of Arkansas, Inc., 309 B.R. at 319 (citing 11 U.S.C. § 548(d)(2)(A) (2000) ("value" is "property, or satisfaction or securing of a present or antecedent debt of the debtor, but does not include an unperformed promise to furnish support to the debtor or to a relative of the debtor").
Under these guidelines, the Court will examine each transfer to determine whether reasonably equivalent value was exchanged for the money transferred from Pennywise Inc.'s two corporate accounts.
Farmers Bank check 5811 (Pl.'s Ex. 3) represents a transfer of $5000.00 from Pennywise, Inc. to Talley on February 23, 2004. Talley testified that he cashed the check and purchased a 1990 MCI bus in Dallas, Texas, using the cash as a deposit or down payment for the transaction. (Tr. at 78.) Defendant's Exhibit One evidences a transaction between Pennywise, Inc. and MCI Financial Services, Inc. for the purchase of the bus on February 24, 2004 for $49,000.00. The contract invoice bears the hand-written notation "rec'd 5,000.00 cash 2/24/04" signed by an MCI representative. The title lists Pennywise, Inc. as the purchaser. Talley testified that the bus was repossessed by MCI Financial in December 2004. (Tr. at 79.) The Court finds that Pennywise Inc. received a reasonably equivalent value for the $5000.00 transfer to Talley because the cash was a down payment on a vehicle sold to Pennywise, Inc. in a commercial transaction and used in the business until its demise shortly before bankruptcy.
Peoples Bank check 10172 was signed by John Talley and written to "cash" in the sum of $535.00 on July 15, 2004. (Pl.'s Ex. 28) Talley stated the money was disbursed by him to a bus driver to purchase fuel and other expenses for a round-trip charter to Omaha, Nebraska. (Tr. at 114.) As corroboration, he introduced a document that is probably a form memorandum for the corporate check. It is titled "Pennywise RV Charter Tours" and bears the number 10172, thus coinciding with the check number. The document included handwritten documentation of expenses for the charter on July 15, 2004, for "Trip #106J" in the amount of $535.00. (Def.'s Ex. 9.) The date of the check coincides with the date of the charter but there are no accompanying receipts for the expenses purportedly paid for with the cash. Therefore, the Court cannot find that equivalent value was received in the form of fuel and lodging for the cash disbursed by Pennywise, Inc. to Talley and then purportedly from Talley to the bus driver.
Peoples Bank Check 10215, dated September 8, 2004, was written to cash in the sum of $300.00. (Pl.'s Ex. 29.) Peoples Bank check number 10214, dated September 10, 2004, was written to David Talley in the sum of $175.00. (Pl.'s Ex. 29.) Talley testified that money from the checks was used to pay for expenses related to a charter bus trip. (Tr. at 115.)
To corroborate his defense, Talley introduced an image bank statement ending September 30, 2004, that contained a photocopy of the two checks, each with "Fuel" handwritten on the statement in the space beneath the two checks. (Def.'s Ex. 10.) Additionally, he introduced a memo of check 10214 with the handwritten notation "9-5-04 MTC 175.00." (Def.'s Ex. 10.) He testified that "MTC" was an abbreviation for Magnolia Travel Center. (Tr. at 116.) Also, a receipt from the Oasis Travel Center in Robertsdale, Alabama evidenced the purchase of fuel for $186.96 on September 12, 2004, by Horace Booth, one of the bus drivers for Pennywise RV Charter Tours. (Def.'s Ex. 10.)
The handwritten notation "Fuel" added to the image bank statement is not conclusive evidence that the checks were written to defray a business-related expense, such as the purchase of fuel, because the notations were added after the statement was received at some point in time not shown by the record. Also, the memo of check 10214 is not convincing because the date on the 10214 memorandum precedes by five days the date on the face of check 10214. Without further documentation, the Court is unable to determine that Pennywise, Inc. received equivalent value for the transfer of $175.00 to Talley. The receipt from the Oasis Travel Center does evidence the purchase of fuel with cash in the sum of $186.96 within four days of check 10215 written to cash. Therefore, the Court finds that with regard to the $300.00 check, the amount of $186.96 was exchanged for reasonably equivalent value, but the Court is unable to determine what if any value was received by Pennywise, Inc. in exchange for the transfer of the remaining $113.06.
Talley explained that the Farmers Bank check 6182 to David Talley on September 28, 2004, for $3500.00 (Pl.'s Ex. 10) was intended to replace three payroll checks to Penney and John Talley that had been previously returned for insufficient funds in the account. (Tr. at 96-97.) Defendant's Exhibit 7 is a bank notice of insufficient funds in the Farmers Bank account on September 15, 2004, to pay the three payroll checks. The Court finds that check number 6182 was a transfer for a reasonably equivalent value in that it satisfied an antecedent debt to the Talleys for their salaries.
Talley also explained the transfer represented by Peoples Bank check 10000 written to David Talley on October 22, 2004 for $1000.00. (Pl.'s Ex. 30.) He stated that he deposited the check, along with other funds, into the Farmers Bank account on the same day. (Tr. at 117.) Defendant's Exhibit 11 is a copy of a deposit ticket showing funds totaling $2600.00 were deposited on October 22, 2004 into the Farmers Bank account. The memorandum to check number 10000 includes a notation that the $1000.00 check was a transfer to the Farmers Bank account. (Def.'s Ex. 11.) The Court finds that the transfer from one corporate account to the other was for reasonably equivalent value.
The Trustee also seeks avoidance of a transfer from Pennywise, Inc. to David Talley evidenced by Peoples Bank check 10265 for $1000.00 that was undated on its face but apparently cashed on or before November 12, 2004. (Pl.'s Ex. 31.) Talley testified he used the money to pay some of Pennywise, Inc.'s expenses during the month of November 2004. (Tr. at 118.) He produced a check memorandum, ledger entries, utility bills, and receipts corroborating his testimony. (Def.'s Ex. 12.) The exhibits demonstrate that cash was paid on Pennywise, Inc.'s accounts to SBC, Entergy, and Alltel, although the documentation provided for the Centerpoint statement shows on its face that the bill was paid by check in December. (Def.'s Ex. 12.) Talley's documents prove that Pennywise, Inc. received a reasonably equivalent value of $785.17 in paid expenses and failed to receive any value for the $214.83 portion of the $1000.00.
The Trustee introduced a copy of Peoples Bank check 10274 dated November 18, 2004, and written to David Talley for $500.00. (Pl.'s Ex. 32.) Talley offered Defendant's Exhibit 13 to show that he had used the $500.00 to pay company bills. He provided documentation that tended to demonstrate that he had paid $104.23 in cash to Wholesale Battery after a check to the creditor had been returned for insufficient funds in November. (Def.'s Ex. 13.) He also provided a copy of a cashiers check to Pelland Enterprises for $122.90 dated November 18, 2004, that he stated was a replacement check for a previously returned check or checks. (Def.'s Ex. 13.) Included in the composite exhibit were receipts from Wal-Mart and B S Home Center that may well have been related to Pennywise, Inc.'s expenses, but were paid in February, March, and April 2004 and thus did not arise contemporaneously with the funds represented by check 10274. The Court finds Pennywise, Inc. failed to receive $272.87 in reasonably equivalent value for the $500.00 in funds expended.
The Trustee offered into evidence Peoples Bank check 10283 written on November 17, 2004 to David Talley for $1000.00. (Pl.'s Ex. 33.) Talley stated he used $619.89 of the money to replace a payroll check that had been returned for insufficient funds. (Tr. at 120.) Although he offered a copy of two returned checks, Talley did not offer evidence in the form of receipts or new checks to show that either returned check had been redeemed by a portion of the $1000.00 represented by check 10283. (Def.'s Ex. 14.) Furthermore, the cash receipts included in the composite exhibit evidenced transactions dated a month to nine months prior to the November 17 check. (Def.'s Ex. 14.) Although the transactions were obviously for business expenses, the Court cannot determine that the value purportedly received by Pennywise, Inc. was in exchange for this particular transfer.
