Court: District Court, E.D. Virginia; May 12, 1983; Federal District Court
Richard A. Bartl, the Receiver in Bankruptcy, seeks to have two deeds of conveyance declared null and void following the foreclosure of real property formerly owned by Philander P. Claxton, III. The property, approximately 7.3 acres with a residence, was transferred to Classic Homes, Inc. shortly before Claxton was subjected to an involuntary bankruptcy petition filed on June 26, 1979. Susan P. Williams subsequently purchased the property at foreclosure sales in August and September 1979. Williams has moved to dismiss the case, arguing that the court lacks subject matter jurisdiction since the property was no longer owned by the bankrupt at the time of the petition.
The court outlines that under Section 70a of the Bankruptcy Act, the Trustee in Bankruptcy acquires title to all nonexempt property of the bankrupt at the petition's filing date. This includes property transferred fraudulently within one year prior to the filing. Such fraudulent transfers are defined as those made without fair consideration while the debtor is insolvent or made with intent to defraud creditors. Section 67d(6) provides that such transactions are null and void against the trustee, but it requires the trustee to actively recover the property.
The court rejects Williams' argument regarding jurisdiction, asserting that the authority of the Trustee derives from the creditors rather than the bankrupt. The Trustee can follow the property into the hands of any recipient, and the Bankruptcy Court has jurisdiction over the debtor's non-exempt property. Claxton's transfer of the property within one year before the bankruptcy filing subjects it to scrutiny for potential fraud against creditors, confirming the court's jurisdiction to adjudicate the matter. The distinction between subject matter jurisdiction and summary jurisdiction is emphasized, noting that objections to summary jurisdiction may necessitate a plenary proceeding in the District Court.
An objection to jurisdiction must be timely raised under Section 2a(7) and Bankruptcy Rules 712 and 915, either via pre-answer motion or in the answer, or it is waived. Defendant Williams filed her motion on November 5, 1980, three months after her answer, rendering it untimely. Although Williams claimed in her answer that the court lacked jurisdiction regarding a property transfer, this assertion can only be treated as an objection to subject matter jurisdiction, and she cannot prevail on this ground. The court found no further objections in her answer concerning summary jurisdiction over her own claim. Additionally, Williams focused her arguments on the jurisdiction over conflicting claims between the trustee and Classic Homes, rather than her own claim.
The Bankruptcy Court can exercise summary jurisdiction if it determines that an objecting party's claim is not adverse to the estate or is merely colorable. A claim's adverse nature is assessed based on facts existing at the petition's filing. Classic was the record owner at that time, making it an adverse claimant. Williams had no claim at the time of petition filing; her title emerged only after that date, and mere subsequent possession does not confer adverse claimant status. Classic consented to the court's jurisdiction, while Williams, asserting an objection in a separate proceeding, lacks standing to challenge it concerning Classic's claim.
Even if Williams had properly raised her objection, it would have been overruled. Furthermore, Williams contended that the order avoiding the property transfer should be voided, arguing that as the titleholder of record, she was a necessary party to the action affecting her title. She also claimed a violation of her procedural due process rights due to lack of notice of the proceedings that jeopardized her property interest, citing Rule 719 of the Bankruptcy Procedure.
Bankruptcy Rule 719(a) mandates that a person must be joined in a proceeding if their absence prevents complete relief among existing parties or if they have a related interest that could be impaired without their participation. The rule is derived from Rule 19 of the Federal Rules of Civil Procedure, and the same factors apply for determining necessary parties. Generally, a subsequent purchaser of disputed property should be joined; however, if the court can provide complete relief and the absent party can still protect their interests, the case may proceed without them.
In this instance, the court sought to void Claxton, III’s deed to Classic, with both the receiver and Classic present in court, making additional parties unnecessary for that action. The voiding of Classic’s deed returned the property title to the bankrupt and, by law, to the receiver, placing defendant Williams in a position to defend her title derived from Classic’s deed. Nevertheless, the court's order did not impede her ability to defend her interests, as it did not address the validity of her claim.
Williams, who was married to Claxton, III at the time of the proceedings, had actual knowledge of the complaint against Classic but did not seek to join the action. This delay allowed her and Claxton, III to potentially transfer the property to evade the bankruptcy Trustee. If a joinder request is successful, the court may order the person to be joined; if not possible, the court may dismiss the action, but is not obligated to do so. Importantly, failure to join a necessary party does not affect the court's subject matter jurisdiction.
Williams lacked standing to appeal the court's order from June 3, 1980, as she was not a party to that action, and similarly, she has no standing to contest the prior order in the current proceeding. The court affirmed that Williams has had her opportunity to defend her title, and her due process claim under the Fifth Amendment is unfounded, as the prior order did not deprive her of property.
