Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-canb-4_06-ap-04092/USCOURTS-canb-4_06-ap-04092-0/pdf.json

Parties Involved:
Silvia Carbaat
Defendant
Susan Hester Newcomb
Defendant
John T. Kendall
Plaintiff

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UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re No. 06-40029 TK 

Chapter 7

MICHAEL ANGELO CARBAAT,

Debtor.

___________________________/

JOHN T. KENDALL, Trustee, A.P. No. 06-4092 AT

Plaintiff,

vs.

SILVIA CARBAAT, SUSAN HESTER 

NEWCOMB,

Defendants.

___________________________/

MEMORANDUM OF DECISION

In this adversary proceeding, plaintiff John T. Kendall, the

duly appointed chapter 7 trustee, (the “Trustee”) seeks to avoid the

pre-petition transfer by the debtor (the “Debtor”) to his former

wife, defendant Silvia Carbaat (“Silvia”), of his interest in their

family home (the “House”) and in an unsecured promissory note (the

“Note”) pursuant to 11 U.S.C. § 548(a) and § 544(b). He also seeks

to recover the transfers or their value from Silvia pursuant to 11

Signed: December 19, 2006

________________________________________

LESLIE TCHAIKOVSKY

U.S. Bankruptcy Judge

________________________________________

Entered on Docket 

December 19, 2006

GLORIA L. FRANKLIN, CLERK 

U.S BANKRUPTCY COURT 

NORTHERN DISTRICT OF CALIFORNIA

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U.S.C. § 550(a)(1) and, with respect to his interest in the House,

from defendant Susan Hester Newcomb (“Newcomb”), Silvia’s mother, as

a subsequent transferee pursuant to 11 U.S.C. § 550(a)(2). The

proceeding was tried to the Court on December 11, 2006 and, at the

conclusion of the trial, was taken under submission. The Court’s

findings and conclusions are set forth below.

SUMMARY OF FACTS

The Debtor and Silvia were married on May 20, 2000. They

separated on October 19, 2003 and were divorced on October 29, 2004.

During their marriage, they had two children, who are currently five

and seven years old, respectively. They purchased the House in

February 2002. Newcomb loaned them the money for the down payment:

i.e., approximately $25,000. 

The marital settlement agreement (the “MSA”) provided that the

Debtor would transfer his interest in the House to Silvia. She

agreed to refinance the mortgage within 90 days to remove the

Debtor’s name from the underlying promissory note. The Debtor also

transferred to Silvia a promissory note for $15,600 owed to the

couple by third parties (the “Note”). The Debtor received sole

ownership of three vehicles. Silvia waived the right to future

spousal support. Each party agreed to bear his or her own attorneys’

fees. The MSA was incorporated into the divorce decree. 

Silvia was unable to obtain the refinancing based on her own

credit. Consequently, in November 2003, she transferred the House to

Newcomb as trustee of a family trust (the “Trust”). Silvia and her

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brother were the sole beneficiaries of the Trust. Newcomb’s credit

permitted her to refinance the mortgage. 

On January 12, 2006, the Debtor filed a chapter 7 petition,

commencing this case. Thus, this case is governed by the amendments

to the Bankruptcy Code made by the Bankruptcy Abuse Prevention and

Consumer Protection Act of 2005 (“BAPCPA”). This adversary

proceeding was commenced on March 5, 2006. 

DISCUSSION

A. OVERVIEW

The Trustee’s First Amended Complaint (the “Complaint”) stated

seven claims for relief: (1) fraudulent conveyance under 11 U.S.C. §

548(a)(1), (2) fraudulent conveyance under 11 U.S.C. § 548(a)(2), (3)

fraudulent conveyance under 11 U.S.C. § 544(b) and Cal. Civ. Code §

3439.04, (4) fraudulent conveyance under 11 U.S.C. § 544(b) and Cal.

Civ. Code § 3439.05, (5) to recover the avoided transfer or its value

from Newcomb under 11 U.S.C. § 550(a)(2), (6) objecting to any claims

filed by defendants under 11 U.S.C. § 502(d), and (7) for sale of coowner’s interests pursuant to 11 U.S.C. § 363(h).

No evidence was provided on the sixth and seventh claims, and

they were not discussed in the trial briefs. Therefore, these claims

will be dismissed without prejudice. The Court will address together

the first and third claims, on the one hand, and the second and

fourth claims, on the other, as they are substantially the same

claims. Thereafter, the Court will address the fifth claim for

relief. 

