UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF ALASKA

In re: Case No. A02-00006-DMD  KATHERINE E. GIORDANO,                          Debtor.	Chapter 7
WILLIAM BARSTOW, TRUSTEE,                                    Plaintiff,   v.   KATHERINE E. GIORDANO and THOMAS R. GIORDANO,                       Defendants.	Adversary No. A02-90033-DMD

MEMORANDUM DECISION

                      This is an action to recover fraudulent transfers as well as an objection to discharge. It is a core proceeding under 28 U.S.C. § 157(b)(2)(H) and (J). This court has jurisdiction pursuant to 11 U.S.C. § 1334(b) and the district court’s order of reference. I find for the plaintiff in the sum of $99,643.50, together with interest and attorney’s fees. The possible revocation of Mrs. Giordano’s discharge is subject to further proceedings.

 

Background

                      Katherine Giordano filed for Chapter 7 relief on January 4, 2002. She works as a nurse’s assistant at an Anchorage hospital. Her husband, Thomas, is unemployed and did not join her in filing. The Giordanos live in Wasilla. The current action, a complaint seeking recovery of fraudulent transfers and objecting to discharge, was filed by Chapter 7 trustee William Barstow on June 7, 2002.

        7 ABR 461 

                       The trustee has alleged a series of fraudulent transfers arose from the sale of a business known as “Taster’s Choice” in June of 1998. The defendants each owned half of the Wasilla business, Taster’s Choice, Inc., an Alaska corporation, which sold espresso and had a T.C.B.Y. franchise. Prior to the sale, Katherine Giordano had been named as a defendant in a state district court lawsuit initiated in June of 1996 entitled Diane Hannon v. K. Giordano, case no. 3AN-96-4866. There the plaintiff sought damages of approximately $30,000.00 arising from the sale of an espresso cart. Katherine also had balances due on approximately 17 credit cards. ^1. She was also the plaintiff in a malpractice lawsuit against Valley Hospital and faced a contingent liability for attorney’s fees and costs if she lost the suit.

                      The defendants sold their business on June 6^th, 1998. As consideration for the sale of the business for $200,000.00, the defendants received cash of $53,000.00, a note for

$120,000.00, and a condominium located in the Park Forrest development of Anchorage with an agreed value of $61,000.00 and an encumbrance of $34,000.00. Mrs. Giordano took $34,000.00 from the proceeds in cash and used it to pay off the mortgage on the Park Forrest condo. The condo was placed in her name. Thomas received $19,000.00 from the down payment in cash. Thomas also received the monthly note payments arising from the business sale totaling $27,000.00, as well as monthly rents from the condominium in the sum of $6,975.00.

                      In May of 1999, Mrs. Giordano lost her suit against Valley Hospital. A judgment was entered against her for $22,943.00. She entered into settlement negotiations with the hospital in August of 1999. The negotiations were unsuccessful. Valley Hospital’s judgment remained unrecorded in August of 1999, however. Mr. Giordano arranged for a sale of the
        7 ABR 462 
condominium to the defendants’ son and his wife on August 24, 1999. The sale closed for nearly $65,000.00 with the Giordanos financing the purchase price. Mrs. Giordano’s creditors then included a minimum of $50,000.00 of unsecured debt, with liabilities to nearly twenty-four unsecured creditors, exclusive of the $22,943.00 Valley Hospital judgment. ^2. The Giordanos arranged for all payments on the condo sale to be made to Mr. Giordano. Thomas R. Giordano was listed as the seller, the holder of a deed of trust, and the party to whom all escrow payments were to be made at closing. Mr. Giordano received all of the monthly escrow payments as well as a $65,000.00 payoff in October of 2003.

                       Mrs. Giordano signed a sale agreement for sale of her interest in the Taster’s Choice note and the Park Forrest condo note to Mr. Giordano on September 2, 1999. Mr. Giordano alleges Mrs. Giordano received $15,000.00 cash for her interests on October 7, 1999. Mrs. Giordano produced four receipts indicating she purchased $12,064.35 of miscellaneous goods from October through December of 1999 with the proceeds.

