In re Raejean S. Bonham dba World Plus
Bankruptcy No. F95-00897
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Several BRA Defendants asserted that the Chapter 7 Trustee could not bring a fraudulent conveyance claim against them under Section 544(b) of the Bankruptcy Code using Alaska's Fraudulent Conveyance Act because there was no judgment creditor who could exercise those avoding powers. Judge Ross's opinion on that defense follows:
HERBERT A. ROSS
U.S. Bankruptcy Judge
605 West 4th Avenue, Room 138, Anchorage, AK 99501-2296 (Phone 907/271-2655)
In re RAEJEAN BONHAM, aka Jean Bonham, aka Jeannie
Bonham, dba World Plus; WORLD PLUS, INC., an Alaska
corporation; and ATLANTIC PACIFIC FUNDING CORP., a Nevada
Case No. F95-00897-HAR
In Chapter 7
In re BONHAM RECOVERY ACTIONS, a proceeding to jointly administer certain pre-trial issues in numerous related adversary proceedings.
ADV PROC NO F95-00897-168-HAR
(BANCAP No. 96-4281)
MEMORANDUM DECISION DENYING MOTION TO DISMISS COUNTS UNDER 11 USC Section 544(b)
1. INTRODUCTION- The trustee has filed avoidance actions with counts based on 11 USC Section 544(b) and either the Alaska Fraudulent Conveyance Act(1) or Alaskan common law. Some defendants argue that these counts cannot be maintained unless there was a judgment creditor of the debtors when the bankruptcy was filed. Is the existence of a judgment creditor a requirement? I hold that it is not, based on the modern rules of procedure. There is no controlling Alaska case law.
2. FACTS AND PROCEDURE REGARDING MOTIONS TO DISMISS- An involuntary bankruptcy was filed against RaeJean Bonham in December 1995. Ms. Bonham's individual case was subsequently consolidated with the estates of two non-debtor corporations which she substantially controlled. The effective date for the orders for relief of all debtors was the initial December 1995 involuntary petition date.
The only significant recovery for the creditors in the bankruptcy case, in which the trustee has estimated there will be about $15 million in allowed unsecured claims, will be from actions brought by the trustee to avoid fraudulent or preferential transfers made under the alleged Ponzi scheme run by the debtors. To recover the transfers, the trustee has filed approximately 660 adversary proceedings to avoid transfers under theories of federal fraudulent transfer,(2) state fraudulent transfer,(3) and preference.(4) The subject of this Memorandum Decision only concerns the motion of some defendants to dismiss the state fraudulent transfer counts.
The trustee has used a common form of complaint in an attempt to automate the process of handling so many individual adversary proceedings. The trustee has generally used the common wording for what defendants denominate counts four and five in most of the complaints, although some of the complaints do not actually number the counts. "Count Four" reads as follows:
STATE FRAUDULENT CONVEYANCE CAUSE OF ACTION [AS 34.40.010]
25. With respect to each of the checks listed in the "Other Fraud" column in paragraph 1 of this complaint, together with each of the Section 548 Fraudulent Conveyance Checks (collectively, the "Other Fraudulent Conveyance Checks"), Debtor intended to hinder, delay or defraud her creditors within the meaning of AS 34.40.010.
26. Each of the Other Fraudulent Conveyance Checks is avoidable under Sec. 544(b), and Defendants are liable to the Trustee under Section 550.
And, "Count Five" reads:
STATE FRAUDULENT CONVEYANCE ACTION [State Common law]
27. Each Other Fraudulent Conveyance Check is avoidable as a fraudulent conveyance under the common law of the State of Alaska.
28. At all times relevant to this claim, up to and including the petition date, Delta Airlines, the Securities and Exchange Commission (SEC), and unpaid investors, were general unsecured creditors of the Debtor whose existence gives standing to the trustee under Section 544(b) to assert this cause of action.
29. Each of the Other Fraudulent Conveyance Check is avoidable under Section 544(b) and Defendants are liable to the Trustee under Section 550.
Some defendants have filed motions to dismiss these counts from their individual adversary proceedings on the grounds that these counts do not state a claim upon which relief can be granted.(5) Because the motions have a global significance in resolving this issue which is common to most of the other adversary proceedings as well, the court determined it would hear this matter in the Bonham Recovery Actions (BRA) in order to resolve it for all adversaries where the issue might occur.(6)
3. ISSUES- The principal legal issue is whether the Alaska Fraudulent Conveyance Act or the common law regarding fraudulent conveyance in Alaska requires that an action be brought by a judgment creditor of the transferor - i.e., does there have to be a prior judgment against the party who made the fraudulent transfer before a fraudulent conveyance action can be brought in Alaska. In the bankruptcy context, the issue becomes, in the BRA defendants' opinion, whether the trustee must rely on the rights of at least one judgment creditor in existence on the date of bankruptcy as a condition for proceeding under 11 USC Section 544(b).
