After trial in Juneau, the court enters its findings of facts and conclusions of law concerning this consolidated adversary proceeding which involves: (a) the complaint of the trustee, Warren Wild against all defendants, to avoid certain pre-petition and post-petition transfers under §§ 544(b), 548, and 549 of the Bankruptcy Code, and for recovery of property and related relief, (b) the complaint of Loveless/Tollefson       3 ABR 262  Properties (LTP) under § 727(a) to avoid the discharge of the individual debtors, William N. and Lillian A. Harris, and (c) the complaint of LTP to avoid the exemptions claimed by William N. Harris and Lillian A. Harris.

1. The individual debtors in Case No. J88-00183, William N. Harris and Lillian A. Harris, filed a chapter 7 on February 23, 1988 (as used in this pleading, "the Harrises" means the debtors in Case No. J88-00183, and not their children or William N. Harris's brothers or sisters). The corporate debtor in Case No. J88-00187, The Viking Restaurant & Lounge, Inc. (VRLI) filed a chapter 7 petition February 23, 1988.

2. The Harrises became involved in the restaurant and bar business at 218 Front Street, Juneau, Alaska, in 1977. They purchased the business from the Shroths. At first the Harrises were partners with another couple whom they bought out in 1979, when the business was incorporated in the name of "Viking Restaurant & Lounge, Inc." (VRLI), the debtor in Case No. J88-00187. The Harrises were at that time the sole shareholders.

3. A food and liquor business known as the "Viking Restaurant & Lounge" has been operated at 218 Front Street from 1977 until at least the end of 1991, except for several years from 1984 to 1986 when William Harris's brother operated a similar business under the name "Trappers Family Restaurant." Trappers was not successful and incurred some debt which VRLI had to pay off when it retook possession in 1986.

4. As a result of various financially unsuccessful restaurant ventures in the Juneau area in the early 1980s and the default of the purchasers from VRLI of the Little Viking Restaurant in the Nugget Creek Mall, VRLI and the Harrises were delinquent on various debts and owed back-due taxes to the IRS and the state and local governments. In late 1987, the Harrises and VRLI were seriously delinquent on their financial obligations, including the LTP debt (see, ¶ 5).

5. In August, 1986, LTP brought suit against the debtors for unpaid rents and fees with respect to the Nugget Mall lease for the Little Viking restaurant in Case No. 1 JU-86-1689 Civil, C.E. Loveless       3 ABR 263  and Barclay Tollefson dba Loveless/Tollefson Properties v. The Viking Restaurant & Lounge, Inc. and William N. Harris, Sr. and Lillian A. Harris in the Superior Court for the State of Alaska, First Judicial District at Juneau. The Court entered summary judgment in favor of LTP in December, 1987 and final judgment on February 11, 1988, in the amount of $167,076.12, plus rents and related charges after November 1, 1987, plus post-judgment interest from December 21, 1987, at the rate of 10½% per annum. LTP duly filed proof of its claims in the bankruptcy proceedings, which claims amounted to $230,291.84 as of February 6, 1989. The unpaid rents were the contractual obligation of the Harrises, but actually incurred by a sub-sub-lessee who did not perform in connection with the sale of the Little Viking.

6. After retaking possession of the Viking Restaurant & Lounge from William Harris's brother in 1986, the Harrises formed a partnership called "The Harris Club" (THC) on November 17, 1986, in part to continue the business of VRLI. Plaintiff's Exh. 19 is the handwritten minutes of a VRLI meeting in which it was determined to convey all of the corporate assets to an alleged creditor of VRLI, Larry Leap, with a buy back agreement, and transfer the remaining corporate rights and ownership to THC to be owed 10% by the debtors Harris and 45% each by their two children, Penny Harris Gilliard and Robert Harris.

