Stubbins v. Sewell (In re Steiner)

Judge Caldwell

Chapter 7
MEMORANDUM AND OPINION REGARDING PLAINTIFF'S COMPLAINT TO AVOID CONEYANCE (DOC. NO. 1)

This Memorandum Opinion and Order serves as the Court's findings of fact and conclusions of law for Chapter 7 Trustee, Brent A. Stubbins' Complaint (Plaintiff), and the Answers filed by Robin L. Sewell (Mr. Sewell), Dawn Sewell (Mrs. Sewell), and WesBanco Bank, Inc. (WesBanco). Plaintiff seeks to recover a real estate transfer as an alleged constructively fraudulent conveyance, pursuant to Sections 544, 548, 550, and 551 of the Bankruptcy Code (Code), and Section 1336.04 of the Ohio Revised Code (ORC). Mr. and Mrs. Sewell counter that they paid adequate consideration. Reviewing the pleadings, evidence, including credibility assessments, the Court finds and concludes that Plaintiff failed to sustain his burden of proof. A brief history and the bases for the Court's decision follow.

John R. Steiner (Debtor), and the Sewells have maintained a close friendship for approximately twenty-five years. The Debtor is a retired airplane mechanic, and Mr. Sewell drives a tractor-trailer. In 2003, Mr. Sewell received a worker's compensation settlement for $32,000.00. As a result, Mr. Sewell and the Debtor searched for real estate investments, and ultimately found a building that piqued their interest. Consequently, on December 17, 2003, the parties purchased, solely in cash, a building located at 300 Fair Avenue, Fairview, Ohio 43736 (Property) for $21,000.00, based upon Mr. Sewell's workmen's compensation settlement. However, because Mr. Sewell was out of town studying to become an electrician, only Mr. Steiner's name appeared on the deed recorded on March 23, 2004. Mrs. Sewell knew about the transaction, but was not directly involved.

After thinking about what to with the building for a couple of months, Mr. Sewell and the Debtor decided to turn it into a general grocery, which also sold prepared food and ice cream. They based this decision on the fact that the closet grocery store was twenty miles away. Mr. Sewell invested an additional $10,000.00 for renovations while the Debtor provided nominal funding in addition to electrical and plumbing work. However, to preserve prepared foods they still needed a refrigerated food case. Ultimately, they located one that covered twelve feet, and cost approximately $20,000.00.

Unfortunately, at the time, Mr. Sewell's credit history would not support a loan in his name, and he did not have full-time employment. At the time, however, the Debtor remained employed. Therefore, to finance the purchase on April 14, 2004, Debtor obtained, solely in his name, a loan of $20,250.00 from WesBanco. In this process, WesBanco acquired a mortgage on the Property recorded on April 23, 2004. This is the first and only mortgage. WesBanco electronically debited the monthly payments from Mr. Sewell's savings account ($276.07). In addition, the loan officer for WesBanco, John Tipko (Mr. Tipko), knew that all payments came from Mr. Sewell.

Their new business opened during the summer of 2005; however, the community support fell short, and they were unable to sell gas or obtain a beer license. In addition, at one point the electricity went out for three weeks causing the loss of merchandise. Six months later the store closed, and the building remained shuttered for several years. Mr. Sewell testified that all together he plowed and lost in the store approximately $87,000.00.

Two years later, on April 2, 2007, WesBanco initiated a foreclosure proceeding due to payment defaults. Mr. Tipko testified that he contacted the Debtor, and as a result, Mr. Sewell worked out a payment arrangement to stop the foreclosure and reinstate the mortgage ($220 per month). At that time, $15,137.21 remained due. Since reinstatement, Mr. Sewell continued to make the payments, leaving a balance of $972.91, as of June 1, 2017. After the store sat vacant for a significant period, Mr. Sewell decided to turn it into his residence. According to his testimony, Mr. Sewell spent an additional $18,000.00 for renovations.