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A. AVOIDANCE OF TRANSFERS AS ACTUALLY FRAUDULENT

1. Applicable Law

As applicable to this case, 11 U.S.C. § 548(a)(1)(A) provides,

in pertinent part, as follows:

The trustee may avoid any transfer...of an

interest of the debtor in property...that was

made...within 2 years before the date of the

filing of the petition, if the debtor

voluntarily or involuntarily–

 (A) made such transfer...with actual intent

to hinder, delay, or defraud any entity to which

the debtor was or became, on or after the date

that such transfer was made...indebted....

11 U.S.C. § 548(a)(1)(2005).

Section 3439.04(a)(1) of the California Civil Code provides, in

pertinent part, as follows:

A transfer made...by a debtor is fraudulent as

to a creditor, whether the creditor’s claim

arose before or after the transfer was made...,

if the debtor made the transfer...as follows: 

 (1) With actual intent to hinder, delay, or

defraud any creditor of the debtor.

Cal. Civ. Code § 3439.04(a)(1). Section 3439.07(a)(1) provides as

follows:

In an action for relief against a

transfer...under this chapter, a creditor,

subject to the limitations in Section 3439.08,

may obtain: 

 (1) Avoidance of the transfer...to the extent

necessary to satisfy the creditor’s claim.

Cal. Civ. Code § 3439.07(a)(1). Section 3439.08(a) provides, in

pertinent part, as follows:

A transfer...is not voidable under paragraph (1)

of subdivision (a) of Section 3439.04 against a

person who took in good faith and for a

reasonably equivalent value or against any

subsequent transferee.

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Section 3439.09(a) provides, in pertinent part, as follows:

A cause of action with respect to a fraudulent

transfer...under this chapter is extinguished

unless action is brought pursuant to subdivision

(a) of Section 3439.07...:

 (a) Under paragraph (1) of subdivision (a) of

Section 3439.04, within four years after the

transfer was made....

 With exceptions not relevant to this proceeding, 11 U.S.C. §

544(b) of the Bankruptcy Code provides that:

...the trustee may avoid any transfer of an

interest of the debtor in property...that is

voidable under applicable law by a creditor

holding an [allowable] unsecured claim....

11 U.S.C. § 544(b)(1). As relevant to this proceeding, 11 U.S.C. §

546(a)(1) requires a trustee to file an avoidance action under either

11 U.S.C. § 544 or 548 within two years after the entry of the order

for relief.

2. Decision

The Trustee contends that the transfer of the Debtor’s interests

in the Note and the House were actually fraudulent and should be

avoided pursuant to the statutes recited above. The proceeding was

timely filed pursuant to 11 U.S.C. § 546(a)(1). In addition, the

transfers occurred within the time frame established by the

applicable version of 11 U.S.C. § 548(a)(1) and Cal. Civ. Code §

3439.09(a). The only issue presented for this Court is whether,

based on the evidence presented, the transfers were made with actual

intent to hinder, delay, or defraud a creditor.

At the conclusion of the trial, the Court made an oral ruling on

these claims. The Court stated that the evidence was not sufficient

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to establish that the transfers were made with actual intent to

hinder, delay, or defraud a creditor. The Trustee asserted that the

Court should find sufficient to establish actual intent the fact that

several badges of fraud were present. See Cal. Civ. Code §

3439.04(b): e.g., the transfer was made to an insider. He contended

that the MSA was collusive. 

The Court was not persuaded. Assuming a divorce is not

collusive, the Court does not consider a spouse an insider of the

divorcing spouse. The Court was persuaded by the demeanor of the

parties that the divorce was not collusive. The only suspicious

aspect of the transaction was Silvia’s subsequent transfer of the

House to Newcomb, as trustee of the Trust. However, the reason for

this subsequent transfer was explained to the Court’s satisfaction:

i.e., to permit Newcomb to refinance the House as required by the

MSA. Thus, the Court finds for Silvia on the first and third claims

and will not avoid the transfers as actually fraudulent.

B. AVOIDANCE OF TRANSFERS AS CONSTRUCTIVELY FRAUDULENT

1. Applicable Law

As applicable to this case, 11 U.S.C. § 548(a)(1)(B) provides,

in pertinent part, as follows:

The trustee may avoid any transfer...of an

interest of the debtor in property...that was

made...within 2 years before the date of the

filing of the petition, if the debtor

voluntarily or involuntarily–

...