The Trustee introduced Plaintiff's Exhibit 8, check 10376 drawn on Pennywise RV Charter Tours, payable to Peoples Bank for $6787.32, and dated December 17, 2004. This check was exchanged, in part, for a Peoples Bank cashier's check bearing the number 189030, drawn in the sum of $4000.00, and dated December 17, 2004. (Pl.'s Ex. 8-A.) It was payable to Marc Honey, the attorney who filed the bankruptcy petition for Pennywise, Inc. Additionally, the Trustee introduced Plaintiff's Exhibit 8-C, a check numbered 10343 and payable to Marc Honey, Law Firm. This check was drawn on the Peoples Bank account in the sum of $4000.00 and was dated December 6, 2004. The purpose of this check was to pay for legal services connected with the filing of the petition. (Tr. at 46.)
Plaintiffs Exhibit Two, Pennywise, Inc.'s petition, includes a schedule titled "Disclosure of Compensation of Attorney for Debtor." Under that heading, Marc Honey of the Honey Law Firm disclosed that he was paid $3791.00 for legal services. The Trustee's argument is that the cashier's check for $4000.00 was not owed to Honey because he had already been compensated by the earlier check dated December 6, 2004 for $4000.00. Thus, the Trustee reasons, Pennywise, Inc. received less than a reasonably equivalent value for the payment related to the cashier's check.
However, it was incumbent upon the Trustee to include Marc Honey, the recipient of the funds, as a defendant in the fraudulent transfer adversary proceeding. In re Palumbo, 353 B.R. 37, 41 (Bankr. D.Mass. 2006) (transferor and transferee are deemed necessary parties to a fraudulent transfer suit) (citing 5 Collier's on Bankruptcy ¶ 548.07[1] at 548-54 note 1 (15th ed. revised 1998) (citing Etchegoyen v. Hamill (In re Farmer's Market), 22 B.R. 71 (B.A.P. 9th Cir. 1982)); Fed.R.Bankr.P. 7019. In this case, only John David Talley is a defendant. Therefore, since Marc Honey is not a named defendant, the Court will not consider whether the transfer to him was constructively fraudulent.
Check 6224, drawn on the Farmers Bank account, was written to John David Talley for $1000.00, dated January 4, 2005. (Pl.'s Ex. 11.) Talley stated that some of the funds were used to replace insufficient funds checks and some were to reimburse himself for shop supplies, repairs, and office supplies previously purchased. (Def.'s Ex. 8.) However, the receipts for supplies bear dates in February and October of the previous year, and there is no corroborating evidence in the form of checks or receipts that Talley used the funds to replace the returned checks. (Def.'s Ex. 8.) Therefore, the Court cannot determine that the value received by Pennywise, Inc. was in exchange for the transfer represented by Check 6224.
The Trustee also introduced Cashier's Check 189199 for $5800.00 dated January 3, 2005, and drawn on Peoples Bank with David Talley as payee and Pennywise RV as the remitter. (Pl.'s Ex. 9-B.) Talley said he used the money to purchase seven cashiers checks to pay the corporation's taxes owed to various state and federal government entities. (Tr. at 94.) He produced copies of cashier's checks documenting that he paid $5686.90 to those government entities on behalf of Pennywise, Inc. on January 27, 2005. (See Def.'s Ex. 6.) Additionally, his hand-written notations on the exhibit indicate he used the remaining money to pay the cost of the seven cashiers checks. Therefore, Pennywise, Inc. received a reasonably equivalent value for the money transferred to Talley and then to the taxing entities.
In summary, the Court finds that Pennywise, Inc. did not receive reasonably equivalent value for the following seven transfers: check 10172 dated July 15, 2004, in the amount of $535.00; check 10215 dated September 8, 2004, in the partial amount of $113.06; check 10214 dated September 10, 2004 in the amount of $175.00; check 10265 approximately dated November 12, 2004 in the amount of $214.83; check 10274 dated November 18, 2004, in the amount of $272.87;check 10283 dated November 17, 2004, in the amount of $1000.00; and check 6224 dated January 4, 2005 in the amount of $1000.00. The total of these checks is $3310.76.
To determine whether these transfers were constructively fraudulent, the Court must also examine Pennywise, Inc.'s financial condition to decide whether Pennywise, Inc. was insolvent or became insolvent as a result of the transfers, or was left with an unreasonably small amount of capital after the transfers. The relevant periods are July, September, and November of 2004 and January of 2005.
Under the Bankruptcy Code, an entity is insolvent if "the sum of such entity's debts is greater than all of such entity's property, at a fair valuation. . . ." 11 U.S.C. 101(32)(A) (2000). In deciding the issue of insolvency, "the court should examine the debtor's balance sheet to determine whether the value of its assets were [sic] greater than its liabilities at the time of the transfer in question." In re Prime Realty, Inc., 380 B.R. at 534 (citing Silverman Consulting, Inc. v. Hitachi Power Tools, U.S.A., Ltd. (In re Payless Cashways, Inc.), 290 B.R. 689, 699 (W.D. Mo. 2003)). Insolvency is proved by demonstrating that the debtor's liabilities exceed assets to the point that the debtor had a substantial negative net worth at the relevant point in time. Van Huffel Tube Corp. v. A G Industries (In re Van Huffel Tube Corp.), 74 B.R. 579, 586 (Bankr. N.D. Ohio 1987).
Pursuant to the dictates of the statute, courts use evidence about the debtor's financial condition to construct a balance sheet that will show the debtor's net worth or lack thereof. Such evidence may require the establishment of the value of company assets and proof of liabilities or expenses at the time of the transfer. Company balance sheets, financial statements, and balance sheets from tax returns may also be of use to the court. See, e.g., Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1066, n. 14 (3d Cir. 1992) (showing district court's comparison of balance sheets before and after transfer that was allegedly fraudulent pursuant to state law); Solomon v. Kirtley (In re Solomon), 299 B.R. 626, 640 (B.A.P. 10th Cir. 2003) (demonstrating debtor's insolvency with balance sheet showing totals of various categories of assets and liabilities). See also Pioneer Home Builders, Inc. v. Int'l. Bank of Commerce (In re Pioneer Home Builders, Inc.), 147 B.R. 889, 891-892 (Bankr. W.D. Tex. 1992) (discussing in detail how the court arrives at fair valuation of an asset under the balance sheet test).
A plaintiff may also establish insolvency through retrojection, a method whereby the plaintiff proves that the debtor was insolvent shortly after the transfers and that the debtor's financial condition did not substantially change in the short interim. In re Prime Realty, Inc., 380 B.R. at 535 (citing Parlon v. Clairborne (In re Kaylor Equip. Rental, Inc.), 56 B.R. 58, 62 (Bankr. E.D. Tenn. 1985)).
The Trustee's evidence regarding Pennywise, Inc.'s financial condition included copies of bank statements detailing transactions in the Pennywise RV Sales and Service, Inc. checking account at Farmers Bank. (Pl.'s Ex. 18-22.) Pennywise, Inc. used this account to pay corporate expenses including payroll checks to employees and pay-offs to lien holders for vehicles and equipment held as inventory that had been sold through the business.
The beginning and ending balances in the account in June 2004 were positive, but 26 checks were either returned or paid as overdrafts against insufficient funds during the month. (Pl.'s Ex. 18.) In August, the account showed a beginning balance of $4327.52 and an ending balance of -$1153.69, but a reconciled balance of $1351.26. (Pl.'s Ex. 19.) Twenty-two checks were either paid as overdrafts or returned because of insufficient funds. (Pl.'s Ex. 19-C.) Talley testified that in August the business had begun "to really trend down." (Tr. at 110.)
In September, the account showed a beginning negative balance but an ending positive balance of $1240.64. (Pl.'s Ex. 20.) Ten checks were either paid as overdrafts or returned because of insufficient funds. (Pl.'s Ex. 20-A.) The October statement reflected a positive beginning balance but a negative ending balance of -$11,173.90 and insufficient funds charges of approximately $375.00. (Pl.'s Ex. 21.) In November, the account began with a negative balance and ended with -$10,888.77. (Pl.'s Ex. 22.) It reflected little activity other than $1000.00 in insufficient funds charges.
The Trustee introduced into evidence copies of returned or insufficient funds checks written by Talley on the Penneywise RV Charter Tours account at Peoples Bank. These included three checks presented for payment on November 9, 2004 for a total of $929.89. (Pl.'s Ex. 26.) The Trustee also introduced into evidence a document showing that Peoples Bank had debited the account for four loan payments in the amount of $1730.06 on September 20, 2004. (Pl.'s Ex. 27.)