7. Although the Harrises put forth various reasons rationalizing certain transfers of VLRI and their own property in a period from November, 1986 through February, 1987, the transfers described below were to a large degree for the purposes of hindering, delaying and/or defrauding their creditors, principally, LTP. From the November 17, 1986 VRLI corporate meeting, the Harrises and VRLI embarked upon a program to divest themselves of most of their leviable assets. The timing of the transactions, relationship to the transferees, and suspicious structuring of them, are "badges of fraud" which belie the Harrises' protests of an innocent explanation. Specifically,

(a) William Harris said the Harrises wanted to insulate the assets of VRLI from its debts. To do this, they decided to form a partnership with their children, Robert Harris (referred to by the nickname "Robby" in the pleadings) and Penny Gilliard (Penny's name has been occasionally spelled "Pennie" in the       3 ABR 264  pleadings, and now has apparently resumed the last name "Harris"), to continue the restaurant and bar business using the assets of VRLI while being protected from its creditors. Robert and Penny would own 45% each of the partnership in exchange for $5,000 each, and debtors would own only 10%. The stated desire of the Harrises was to avoid having the children's interests subject to the debts of the business. They desired to perform the transfer, since the restaurant at 218 Front Street was "doing well" per the corporate minutes (although the Harrises say this only meant it was just paying its bills). At the time of the decision, the business had a going concern value of more than a nominal amount and the equity in the physical assets also must have had more than nominal value based on the admission by William Harris, Sr. and the purported use of the physical assets as a means of paying off Larry Leap as described in ¶ 7(c). The Harrises said they wanted to turn the arduous operation over to Robert and Penny so that the Harrises could relax and not work as hard as they had been. This is an improbable explanation since Robert was in Hawaii running a business with Mr. Harris's brother until June, 1987 and Penny was mainly tied up with her own ice cream parlor in the Nugget Mall in Juneau until about April, 1988. I find the transfer was a devise to hinder or delay creditors as the November 17, 1986 minutes almost explicitly admit. I find that the claim that the granting of Penny and Robert such large interest was in compensation for past due unpaid wages or draws was not supported by the evidence. Prior to and within the year after the bankruptcy petitions, notwithstanding the transfer of the indices of title to the restaurant to THC and their claim to have stepped back from the day-to-day operation, the Harrises ran the business and received a majority of the net proceeds from the operation as opposed to those received by Penny and Robert.

(b) The Harrises conveyed their Shelter Island property, consisting of four lots and a cabin, and worth about $65,000, to their son, William N. Harris, Jr. (referred to in the pleadings as "Willie"), for $10,000, payable when possible. The amount was never paid, nor was this amount supposedly owing listed on the petitions
      3 ABR 265  in bankruptcy. The Harrises never collected the $10,000 from Robert and he conveyed the Shelter Island property back to THC which in turn conveyed over to Larry Leap in 1992. The circumstances surrounding the transaction contain sufficient badges of fraud (i.e., a transfer among relatives and friends which a debtor remains able to control notwithstanding transfer of legal title) to lead me to find the transfer to Willie and ultimately to Leap a ruse to hinder, defraud, or delay creditors of the Harrises. The Shelter Island property is described as:

All of Lots 2, 3, 4 and 5, Block "C" of the Shelter Island Estates subdivision of U.S. Survey No. 1520, according to the official plat thereon on file in the office of the Recorder, Juneau Recording District, First Judicial District, State of Alaska, together with any improvements and personal properties thereon

(c) The Harrises caused VRLI to convey most or all the tangible assets of the Viking Restaurant & Lounge business to a creditor named Larry Leap in satisfaction of a purported debt owed to Leap of between $125,000-137,000 for various consideration, including services performed by Leap, a loan and the balance owed on the Shelter Island properties. The assets were supposedly worth approximately $40,000. Under the arrangements, the restaurant business (under ownership of THC) would retain the assets and have an option to buy the assets back for $125,000, with payments of $1,500 per month, beginning June, 1988. This is a contrived transaction to put the nominal title to the property of VRLI and the Harrises in the name of others. Notwithstanding the fact that some payments of the $1,500 installments are shown on the books of THC, the "debt" to Leap is suspicious and does not appear to be nearly as large as alleged. The debt was allegedly accrued for contracting work on various projects (many quite old) of VRLI and the Harrises, but never appeared on their financial records before the November 17, 1986 meeting. Leap was not even much concerned about repayment until prodded to request payment by William N. Harris. See, Plaintiff's Exh. 20 (Letter from Leap to Harris in October 1986). The bona fides of the transaction further is weakened by the facile modification of the terms when the Harrises       3 ABR 266  learned that the structuring of the original November 17, 1986 deal would have severe negative tax implications. For this reason, I find the Leap deal is a facade to hide assets or hinder creditors in recovering assets from the Harrises or VRLI. Through various conveyances, Leap subsequently received title to the Shelter Island properties which William Harris, Jr. once held. This transfer was likewise traceable to the Harris's attempt to hide the property from creditors and is a facade. In any event, Larry Leap did not answer trustee's complaint seeking to avoid the transfer to him and he has been defaulted.

