Court: United States Bankruptcy Court, D. Nebraska; November 1, 1988; Us Bankruptcy; United States Bankruptcy Court
On July 30, 1985, Robert Craig, the debtor, entered into a mortgage agreement with Minden Exchange Bank Trust Company (the "Bank") shortly before filing for bankruptcy. In exchange for a $250,000 loan, the debtor and his wife mortgaged 880 acres of land, with the Bank using the loan proceeds to reduce the debtor's obligations under a personal guarantee for a third-party corporation, Minden D. J, Inc., which had an outstanding debt of approximately $399,997. The Official Creditors’ Committee initiated legal action to avoid the mortgage as a preference under 11 U.S.C. § 547 or as a fraudulent conveyance under § 548. The Bank contended that the transaction did not constitute a preference or fraudulent conveyance and moved for a directed verdict, claiming the plaintiff failed to demonstrate a preferential effect.
Key findings include that the mortgage was executed 83 days before the bankruptcy filing, with the mortgaged land valued between $250,000 and $270,000, based on estimates provided by the Bank's executive vice-president. The court determined that the mortgage would be avoided, concluding that the Bank acted to secure its interests aggressively, as it would not have permitted the debtor to retain any equity in the mortgaged property. Other unsecured creditors, including First National Bank of Minden, also held claims against the debtor.
The plaintiff contends that the $250,000 note and mortgage granted to the Bank, along with a $250,000 credit on the debtor's guaranteed debt, constitutes a fraudulent conveyance. Additionally, the plaintiff asserts that the $250,000 credit qualifies as a payment on an antecedent debt, making it a preference, and calculates the amount to be set aside as $159,090.89, based on the proportion of the loan attributed to 560 acres of mortgaged land. The plaintiff claims the land's value is approximately $250,000, arguing that the Bank would not have received the full value in a Chapter 7 liquidation and would have shared it with other creditors, thus demonstrating preferential treatment.
In contrast, the Bank argues that no preference exists under § 547 because the plaintiff failed to prove preferential effect as required by § 547(b)(5) and contests the evidence regarding the land’s value. Furthermore, the Bank claims that even if the plaintiff's evidence were sufficient, the mortgage transaction is exempt from avoidance under § 547(c)(1) due to the release of the debtor from liability on a guaranty, which the Bank considers new value exchanged for the note and mortgage. The Bank also maintains that granting a mortgage to secure an antecedent debt does not constitute a fraudulent conveyance under § 548.
The analysis of transfers indicates that two property transfers occurred: a mortgage on the debtor’s 560 acres and retention of $250,000 loan proceeds by the Bank for the debtor’s guaranty obligation. The plaintiff's counsel suggests the court can determine the preferential payment amount by allocating the loan proceeds based on the acreage mortgaged by the debtor and his wife. This method results in $159,090.89 attributed to the debtor’s 560 acres and $90,090.11 to the wife’s 320 acres. The Bank's counsel disputes this allocation, arguing that there is insufficient evidence regarding the value of the mortgaged properties.
The court finds that there is insufficient evidence to assess the relative value of the 560-acre and 320-acre tracts, including their current use or any improvements. The plaintiff’s valuation methodology, which assumes both tracts have the same value per acre, lacks evidentiary support and is therefore rejected. Under § 547(b), while the debtor has a discernible interest in the $250,000—derived from a loan for which the debtor and his wife are jointly liable—the precise quantification of that interest remains unclear. The debtor's transfers of the mortgage on the 560 acres and his interest in the $250,000 to the Bank qualify as transfers to a creditor, satisfying the first element of § 547(b).
Given that these transfers occurred within the 90 days before the bankruptcy petition, the conditions of §§ 547(b)(3) and (b)(4) are met, establishing the debtor's presumed insolvency. The transfers relate to a pre-existing guaranty obligation, fulfilling § 547(b)(2). The Bank contends that the mortgage transfer was in exchange for a new loan and a release from guaranty obligations, asserting that this constituted new value and not antecedent debt. However, the court rejects this view, noting that the $250,000 loan was contingent on the debtor's agreement to apply the proceeds to the guaranty obligation, thus not providing new value to the debtor's estate. Furthermore, the Bank's release of unpaid amounts and any forbearance from collection do not qualify as new value under the Bankruptcy Code. Consequently, the court concludes that the mortgage was indeed granted in exchange for an antecedent debt.