Because I have decided that the existence of a such judgment creditor is not a prerequisite, I will not discuss other issues addressed by the parties, such as whether the existence of a prepetition general unsecured creditor who later obtained a judgment on a lawsuit filed prepetition meets the requirement of a judgment creditor.
4. LEGAL ANALYSIS-
4.1. Framework of 11 USC Section 544(b). 11 USC Section 544(b) provides:
(b) 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.
One of the conditions for the trustee using Section 544(b), is the existence of some unsecured creditor who could avoid a transfer under state law at the time the case is filed. Without the existence of at least one such unsecured creditor, the trustee cannot act under Section 544(b).(7)
"Although federal law provides the trustee with rights of an actual unsecured creditor, the extent of the rights is determined by the applicable state or local law."(8) Thus, even if there is an unsecured creditor existing to fulfill the literal requirements of Section 544(b), if a state law requires that a creditor recover a judgment as an antecedent to bringing a state fraudulent conveyance action, as the BRA defendants contend, this could bar the trustee from bringing an action if such a judgment creditor did not exist.
4.2. The Requirement of a Judgment Creditor as a Condition of a Fraudulent Conveyance Action Under the Common Law or Statute Has Been Abrogated by Modernization of the Rules. There is authority both for and against the requirement of obtaining a judgment before bringing a fraudulent conveyance action. Many of the cases are based on the particular statute in question. The authority supporting such a requirement is, however, generally antiquated and no longer persuasive because of the modernization of the rules of civil procedure.
An example cited by the defendants of the requirement that the plaintiff already be a judgment creditor as a condition precedent maintaining a fraudulent conveyance action based on common law is Cates v Allen.(9) The court held that a general creditor could not contest a transfer as being fraudulent until "the creditor has established his debt by the judgment of a court of competent jurisdiction, and has either acquired a lien upon the property, or is in a situation to perfect a lien thereon, and subject it to the payment of his judgment, upon the removal of the obstacle presented by the fraudulent conveyance."(10) Cates relied on the court's earlier ruling in Scott v Neely.(11)
Both these United States Supreme Court cases were discussed by the then New York Justice Benjamin Cardozo in American Surety Co. of New York v Conner, which acknowledged the rule of Cates v Allen and Scott v Neely, but held that the requirement of a judgment creditor in New York was done away with when it adopted the Uniform Fraudulent Conveyance Act.(12) The BRA defendants argue that the 1829 New York fraudulent conveyance statute was identical to the Alaska statute until it was changed in 1925 by New York's adoption of the UFCA.(13)
Not all states were as rigid as New York in finding a judgment was a precondition to a fraudulent conveyance action. For example, the Supreme Court of Oklahoma, interpreting a fraudulent conveyance statute similar to Alaska's, held that there is no requirement of a judgment creditor to bring a fraudulent transfer action.(14) The Oklahoma result seems more in line with the modern practice of preferring substance over form, or addressing the merits as opposed to an artificial procedure.
The trustee argues that this modernization and simplification of practice was the purpose for adopting FRCP 18(b), which states:
(b) Joinder of Remedies; Fraudulent Conveyances. Whenever a claim is one heretofore cognizable only after another claim has been prosecuted to a conclusion, the two claims may be joined in a single action; but the court shall grant relief in that action only in accordance with the relative substantive rights of the parties. In particular, a plaintiff may state a claim for money and a claim to have set aside a conveyance fraudulent as to that plaintiff, without first having obtained a judgment establishing the claim for money.