(d)  The Harrises likewise conveyed some real property in Windham Bay to THC in about 1986 or 1987 without disclosing it. When considered with the other transfers occurring at this time as the Harrises financial fortunes worsened, the transfers are fraudulent. The Harrises retained an equitable interest in the property and it should be part of the bankruptcy estate to the exclusion of THC or any of the other named defendants. The description of the Windham Bay real property is:

Lots 12, 22, 23, 24, and all man-made structures, materials and equipment thereon, of the Chuck River Recreation Tracts, a subdivision of U.S. Survey 1940, according to Plat 74-20, Juneau Recording District, First Judicial District, State of Alaska.

(e) In short, it is improbable that the Harrises would have transferred most of their income producing or valuable assets in 1986 and 1987 in which they had equity unless they did so to hinder, defraud, or delay their creditors.

(f) Notwithstanding the transfers in form during the period from November, 1986 through about February, 1987 (more than one year before the bankruptcy petitions), in substance, the Harrises remained in control and operated the restaurant and liquor business at 218 Front Street up to the time of the bankruptcy petitions. They continued to take draws, and use the check book of THC as their own personal check book when necessary. The Harrises reaped most of the benefits from the operation between November, 1986 and the date of the bankruptcy petition in the way of draw from the business as opposed to Robert and Penny who were supposed
      3 ABR 267  to be taking over the operation. As such, the transfers amounted to a "continuing concealment" of the transferred assets as property of the Harrises and VRLI which continued to the date of the filings.

8. From the late 1970s, the Harrises have always held the alcoholic beverage dispensary license used from time to time at the Viking Restaurant & Lounge in their individual names. This is the license which the Harrises claim as exempt on their bankruptcy schedules. Although the Harrises and VRLI had one or more management agreements under which VRLI had the right to operate the license and was to pay many of the expenses in connection with operations, the license was the property of the individual Harris debtors when they filed a joint chapter 7 petition on February 22, 1988. The license is not an asset of VRLI which filed a chapter 7 petition on February 23, 1988. Notwithstanding the fraudulent transfers of other properties, nothing the Harrises have done with respect to the liquor license in relation to their creditors warrants a denial of their claim of an exemption for the license.

9. The "pull tab" business engaged in by the Harrises or VRLI was incipient in 1987. They did not become more heavily involved until after the bankruptcy petitions. For this reason, I find that there was no fraudulent conveyance or misuse of the pull tab opportunity or property, and the trustee or the creditors have not been denied an estate asset by the Harrises post-petition pursuit of this business. The pull tab business does not give rise to an avoidable transaction.

10. The Harrises and their children, Robby, Penny, Willie, and/or Richard as partners or co-venturers in THC engaged in various real estate ventures (mostly rehabilitations in the Juneau area). Richard has a grocery business in Grays Harbor, Washington, funded post-petition by THC, and operated by Mr. Harris's sister. While there may be some use of proceeds of VRLI's property, the trustee has not traced this to estate property sufficiently (in most cases) to allow avoidance. The proceeds for these ventures may well have been the pull-tab proceeds which I have excluded.