The Bank converted an unsecured contingent guaranty claim against the debtor into a secured claim through a mortgage transaction, which would not have occurred without the prior guaranty obligation. This transfer is deemed to be in consideration of antecedent debt. The critical issue is whether the transfer met the requirements of § 547(b)(5), specifically if it allowed the Bank to receive more than it would have in a Chapter 7 liquidation. The court cannot rely on the bankruptcy schedules and statement of affairs due to a prior objection regarding their accuracy, and although they were admitted for limited purposes, their reliability remains disputed. This limitation impedes the court's ability to conduct a detailed hypothetical liquidation analysis. Nonetheless, it is noted that prior to the transaction, the Bank had an unsecured claim of $399,997. After the transaction, it held a $250,000 secured note backed by the debtor's only significant asset, 560 acres of land. Other unsecured creditors exist, including the First National Bank of Minden, owed approximately $133,000. The court concludes that while it cannot calculate the exact preferential effect, the Bank clearly benefits from a secured claim compared to its previous unsecured claim in a Chapter 7 scenario. Thus, the requirements of § 547(b)(5) are satisfied, indicating that the transfer enabled the Bank to receive more than it would have otherwise. The court finds that precise quantification is unnecessary, as satisfying the statute's conditions suffices to confirm the preferential effect.
The Bank contends that the mortgage transaction and the payment of $250,000 did not yield it more than it would receive in a hypothetical Chapter 7 liquidation. If the mortgage is invalidated, the Bank's claim would revert to $399,997, which is part of a total of at least $533,675 in unsecured claims. The Bank holds approximately 74.95% of this total. It estimates the net liquidation value of the mortgaged property at $346,897, suggesting it would receive about $260,000 in a Chapter 7, exceeding its $250,000 obligation under the note. Thus, the Bank argues there is no preferential treatment since it would not gain more from the mortgage transaction than from liquidation.
However, the analysis is flawed due to incorrect assumptions about the property's value. The opposing analysis assumes the debtor was insolvent before bankruptcy, with liabilities exceeding assets. The Bank's unsecured claim is confirmed at $399,997, and total unsecured claims exceed $533,675. The fair market value of the 560 acres mortgaged by the debtor is estimated below $270,000, with the 560 acres specifically valued at $250,000 for this analysis. This leads to the conclusion that the maximum the Bank could receive in a Chapter 7 liquidation is $187,375, which would likely be less due to administrative expenses, other creditor claims, and the assessed value of the property. Ultimately, if the mortgage and payment stand, the Bank would retain the payment and receive full proceeds from the property, subject to the note's limit.
The requirement of § 547(b)(5) is satisfied as the Bank would receive more from its mortgage than it would in a hypothetical Chapter 7 liquidation. It would be inequitable to both invalidate the Bank's mortgage and recover the debtor's payment of interest in the $250,000. The remedy is to set aside the mortgage on the 560 acres, preserving it for the benefit of the estate under § 551 of the Bankruptcy Code. The case references the principle that transfers made to evade the Bankruptcy Code provisions, which create undue preferences for creditors, are voidable. The mortgage transaction resembles a direct preference that would be avoidable if executed immediately before bankruptcy.
Additionally, under 11 U.S.C. § 548(a)(1), the mortgage may be avoided if it was made with the actual intent to hinder, delay, or defraud creditors. Several "badges of fraud" indicate such intent: (1) the transaction occurred in anticipation of litigation, significantly reducing the debtor's assets; (2) it was outside the usual course of business; (3) it happened while the debtor was insolvent; (4) the debtor's obligations exceeded asset values; and (5) it involved a transfer of all substantial property. The combination of these factors leads to an inference of fraudulent intent, confirming that Robert L. Craig granted the mortgage intending to defraud creditors.
A transfer that intentionally deprives creditors of benefits under the Bankruptcy Act is considered to hinder, delay, or defraud creditors, as outlined in § 67e. When a debtor receives funds to make a preferential payment with bankruptcy anticipated, the transaction may be deemed fraudulent. Specifically, if a bank lends money to a customer for the purpose of making a preferential payment on a separate unsecured loan, while converting an unsecured claim into a secured one via a mortgage, that transaction can be avoided under § 548(a)(1). The principles from the case Dean v. Davis remain relevant post-Bankruptcy Reform Act, particularly regarding transfers made within ninety days of bankruptcy. However, the applicability of these principles to transfers outside that timeframe remains unaddressed. Although § 67d(3), which codified the preference avoidance rule, was excluded from the Bankruptcy Reform Act due to concerns about deterring lenders, the doctrine still applies in this case. The specific facts of this case—a two-party transaction and the timing of the transfer—limit the ruling's impact and should not deter lenders from providing consolidation loans where proceeds are directed to third-party payments. Ultimately, the court finds the mortgage on the 560 acres avoidable as both a preference under § 547 and a fraudulent conveyance under § 548, rendering it unnecessary to assess its avoidability under Nebraska law pursuant to § 544. An order consistent with this finding will be issued.