Additionally, the Trustee elicited testimony from Talley about the deposits on hand in the Peoples Bank account from May to December 2004. (Tr. at 135-136.) The beginning and ending balances ranged from a high of $11,382.98 in December 31, 2004 to a low of $589.79 at the end of October 2004.
Talley testified that as the financial condition of Pennywise, Inc. deteriorated, he and his wife began contributing their personal assets to fund the business in November and December. (Tr. at 129.) They deposited their state and federal tax refunds into the business account and also contributed $16,000.00 in proceeds from the sale of real property owned by them individually. (Tr. at 131.) Additionally, they cashed certificates of deposit totaling $22,200.00 that were pledged to the bank as collateral, presumably to defray outstanding indebtedness. (Tr. at 125 131.)
Talley stated that because he never transferred any assets into the corporation, his accountant had advised him that the Internal Revenue Service did not view Pennywise, Inc. as a corporation, even though Pennywise, Inc. was assigned a tax identification number. Therefore, Talley described his corporate tax return as "zero on everything." (Tr. at 141.) The corporate tax return did not show business revenues, receipts, expenses, or assets. The income from the business and the business expenses were reported on the Talleys' individual returns.
However, bank statements of the corporate checking account at Farmers Bank showed substantial deposits and withdrawals throughout the relevant period. In May 2004 deposits were $79,103.44 and checks or debits totaled $68,879.96; the June 2004 bank statement indicated deposits of $30,325.77 and debits totaling $38,956.00; the August 2004 statement showed deposits of $37,150.33 and debits of $42,620.82; the September 2004 statement indicated deposits of $38,737.66 and debits totaling $36,334.13; the October 2004 statement showed deposits of $19,931.58 and debits totaling $32,337.14; the November 2004 statement indicated deposits of $1,347.24 and debits of $1,057.02. (Pl.'s Ex. 17-22.)
Furthermore, despite the information on the corporate tax return, the company listed $389,000.00 in assets and $1,072,930.55 in liabilities when Pennywise, Inc. filed for bankruptcy. (Pl.'s Ex. 2, Amended Summary of Schedules.) According to the bankruptcy schedules, Pennywise, Inc. owned real estate and equipment. The company maintained inventory for sale, and may also have operated under a floor-plan arrangement with a lending institution. As a company actively doing business through most of 2004, Pennywise, Inc. probably had accounts receivable during any given month.
The facts in evidence are that Pennywise, Inc.'s bank accounts show a debtor struggling to make ends meet during the relevant months, perhaps buying more time in which to remit payment to creditors by writing checks against insufficient funds. However, the Court cannot conclude that Pennywise, Inc. was insolvent or became insolvent because of the transfers during July, September, and November of 2004 and January of 2005. From this record, the Court is unable to construct a balance sheet showing that during the relevant periods the Debtor's liabilities were greater or were rendered greater than the fair value of its assets.
First, there is no clear picture of what assets belonged to Pennywise, Inc., much less information that would indicate a fair value of the assets. For example, the Court surmises from the nature of the business that Pennywise, Inc. owned accounts receivable, inventory, real property, equipment and vehicles but no evidence of any such assets was made part of the record. Similarly, the Court is unaware of what the company's liabilities were, although it is probable that the company operated under a floor-plan arrangement with a financial institution. (See Pl.'s Ex. 6, note and security agreement referring to existence of a floor plan.)
The best proof of insolvency that was offered is Pennywise, Inc.'s petition and schedules that show assets valued at $389,000.00 and liabilities valued at $1,072,930.55, but this evidence is not competent to prove insolvency months prior to the petition date. No evidence in the record demonstrates that the debtor's financial condition was exactly the same in July, September, and November 2004 as it was on January 5, 2005, the date of the petition filing. See Burdick v. Lee, 256 B.R. 837, 840 (D.Mass. 2001) (stating bankruptcy schedules showing liabilities in excess of assets on filing date are not prima facie evidence of insolvency on the date of the an alleged transfer) (citing Annis v. First State Bank (In re Annis), 78 B.R. 962, 967 (Bankr. W.D. Mo. 1987)).
However, insolvency was proved with regard to the transfer of $1000.00 from Pennywise, Inc. to Talley one day prior to the filing of the bankruptcy petition, which shows assets of $392,010.00 and liabilities of $790,189.56. While the Court is convinced that the Pennywise, Inc. petition is inaccurate in many respects, Talley will not be allowed to shield himself from liability for a fraudulent transfer by filing a confusing or inaccurate petition for his corporation. Under penalty of perjury, Talley signed the Pennywise, Inc. petition and schedules showing his corporation was insolvent one day after the $1000.00 transfer. That transfer is, therefore, constructively fraudulent.
The only remaining issue is whether Pennywise, Inc. was operating with an unreasonably small amount of capital after it made the transfers represented by the seven checks. The focus of the inquiry is "the debtor's ability to generate enough cash from operations or the sale of assets to pay its debts as they become due and remain a financially viable going concern." In re Prime Realty, Inc., 380 B.R. at 537 (citing Dahar v. Jackson (In re Jackson), 459 F.3d 117, 123-24 (1st Cir. 2006)). See also Murphy v. Nunes (In re Terrific Seafoods. Inc.), 197 B.R. 724, 736 (Bankr. D.Mass. 1996) (defining unreasonably small capital as "a level of capitalization that renders a debtor unable to generate sufficient profits, or at least cash flow, to sustain operations") (quoting Ferrari v. Barclays Business Credit, Inc. (In re Morse Tool, Inc.), 148 B.R. 97, 132 (Bankr. D.Mass. 1992) (citing Moody v. Security Pacific Business Credit, Inc., 971 F.2d 1056, 1070 (3d Cir. 1992))). Insufficient funds in a debtor's checking account is evidence that a debtor is operating with an unreasonably small amount of capital for purposes of 11 U.S.C. § 548(a)(1)(B)(ii)(II). In re Prime Realty, Inc., 380 B.R. at 537 (citing W.E. Tucker Oil Co. v. First State Bank of Crossett (In re W.E. Tucker Oil Co.), 55 B.R. 78, 82 (Bankr. W.D. Ark. 1985)).
Throughout the relevant period, the evidence shows that Pennywise, Inc. wrote numerous checks drawn against insufficient funds. Additionally, the fact that the Talleys contributed their own funds to the business in November and December 2004 tends to show that the business had no capital reserves and had to look to its shareholders to supply it.
However, the record is devoid of any other evidence to show unreasonably small amount of capital, such as statements concerning cash flow, cash on hand, or the company's capital structure or lack thereof. See In re Prime Realty, Inc., 380 B.R. at 537 (recognizing that even though debtor had insufficient cash in its checking account, it continued to operate for almost a year after the transfers, and Trustee failed to introduce any evidence of debtor's capital structure, cash flow, or statement of cash after the transfers).
In the instant case, the evidence shows that the lack of funds to remit to creditors had been an ongoing problem for Pennywise, Inc. for at least a year prior to bankruptcy. Talley testified that overdrafts were nothing out of the ordinary in this type of business. (Tr. at 60.) The Court has no other information about the typical capital structure for this type of business other than Talley's self-serving comment. The point here is that the Court cannot conclude that the transfers, each in rather insignificant amounts, caused capital to diminish to an unreasonably small amount. In re Terrific Seafoods, Inc., 197 B.R. at 736 (opining that de minimis transfer for less than reasonably equivalent value did not affect debtor's ability to sustain operations).
In summary, the Trustee failed to prove either that the transfers occurred while Pennywise, Inc. was insolvent, that the transfers caused insolvency, or that the transfers resulted in an unreasonably small amount of capital. Therefore, the Trustee's complaint as it pertains to eleven of the checks is dismissed. The Court finds that Farmers Bank check number 6224 dated January 4, 2005 was a fraudulent transfer.