11. At some undisclosed date, probably in 1991, Penny and Robert began running the restaurant portion of the business at 218 Front street as their own, and the Harrises ran the bar and pull tab business.       3 ABR 268  In May, 1992, the restaurant portion of the business at 218 Front Street was sold to Robert Creekpaum for $80,000 by Penny Gilliard. Robert had left the business and the state before this sale for personal reasons. In payment, Creekpaum traded his interest in another Juneau restaurant named Gold Creek Corner Deli, which was valued at $40,000 and a promissory note for $40,000 to Penny Gilliard. The down-payment of $40,000 was in the form of his restaurant across the street from the federal building in Juneau, Alaska, the Gold Creek Corner Deli. That restaurant was promptly retransferred to daughter Penny Gilliard (now Harris). The balance of $ 40,000 was payable pursuant to a promissory note without any recorded security, at $1,000 per month, commencing July 15, 1992. The assets traded to Creekpaum were property of the VRLI estate subject to avoidance by the trustee for the pre-petition transfers to Leap. It is unclear how title was transferred back to Penny Gilliard, but the trustee is entitled to the proceeds of the Creekpaum transfer, namely an interest in the Gold Creek Corner Deli and the $40,000 promissory note.

12. In three instances, the trustee has identified real property which has been transferred in suspicious transactions and should be recoverable. Two of these involve real estate: (a) the Shelter Island and (b) Windham Bay properties which have been transferred to Larry Leap. Mr. Leap has been defaulted and the transfers of these properties should be avoided. The third involves a sale of the restaurant portion of the Front Street operation by Robert and Penny to Robert Creekpaum for $40,000 in the form of a promissory note and $40,000 worth of a trade of Creekpaum's interest in the Gold Creek Corner Deli. The remainder of the promissory note should be recovered by the trustee of the VRLI estate and Penny Gilliard should account for the property turned over to her and the trustee should have a constructive trust of the property Penny received from Creekpaum or reimburse the estate for its value.

1. This is a core proceeding. 28 USC § 157(b)(2)(A), (E), (H), (J).

2. The Harrises are entitled to exempt the liquor license which was at the Viking Lounge & Restaurant at the filing of this case.       3 ABR 269  AS 09.38.015(a)(7). Nothing that the Harrises have done with respect to their creditors or the trustee in bankruptcy justifies denial of the exemption. Compare, In re Swift, 124 BR 475, 482-83 (Bankr WD Tex 1991); In re Gaudet, 109 BR 548 (Bankr DRI 1989); and In re Primack, 89 BR 954, 958 fn5 (Bankr MD Fla 1988).

3. By a preponderance of the evidence [In re Lawler, 141 BR 425 (9th Cir BAP 1992)], plaintiffs have established that the Harrises and VRLI transferred real property and their interest in the VRLI during the period from November 1986 through about March, 1987 with intent to hinder, defraud, or delay LTP. 11 USC § 727(a)(2), In re Woodfield, 978 F2d 516 (9th Cir 1992), In re Adeeb, 787 F2d 1339 (9th Cir 1986), In re Devers, 759 F2d 751 (9th Cir 1985), and In re Aubrey, 111 BR 268, 273 (9th Cir BAP 1990). The Harrises retained continuing control of the assets notwithstanding the appearance of having made the transfer, and therefore were within the one-year time limit required by 11 USC § 727(a)(2). See, In re Towe, 147 BR 545 (Bankr D Mont 1992). The Harrises caused the VRLI to transfer property. 11 USC § 727(a)(7). For these reasons, the Harrises discharge is denied.

5. The transfers of the Shelter Island property and Windham Bay property described in ¶ 7 are avoided and should be recovered by the trustee for the estate of the Harrises. The transfer of the restaurant property to THC and the restaurant property sold by Creekpaum and the proceeds of the promissory note should be recovered for the benefit of the VRLI estate. 11 USC § 544(b).

6. The dealings of the Harrises and the other defendants in various other properties in Alaska and Washington state are not transactions which are avoidable or which subject defendants to damages. Any lis pendens against these properties should be released.

7. The trustee and LTP shall recover their costs from the Harrises.

DATED: September 13, 1993

HERBERT A. ROSS
U.S. Bankruptcy Judge