Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_04-cv-04916/USCOURTS-cand-3_04-cv-04916-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:1334 Bankruptcy cases and proceedings under title 11

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re:

MICHAEL ANTHONY KEANE,

Debtor. /

BRIAN A. HOLT, Trustee,

Plaintiff,

 v.

MICHAEL ANTHONY KEANE and

ANNA-MARIE KEANE,

Defendants. /

No. C 04-04916 WHA

ORDER AFFIRMING

BANKRUPTCY COURT

DECISION

INTRODUCTION

In this bankruptcy appeal, Brian A. Holt, the trustee representing unsecured creditors in

a Chapter 7 proceeding, seeks to set aside the debtor’s transfer of equity in a

community-property residence to his ex-wife as part of a divorce settlement. This order finds

that the bankruptcy judge correctly found that this was not a fraudulent transfer. Accordingly,

the decision of the bankruptcy court is AFFIRMED.

STATEMENT

On March 27, 2002, Michael filed a voluntary bankruptcy petition under Chapter 7,

claiming total assets of $20,264.00 and total liabilities of $1,204,872.53. An adversary

proceeding was commenced on September 8, 2003, with the filing of plaintiff’s complaint to

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avoid the allegedly fraudulent transfer of residential property to his ex-wife as part of a divorce

settlement. A bench trial was held on August 23, 2004. The Honorable Dennis Montali ruled

in favor of defendants on September 8, 2004; judgment was entered on September 17, 2004. 

The trustee’s motion for a new trial was denied during a hearing on October 28, 2004. This

appeal followed shortly thereafter.

The underlying facts and conclusions of law were set forth in narrative form by the

bankruptcy judge at the hearing on September 8, 2004 (Hearing Tr. 3:1–13:23). This order will

also briefly summarize the evidence contained in the record of designated items as well as the

trial exhibits contained in the appendix to appellant’s opening brief.

Michael and Anna-Marie Keane were married on May 3, 1997. In December 1999, they

purchased their residence at 1622 Marymeade Lane in Los Altos, California, for $1,175,000. 

Anna-Marie made a separate-property contribution of approximately $155,000 as part of the

$324,000 down payment. The balance of the purchase price was paid with their joint savings, a

loan from Michael’s company, and a bank loan of $822,500, which was secured with a first

deed of trust.

In February 2000, Michael and Anna-Marie borrowed an additional $223,500, secured

by a second deed of trust. They had intended to use these funds to repay the money borrowed

from Michael’s company and do some remodeling (Trial Tr. 26:9–27:1). Instead, Michael lost

most, if not all, of this money buying stock in Legato Systems on margin. The bankruptcy

judge found that “at least $216,000 was lost and probably the entire $223,500 that was

borrowed” (9/8/04 Hearing Tr. 3:20–22). Michael did not tell Anna-Marie about the investment

until after he had already lost the money (Trial Tr. 27:2–11). In addition, Michael borrowed

substantial sums to fund his business. A few weeks after he informed Anna-Marie that he had

personally guaranteed this debt, the couple separated on March 26, 2001. Michael moved out

of the marital residence and ceased to share in any of the expenses (id. 28:12–20).

On November 18, 2001, the couple executed a marital settlement agreement. Therein,

Michael and Anna-Marie, both represented by counsel, estimated that the fair market value of

the residence was $1,175,000 and it was encumbered by two loans totaling approximately

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*

 From January 2002 through August 2004, these expenses included $243,738.80 against the secured

obligations, $35,048.75 in property taxes and $17,000.00 in home improvements (see Trial Exhibit O, included

in appendix to appellant’s opening brief).

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$1,030,000, leaving a net equity of $144,700. They agreed that the residence would be assigned

to Anna-Marie, who would assume responsibility for all of the mortgage payments, property

taxes and other expenses.*

 An interspousal transfer deed transferring the residence to her was

signed on November 19, 2001, and recorded in the Santa Clara County Recorder’s Office on

November 28, 2001. Meanwhile, Anna-Marie would waive all claims against Michael in

connection with his squandering of the proceeds from the February 2000 loan. The marital

settlement agreement also assigned all business debts to Michael, explicitly acknowledging that

he had violated his “fiduciary duty obligations to [Anna-Marie] and the dictates of Family Code

Section 1100(d).” On December 27, 2001, the Superior Court of Santa Clara County entered a

judgment of dissolution of marriage.