                        Mrs. Giordano’s litigation progressed. Valley Hospital recorded its judgment lien of $29,779.31 on November 1, 1999. A final judgment and decree was filed against Mrs. Giordano for $23,580.08 in the Hannon litigation on November 23, 1999.

                      Shortly after his purchase of Mrs. Giordano’s interest in the Taster’s Choice escrow, Mr. Giordano arranged for a partial sale of the remaining note balance. Mrs. Giordano’s name does not appear upon any of the sale documents. They were executed solely by Mr. Giordano. He received $32,112.02 on January 14, 2000. The defendants allege that Mr. Giordano gave Mrs. Giordano another $16,050.00 in cash at that time. No written documents corroborate their statements, however. On March 24, 2000, Diane Hannon recorded her
        7 ABR 463 
judgment of $23,431.34 against Mrs. Giordano. Providian National Bank sued Mrs. Giordano for another $20,000.00 in state district court on June 25, 2000. Following a default by the original purchasers of “Taster’s Choice,” Mr. Giordano exacted another $16,000.00 for relinquishment of his remaining contract rights on December 14, 2000. Mrs. Giordano received none of those proceeds.

                      Judgments continued to be entered against Mrs. Giordano through 2001 and 2002. Her wages were garnished. She filed for Chapter 7 relief on January 4, 2002. Her schedule of unsecured creditors revealed credit card debt of at least $172,000.00, medical bills of about $13,000.00, and liquidated debts to Valley Hospital and Diane Hannon totaling $54,570.00.

                      Mr. Barstow filed his complaint against the defendants on June 7^th, 2002. On September 19, 2003, a trial date was set for November 5, 2003. On October 20, 2003, Mr. McFarlane, attorney for the defendants, filed a motion for a telephonic appearance for Mr. Giordano. Following a hearing on November 3, 2003, this court denied Mr. Giordano’s request for telephonic appearance. The plaintiff issued and served subpoenas on the Giordanos requiring them to appear at trial on November 5, 2003. Neither defendant appeared at the trial on November 5, 2003 in accordance with the plaintiff’s subpoenas. The plaintiff requested entry of a default judgment against the defendants. The court entered a default of the defendants on the day scheduled for trial. No default judgment was entered, however.

                      All of the evidence contained in the parties’ joint stipulated exhibits was admitted into evidence on November 5, 2003. Additionally, the court has reviewed the deposition of Thomas Giordano and taken judicial notice of the affidavits of Katherine Giordano contained in the adversary case file. Attorneys for the parties have argued their views on the proper elements of damages in this case on the day of trial.

        7 ABR 464 

                       Following argument on November 5, 2003, the parties agreed that on October 1, 2003, Mr. Giordano received $65,000.00 from the payoff of a note secured by the Park Forrest condominium. A preliminary injunction has been issued prohibiting the defendants from disposing of the payoff and other funds in their possession pending entry of a final judgment.

                                 

Fraudulent Conveyances

                      Rule 55(a), Fed. R. Civ. Pro., applies to this adversary proceeding. ^3. When a party against who a judgment is sought “has failed to plead or otherwise defend as provided by these rules,” ^4. a default may be entered. Here the defendants have plead and otherwise defended themselves. I now view their failure to appear at trial as inadequate grounds for entry of a default. ^5. I will withdraw my prior entry of default. This memorandum decision will be based on the evidence presented at trial on the issues of liability and damages. Withdrawal of the default will not effect, however, any future proceedings for contempt, revocation of discharge, or the drawing of certain adverse inferences from the failure of the defendants to testify at trial. ^6.  