The Alaska civil rule is identical.(15)
Any support that Cates v Allen and Scott v Neely lent to defendants' argument is undermined by Dairy Queen, Inc. v Wood,(16) which backs the trustee's contention that FRCP 18(b) made these old cases obsolete. In Dairy Queen (a case involving the right to a jury trial) the court said:(17)
At the outset, we may dispose of one of the grounds upon which the trial court acted in striking the demand for trial by jury--that based upon the view that the right to trial by jury may be lost as to legal issues where those issues are characterized as 'incidental' to equitable issues--for our previous decisions make it plain that no such rule may be applied in the federal courts. In Scott v. Neely, decided in 1891, this Court held that a court of equity could not even take jurisdiction of a suit 'in which a claim properly cognizable only at law is united in the same pleadings with a claim for equitable relief.' That holding, which was based upon both the historical separation between law and equity and the duty of the Court to insure 'that the right to a trial by a jury in the legal action may be preserved intact,' created considerable inconvenience in that it necessitated two separate trials in the same case whenever that case contained both legal and equitable claims. Consequently, when the procedure in the federal courts was modernized by the adoption of the Federal Rules of Civil Procedure in 1938, 28 U.S.C.A., it was deemed advisable to abandon that part of the holding of Scott v. Neely which rested upon the separation of law and equity and to permit the joinder of legal and equitable claims in a single action. Thus Rule 18(a) provides that a plaintiff 'may join either as independent or as alternate claims as many claims either legal or equitable or both as he may have against an opposing party.' And Rule 18(b) provides: 'Whenever a claim is one heretofore cognizable only after another claim has been prosecuted to a conclusion, the two claims may be joined in a single action; but the court shall grant relief in that action only in accordance with the relative substantive rights of the parties. In particular, a plaintiff may state a claim for money and a claim to have set aside a conveyance fraudulent as to him, without first having obtained a judgment establishing the claim for money.' [footnotes omitted, but omitted footnote 3 refers to Cates v Allen as being of the same ilk as Scott v Neely.]
The Advisory Committee Notes to the 1937 adoption of FRCP 18(b) confirms this when they state:
Note to Subdivision (b). This rule is inserted to make it clear that in a single action a party should be accorded all the relief to which he is entitled regardless of whether it is legal or equitable or both. This necessarily includes a deficiency judgment in foreclosure actions formerly provided for in [former] Equity Rule 10 (Decree for Deficiency in Foreclosures, Etc.). In respect to fraudulent conveyances the rule changes the former rule requiring a prior judgment against the owner (Braun v. American Laundry Mach. Co., 56 F.2d 197 (S.D.N.Y. 1932) ) to conform to the provisions of the Uniform Fraudulent Conveyance Act, SectionSection 9 and 10. See McLaughlin, Application of the Uniform Fraudulent Conveyance Act, 46 Harv.L.Rev. 404, 444 (1933).
Case law interpreting the application of FRCP 18(b) in fraudulent transfer actions supports the trustee's position.(18)
All the defendants' citation of older case law and scholarly authorities notwithstanding, the adoption of Rule 18(b) has obliterated their formalistic argument that a prior judgment is a necessary precursor to a fraudulent transfer action, whether based on Alaska's statutes or common law. That is, unless the Alaska Supreme Court has ruled otherwise with respect to actions under AS 34.40.010.
4.3. Alaska Case Law Regarding AS 34.40.010 Does Not Require a Prior Judgment to Bring a Fraudulent Conveyance Action- The BRA defendants argue that the Alaska case of Summers v Hagen(19) supports their argument that only a judgment creditor can bring a fraudulent transfer action.
The trustee counters that Summers does not bind the bankruptcy court to that conclusion, and argues that First National Bank of Fairbanks v Enzler(20) is an Alaska Supreme Court opinion favoring the trustee.
I conclude that Summers does not bind the bankruptcy court or prevent it from following the clear intent of Alaska Rule of Civil Procedure 18(b). Enzler, on the other hand, does not address the point raised by the BRA defendants, so is not dispositive.
Summers was not a fraudulent conveyance action, but an action for damages for conspiring to defraud or participating in a fraudulent transfer scheme. Briske conveyed real property to Summers to defeat a judgment already obtained by Hagen against Briske. So, the issue regarding the necessity of a prior judgment as a predicate to a fraudulent transfer action was not even present in the case - such a judgment already existed.
The real property fraudulently conveyed by Briske was returned by Summers to Hagen by stipulation after suit was filed. Hagen, however, still sought damages as a result of Summers' alleged conspiracy to defraud Hagen or his participation in the fraudulent conveyance. The main thrust of the opinion was to determine whether a cause of action for participation in the fraudulent conveyance scheme existed. The court said it was adopting the minority rule and held that such an action does exist in Alaska.(21) In the opinion, the court said in footnote 6:(22)
In McElhanon, the court recognized the cause of action for judgment creditors, applying the Uniform Fraudulent Conveyance Act. McElhanon, 728 P.2d at 263, 266. We recognize the cause of action for those who are general creditors at the time of the fraudulent conveyance as well. General creditors, however, must reduce their claims to judgment before asserting this cause of action. Prior to judgment, general creditors have no legal right to the property fraudulently conveyed. [italics added]
It is this statement in footnote 6 upon which the BRA defendants rely in their argument that a judgment is required as a precursor to a fraudulent conveyance action under AS 34.40.010. The case referred to in footnote 6 is to McElhanon v Hing,(23) an Arizona case, in which there was also a prior judgment against the transferor, just as there was against Briske. So, it not quite clear what point the Alaska Supreme Court was making, or, more importantly, why it was making it.