The bankruptcy judge began by noting that the property itself had been sold, but “by

stipulation, the trustee and the defendant have set aside and left in escrow $370,000 or so

pending the outcome of this action” (id. at 6:10–13). With respect to the trustee’s first theory of

liability under 11 U.S.C. 548(a)(1)(A) or California Civil Code § 3439.04(a)(1), its state law

equivalent, the bankruptcy judge explicitly found that “the divorce was not a sham; it was a real

divorce for all purposes” (9/8/04 Hearing Tr. 4:3–4). Specifically, he found no evidence “that

the transfer of the property comes within Section 548(a)(1)(A), namely, that there was actual

intent to hinder, delay, and defraud creditors” (id. 6:14–17).

As for the trustee’s alternative theory of fraudulent transfer under 11 U.S.C.

548(a)(1)(B) or California Civil Code §§ 3439.04(a)(2) and 3439.05, the bankruptcy judge first

noted that at the time of allegedly fraudulent transfer, the debtor was insolvent (id. at 4:15–16). 

Turning to the question of whether reasonably equivalent value was received in exchange, he

noted that the value of the property at the time of the transfer was in dispute.

One appraiser, Cindy Aldrich, valued the house at $1,095,000. Meanwhile, Gerald

Burch appraised the house at $1,350,000. Michael and Anna-Marie estimated the fair market

value at $1,175,000 in their marital settlement agreement, which was the same as the purchase

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price (id. at 4:16–25). Observing that the debt against the house was $1,030,000 at the time of

the transfer, the bankruptcy judge determined that the amount of equity transferred from the

debtor to his ex-wife would be $65,000 based on Ms. Aldrich’s valuation, $145,000 based on

the parties’ marital settlement agreement or $320,000 based on Mr. Burch’s valuation. He then

went on to disregard the figure proposed by Ms. Aldrich because the parties’ own valuation, as

set forth in their marital settlement agreement was “binding at the minimum” (id. at 5:1–13).

In deciding how much to weight to give to the Mr. Burch’s appraisal, the bankruptcy

judge considered the comparable properties used in his appraisal. He was not persuaded that it

was appropriate to use one “2.38 miles away from the family residence, when the convention is

to attempt to get comps [comparables] within a mile” (id. at 11:14–17). Moreover, the

bankruptcy judge expressed concern that most of the closing dates were “in the outer edge of

six months prior to the subject property,” especially in light of Mr. Burch’s concession that

“summer months prices tend to be higher than in the fall and winter” (id. at 12:6–15). From

month to month, there was anywhere from a two to seven percent difference in the median

price. Ultimately, the bankruptcy judge decided that a five percent adjustment of the figure

proposed by Mr. Burch would be sufficient to account for the “downward trend that drops

considerably downward by December” (id. at 12:17–13:4). He calculated the value of the

property at the time to be $1,282,500 (id. at 13:8–17). Thus, the amount of equity transferred

was $252,500.

As for the value received in exchange, the bankruptcy judge found that there were at

least two antecedent debts satisfied by the transfer. First, he found that Anna-Marie could trace

her down-payment contribution of $155,000 to a separate property source such that “at the very

minimum” she had waived a claim for that amount under the marital settlement agreement (id.

at 7:5–8:8). Second, he considered the claim that Michael had breached his fiduciary duty to

Anna-Marie by diverting the borrowed community funds (i.e., the $223,500 loan) from their

intended purpose in order to engage in highly-speculative margin investing. Relying upon In re

Marriage of Czapar, 232 Cal.App.3d 1308 (1991), the bankruptcy judge found that the

community had a right to reimbursement of these funds, meaning that Anna-Marie had a claim

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to at least half of this amount (id. at 8:9–10:11). Accordingly, he found that Anna-Marie had

waived a claim of no less than $266,500. (By this Court’s calculation, her waived claims were

worth at least $266,750, but this difference does not affect the outcome.)