        7 ABR 465 

                       The trustee brought this action pursuant to 11 U.S.C. § 544(b)(1). ^7. This statute allows the trustee to succeed to the rights of an unsecured creditor in existence at the commencement of the case who can avoid transfers or obligations under applicable state law. ^8. Alaska law allows unsecured creditors to invalidate fraudulent transfers pursuant to A.S. 34.40.010. It invalidates transfers “made with the intent to hinder, delay or defraud creditors.” The burden of proving a fraudulent transfer is on the plaintiff, ^9. by a preponderance of the evidence. Clear and convincing proof is not required. ^10. The statute of limitations on fraudulent transfers is 6 years. ^11. Fraudulent transfers of cash can be recovered by a trustee. ^12.

                       Alaska has recognized certain badges of fraud may accompany fraudulent transfers.

The badges of fraud here are as clearly apparent as they are multitudinous. The compelling ones in terms of long-recognized indicia of fraud are: (1) The consideration . . . is inadequate . . . (2) The transfer of the property was in anticipation of a pending suit . . .. (3) The transferor-debtor was insolvent . . .. (4) There was a failure to record the instrument within a reasonable length of time . . .. (5) The conveyance was a transfer of all or substantially all the debtor’s
        7 ABR 466 
property . . .. (6) The retention of possession of the premises by the grantor from the date of the execution of the deed . . . stands unexplained . . .. (7) The transfer so completely depleted the assets of Dale Trude that his creditor, the plaintiff, has thereby been hindered and delayed in recovering any part of his judgment. . . . (8) The relationship of the parties becomes an additional badge of fraud when there also appear other circumstances which of themselves incite distrust and suspicion . . ..

 

While such facts as these are to be considered in determining whether a transfer will be found fraudulent, we have indicated that the weight to be accorded these facts will vary depending on the case.

 

Badges of fraud must be viewed within the context of each particular case, and where their presence is satisfactorily accounted for, or where their existence is not inconsistent with a construction of the transaction as a valid one, they deserve to be accorded little weight. (footnotes omitted). ^13.

                        Other courts have developed a more exhaustive list.

Examples of “badges of fraud” include transfers of property by a debtor during the pendency or threat of third-party creditor litigation, transfers of property that render the debtor insolvent or greatly reduces his estate, a series of contemporaneous transactions that strip the debtor of all property available for execution, secret or hurried transactions that are not in the usual mode of doing business, any transaction that is conducted in a manner differing from customary methods, transactions whereby the debtor retains benefits over transferred property, little or no consideration given in return for a transfer, and a transfer of property between family members or parties maintaining a special or
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close relationship. Additionally, the use of dummies or fictitious parties, the purchaser’s failure to examine or inventory the goods bought or looseness or incorrectness in determining the value of the purchased property, the assumption of a business name for the sole purpose of receiving title to properties from the debtor where the assumed business name did not exist before the conveyance, the conveyance of property to a person having no apparent use for the property, the lack of an innocent purpose for the transfer, the general chronology of events and transactions under inquiry, the failure the debtor to call parties to testify or to produce available explanation or rebutting evidence, and, the fact that the debtor has absconded are all considered badges of fraud. No one factor is dispositive to a finding of fraud. (footnotes omitted). ^14.

                      In reviewing the defendants’ transactions, several badges of fraud are apparent. As of June 6, 1998, the closing date of the Taster’s Choice sale, Mr. Giordano received $18,800.00 in down payment funds. There was no consideration for transfer of Mrs. Giordano’s one-half of the proceeds. There was litigation pending against Mrs. Giordano for a period of two years where she was a defendant. Additionally, Mrs. Giordano also faced a contingent liability for attorney’s fees and costs in her malpractice suit against Valley Hospital. Mrs. Giordano was insolvent at the time of the transfer because she had virtually no nonexempt property, and her assets were negligible. Her contingent liabilities to Diane Hannon and Valley Hospital were liquidated for over $52,000.00. A review of her schedule “F” reveals that Mrs. Giordano had incurred at least $30,000.00 in credit card debt by June of 1998. ^15. Even if the condo were considered her asset, she remained insolvent at the time of the transfer. Additionally, the transfer was to a family member, her husband in cash. The general chronology of events
        7 ABR 468 
involved the debtor loading up on debt while transferring assets to her husband. Creditors were hindered and delayed by Mrs. Giordano’s actions. The debtor and her husband failed to testify at trial. The rebuttal evidence submitted by the defendants has been inadequate. The June 6, 1998 transfer of $9,400.00 cash to Mr. Giordano was made with the intent to hinder, delay or defraud creditors.