The issue of a judgment being a predicate to a fraudulent conveyance action was not argued, and Summers was in fact not a fraudulent transfer case per se, but a conspiracy case. Perhaps the Supreme Court was attempting to make a pronouncement applicable to conspiracies related to a fraudulent conveyance and just did not articulate it correctly.
Additionally, the court cited no authority for the statement, which is in direct conflict with Alaska Civil Rule 18(b). If, however, the court meant what it literally said (that a prior judgment was a necessary precursor of a fraudulent conveyance action under AS 34.40), is it binding on me as a bankruptcy judge, charged with applying Alaska law with respect to the trustee's invocation of Section 544(b)? I think not, because the statement was at most dicta.
Dicta is a pronouncement by a high court which is not subject to the general rules of stare decisis or binding on a lower court to follow.(24) It exists when a higher court expresses an opinion about the law which is not required in the resolution of the issues before the court.(25)
Since the statement in footnote 6 in Summers did not address a matter that was before the court and expressed an opinion about an issue that was not necessary to resolve, it is dicta, and need not be followed.
First National Bank of Fairbanks v Enzler, the case relied upon by the trustee, does not address the issue raised by the BRA defendants (i.e., the necessity of a preexisting judgment against the transferor as a predicate to suing under AS 34.40.010), although a fraudulent transfer law suit was being prosecuted without a prior judgment.
In Enzler, a bank and trustee in bankruptcy sued a bankruptcy debtor and his wife for a fraudulent conveyance allegedly made by the husband-debtor to the non-debtor wife. One of the defenses raised was that the obligation of debtor to the bank was contingent at the time of the transfer, and depended upon whether collateral held by the bank was sufficient to satisfy the full debt of the bank. The bank was a contingent creditor at the time of the transfer, but a sale had occurred, liquidating the deficiency before the fraudulent transfer action. However, the bank had no judgment when it brought suit. The issue addressed by the court was whether a fraudulent transfer action could be brought based on a debt that was contingent at the time of the transfer. It did not address whether a prior judgment was necessary, and probably that defense was never raised.
Thus, I conclude that:
I am confident, however, that the Supreme Court of Alaska would resolve this problem simply by reference to Rule 18(b).
5. CONCLUSION- A separate, nonfinal order will be entered denying the BRA defendants' motion for dismissal of the Section 544(b) common law and statutory counts.
Dated: November 11, 1998
/s/ HERBERT A. ROSS
U.S. Bankruptcy Judge
1. AS 34.40.010, et seq.
2. 11 USC Section 548.
3. 11 USC Section 544(b) and AS 34.40.010, et seq.
4. 11 USC Section 547.
5. FRCP 12(b)(6), incorporated by FRBP 7012(b).
6. Notice of Filing Defendants' Motion to Dismiss Counts Four, Five, and Six of Plaintiff's Amended Complaint, filed by Brad Ambarian (for various defendants as shown on the list attached to the Notice), Docket Entry 591, filed July 15, 1998.
7. 5 Collier on Bankruptcy (15th Ed Rev 1998), Par. 544.09 [all references to "Collier" shall be to 5 Collier on Bankruptcy.
8. Collier at Par. 544.09 (footnote omitted).
9. 149 US 451 (1893).
10. Cates at 456.
11. 140 US 106 (1891).
12. 166 NE 783 (NY 1929).
13. Defendants' Motion to Dismiss, in Section 3 (see, footnote 6).
14. Harry v Hertzler, 90 P2d 656, 659 (Okla 1939).
15. Rule 18(b) of the Alaska Rules of Civil Procedure.
16. 369 US 469, 82 SCt 894 (1962).
17. 369 US at 470-71, 82 SCt at 896.
18. Graff v Neiberg, 233 F2d 860, 863 (7th Cir 1956); Combs v Chambers, 283 FSupp 295, 296 (D Okla 1968); United States v Johnson, 245 FSupp 433, 434 (D Ark 1965).
19. 852 P2d 1165 (Alaska 1993).
20. 537 P2d 517 (Alaska 1975).
21. Summers v Hagen at 1169-70.
22. Summers v Hagen at 1170, fn6.
23. 728 P2d 256 (Ariz App1985).
24. United States v Reed, 810 FSupp 1078, 1080 fn 3 (D Alaska 1992).
25. Fireman's Fund Ins. Co. v Maryland Casualty Co., 77 CalRptr2d 296, 309 (CalApp 1998); Malone v Fons, 580 NW2d 697, 701 (WisApp 1998); King v Erickson, 89 F3d 1575, 1582 (Fed Cir 1996).
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