 (B)(i) received less than a reasonably

equivalent value in exchange for such transfer

or obligation; and 

 (ii)(I) was insolvent on the date that

such transfer was made...or became insolvent as

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a result of such transfer...; 

 11 U.S.C. § 548(a)(1)(B)(2005). As relevant here, “insolvent” is

defined as a:

financial condition such that the sum of...[the

debtor’s] debts is greater than all of...[the

debtor’s] property, at a fair valuation,

exclusive of– 

 (i) property transferred, concealed or removed

with intent to hinder, delay, or defraud such

entity’s creditors, and 

 (ii) property that may be exempted from

property of the estate under section 522

of...[the Bankruptcy Code.] 

 11 U.S.C. § 101(32)(A). 

Section 548(d)(2)(A) states as follows:

“[v]alue” means 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....

11 U.S.C. § 548(d)(2)(A).

 

Section 3439.05 of the California Civil Code provides, in

pertinent part, as follows:

A transfer made...by a debtor is fraudulent as

to a creditor whose claim arose before the

transfer was made...if the debtor made the

transfer...without receiving a reasonably

equivalent value in exchange for the

transfer...and the debtor was insolvent at that

time or the debtor became insolvent as a result

of the transfer....

Cal. Civ. Code § 3439.05. Section 3439.01(a) states as follows:

 

“Asset” means property of a debtor, but the term

does not include, the following: 

 (1) Property to the extent it is encumbered by

a valid lien. 

 (2) Property to the extent it is generally

exempt under nonbankruptcy law. 

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Cal. Civ. Code § 3439.01(a). Section 3439.02, in pertinent part,

states as follows:

 (a) A debtor is insolvent if, at fair

valuations, the sum of the debtor’s debts is

greater than all of the debtor’s assets. 

 ... 

 (c) A debtor who is generally not paying his

or her debts as they become due is presumed to

be insolvent. 

 ... 

 (e) Debts under this section do not include an

obligation to the extent it is secured by a

valid lien on property of the debtor not

included as an asset.

Cal. Civ. Code § 3439.02. Section 3439.03, in pertinent part,

states as follows:

 Value is given for a transfer...if, in

exchange for the transfer...property is

transferred or an antecedent debt is secured or

satisfied but value does not include an

unperformed promise made otherwise than in the

ordinary course of the promisor’s business to

furnish support to the debtor or another person.

Cal. Civ. Code § 3439.03. This type of claim is also extinguished

if an action is not filed within four years of when the transfer

occurred. See Cal. Civ. Code § 3439.09(b). 

As set forth in the preceding section, Cal. Civ. Code §

3439.07(a)(1) provides as follows:

In an action for relief against a

transfer...under this chapter, a creditor,

subject to the limitations in Section 3439.08,

may obtain: 

 (1) Avoidance of the transfer...to the extent

necessary to satisfy the creditor’s claim.

Cal. Civ. Code § 3439.07(a)(1). Section 3439.08(a) provides, in

pertinent part, as follows:

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Since all of the transfers made and value received were part

of the MSA, there is no question concerning whether the value

received was “in exchange” for the transfers made as required by

both statutes.

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A transfer...is not voidable under paragraph (1)

of subdivision (a) of Section 3439.04 against a

person who took in good faith and for a

reasonably equivalent value or against any

subsequent transferee.

Finally, as also set forth in the preceding section, 11 U.S.C.

§ 544(b) permits a chapter 7 trustee to file an avoidance action that

could have been filed by a creditor under nonbankruptcy law. 11

U.S.C. § 544(b). The Trustee has two years from the date of entry of

the order for relief to file the action. See 11 U.S.C. § 546(a)(1).

2. Decision

The only issues presented by these two claims are: (1) whether

the Debtor received reasonably equivalent value for the transfers and

(2) if not, whether the Debtor was insolvent at the time of the

transfers or was rendered insolvent by the transfers. 

(1) Reasonably Equivalent Value

As set forth above, both 11 U.S.C. § 548(a)(1)(B) and Cal. Civ.

Code § 3439.05 define a constructively fraudulent transfer as a

transfer for which the debtor did not receive “reasonably equivalent

value.” To determine whether the transfers sought to be avoided by

the Trustee were constructively fraudulent, the Court must determine

the value of what the Debtor transferred and the value of what he

received.1 The Court must then determine whether the latter value is

reasonably equivalent to the former. “Reasonable equivalence” does

not require exact equality in value. In re Food & Fibre Prot.,

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Silvia contended that the value of the Note should be reduced

by the costs incurred to collect the balance due. She contended

that these costs totaled approximately $1,800. The Court was not

persuaded. It was not inevitable that these costs would be

incurred in order to realize the value of the Note. 

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Ltd., 168 B.R. 408, 417 (Bankr. D. Ariz. 1994); see also BFP v.