                     Moreover, Mr. Giordano received all of the monthly $1,500.00 Taster’s Choice note payments from July 15, 1998 through December 15, 2000. Each payment included $750.00 belonging to Mrs. Giordano. Her financial situation continually degenerated from June of 1998 onward. Mr. Giordano received an additional $13,500.00 in fraudulently transferred payments during that period.

                      Mr. Giordano also received all of the rental payments from the Park Forrest condominium following the closing. Like the note payments, at least half of the rental payments received by Mr. Giordano were fraudulent transfers. The fact that Mr. Giordano incurred rental expenses maintaining the condominium is meaningless. Mr. Giordano owes the estate $3,487.50 for Mrs. Giordano’s share of the rental income because the rental income was transferred to him with the intent to hinder, delay and defraud her creditors.

                      Following the sale of the condominium in September of 1999, Mr. Giordano received 100% of the monthly payments for a period of four years. The trustee is entitled to recover 48 of those payments at $275.00 a month as fraudulent transfers, for a total of $13,200.00. Multiple judgments had been entered against Mrs. Giordano, she accumulated $172,000.00 in credit card debt, and the payments were made to Mr. Giordano with the intent to hinder, delay or defraud her creditors.

        7 ABR 469 

                       In September of 1999, Mrs. Giordano entered into an agreement to sell her interest in the Taster’s Choice note and the Park Forrest condominium note to Mr. Giordano. She alleged she received $15,000.00 for her interest on October 7, 1999. There is corroboration for her receipt of approximately $12,000.00 around that time. The funds received were inadequate consideration for her transfer and the transfers were made with the intent to hinder, delay or defraud her creditors. Mrs. Giordano’s interest in the two notes was actually worth at least $56,500.00 at the time of the transfer. Her interest in the face amount of the notes exceeded $92,439.96. ^16. Moreover, she had accumulated multiple judgments and nearly $172,000.00 in credit card charges when she “sold” her interests to Mr. Giordano.

                      Mr. and Mrs. Giordano filed a joint return for tax year 2000. They received a tax refund of $7,000.00. Mr. Giordano took all the money. He benefitted from a $3,500.00 transfer from Mrs. Giordano. The transfer was made to hinder, delay or defraud Mrs. Giordano’s creditors.

                      In summary, I find the following transactions to be fraudulent conveyances from Mrs. Giordano to Mr. Giordano under A.S. 34.40.010 that were made with the intent to hinder, delay or defraud creditors:

	Transaction	Fraudulent Transfer Amount
1.	6/6/98-closing of Taster's Choice sale	$ 9,400.00
2.	7/15/98 through 12/15/00-18 months @$750.00 each through Taster’s Choice escrow	13,500
3.	Condo Rents (1998-1999)	3,487.50
7 ABR 470
4.	Condo payments - 48 months @$275.00 beginning 9/1/99 through 9/1/2003	13,200.00
5.	10/7/99 sale of interest in Taster’s Choice & Park Forrest Condo Notes	56,556.00	17.
6.	4/26/01-tax refund for year 2000	3,500.00
	TOTAL	$ 99,643.50

Under Alaska law, the plaintiff is also entitled to pre-judgment interest from June 18^th, 2002, the date of service in this action, until entry of judgment. The applicable rate is 5 percent. ^18.