THE 1983 BUS
On January 8, 2001, Pennywise RV Sales Service (not the corporation) executed a note payable to People's Bank in Magnolia, Arkansas, in the sum of $23,435.52 for the purchase of a 1983 MCI bus. The note called for payments of $506.56 for 60 months. The bus was titled in the name of Pennywise R.V., which at the time was Talley's sole proprietorship through which he operated the business. Pennywise R.V. Sales Service, Inc. was not incorporated until July 27, 2001. (Def.'s Exhibit 3.) As previously stated, Talley did not transfer the assets of the existing sole proprietorship to the corporation. However, throughout 2004, sporadic payments were made on the note from Pennywise, Inc.'s two checking accounts.
Talley testified that the bus remained his personal property, but "the bus was used in the corporation . . . in the charter bus business . . . Pennywise RV Charter Tours." (Tr. at 81.) He stated the income produced from the Charter Bus Service was income for Pennywise, Inc. and that the business never paid him for the use of the bus. (Tr. at 81.) The Trustee introduced a bill of sale documenting a post-petition sale of the bus from Pennywise RV World to Donald R. Clark for the sum of $12,000.00.
Talley used the funds from the sale of the bus in the existing, post-petition business and to "pay taxes with the old incorporation." (Tr. at 82.) Talley also applied approximately $2000.00 from the sale proceeds to the remaining indebtedness on the note to People's Bank.
The Trustee seeks judgment against Talley for the amount he received from the sale of the 1983 MCI bus under the theories of turnover pursuant to 11 U.S.C. § 542 and post-petition transfer pursuant to 11 U.S.C. § 549. To determine whether the Trustee is entitled to judgment, the Court finds it necessary to take judicial notice of several documents that are part of the Court's records regarding this case. These include the docket, a motion, a notice of opportunity to object, and an order filed in an adversary proceeding brought by the Trustee on behalf of the Pennywise, Inc. estate against Peoples Bank of Magnolia. The requisite documents are attached to this opinion.
The Federal Rules of Evidence permit a court to take judicial notice of adjudicative facts in certain circumstances. As applicable in the instant case, a judicially noticed fact must be one not subject to reasonable dispute in that it is "capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Fed.R.Evid. 201(b). The Rule further states that "[a] court may take judicial notice, whether requested or not," and "[j]udicial notice may be taken at any stage of the proceeding." Fed.R.Evid. 201(c) (f). A party may request a hearing "as to the propriety of taking judicial notice . . . In the absence of prior notification, the request may be made after judicial notice has been taken." Fed.R.Evid. 201(e).
Generally, bankruptcy courts may take judicial notice of the court's own records. Hon. Barry Russell, Bankruptcy Evidence Manual, § 201.5 (West 2007) (quoting State of Fla. v. Charley Toppino Sons, Inc., 514 F.2d 700, 704 (5th Cir. 1975)). Specifically, bankruptcy courts have taken judicial notice of case dockets and orders filed therein. See Hunter v. Hickman (In re Hickman), 151 B.R. 125, 128 (Bankr. N.D. Ohio 1993) (taking judicial notice of court's own docket and its local rules); In re Snider Farms, Inc., 125 B.R. 993, 995 (Bankr. N.D. Ind. 1991) (taking judicial notice of contents of court order). The author of the Bankruptcy Evidence Manual emphasized, however, that "[a] court may properly take judicial notice of the existence of each document in a court file, but may only take judicial notice of the truth of facts asserted in documents such as (1) orders, (2) judgments (3) findings of fact and conclusions of law . . ." Bankruptcy Evidence Manual at § 201.7.
In the instant case, Talley admitted in his testimony at trial that he had sold the bus at issue after the individual and corporate bankruptcy petitions were filed. He stated he did so on the advice of counsel. At that point in the testimony, counsel for Talley introduced Defendant's Exhibit 2, which was admitted without objection by the Trustee. The exhibit was titled "Agreed Order Granting Motion of Peoples Bank for Relief from the Automatic Stay and Abandonment of Collateral." Included in the collateral listed in the precedent as abandoned by the Trustee was the 1983 TMC [sic] Charter bus. Neither the Court nor the attorneys for the parties had signed the precedent. It purportedly pertained to an adversary proceeding, case number 1:06-ap-7137, brought by the Trustee and styled "Renee S. Williams, Trustee vs. Peoples Bank, Magnolia, Arkansas."
At the hearing held for the purpose of oral arguments in this case, the Court informed the attorney for Talley that the order admitted as Defendant's Exhibit 2 was never entered by the clerk on the Court's docket. The attorney steadfastly maintained that the order was filed in the Pennywise case, but subsequently corrected that assertion in a post-trial letter addressed to the Court that directed the Court's attention to the docket of adversary proceeding 1:06-ap-7137.
Thus, the Court takes judicial notice of the docket in this adversary proceeding and finds that a Motion for Authority to Settle Adversary Proceeding was filed by the Trustee, along with a notice to interested parties of opportunity to object to the Motion. The Motion proposes, inter alia, to abandon the bus at issue and to grant relief from stay to Peoples Bank. The docket reflects that no objections were filed and that on March 26, 2007, the Court signed and entered an order granting the motion to settle the case. Since the accuracy of the Court's final, unappealed order granting the Trustee's own motion with regard to property of the Pennywise estate cannot reasonably be disputed, the Court finds that the 1983 bus was abandoned by the Trustee from the Pennywise, Inc. estate on March 26, 2007.
The Bankruptcy Code provides that "the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(a) (2006). The effect of the Trustee's abandonment of the bus from property of the estate is that any title that was vested in the trustee is extinguished. CBS, Inc. v. Folks (In re Folks), 211 B.R. 378, 388 (B.A.P. 9th Cir. 1997) (citing Brown v. O'Keefe, 300 U.S. 598, 602 (1937); Bryson v. Bank of N.Y., 584 F.Supp. 1306, 1316 (S.D.N.Y. 1984)). Abandonment removes the property from the jurisdiction of the bankruptcy court. Sherrell v. Fleet Bank of N.Y. (In re Sherrell), 205 B.R. 20, 22 (N.D.N.Y. 1997) (citing In re Grossinger's Assoc., 184 B.R. 429, 432 (Bankr. S.D.N.Y. 1995) (citing In re Helms, 1991 WL 284111, at *1 (E.D. La. 1991))).
When estate property is abandoned, its ownership reverts to any party with a possessory interest in the property. Malden Mills Indus., Inc. v. Maroun (In re Malden Mills Indus., Inc.) 303 B.R. 688, 700 (B.A.P. 1st Cir. 2004) (citing In re A.J. Lane Co., 133 B.R. 264, 268 (Bankr. D.Mass. 1991) (citing H.R .Rep. No. 95-595 (1977) and S. Rep. No. 95-989 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5878, 5963, 6333)); In re Wilson, 94 B.R. 886, 888 (Bankr. E.D. Va. 1989) (citing S. Rep. No. 95-989 (1978)); In re St. Lawrence Corp., 239 B.R. 720, 727-28 (Bankr. D.N.J. 1999) (citing 5 Collier on Bankruptcy ¶ 554.02[3] (Lawrence P. King ed., 15th ed. rev. 1996), aff'd, 248 B.R. 734 (D.N.J. 2000)). Upon abandonment, both debtor and lienholder are restored to whatever rights in the property they held prepetition. In re Kasper, 309 B.R. 82, 94 (Bankr. D.Colo. 2004) (citations omitted).
The Court concludes that because the bus has been abandoned from property of the Pennywise, Inc. estate, the Trustee has relinquished any right or title to the property and turnover would be inappropriate. Upon abandonment, ownership of the bus reverted to Pennywise, Inc., Talley, and/or the lienholder in accordance with whatever prepetition rights they possess. Moreover, because the bus is no longer property of the estate, the Court lacks jurisdiction to order turnover. Therefore, the motion for turnover with regard to the bus is moot.
TURNOVER OF OTHER PERSONAL PROPERTY
In her complaint, the Trustee contends that, in accordance with section 542(a) of the Bankruptcy Code, Talley is required either to turn over certain personal property purchased with Pennywise, Inc. funds or, if the property has been sold, to remit the proceeds from the sale of the property to the Trustee. With regard to a trustee's turnover action, the Bankruptcy Code provides, in pertinent part, that "an entity . . . in possession, custody, or control, during the case, of [property of the estate] . . . shall deliver to the trustee . . . such property or the value of such property . . ." 11 U.S.C. § 542(a) (2000).