When the bankruptcy judge added this to the $1,030,000 mortgage, he reasoned that if

the value of the property at the time of the transfer was less than $1,296,500, then “there was no

fraudulent transfer under any circumstances” (id. at 10:17–23). As described above, he found

the value of the property to be $1,282,500 and thus a reasonably equivalent value had been

received in exchange for the transfer. He concluded that “the trustee is not entitled to recover

under any fraudulent-transfer theory and that the defendant, Anna-Marie Keane, is entitled to a

judgment in her favor” (id. at 13:20–23).

At the hearing on October 28, 2004, the bankruptcy judge denied the trustee’s requests

for reconsideration, a new trial or an amended judgment finding liability under a preference

theory (Hearing Tr. 3:2–7:9). He noted that counsel had previously conceded that the trustee

was not arguing a preference theory (see Trial Tr. 87:16–21) and it would be unfair to “punish

the defendant for proving his – her defense by rewarding the other side with a judgment on a

theory that wasn’t pleaded” (10/28/04 Hearing Tr. at 5:5–8). The bankruptcy judge then

distinguished the cases raised by the trustee, which held that engaging in speculative margin

trading did not amount to a breach of fiduciary duty, because Michael had engaged in “more

than just an unsound investment.” Indeed, he had diverted community funds from a mortgage

loan that was intended for a specific purpose (id. at 7:10–8:20).

ANALYSIS

1. STANDARD OF REVIEW.

The bankruptcy court’s findings of fact are reviewed under a clearly erroneous standard,

while conclusions of law are reviewed de novo. In re Jan Weilert RV, Inc., 315 F.3d 1192,

1196 (9th Cir. 2003). This means that findings of fact must be accepted unless this Court is

“left with the definite and firm conviction that a mistake has been committed.” Ibid.

The following issues have been challenged on appeal: (1) whether there was actual

intent to hinder, delay, and defraud creditors; (2) whether there was adequate consideration for

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the transfer; (3) whether Anna-Marie had a claim against Michael for breach of fiduciary duty;

(4) whether the bankruptcy judge should have considered the value of any claims waived by

Michael; (5) whether the trustee should have been permitted to amend his complaint to allege a

preference; and (6) whether the transfer should be avoided under 11 U.S.C. 547.

2. FRAUDULENT TRANSFER.

With regard to whether the transfer of equity in the residence at 1622 Marymeade Lane

was a fraudulent transfer under 11 U.S.C. 548(a)(1)(A) or California Civil Code

§ 3439.04(a)(1), the finding of actual intent (or lack thereof) is a question of fact. In the

absence of any evidence indicating that this finding was clearly erroneous, this order accepts the

bankruptcy judge’s conclusion that the divorce was not a sham. Accordingly, the bankruptcy’s

finding that there was no actual intent to hinder, delay or defraud creditors is AFFIRMED.

As for the trustee’s alternative theory of fraudulent-transfer liability, this order accepts

the bankruptcy judge’s finding that the debtor was insolvent at the time of the transfer and

agrees that the key question, also primarily factual in nature, is whether there was reasonably

equivalent value exchanged for the transfer. Appellant does not appear to dispute the

bankruptcy judge’s finding that the value of the property at the time of the transfer was

$1,282,500, such that the amount of equity transferred was $252,500. Instead, the focus of this

appeal is whether the bankruptcy judge properly calculated Anna-Marie’s waived claims to

equal at least $266,500.

Appellant apparently concedes that Anna-Marie had a claim to her separate property

contribution of $155,000, but argues that she was not entitled to the additional $111,500 claim

accounting for Michael’s breach of fiduciary duty. Appellant attempts to distinguish Czapar on

the basis that Michael did not misappropriate community funds. This order disagrees. The

trustee’s argument that speculating in stocks is not a deliberate misappropriation misses the

point. As explained by the bankruptcy judge during the hearing on the trustee’s motion for

reconsideration, speculating in high-risk stocks is one thing, but doing so by diverting

community funds designated for another purpose without spousal consent is quite another. 