Resolution Trust Corp., 511 U.S. 531, 540 n.4 (1994).

(a) Value of Transferred Property

The complaint seeks to avoid two transfers: (1) the transfer of

the Debtor’s interest in the House and (2) the transfer of the

Debtor’s interest in the Note. The balance due on the Note was

$15,800. Thus, the value of the Debtor’s interest in the Note was

$7,900.2

The value of the Debtor’s interest in the House at the time of

the transfer was disputed. The Debtor listed the value of the House

as $290,000 in his bankruptcy schedules. However, at the trial, the

Trustee called an appraiser as an expert witness who valued the House

at $372,000. Silvia contended that the value of the House was

$320,000. 

The Court concludes that the House should be valued at $350,000.

The closest comparable house in size, age, and location sold for

$372,000 in approximately the same time frame. However, evidence was

presented that this house had been remodeled recently whereas the

House had deferred maintenance. The appraiser admitted that he did

not inspect the inside of the House. The balance of the secured debt

was approximately $290,000. As a result, the net equity in the House

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was approximately $60,000 and the Debtor’s share of that was $30,000.

Thus, the total value of these two transfers was $37,900. 

(b) Value of Property Received

In return for these transfers, the Debtor received sole

ownership of three vehicles with a net equity of $3,500. On his

bankruptcy schedules, he listed other personal property with a total

value of approximately $6,500. Presumably, at the time of the

transfers he owned the same assets or others of the same type of a

similar value. The MSA gave him the sole ownership of these assets

as well, thus increasing the total value of property he received to

approximately $6,750. 

Silvia also agreed to refinance the home mortgage so as to

obtain a release of the Debtor’s liability on the underlying note.

This agreement had no value. A debtor has no personal liability on

a note secured by a purchase money mortgage on his residence. See

Cal. Civ. Proc. Code § 580b. Silvia also agreed to assume the

$25,000 debt to Newcomb for the down payment on the House. This

agreement had a value to him of $12,500, thus increasing the value of

the property he received to approximately $19,250. The Trustee

contends that this is the full extent of the property received by the

Debtor in exchange for the transfers. The Court finds $19,205

to be less than reasonably equivalent in value to $37,900. It finds

that the minimum amount of value that would be reasonable equivalent

is $26,530: i.e., 70 percent of the value transferred. The value

received that has been discussed thus far falls short of this number

by $7,325. 

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The definition contemplates a scenario whereby the debtor

transfers property of tangible value to a third party in return for

the third party’s agreement to provide support to him in the

future.

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Silvia contends that the Court should consider two other items

given to the Debtor to be of value in excess of this figure: (1) her

agreement to pay her own attorneys’ fees and (2) her waiver of

spousal support. The Court concludes that a waiver of spousal

support cannot serve as value in this context. 

As noted above, the definition of value in both 11 U.S.C. §

548(d)(2)(A) and Cal. Civ. Code § 3439.03 excludes an unperformed

promise to provide future support to the debtor or to another person.

The rationale of these provisions, although not their precise

language, precludes treating the Debtor’s waiver of future spousal

support as value.3 The rationale behind the statutory exclusion is

that an unperformed promise to provide future support to the debtor

does not benefit creditors in a liquidation. In re Lucas Dallas,

Inc., 185 B.R. 801, 807 (Bankr. 9th Cir. 1995)(citing California

legislative history); see In re Agric. Research & Tech. Group, Inc.,

916 F.2d 528, 540 (9th Cir. 1990)(citing comment to Uniform

Fraudulent Transfer Act). Similarly, in a chapter 7 case, the waiver

of a debtor’s obligation to pay future spousal support from his postpetition income does not create value from a creditor’s perspective.

However, the Court concludes that the Debtor’s agreement to pay

her own attorneys’ fees did constitute value for purposes of this

proceeding. If the Debtor had been ordered to pay Silvia’s

attorneys’ fees, those fees would constitute a claim against his

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bankruptcy estate. By eliminating this claim, other creditors would

be benefitted by having fewer creditors with which to share any

proceeds from the estate. 

There are two admitted weaknesses in the Court’s conclusion.

First, the family law court had not yet ordered the Debtor to pay

Silvia’s attorneys’ fees when she entered into the MSA. However, the

Court finds that it is more likely than not that the family law court

would have made such an order. The evidence established a dramatic

disparity in the parties’ incomes. Silvia had the primary

responsibility for the care of the couple’s two young children and

worked a waitress for minimum wage plus tips. The Debtor worked for

a company that performed industrial painting, e.g., on bridges,

earning as much as $21 an hour. He had had an income of $100,000 in

2005 although he testified without contradiction that he was likely

to earn substantially less in 2006.