The trustee bears the burden of proof in a turnover proceeding at all times and must, at a minimum, establish a prima facie case that the property at issue is property of the estate. Once the prima facie case is established, the burden of going forward shifts to the party resisting the turnover action to prove the resisting party's ownership interest. Evans v. Robbins, 897 F.2d 966, 968 (8th Cir. 1990) (citing Gorenz v. Illinois Dept. of Agriculture, 653 F.2d 1179, 1184 (7th Cir. 1981) (quoting 2 Collier on Bankruptcy, ¶ 23.10 (14th ed. 1976))); DeBold v. Case (In re Tri-River Trading, LLC), 329 B.R. 252, 263 (B.A.P. 8th Cir. 2005) (citing First Fed. of Mich, v. Barrow, 873 F.2d 912, 915 (6th Cir. 1989); Daly v. Radulesco (In re Carrozzella Richarson), 247 B.R. 595, 602 (B.A.P. 2d Cir 2000); Davis v. Moon (In re Usery), 158 B.R. 470, 472 (Bankr. W.D.Mo. 1993)), aff'd, 452 F.3d 756 (8th Cir. 2006). However, the burden of persuasion remains, at all times, with the trustee. Evans, 897 F.2d at 968;In re Usery, 158 B.R. at 472.
Under the statute, the trustee will preveil in a turnover action if he proves not only that the property at issue is property of the estate, but also that the debtor has the present ability to turn over this property. Brown v. Pyatt (In re Pyatt), 486 F.3d 423, 429 (8th Cir. 2007) (recognizing that both precode and bankruptcy code practice dictate that an entity lacking present possession of property cannot be the subject of a motion to compel turnover); First Nat'l Bank of Clinton v. Julian, 383 F.2d 329, 339 (8th Cir. 1967) (quoting Maggio v. Zeitz, 333 U.S. 56, 64 (1947)); In re Santaella, 298 B.R. 793, 799 (S.D. Fla. 2002) (citing In re Lawrence, 251 B.R. 630, 639 (S.D. Fla. 2000)). A turnover proceeding is only appropriate if the property at issue is still in the hands of the party resisting turnover. In re Pyatt, 486 F.3 at 429.
The United States Supreme Court has ruled that the standard for the trustee's burden of proof in a turnover action is by clear and convincing evidence. Maggio v. Zeitz, 333 U.S. 56, 63 (1948) (decided under precode law) (citations omitted). The Eighth Circuit Court of Appeals has followed that Supreme Court ruling in precode and Bankruptcy Code cases. See, e.g., First Nat'l Bank of Clinton, 353 F.2d at 333 (precode ruling that the standard is clear and convincing evidence); Evans, 897 F.2d at 968 (same, decided based on the Bankruptcy Code). However, some recent bankruptcy cases discussing the burden of proof in a turnover action point out that since Maggio, the Supreme Court has ruled that a preponderance of the evidence standard is presumptively applied in bankruptcy proceedings. See a discussion of the burden of proof standard in In re Santaella, 298 B.R. 793, 800 (2002) (noting t at the preponderance of the evidence standard is "consistent with the growing weight of authority" and discussingGrogan v. Garner, 498 U.S. 279, 286 (1991)) (citations emitted).
Applying these rules with regard to the Trustee's demand for turnover, the Court will examine the facts regarding the personal property at issue.
ALL TERRAIN VEHICLE
On April 15, 1998, prior to the incorporation of Pennywise, Inc., Talley sold a 1994 Mity Light all terrain vehicle. As part of the sale, he took in on trade a Timberwolf 250 all terrain vehicle (ATV) for a credit of $3000.00 on the purchase price of the Mity Lite. (Pl.'s Ex. 5.)
The ATV is listed as an asset in the Talleys' personal bankruptcy under the description "Firearms and Hobby Equipment Valued at $4600.00" along with other items. The ATV is not listed in the corporate case petition. Talley testified it never became property of Pennywise, Inc., although it was used at the corporation and stayed at the corporation all the time. It was used by the employees to move stuff around on the yard." (Tr. at 85.) Talley said the corporation never paid him for the use of the ATV, and he still has possession of it. It was claimed as exempt in the personal bankruptcy.
1997 FORD 1320 TRACTOR BEFCO FINISH MOWER SIDEWINDER BUCH HOG
Plaintiff's Exhibit 7 is a promissory note made by David Talley in favor of the First National Bank of Lewisville dated April 8, 2002, in the principal sum of $7020.00. The indebtedness was secured by a security interest in a 1997 Ford Tractor, a finish mower, and a sidewinder bush hog. The note was payable in 23 installments of $320.75 per month, beginning May 8, 2002 and ending May 8, 2004. The Trustee introduced the following checks written on the Pennywise, Inc., account at Farmers Bank and Trust in payment of this debt:
1. #5344 10/07/03 First Nat'l Bank of Lewisville $320.75 2. #5599 12/05/03 First Nat'l Bank of Lewisville $320.75 3. #5726 1/26/04 First Nat'l Bank of Lewisville $335.75 4. #5759 2/04/04 First Nat'l Bank of Lewisville $320.75 5. #5862 3/25/04 First Nat'l Bank of Lewisville $320.75 6. #5949 5/03/04 First Nat'l Bank of Lewisville $415.78* *Returned for insufficient funds On August 19, 2005, post-bankruptcy, Talley sold the collateral listed above for $7000.00. (Def.'s Ex. 5.) Talley stated that the payments were made from the corporate account because the equipment was used by the corporation and "it stayed at the corporation . . . 95% of the time" (Tr. at 01.) He said the corporation never paid Talley for the use of the equipment.The equipment was not scheduled specifically in either the corporate case or the individual case. Talley stated he took the $7000.00 from the sale of the equipment and put it in the account of his current business, Pennywise RV World, at Summit Bank. Then he disbursed $3641.00 on September 8, 2005, from Pennywise RV World to pay taxes owed by Pennywise, Inc. to the Department of Finance and Administration for sales by Pennywise, Inc. However, the attachment to Defendant's Exhibit 5 shows that the tax was actually assessed for sales in his post-petition business, Pennywise RV World, for the month of May 2005.
The Trustee seeks turnover of the proceeds of the sale of the ATV, tractor, mower and bush hog. After examining the facts in the record, the Court concludes the Trustee did not carry her burden of proof, whether by a preponderance or by clear and convincing evidence, that Pennywise, Inc. owned the personal property at issue so that it became property of the estate upon the filing of the bankruptcy.
Based on this record, the Court rules that some form of bailment existed between Talley and Pennywise, Inc. with regard to this property. See, e.g., Washington v. General Motors Acceptance Corp., 137 B.R. 748, 751 (Bankr. E.D. Ark. 1992) (recognizing bailment relationship between father who purchased vehicle and held title and daughter who made the down payment and monthly payments and drove the vehicle).
Under Arkansas law, a bailment is defined as "`a delivery of personalty for some particular purpose, or on mere deposit, upon a contract, express or implied, that after the purpose has been fulfilled it shall be redelivered to the person who delivered it, or otherwise dealt with according to his directions, or kept until he reclaims it . . .'" Sullivant v. Penn. Fire Ins. Co. , 268 S.W. 2d 372, 374, 223 Ark. 721, 724 (1954) (quoting 8 C.J.S., Bailments, § 1). In a bailment relationship, title to the property subject to a bailment remains in the bailor. Therefore, upon bankruptcy, bailment property does not become property of the bailee's estate. Veon v. Hinks (In re Veon), 12 B.R. 186, 189 (Bankr. Pa. 1981) (citing 4A Collier on Bankruptcy ¶ 70.18 at 199-293 (14th ed.)). Under bankruptcy law, when a bailee files a bankruptcy petition, the bailee's interest in the bailment, but not the property subject to the bailment, becomes property of the estate. In re Washington, 137 B.R. at 751
In the instant case, Talley clearly owned the ATV, having personally acquired it prior to the incorporation of Pennywise, Inc. and having stated in undisputed testimony that he did not transfer assets from his existing sole proprietorship when he incorporated his business. He permitted Pennywise, Inc. employees to use the ATV to move equipment around the premises but the ATV did not become Pennywise, Inc.'s property by virtue of the bailment relationship that existed between Talley and the business. Therefore, the ATV is not property of the estate and is not subject to a turnover order.
