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Bankruptcy – Real Property – Transfer – Avoidance – Constructive Fraud

Anderson v. Architectural Glass Construction, Inc. (In re Pfister) (Lawyers Weekly No. 003-007-12, 14 pp.) (Helen Elizabeth Burris, J.) 10-80162; B.S.C.

Holding: Even though the debtor and her husband transferred title to the land at issue to the husband’s business in order to deal quickly with a bank mistake, since the debtor was already insolvent and she filed bankruptcy less than a year later, the transfer is avoidable by the bankruptcy trustee as constructively fraudulent.

The trustee is entitled to judgment against the husband’s business in the amount of $43,500.


The debtor and her husband borrowed money to buy land (the Property) for the husband’s business. On the advice of their accountant, they took title in their individual names. Although the original intent was to charge the business rent, the business ended up making the mortgage payments instead.

The business borrowed more money to build warehouses on the property, and the loans were secured by mortgages on the Property executed by the debtor and her husband.

The business opened a facility in Wichita, Kansas. The business borrowed $87,000 to finance the expansion.

As the husband was getting ready to leave for an extended stay in Wichita, the couple learned that the bank had mistakenly named the business as mortgagor in the new mortgage. In order to quickly deal with the bank’s mistake, the couple transferred their interest in the Property to the business. There is no indication that the business paid the couple for the Property (other than the $10 recited as consideration in the deed).

A few months later, the debtor filed her bankruptcy petition. She admitted that her financial condition had not changed much between the transfer of the Property and the filing of the petition.

The bankruptcy trustee seeks to avoid the transfer of the Property.

Fraud & Constructive Fraud

After considering the testimony of the witnesses, the court finds as a fact that the transfer of the Property was made by the debtor for reasons other than to intentionally hinder, delay, or defraud her creditors.

Even if there is no actual fraud, a trustee may avoid a transfer that is constructively fraudulent, that is, if the debtor “(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 such obligation was incurred….” 11 U.S.C. § 548(a)(1)(B).

The trustee has proven all the elements of constructive fraud under § 548(a)(1)(B).

Furthermore, because the debtor was indebted to the IRS at the time of the transfer, the court finds that the transfer is also constructively fraudulent and avoidable pursuant to 11 U.S.C. § 544(b) and 28 U.S.C. § 3304(a)(1) of the Fair Debt Collection Practices Act.

The trustee has presented evidence of post-transfer transactions that would complicate any recovery for the estate should the trustee’s recovery be limited to avoidance of the transfer.

If the debtor’s interest in the Property had not been transferred, it would have been available to the trustee for liquidation and distribution to creditors.

On the date of the transfer, Greer State Bank agreed to lend $87,000 to the business with the Property as security. The evidence indicates that no funds would have been lent without a lien on the Property. Therefore, it appears that the property was worth at least $87,000 at the time of the transfer. The debtor’s one-half undivided interest was thus worth at least $43,500.

The trustee is entitled to judgment against the business in the amount of $43,500.

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