Second, no evidence was presented establishing the precise

amount of the attorneys’ fees that had been incurred by Silvia.

However, evidence was provided that the dissolution proceeding had

been litigious. An evidentiary hearing was required in connection

with the temporary support order. A final evidentiary hearing had

been scheduled to resolve all the marital issues. The MSA was

settled shortly before the trial date after considerable negotiation.

Based on this evidence, the Court finds it more likely than not that

Silvia had incurred substantially more than $7,325 in attorneys’

fees. 

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(2) Insolvency

Having concluded that the Debtor received reasonably equivalent

value in exchange for the transfers, the Court need not address the

issue of whether the Debtor was insolvent at the time of the

transfers or was rendered insolvent by them. Nevertheless, the Court

will do so to establish a record in the event of an appeal. Based on

the evidence presented, the Court finds and concludes that the Debtor

was either insolvent at the time of the transfers or was rendered

insolvent as a result of the transfers. 

The Trustee contended that, as a result of the transfers, the

Debtor was left with only three vehicles, the unencumbered value of

which totaled $3,500. The evidence established that, at the time of

the transfers and thereafter, the Debtor had unsecured debt on three

credit cards totaling over $17,000. Therefore, even if the Debtor

was not insolvent at the time of the transfers, the Debtor was

rendered insolvent as a result of the transfers. 

C. RECOVERY OF AVOIDED TRANSFER OR ITS VALUE

1. Applicable Law

Section 550(a) of the Bankruptcy Code provides, in pertinent

part, that:

Except as provided in this section, to the

extent that a transfer is avoided under section

544...of this title, the trustee may recover,

for the benefit of the estate, the property

transferred, or, if the court so orders, the

value of such property, from– 

 (1) the initial transferee of such

transfer... 

(2) any immediate or mediate transferee of

such initial transferee.

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As with the issue of insolvency, since the Court has

concluded that the transfers are not avoidable, the Court need not

address this issue and does so only to create a record. 

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Section 550(b)(1) of the Bankruptcy Code provides, in pertinent part,

that:

The trustee may not recover under section (a)(2)

of this section from– 

 (1) a transferee that takes for value,

including satisfaction or securing of a present

or antecedent debt, in good faith, and without

knowledge of the voidability of the transfer

avoided....

11 U.S.C. § 550(b)(1).

2. Decision

The Trustee seeks to recover the avoided transfers or their

value from Silvia and Newcomb.4 Silvia is the immediate transferee

of both transfers and thus, if the transfers were avoidable, would be

absolutely liable for their value: i.e., $37,900. See 11 U.S.C. §

550(a)(1). 

Newcomb is a subsequent transferee of the Debtor’s interest in

the House pursuant to 11 U.S.C. § 550(a)(2). Section 550(b)(1)

provides a defense to the recovery action for a subsequent transferee

who gave value for the transfer, including the satisfaction or

securing of an antecedent debt, in good faith, without knowledge of

the avoidability of the transfer to the extent of the value given. 

 Based on the evidence presented, the Court finds that Newcomb

acted in good faith without knowledge of the avoidability of the

transfer. However, the Court finds that Newcomb did not give value

for the transfer. Although the evidence established that Newcomb had

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loaned the couple $25,000 for the down payment for the House, no

evidence was presented that Silvia transferred title to the House to

Newcomb to satisfy or secure that debt. Therefore, if the transfers

were avoidable, the Court would find Newcomb liable to transfer the

Debtor’s interest in the House to the bankruptcy estate. 

CONCLUSION

The Court finds for Silvia on the first and third claims,

seeking to avoid the transfers as actually fraudulent. The Court

also finds for the Silvia on the second and fourth claims, seeking to

avoid the transfers as constructively fraudulent. Consequently, the

Court also finds for the defendants Silvia and Newcomb on the fifth

claim, to recover the avoided transfers. No evidence was presented

on the six and seventh claims. As a result, they are dismissed

without prejudice. Counsel for the defendants is directed to submit

a proposed form of judgment in accordance with this decision.

END OF DOCUMENT

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COURT SERVICE LIST

Gerald C. Vanoli

3445 Golden Gate Way

P.O. Box 479

Lafayette, CA 94549-0479

Joanne LaFreniere

Stromsheim & Associates

201 California St., Ste. 350

San Francisco, CA 94111

Case: 06-04092 Doc# 29 Filed: 12/19/06 Entered: 12/19/06 16:03:51 Page 17 of

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