As to the tractor, mower and bush hog, this equipment served as collateral when Talley, but not Pennywise, Inc., gave a promissory note in April 2002 to First National Bank of Lewisville. This circumstance weakly supports the inference that Talley, and not Pennywise, Inc., owned the property when the note-security agreement was signed. However, the Trustee failed to produce documentary evidence proving that Pennywise, Inc. had an ownership interest in the properly. The other relevant evidence is that of the 23 payments due on the note, Pennywise, Inc. made two payments in 2003 and four payments in 2004. The record does not reflect who made the other 17 payments.
The evidence in the record is inconclusive on the issue of who owned the three pieces of collateral, and the six note payments made by Pennywise, Inc. do not conclusively establish the corporation's ownership. Therefore, the Court concludes that the Trustee did not carry her burden of proof to show that Pennywise, Inc. was the true owner and not the bailee of the property that was used by the corporation but owned by Talley for the purpose of maintaining the premises. Like the ATV, the three pieces of equipment remained the property of Talley and as such, are not property of the Pennywise, Inc. estate subject to turnover. The question of whether Talley, in his individual case, intentionally concealed the property from the trustee and then impermissibly sold the property post-petition is not an issue before the Court in the instant proceeding.
THE JCB 214-E BACKHOE
Plaintiff's Exhibit 6 is a copy of Defendant's Exhibit 4, which is a note and security agreement from Pennywise, Inc. and John Talley to Peoples Bank of Magnolia, Arkansas, dated May 21, 2003, and secured by a JCB 214-E Backhoe, a certificate of deposit in the amount of $15,200.90, and all of the "debtor's equipment."
The note states that the purpose of the loan is to remove the backhoe from the "floor plan and set up in monthly payments." (Pl.'s Ex. 6.) Talley signed the note as borrower both individually and as president of Pennywise, Inc. The note was in the principal sum of $17,837.47 and was due to be repaid in 00 monthly payments of $358.47.
The backhoe was sold to the Warlick brothers for $19,000.00 as evidenced by a cashier's check made payable to David Talley dated September 13, 2003. After the Backhoe was sold, the following checks from Pennywise, Inc.'s account at Farmers Bank were paid to Peoples Bank on the note:
a) #5449 10/29/03 Peoples Bank $358.47 #5574 11/25/03 Peoples Bank $358.47 #5860 03/25/04 Peoples Bank $358.47 #5913 04/15/04 Peoples Bank $408.47 #6056 07/14/04 Peoples Bank $433.47 Talley testified that the backhoe was never owned by Pennywise, Inc., that he had purchased the backhoe prior to the incorporation of the business, and that the backhoe remained his personal possession after the incorporation. Despite his assertion of ownership, he stated that when he sold the backhoe in September 2003, he deposited the $19,000.00 into the corporate account. However, this assertion was not supported by documentation. He further stated that he ultimately used the $19,000.00 received in September 2003 to pay off the People's Bank note in December 2004. To the contrary, Defendant's Exhibit 4, which is the note in question in this case, was paid by renewal on December 23, 2004. The renewal note was not introduced into evidence by Talley.Although Talley states that he owned the backhoe prior to the incorporation of the business, no document in the record corroborates his testimony by showing that the backhoe was first acquired by him as an individual and not by Pennywise, Inc. The note in question was made almost two years after the incorporation of the business. It further recites that the backhoe had previously been part of the inventory serving as collateral in Pennywise, Inc.'s floor plan financing arrangement. These circumstances support an inference that the backhoe was Pennywise, Inc's property.
More important, the note itself evidences Pennywise, Inc.'s ownership of the backhoe. The note contains a heading entitled "Additional Terms of the Security Agreement." One of the additional terms agreed to by the two borrowers, Talley and Pennywise, Inc., is the following. "Warranty of Title: I warrant to you that I own the collateral free and clear of all liens or security interests . . ." (Def.'s Ex. 4 at 2.) Talley individually and as president of Pennywise, Inc. agreed to this term when he signed the note in both capacities. For these reasons, the Court finds that, prior to the sale of the backhoe, Pennywise, Inc. shared ownership of the property with Talley and thus shared ownership of the proceeds from the sale.
However, the record indicates that when the backhoe was sold to a third party in September 2003, the check for the backhoe listed only Talley as payee. Although Talley claims to have deposited the check into the Penny wise, Inc. account, there is no documentation of that deposit in the record, and the Court draws a negative inference from that fact. Thus, the evidence demonstrates that Talley sold the jointly owned backhoe, retained all the proceeds, and made some payments on the note from the corporate account after the backhoe was sold, although the Court notes that the bank did hold other collateral for the note. On December 23, 2004, the balance of the note to the bank was paid by renewal, indicating that Talley did not, in fact, apply the $19,000.00 proceeds to the note balance on the eve of bankruptcy.
At the hearing for the purpose of oral argument, counsel for Talley stated that, "my recollection is that Mr. Talley explained to the Court that the reason that the Trustee located checks that he questioned, because they continued to be payments on the backhoe note, was that he had obtained permission from the bank to sell that piece of collateral because there were other collateral, that is personal CD, — that secured that note . . . they continued, with the agreement of the bank, to make payments on that note until it was paid down to the point when they filed bankruptcy . . . at that time they rolled the remaining balance over to a personal loan . . . with the bank." (Tr. at 16-17, Dec. 5, 2007.) Although this is a plausible explanation for the post-sale checks and is corroborated by the note listing a certificate of deposit as collateral, the record contains no such testimony by the Debtor.
The Trustee has established that a portion of the $19,000.00 sale proceeds from the backhoe belonged to Pennywise, Inc., and, if still in existence, would have become property of the estate upon the filing of the bankruptcy petition. But the question then becomes whether the sale proceeds belonging to Pennywise, Inc. remained in Talley's possession or control at the time that the Trustee filed the instant adversary proceeding on August 2, 2006.See Pyatt, 486 F.3d at 428-29 (holding that entity cannot be compelled to turn over estate property if entity lacks possession or control at the time of filing the turnover action) (citingMaggio, 333 U.S. at 64). The Trustee has the burden of proof on this issue.
At the time of the sale of the backhoe, there is conclusive proof that Talley was in possession of the entire sale proceeds. Approximately three years have elapsed between the time of the sale of the backhoe and the filing of the adversary proceeding seeking turnover. The only other evidence about the sale proceeds is that they were not applied to the loan balance, which was paid by renewal in December 2004.
As stated, the Court rejects Talley's defense that he deposited the funds into the corporate account and later applied them to the loan balance. Additionally, Talley's counsel argues that it is unreasonable to expect Talley to be in control of the funds after so much time has elapsed. However, courts have granted turnover despite the fact that years intervene between the filing of the petition and the filing of the turnover proceeding. Evans, 897 F.2d at 970 (holding that debtors' egregious behavior warranted turnover even though six years had elapsed between filing the petition and the turnover motion).
Under the doctrine of continued possession, "the legal presumption is that a bankrupt, who at the time of his adjudication in bankruptcy has and unlawfully holds back from his trustee in bankruptcy a part of his property, or of its proceeds, continues to hold it or them, but this presumption grows weaker as time passes, until it finally ceases to exist." Evans, 897 F.2d at 969 (quoting Marin v. Ellis, 15 F.2d 321 (8th Cir. 1926)). In Marin, this presumption was inconclusive ten months after the bankruptcy filing. About the presumption, the Supreme Court has commented, "the trustee has been allowed the benefit of what is called a presumption that the possession continues until the possessor explains when and how it ceased . . . [However] turnover orders should not be issued, or approved on appeal, merely on proof that at some past time property was in possession or control of the accused party, unless the time element and other factors make that a fair and reasonable inference." Maggio, 333 U.S. at 64-66.
In the instant case, the Trustee has adduced no evidence that Talley was still in possession of the funds belonging to Pennywise, Inc. when the turnover action was filed. In view of that lack of evidence and in view of the fact that three years have elapsed between the backhoe sale and the filing of the turnover action, the Court cannot draw a fair and reasonable inference that Talley still possesses the funds. For that reason, the Trustee's request for turnover of the funds from the sale of the backhoe is denied.