The order positioned the Trustee in Bankruptcy to contest Williams’ title through a formal complaint, with Williams being duly notified and given the chance to respond. Williams references *Fuentes v. Shevin*, asserting it supports her claim; however, the court distinguishes the case, noting that no property has been seized in the present situation. Williams contends the order has rendered her title unmarketable, equating the court's actions to a 'taking' of property. The court counters that Williams’ title was already unmarketable before June 3, 1980, and defending one's title does not constitute a 'taking.'
Williams also claims the court lacked jurisdiction to void Claxton, III’s deed to Classic, a bona fide purchaser for value. While the Trustee admits Classic's status, he contends the transaction was not for 'value,' and Classic opted to settle rather than defend. Williams lacks standing to contest an order in a different proceeding. Additionally, she argues the court lacks jurisdiction based on the Supreme Court's decision in *Northern Pipeline Construction Co. v. Marathon Pipe Line Co.*, which deemed the expanded jurisdiction of bankruptcy judges unconstitutional. However, since Claxton, III's bankruptcy is governed by the prior Bankruptcy Act, Williams’ argument is essentially a reiteration of her objections to the court’s summary jurisdiction, which have already been overruled. Consequently, the court denies Williams' objections to its jurisdiction and her motion to dismiss the proceeding.
Claxton, III purchased the property in 1976, initially securing a first deed of trust for approximately $335,000. He later acquired another first trust for $200,000, with the Neels retaining a second trust for the remaining balance. In December 1978, Claxton, III entered into a sales contract to sell part of the property to Classic Homes, Inc. for $100,000 in cash and $300,000 under a deed of trust and note. Classic subsequently filed for specific performance in April 1979, concerned about Claxton's intentions to fulfill the contract.
On April 20, 1979, the parties reached a settlement approved by the Circuit Court, resulting in a consent decree that allowed Claxton, III to encumber the property up to $400,000. Claxton, III was required to execute an escrow deed conveying 7.3 acres to Classic, allowing Classic to record the deed and obtain full title if Claxton defaulted. Classic discovered that Claxton had encumbered the property with four additional deeds of trust totaling $520,000, exceeding the agreed limit, prompting Classic to record the escrow deed on May 22, 1979. During this period, Claxton, III was the CEO of Watkins Corporation, which filed for bankruptcy on May 10, 1979. Notably, several lienholders were connected to Watkins, including Waibel and Allen & Co. Samuel F. Neel, who held a deed of trust and was previously chairman of Watkins, initiated foreclosure proceedings due to dissatisfaction with Claxton. A foreclosure sale occurred on June 27, 1979, resulting in Claxton, Jr. (Claxton, III's father) as the successful bidder. However, Claxton, Jr. failed to close the transaction, leading to a second foreclosure sale scheduled for August 21, 1979. Claxton, Jr. attempted to sell the property to George and Angela Shafran, contingent on obtaining title, and subsequently negotiated to buy Neel's interest in the property and shares in Watkins Corporation for $50,000.
Terms of the transaction included the resignation of the trustee who did not convey property to Claxton, Jr. Following this, Claxton, Jr. held the second and third deeds of trust, and Garfinkel was appointed as the substitute trustee. On August 9, 1979, Classic filed a suit to quiet title, obtaining a temporary restraining order that blocked a sale scheduled for August 21, 1979, by Neel. The pending suit involved only the fourth, fifth, and sixth deeds of trust, allowing Claxton, Jr.'s sale on August 31, 1979, to proceed, with Susan P. Williams as the successful bidder. Classic's restraining order expired when it did not pursue a permanent injunction by the September 5, 1979 hearing. Subsequently, the foreclosure on the second deed of trust took place on September 12, 1979, with Williams again as the successful bidder.
Garfinkel had known Claxton, III for about five years and had a friendship with him, which included being his flying instructor. In August 1979, Garfinkel agreed to be the substitute trustee for Claxton, Jr.'s deeds, having prior acquaintance with both Claxton, Jr. and Williams. Claxton, III advised Garfinkel on trustee responsibilities and helped him find a knowledgeable attorney. Garfinkel believed his appointment complied with a Virginia law requiring trustees to be residents.
Discrepancies arose regarding the sale terms; while the advertisement stated payment could be in cash or other acceptable terms, conflicting testimonies emerged about the actual terms announced during the sales. On August 31, 1979, Williams provided personal, unsecured notes as payment, which Garfinkel accepted for the third, fourth, and fifth trustholders. At the September 12 sale, Williams, now the record owner, tendered a single note for the second trust but made no offers to Union First National Bank concerning the sixth deed of trust. No cash deposits were made at either sale, with the only cash paid by Williams covering recording fees.