 

Credit Card Fraudulent Conveyances

 

                      In addition to the fraudulent transfers previously set forth, the trustee contends that Mr. Giordano received additional fraudulent transfers arising from Mrs. Giordano’s credit card transactions. The trustee has failed to meet his burden of proof on this issue. Mr. Giordano has accumulated a substantial net worth during his wife’s long slide into bankruptcy. ^19. The trustee has failed to establish a link between his apparent wealth and specific cash advances taken from Mrs. Giordano’s credit cards, however. There have been no credit card statements submitted indicating the amount of cash advances Mrs. Giordano took during the period of 1997 through 1999. There has been no expert accounting testimony
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linking her credit card debt with his wealth. I cannot, under the guise of drawing adverse inferences from their failure to appear at trial, engage in such a speculative enterprise.

                      Nor is there a secondary basis for liability for a fraudulent conveyance scheme. ^20. First of all, the trustee may have no standing to raise this argument. Summers v. Hagan requires that general creditors reduce their claims to judgment before asserting a claim for a fraudulent conveyance scheme. ^21. The trustee has the rights of an unsecured creditor under 11 U.S.C. § 544(b)(1), not an unsecured creditor with a judgment. Even if the trustee had standing, damages for a fraudulent conveyance scheme can only be raised if the fraudulent conveyance remedy alone, i.e. voiding the transfer as to a creditor, is inadequate. ^22. There has been no evidence submitted indicating specific fraudulent transfers from Mrs. Giordano’s credit cards to Mr. Giordano. Without evidence of such transfers, application of the test is impossible. The trustee’s credit card claims are without merit.

Objection and Revocation of Discharge

                      The last day for filing objections to discharge was April 1, 2002. Mrs. Giordano’s discharge was entered on June 7^th, 2002. The trustee’s complaint was filed the same day. It alleges violations of 11 U.S.C. § 723(a)(2)(A), (a)(3) and (a)(5). Those counts are barred because they were not filed in a timely manner. ^23. The trustee also seeks revocation of
        7 ABR 472 
discharge under 11 U.S.C. § 727(d)(2). This subsection allows revocation of discharge when the debtor acquired property of the estate and knowingly and fraudulently failed to report the acquisition of the property or to deliver the property to the trustee. I can find no evidence to substantiate this allegation.

                      Mrs. Giordano appears to have violated section 727(d)(3) by failing to appear at trial, however. Section 727(d)(3) incorporates 11 U.S.C. § 727(a)(6). It provides for revocation of discharge when the debtor has refused to “obey any lawful order of the court.” A subpoena is a lawful order of the court. ^24. The debtor’s failure to appear constitutes grounds for revocation of her discharge. Because the conduct that gave rise to the revocation occurred November 5^th, 2003, after the filing of the complaint herein, Mrs. Giordano is entitled to further notice and hearing in accordance with 11 U.S.C. § 727(d)(3). The court will issue an appropriate notice for further proceedings.

Attorney’s Fees

                       “[W]hen state law and not federal bankruptcy law provides the rule of decision in a contested matter, the bankruptcy court will award fees to the same extent allowed under the governing state law.” ^25. Here the court applied Alaska law to determine whether or not certain fraudulent conveyances occurred. The plaintiff is entitled to attorney’s fees under Rule 82 of the Alaska Rules of Civil Procedure. The plaintiff will be given until January 23, 2004 to file a motion for award of attorney’s fees consistent with Rule 82. The plaintiff may not recover
        7 ABR 473 
attorney’s fees for time spent pursuing federal claims for objection and revocation of discharge.

Conclusion

                      An interlocutory order will be entered that is consistent with this memorandum decision. An interlocutory order is not subject to appeal. No final judgment will be entered

until the amount of attorney’s fees is liquidated and a determination regarding revocation of Mrs. Giordano’s discharge has been made.         

                       DATED: January 7, 2004.