POST PETITION TRANSFER
Pursuant to section 549 of the Bankruptcy Code the Trustee seeks to avoid any unauthorized post-petition transfers of property of the estate to Talley. The only item subject to this avoidance action is a post-petition check written on the Pennywise, Inc. account at Farmers Bank and signed by Talley. (See Pl.'s Ex. 34.) Dated January 14, 2004, it lists Talley as payee in the sum of $518.40.
Talley stated that this was a "short" payroll check owed to him because during 2004 he had not collected all of his earnings from Pennywise, Inc. However, after bankruptcy, the checking account balances remaining in the Pennywise, Inc. accounts were property of the estate and Talley became a creditor of Pennywise for whatever wages were owing to him when the position was filed. His remedy was to file a claim in the Pennywise, Inc. case and not to accord himself special treatment that elevated his claim above those of the other creditors. The Trustee may avoid this post-petition transfer and is awarded judgment in the amount of 8518.40 against Talley.
EQUITABLE SUBORDINATION OF CLAIMS
The Trustee requests that any claims Talley may have against the Pennywise, Inc. estate be equitably subordinated to all other claims pursuant to section 510(c). That Bankruptcy Code section provides that the court may "under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim . . ." 11 U.S.C. § 510(c) (2000).
The Trustee does not allege or prove that Talley has yet filed a claim in the Pennywise, Inc. case. A court may not equitably subordinate a claim not in existence. Thistlethwaite v. Federal Deposit Ins. Corp. (In re Pernie Bailey Drilling Co., Inc.), 111 B.R. 565, 571 (Bankr. W.D. La. 1000) (stating that, as a matter of law, there is no basis for equitable subordination because there is no claim to subordinate).
Therefore, the Trustee's request for equitable subordination is denied without prejudice to any claims filed in the future by Talley in the Pennywise, Inc. case.
CONCLUSION
The Trustee's cause of action for fraudulent transfer is dismissed as to all checks with the exception of Farmers Bank check 6224 in the sum of $1000.00. The Trustee's cause of action for turnover of various items of personal property is dismissed. The Trustee may avoid the post-petition transfer to Talley in the sum of $518.40.
The Trustee is given judgment against Talley in the amount of $1518.40. Talley has no existing claim against the estate to equitably subordinate; therefore, the Trustee's claim for equitable subordination is denied without prejudice.
IT IS SO ORDERED.
U.S. Bankruptcy Court Western District of Arkansas (El Dorado) Adversary Proceeding #: 1:06-ap-07137 Internal Use Only 105419
Assigned to: Related BK Case: Date Terminated: Related BK Title: Date Dismissed: Related BK Chapter: Demand: Nature[s] of Suit: Plaintiff Renee S. Williams Thomas S. Streetman LEAD ATTORNEY Defendant Peoples Bank, Magnolia, Arkansas Kimberly Wood Tucker U.S. Trustee U.S. Trustee (ust) Filing Date # Docket Text 27 26 24 25 22 24 16 23 22 20 21 19 20 19 1 18 17 17 17 16 16 16 To Settle Adversary Proceeding 15 1 8 14 13 13 1 8 12 11 11 10 9 1 8 8 7 4 6 5 4 Signature 3 2 1
Judge James G. Mixon Date Filed: 09/14/06 05-70065 04/09/07 Pennywise RV Sales Services, Inc. 03/26/07 7 454 Recover Money Property ____________________ represented by 125 Roberts Ridge Terrace STREETMAN MEEKS, PLLC Hot Springs, AR 71901-7286 P.O. Drawer A (501) 624-4330 Crossett, AR 71635-1801 (870) 364-2213 Emailtstreetman@smmattorneys.com V. ____________________ represented by WRIGHT LINDSEY JENNINGS 200 W. Capitol Ave., Ste. 2200 Little Rock, AR 72201-3699 (501) 324-7357 Fax: (501) 376-9442 Email: ktucker@wlj.com ____________________ Office of U.S. Trustee 200 W Capitol, Ste. 1200 Little Rock, AR 72201 501.324.7357 04/09/2007 • Adversary Case 06-7137 Closed. (Becker, Pat) (Entered: 04/09/2007) 03/28/2007 • BNC Certificate of Mailing (RE: related document(s) Order on Motion for Authority) No. of Notices: 2. Service Date 03/28/2007. (Admin.) (Entered: 03/29/2007) 03/28/2007 • BNC Certificate of Mailing (RE: related document(s) Order on Motion to Dismiss Adversary Proceeding) No. of Notices: 2. Service Date 03/28/2007. (Admin.) (Entered: 03/29/2007) 03/26/2007 • Order Granting Motion For Authority to Settle Adversary Proceeding (Related Doc # ) Entered on Docket 3/26/2007 (Becker, Pat) (Entered: 03/26/2007) 03/26/2007 • Disposition of Adversary. (Becker, Pat) (Entered: 03/26/2007) 03/26/2007 • Order of Dismissal With Prejudice (Related Doc # ) Entered on Docket 3/26/2007 (Becker, Pat) (Entered: 03/26/2007) 03/22/2007 • BNC Certificate of Mailing (RE: related document(s) Order to Submit) No. of Notices: 0. Service Date 03/22/2007. (Admin.) (Entered: 03/23/2007) 03/22/2007 • Motion to Dismiss Adversary Proceeding with Prejudice Filed by Thomas S. Streetman on behalf of Plaintiff Renee S. Williams (Streetman, Thomas) (Entered: 03/22/2007) 03/20/2007 • Order to Submit Order(RE: related document(s) Complaint, filed by Plaintiff Renee S. Williams) Entered on 3/20/2007 (Becker, Pat) (Entered: 03/20/2007) 02/28/2007 • Notice of Opportunity to Object/Respond to (related documents Notice of Opportunity to Object/Respond). Certificate of Service. (RE: related document(s) Notice of Opportunity to Object/Respond) filed by Thomas S. Streetman Plaintiff Renee S. Williams. (Streetman, Thomas) (Entered: 02/28/2007) 02/28/2007 • ERROR: INCORRECT PDF ATTACHED. DOCUMENT REDOCKETED, SEE DOCUMENT #18. Notice of Opportunity to Object/Respond to (related documents Motion for Authority). Certificate of Service. (RE: related document(s) Motion for Authority filed by Plaintiff Renee S. Williams) (Streetman, Thomas) Modified on 3/1/2007 (Becker, Pat). (Entered: 02/28/2007) 02/28/2007 • Motion for Authority Filed by Thomas S. Streetman on behalf of Renee S. Williams (Streetman, Thomas) (Entered: 02/28/2007) 02/20/2007 • Hearing Scheduled For 2/21/07 Not Held. Settled or Continued Prior to the Hearing (RE: related document(s) Complaint, filed by Plaintiff Renee S. Williams, Answer to Complaint filed by Defendant Peoples Bank, Magnolia, Arkansas). (Littrell, Angela) (Entered: 02/20/2007) 12/22/2006 • BNC Certificate of Mailing — Hearing (RE: related document(s) Hearing (Document) Sched/Cont/Resched, Hearing (Document) Sched/Cont/Resched) No. of Notices: 3. Service Date 12/22/2006. (Admin.) (Entered: 12/22/2006) 12/20/2006 • TRIAL on the merits Scheduled (RE: related document(s) Complaint, filed by Plaintiff Renee S. Williams, Answer to Complaint filed by Defendant Peoples Bank, Magnolia, Arkansas) Hearing scheduled for 2/21/2007 at 01:00 PM at El Dorado. (Littrell, Angela) (Entered: 12/20/2006) 12/17/2006 • BNC Certificate of Mailing (RE: related document(s) Scheduling Order) No. of Notices: 3. Service Date 12/17/2006. (Admin.) (Entered: 12/17/2006) 12/15/2006 • Scheduling Order Trial date set for 2/21/2007 at 01:00 PM at El Dorado. Entered on 12/15/2006 (Becker, Pat) (Entered: 12/15/2006) 10/19/2006 • BNC Certificate of Mailing — Hearing (RE: related document(s) 9 Hearing (Document) Sched/Cont/Resched, Hearing (Document) Sched/Cont/Resched) No. of Notices: 3. Service Date 