Garfinkel's reports to the Fairfax County Commissioner of Accounts indicated he paid for advertising and auctioneer fees, but he later claimed that Claxton, Jr. had made those payments. His reports also stated that he received significant amounts from both sales, although he asserted that he only received notes, not cash. The reports showed payments against liens, but Garfinkel testified he disbursed notes rather than actual payments. By trial time, the Commissioner of Accounts had not approved the sale reports. Williams learned of the August 31 sale from Claxton, III, who suggested she could buy the property with notes and helped her prepare them. She anticipated repaying these notes with proceeds from a contract between the Shafrans and Claxton, Jr. Additionally, Williams confirmed that Claxton, III was residing in the property at the time of her purchase and that she subsequently entered into a lease with him for six months at $3,000 per month.
Claxton, III paid one and a half months' rent in cash in October 1979 and later provided furnishings in lieu of rent. In March 1980, he facilitated a new tenant for the property, who was the wife of a fellow inmate of Claxton, III. Williams, the property owner, mentioned an attempted lease with a Florida company that deposited approximately $225,000, but the deposit did not clear, and it is uncertain if the lease was finalized. Williams was unsure of the new tenant's status and both she and Claxton, Jr. were working to resolve the property's situation. To finance a buyout of Neel in August 1979, Claxton, Jr. endorsed two of Claxton, III's notes secured by second and third deeds of trust on the property. Claxton, Jr. later sought bank approval to substitute these notes with ones from Susan Williams, who proposed a contract to assign the proceeds from a Shafran contract and sought to assume the existing deed of trust but was hindered by ongoing litigation. The bank indicated willingness to approve an assumption contingent on obtaining title insurance but still held the secured notes and rejected Williams’ recent offer involving a different property. By trial time, Williams had spent over $80,000 to maintain the property, intending to pay off liens from a land sale to the Shafrans and occupy the house with her sister. She engaged engineers for property subdivision studies, secured an injunction against a foreclosure attempt, and arranged for the purchase and assumption of the first trust, making monthly payments of $2,475. She also settled a fourth trust and made an installment payment on a trustee’s fee. Funding sources included a deposit related to a purchase contract with the Bandierante Corporation, which was represented by Claxton, III’s attorney. Williams utilized her family resources and employment income to cover expenses. Claxton, III described his relationship with Williams as a strong friendship, though Williams clarified that while he was a good friend, he was not her closest friend. She noted her marriage from 1969 to 1977, but it later emerged that she and Claxton, III were married at the time of their testimony.
The marriage certificate indicates that the marriage occurred on December 8, 1979, three months after foreclosure sales and one year prior to the trial. The court admitted this certificate as evidence following a motion by the Trustee in Bankruptcy. Williams opposed the Trustee's motion to admit additional documentary evidence by presenting an ante-nuptial agreement with Claxton, III, which stipulates that both parties would retain separate property post-marriage.
Under Section 67d(2)(a) of the Bankruptcy Act, any transfer by a debtor within one year of filing a bankruptcy petition is considered fraudulent to creditors if it occurs without fair consideration and results in the debtor’s insolvency, irrespective of the debtor's intent. Section 67d(2)(d) allows for the avoidance of transfers made with the intent to hinder, delay, or defraud creditors. Additionally, Section 70e(1) deems any transfer fraudulent if it would be voidable under state law, and Section 70e(2) ensures that property affected by such transfers remains part of the bankruptcy estate, recoverable by the Trustee.
According to Section 55-80 of the Virginia Code, any property transfer made with intent to defraud is fraudulent unless the purchaser for valuable consideration lacks notice of the fraudulent intent. A claim of fraud must be established by clear and convincing evidence, which can be circumstantial. A prima facie case of fraud shifts the burden to the party defending the transaction to prove its fairness.
Indicators of fraud, or “badges of fraud,” include the close relationship between parties, the grantor's insolvency, creditor pursuit at the time of transfer, inadequate consideration, and the grantor retaining possession of the property. While these elements vary in significance, their presence can suggest fraudulent intent. For instance, a familial relationship warrants scrutiny, and retained possession raises presumption against transaction fairness, though mere possession retention isn't definitive of fraud.
Williams’ claim to the property arose after Claxton, III's bankruptcy petition was filed. Claxton, III resisted bankruptcy adjudication, and a receiver was appointed on March 12, 1980. Transfers occurring between the petition filing and the adjudication or receiver possession may be valid under Section 70d, provided they involve fair equivalent value. If the transferee knew of the pending bankruptcy, there's a presumption against good faith unless they can prove reasonable belief in the petition's invalidity. The burden of proof lies with the party defending the transaction.