While appellant asserts that “[t]here is no contention that Michael secretly profited, failed to

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account or even failed to disclose his trading,” this is not true (Br. 17). The evidence at trial

indicated that Michael failed to inform Anna-Marie of his margin trading until after he lost the

money. The bankruptcy judge found that the community would have been entitled to

reimbursement of the misappropriated funds and that Anna-Marie waived a claim for at least

half of $223,500. This order agrees.

Appellant further asserts that Michael made his own separate-property contribution that

the bankruptcy judge failed to take into account. Not only was this point improperly raised for

the first time on appeal, but appellant has provided no evidence that any portion of the $324,000

down payment was paid with Michael’s separate property. The record clearly reflects that the

$169,000 balance was paid with community-property funds. Although appellant argues that

Anna-Marie acknowledged a contribution of $100,000 borrowed from Michael’s company,

there is no evidence that this could be traced to a separate-property source. Even if Michael had

owned the company before he was married, to the extent that this $100,000 was earned during

the marriage, it would have been community property. Moreover, the marital settlement

agreement expressly indicated that Anna-Marie’s $155,000 was the only separate-property

contribution; Michael never claimed any portion of the down payment as his separate property.

In summary, this order AFFIRMS the bankruptcy judge’s ruling that there was no

fraudulent transfer because reasonably equivalent value was received in exchange.

3. PREFERENCE.

Appellant also argues that the bankruptcy judge should have allowed a post-judgment

amendment to the complaint to allege a preference under 11 U.S.C. 547. This order finds that

the bankruptcy judge did not abuse his discretion in denying this eleventh-hour request. 

Compare Caddy-Imler Creations, Inc. v. Caddy, 299 F.2d 79, 84 (9th Cir. 1962)(“[T]here was

no clear abuse of discretion in the trial court’s refusal to change the entire legal theory of the

case after the introduction of all evidence was complete.”). Considering that the trustee openly

admitted during trial that he was not suing under a preference theory, he can hardly assert that it

would be appropriate to amend the pleadings to include a preference claim to conform to the

evidence presented. FRCP 15(b). The bankruptcy judge’s ruling is AFFIRMED.

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In any case, even if the trustee had alleged a preference in his complaint, he probably

would not have prevailed. The transfer was not made within ninety days of the filing of

Michael’s bankruptcy petition as required by 11 U.S.C. 547(b)(4)(A). It is also far from certain

whether the trustee could have proven that Anna-Marie was an insider as required by 11 U.S.C.

547(b)(4)(B). While a debtor’s spouse is normally an insider, an ex-spouse is analyzed

differently. In re Schuman, 81 B.R. 583, 585–86 (9th Cir. 1987). As the divorce proceedings

were already in progress, the bankruptcy judge would have focused on the closeness of the

parties and the degree to which the transferee was able to exert control or influence over the

debtor. At the time of the transfer, Michael and Anna-Marie had already been separated for

well over eight months and negotiated the marital settlement agreement at arms-length, each

represented by counsel. There was no evidence in the record that even remotely suggests

Anna-Marie exercised any undue control or influence over Michael during this process.

Furthermore, pursuant to 11 U.S.C. 547(c)(7), a trustee may not avoid a transfer as a

preference if it was a bona fide payment of a debt to a spouse or former spouse “in connection

with a separation agreement, divorce decree or other order of a court of record, determination

made in accordance with State or territorial law by a governmental unit or property settlement

agreement.” Here, the judgment of dissolution of marriage entered by the Superior Court of

Santa Clara County, incorporating the marital settlement agreement would certainly qualify.

CONCLUSION

For the reasons stated above, the ruling of the bankruptcy judge is AFFIRMED. 

Judgment will be entered accordingly.

IT IS SO ORDERED.

Dated: May 10, 2005 WILLIAM ALSUP

UNITED STATES DISTRICT JUDGE

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