During reinstatement discussions with Mr. Tipko, Mr. Sewell sought advice on how to transfer title of the deed to his name, but was told that WesBanco could not provide legal advice, and that Mr. Sewell and the Debtor should contact an attorney. Instead, Mr. Sewell read about drafting land contracts. As a result, on June 15, 2007, Mr. Sewell and Debtor entered into an unrecorded land contract stating:

This land contract is between John R. Steiner and Robin L. Sewell on the property . . . The property is to be transfers (sic) over to Robin L. Sewell the loan will be paid to WesBanco Bank Inc. ...Robin L. Sewell will take over the payments on said loan until the loan is paid in full and or when he is able to obtain his own financing. John R. Steiner releases any and all claims on said property at this time the arrangements on the contract with the loan was approved by John Timko (sic) loan manager and vice president Of (sic) WesBanco. Robin L. Sewell accepts the property as is."

Eight years later on June 17, 2015,v the Debtor signed an Affidavit providing in relevant part: "...I John R. Steiner, myself along with Dawn Swell and Robin Swell (sic) where (sic) involved in a land contract with WesBanco Bank in St. Clarisville, Ohio on the property. . . I have never received any money for the property nor will I be paid any money for the property . . ." Following closely on the heels of the Affidavit, on June 19, 2015, Guernsey County, Ohio recorded a Warranty Deed for the property from the Debtor to Mr. and Mrs. Sewell for"...valuable consideration paid..."

Six months later due to a heart attack without health insurance, Debtor filed the current Chapter 7 bankruptcy petition on December 29, 2015, but failed to disclose the Property. Debtor testified, however, that he revealed it during the creditors' meeting. Also, Plaintiff located the transfer by conducting a real estate search, reviewed the conveyance documents and discovered there was no payment involved. On November 3, 2016, Plaintiff initiated the present fraudulent conveyance complaint, and at that point, Mr. Sewell stopped making mortgage payments along with vacating the Property. At trial, the balance on the loan was a mere $972.91. Mr. Tipko testified that with a mortgage balance this low he had the discretion not to call the loan due and commence foreclosure proceedings. According to the Office of the Guernsey County Auditor, the Property is currently valued at $93,700.00. Assuming Plaintiff prevails in this litigation and markets the Property, to date there are only three filed claims in the underlying bankruptcy case totaling $893.08.

Plaintiff contends that Debtor's transfer of Property to Mr. and Mrs. Sewell should be avoided as a constructive fraudulent transfer under Sections 548(a)(1)(B) of the Code and 1336.04(A)(2) of the Ohio Revised Code, because Debtor did not receive adequate consideration, and was insolvent at the time of the transfer or the transfer caused his insolvency. Section 1336.04(A)(2) mirrors Section 548(a)(1)(B) of the Code. Rieser v. Hayslip, et al. (In re Canyon Systems Corp.), 343 B.R. 615, 638 (Bankr. S.D. Ohio 2006).

Plaintiff has failed to meet his burden of proof as to constructive fraud simply because he failed to establish inadequate consideration. Insolvency and other avoidance-related allegations are rendered moot by this evidentiary failure. Specifically, Debtor did not initially buy the Property with his own funds. The money came from Mr. Sewell's workmen's compensation settlement. The Debtor never made a payment on the loan. In addition, Mr. Sewell renovated the Property with his funds, not the Debtor's. Mr. Sewell's investment approximate the Auditor's valuation, and the Court was not presented with any contrary professional appraisal testimony. Indeed, but for Mr. Sewell's efforts there would be no building to serve as a target in this litigation. For all these reasons, the Court finds and concludes that Plaintiff has failed to sustain his burden of proof, and may not avoid the Property transfer under the Code and the Ohio Revised Code.

Mark Stubbins, Esq. (electronic service)
Brent A. Stubbins, Esq. (electronic service)
Shelley E. Hibburt, Esq. (electronic service)
Robert D. Plumby, Esq. (electronic service)
Crystal I. Zellar, Esq. (electronic service)