Section 70d of the Bankruptcy Act excludes real property transfers from its protections, meaning an individual facing an involuntary petition cannot freely manage their property during the proceedings. Williams purchased property at a foreclosure sale characterized by significant irregularities, including the acceptance of unsecured personal notes instead of immediate cash or equivalent payment. Garfinkel, acting as trustee and a personal friend of Claxton, III, misrepresented payments to lienholders, who only received notes. Claxton, III informed Williams that she could purchase the property with these notes, which would be paid off using proceeds from a separate contract negotiated by Claxton, Jr. Following the purchase, Williams married Claxton, III and allowed a friend of Claxton, III to occupy the property rent-free. Claxton, Jr. attempted to buy the property shortly after the involuntary petition was filed, following Claxton, III's suggestion, and later acquired shares in the bankrupt Watkins Corporation as part of the purchase agreement. Throughout this period, Claxton, III was insolvent, a fact supported by evidence of debts related to his business activities. Although record title was held by Classic on the purchase date, Claxton, III remained in possession. Section 67d(2)(a) of the Bankruptcy Act allows courts to void transfers made for inadequate consideration during insolvency. Virginia law, applicable under Section 70e, also permits avoiding transfers made with intent to defraud creditors. Evidence suggests the property’s market value was between $700,000 and $800,000, and payment by unsecured notes does not constitute fair consideration. Claxton, III's actions indicate a deliberate attempt to shield the property from creditors, involving a coordinated effort with associates to structure transactions that would keep the asset outside the bankruptcy estate. His active involvement in these transactions demonstrates an intent to hinder and defraud creditors, rendering the transfer invalid despite Williams' title arising from the foreclosure sale.
The deed from Claxton, Ill to Classic has been invalidated by consent, and evidence presented indicates that this conveyance occurred for inadequate consideration while Claxton, III was insolvent. Claxton, III's continued occupancy of the property and the occurrence of foreclosure sales suggest that Classic did not fulfill its debt obligations associated with the escrow deed. As a result, the Trustee's Special Warranty Deeds from August and September 1979 will be declared null and void, and Garfinkel’s note for a trustee’s fee will also be avoided. Any payments made, including a $1,500 installment prior to trial, will be returned to the Trustee in Bankruptcy. Susan Williams is granted a claim against the estate for her documented expenses in maintaining the property, minus the $4,500 received and the fair market value of furnishings as rent. The claim amount will increase by any recovered funds from the $1,500 paid to Garfinkel.
Williams filed a motion to submit new evidence, including an affidavit and an alleged agreement between Classic and Claxton, III regarding future reconveyance of property under certain conditions. However, she fails to meet the criteria outlined in Rule 60(b)(2) of the Federal Rules of Civil Procedure for introducing new evidence, including demonstrating the existence of the document at the time of trial and exercising due diligence to discover it. The court finds it unreasonable to believe that Claxton, III would not have disclosed such a document to Williams. Even if the evidence met the diligence criteria, it would not alter the court's assessment of the transaction, as any contingent agreement allowing Claxton, III to reclaim property would still need to be proven not to defraud Claxton, Ill's creditors.
Defendant Williams' motion to introduce newly-discovered evidence or to supplement the record is denied. Richard A. Bartl, previously the receiver for Claxton, III, is now the Trustee in Bankruptcy for Claxton, III's estate. The bankruptcy petition against Claxton, III was filed before the Bankruptcy Code's effective date on October 1, 1979, meaning the case is governed by the former Bankruptcy Act of 1898. The trustee's title to the bankrupt's property relates back to the filing date, June 26, 1979, despite the adjudication order being entered later on March 21, 1980. Claxton, III's motion to vacate this order was denied on March 8, 1982, and Bartl was appointed trustee at the creditors' meeting on April 12, 1982. The receiver retains rights during adjudication, and the trustee has the authority to avoid fraudulent transfers under state law. The Supreme Court case Cline v. Kaplan, which addressed jurisdiction issues, was overruled by Congress, affirming that subject matter jurisdiction in bankruptcy is concerned primarily with whether the bankrupt is a proper party. Testimonies revealed that Williams attempted to substitute her note and deed of trust for existing secured notes held by Union First National Bank, but was unable to meet the bank's conditions due to a pending title dispute. Virginia Code § 55-80 renders any fraudulent transfers void against creditors, unless the purchaser had no knowledge of the fraud. Furthermore, under Bankruptcy Act § 70d(5), the burden of proof lies with the person asserting the validity of a transfer.