10/19/2006. (Admin.) (Entered: 10/19/2006) 10/17/2006 • PRE-TRIAL Hearing Scheduled (RE: related document(s) Complaint, filed by Plaintiff Renee S. Williams, Answer to Complaint filed by Defendant Peoples Bank, Magnolia, Arkansas). Hearing scheduled for 12/5/2006 at 09:30 AM at El Dorado. (Littrell, Angela) (Entered: 10/17/2006) 10/12/2006 • Answer to Complaint Filed by Kimberly Wood Tucker on behalf of Defendant Peoples Bank, Magnolia, Arkansas (Tucker, Kimberly) (Entered: 10/12/2006) 09/17/2006 • BNC Certificate of Mailing (RE: related document(s) Memorandum of Document Deficiency) No. of Notices: 0. Service Date 09/17/2006. (Admin.) (Entered: 09/17/2006) 09/15/2006 • Summons Service Executed on Peoples Bank, Magnolia, Arkansas (Streetman, Thomas) (Entered: 09/15/2006) 09/15/2006 • Document Regarding: Amended Adversary Proceeding Cover Sheet Filed by Thomas S. Streetman on behalf of Plaintiff Renee S. Williams. (Streetman, Thomas) (Entered: 09/15/2006) 09/15/2006 • Memorandum of Document Deficiency to Thomas Streetman (RE: Document 1) Regarding . (Becker, Pat) (Entered: 09/15/2006) 09/14/2006 • RECEIPT of Complaint (1:06-ap-07137) [cmp, cmp] ( 250.00) Filing Fee. receipt number 1773758, amount $ 250.00. (U.S. Treasury) (Entered: 09/14/2006) 09/14/2006 • Summons Issued on Peoples Bank Answer Due 10/16/2006 (Streetman, Thomas) (Entered: 09/14/2006) 09/14/2006 • Adversary case 1:06-ap-07137. Complaint by Renee S. Williams against Peoples Bank. Fee Amount (Attachments: # 1 Adversary Proceeding Cover Sheet) (454 (Recover Money/Property)) (Streetman, Thomas) (Entered: 09/14/2006) IN THE UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF ARKANSAS EL DORADO DIVISION IN RE: PENNYWISE RV SALES SERVICE, INC., NO. 1:05-bk-70065-M DEBTOR (CHAPTER 7) RENEE S. WILLIAMS, TRUSTEE PLAINTIFF VS. A.P. NO. 1:06-ap-07137 PEOPLES BANK MAGNOLIA, ARKANSAS DEFENDANTMOTION FOR AUTHORITY TO SETTLE ADVERSARY PROCEEDING
Plaintiff, Renee S. Williams. Trustee, by her attorneys, Streetman, Meeks McMillan, PLLC, for her Motion states:Plaintiff and defendant have entered into a settlement agreement on the following terms:
1. The defendant will pay plaintiff $17,500.00.
2. Plaintiff will dismiss her complain against defendant with prejudice.
3. Defendant's unsecured claims will be subordinated to all other unsecured claims.
4. Plaintiff will agree to defendant's relief from the automatic stay and abandon to defendant the following collateral, one 2000 Chevrolet Conversion Van. one 1968 Silver Eagle Bus, and one 1983 TMC Charter Pus.
5. Plaintiff believes the proposed settlement is in the best interest of the estate and request authority to finalize the settlement.tstreetman@smmatiomeys.com /s/Thomas S. Streetman
Dated February 27, 2007. Respectfully submitted, RENEE S. WILLIAMS, TRUSTEE/PLAINTIFF By: STREETMAN, MEEKS McMILLAN, PLLC Her Attorneys P.O. Drawer A Crossett, Arkansas 71635 (870)364-2213 E-mail: PER: THOMAS S. STREETMAN (ABA #61030)CERTIFICATE OF SERVICE
Thomas S. Streetman, attorney for Trustee, certifies that a copy of the foregoing MOTION FOR AUTHORITY TO SETTLE ADVERSARY PROCEEDING has been served by e-mailing a copy to Charles W. Tucker, Assistant U. S. Trustee,charles.tucker@usdoj.gov; and to Kimberly Wood Tucker,ktucker@wlj.com, on this 27th day of February, 2007./s/Thomas S. Streetman THOMAS S. STREETMAN (ABA #61030)NOTICE OF PROPOSED SETTLEMENT
NOTICE IS HEREBY GIVEN to all creditors and interested parties that Trustee has entered into a proposed Settlement Agreement with PEOPLES BANK, MAGNOLIA, ARKANSAS, and will request approval of the settlement by the United States Bankruptcy Court on the following terms:
1. Under the terms of the proposed settlement, Peoples Bank will pay Trustee $17,500.00.
2. In return Trustee will dismiss her adversary proceeding against Peoples Bank with prejudice.
3. All unsecured claims which Peoples Bank has against debtor's estate will be subordinated to all other unsecured claims.
4. The Trustee will agree to relief from the automatic stay and abandon all interest in the Bank's collateral, specifically, a 2000 Chevrolet Conversion Van, 1968 Silver Eagle Bus, and 1983 TMC Charter Bus.
5. Trustee believes this settlement is in the best interest of the estate and will seek approval from the Court.
Your rights may be affected. You should read these papers carefully and discuss them with your attorney, if you have one in this bankruptcy case.
If you do not want the Court to approve the Settlement Agreement as outlined herein, or if you want the court to consider your views on the Trustee's motion, then on or before March 20, 2007, which date is twenty (20) days from the date of this Notice, you or your attorney must:
File with the court a written request for a hearing at:
Ms. Jean E. Rolfs
Clerk, United States Bankruptcy Court
300 W. 2nd Street
Little Rock, AR 72201
If you mail your request to the court for filing, you must mail it early enough so the court will receive it on or before the date stated above. You must also mail a copy to:
Ms. Renee S. Williams, Trustee
125 Roberts Ridge Terrace
Hot Springs, AR 71901-7286
AND
Mr. Thomas S. Streetman
Streetman Meeks McMillan, PLLC
P. O. Drawer A
Crossett, AR 71635
Attend any hearing the court schedules on your request, if one is filed.
If you or your attorneys not take these steps, the court may decide that you do not oppose the relief sought in the proposed settlement and may enter an order granting that relief.
DATED February 27, 2008 tstreetman@smmatiomeys.com /s/Thomas S. Streetman
Respectfully submitted, RENEE S. WILLIAMS, TRUSTEE/PLAINTIFF. By: STREETMAN, MEEKS McMILLAN, PLLC Her Attorneys P.O. Drawer A Crossett, Arkansas 71635 (870)364-2213 E-mail: PER: THOMAS S. STREETMAN (ABA #61030)CERTIFICATE SERVICE
Thomas S. Streetman, attorney for Trustee, certifies that a copy of the foregoing Notice of Proposed Settlement has been served by e-mailing a copy to Renee S. Williams, Trustee, reneewilliams@earthlink.net, Charles W. Tucker, Assistant U.S. Trustee, charles.tucker@usdoj.gov; and to Kimberly Wood Tucker, ktucker@wlj.com and by U.S. Mail to all persons, entities, and parties in interest listed on the attached matrix on this 27th day of February, 2007./s/Thomas S. Streetman THOMAS S. STREETMAN (ABA #61030)ORDER
Before the Court is Trustee's Motion for Authority to Settle Adversary Proceeding and Notice of Proposed Settlement. Notice of the proposed settlement was filed on February 27, 2007, and served on all creditors and interested parties on February 27, 2007.
More than twenty (20) days have elapsed since the notice was filed and served, and no one has objected to the proposed settlement. The Court finds the proposed settlement is in the best interest of the estate, and is hereby approved.
IT IS SO ORDERED. Intended Notice Recipients — Method of Notice CM/ECF Notice of Electronic Filing Recipients: (Refer to Notice of Electronic Filing[NEF] for notice transmission details.)
District/Off: 0861-1 User: rob Date Created: 4/22/2008 Case: 1:06-ap-07111 Form ID: pdfwotrm Total: 3 pla Renee S. Williams reneewilliams@earthlink.net aty Marc Honey courtneypeak@honeylawfirm.com aty Thomas S. Streetman tstreetman@smmattorneys.com TOTAL: 3