                                                              BY THE COURT

                                                                /s/ Donald MacDonald IV

                                                              DONALD MacDONALD IV

                                                              United States Bankruptcy Judge

 

N O T E S:

1.     I included credit cards with charges incurred through 1997 from Mrs. Giordano’s Schedule “F”,\ Exhibit 14.

2.     These numbers are based on Mrs. Giordano’s Schedule “F”, Exhibit 14.

3.     Rule 7055, Fed. R. Bkr. Pro.

4.     Rule 55(a), Fed. R. Civ. Pro.

5.     Bass v. Hoagland, 172 F.2d 205 (5^th Cir. 1949), cert. denied 338 U.S. 816 (1949).

6.     Russell, Bankruptcy Evidence Manual 2003 ed.,¶ 301.1(9), (West 2002).

7.     11 U.S.C. § 544(b)(1) provides:

Except as provided in paragraph (2), the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

8.     5 Collier on Bankruptcy, ¶ 544.09[1].

9.     Matheson v. Patenaude, 8 Alaska 238 (D. Alaska Terr. 1930).

10.     Gabaig v. Gabaig, 717 P.2d 835 (Alaska 1986).

11     Barstow v. Ferrara, et. al.(In re Ferrara), 3 A.B.R. 472, 491 (Bankr. D. Alaska 1994).

12.     Compton v. Maag & Maag-Woods, 6 A.B.R. 355, 358-361 (Bankr. D. Alaska 2000).

13.     First National Bank of Fairbanks v. Enzler, 537 P.2d 517, 522 (Alaska 1975) quoting Evans v. Trude, 193 Or. 648, 240 P.2d 940, 944 (Oregon 1952) and Blumenstein v. Phillips Ins. Center, Inc., 490 P.2d 1213, 1223 (Alaska 1971) (footnote omitted).

14.      37 Am Jur. 2d, Fraudulent Conveyances, § 14.

15.     She had $172,000.00 by the end of 1999.

16     The face amount of the Taster’s Choice note was $120,000.00; the face amount of the Park Forrest\ condo note was $64,878.93. Half of their total is $92,439.46.

17     This sum represents the total of Mrs. Giordano’s interest in funds received by Mr. Giordano from: (1) the January 14^th, 2000 partial sale of the Taster’s Choice note; (2) the Dec. 15^th, 2000 payment for close of the Taster’s Choice escrow; and (3) the payoff of the Park Forrest condominium note on October 3, 2003.

18.     A.S. 09.30.070.

19.     Mr. Giordano may have accumulated over $300,000.00 from 1998 to the present while unemployed.

20.     To prove liability for a fraudulent conveyance scheme the plaintiff must prove: (1) An unlawful agreement; (2) The specific intent of each participant in the scheme to hinder, delay and defraud a creditor of one who participated in the scheme; (3) Acts committed pursuant to the unlawful agreement; (4) Damages caused by the acts committed pursuant to the unlawful agreement. Summers v. Hagan, 852 P.2d 1165, 1169-1170 (Alaska 1993).

21.     Summers v. Hagan, 852 P.2d at 1170, footnote 6.

22.     Summers v. Hagan, 852 P.2d at 1170.

23.     Rule 4004(a) is strictly construed and requires a complaint objecting to discharge to be filed within sixty days of the first date set for the meeting of creditors. Anwiler v. Patchett (In re Anwiler), 958 F.2d 925, 927 (9^th Cir. 1992), cert. denied, Anwiler v. Patchett, 506 U.S. 882 (1992).

24.     In re Simon, 297 F. 942 (2^nd Cir. 1924); Thrifty Rent-A-Car System, Inc. v. Saini (In the Matter of Saini),34 B.R. 509 (Bankr. W. D. Penn. 1983).

25.     In the Matter of Holiday Mobile Home Resorts, 803 F.2d 977, 979 (9^th Cir. 1986); In the Matter of Sparkman, 703 F.2d 1097, 1099 (9^th Cir. 1983).