Ben Barry
CHAPTER 7
MEMORANDUM OPINION AND ORDER
Before the Court is Metropolitan National Bank's Objection to Claim of Exemption and Motion for Relief From the Automatic Stay and Abandonment of Property of the Estate filed on September 14, 2012, and a response by the debtor, Lora Gaddy; plus the debtor's Motion to Avoid Judicial Liens filed on October 21, 2012, and a response by Metropolitan National Bank [Metropolitan]. The Court heard the parties' arguments on April 4, 2013, and at the conclusion of the trial allowed the parties time to file post-trial briefs. After considering the evidence, statements of counsel, and testimony presented during the trial and the parties' post-trial briefs, for the reasons stated below, the Court sustains Metropolitan's objection to the debtor's claim of exemption in the Juneway Terrace property and denies the debtor's motion to avoid Metropolitan's lien. To the extent the automatic stay has not been terminated as a matter of law, the Court grants Metropolitan's motion for relief from stay. Finally, because the trustee did not respond to Metropolitan's motion for abandonment, the Court grants Metropolitan's motion for abandonment.
JURISDICTION
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157. Metropolitan's objection to the debtor's claim of exemption from property of the estate arises under title 11 of the United States Code or arises in a case under title 11 of the United States Code and is a core proceeding pursuant to 28 U.S.C. § 157(B). The debtor's motion to avoid Metropolitan's lien also arises under title 11 of the United States Code and is a core proceeding under 28 U.S.C. § 157(O). Because the debtor received her discharge on October 15, 2012, under 11 U.S.C. § 362(c), the stay of an act against property of the debtor or the debtor is terminated as a matter of law and Metropolitan's motion to remove the stay of an act against property of the debtor or the debtor is moot. However, the stay against property of the estate continues until the property is no longer property of the estate. Unless the court orders otherwise, property of the estate that was not otherwise administered is not abandoned until the case is closed. 11 U.S.C. § 554(c). Accordingly, Metropolitan's motion for relief from stay as to property of the estate arises under title 11 of the United States Code and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(G). Finally, Metropolitan's motion for abandonment arises under title 11 of the United States Code or arises in a case under title 11 of the United States Code and is a core proceeding pursuant to 28 U.S.C. § 157(b)(1). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 7052 and 9014.
BACKGROUND
There are two express trusts involved in this proceeding: The Lora Dean Gaddy Broberg Trust [Lora Gaddy Trust] and the Lora Dean Broberg Revocable Trust [Lora Broberg Revocable Trust]. At all relevant times, the debtor, Lora Gaddy, was the trustee of each of the trusts. The Lora Gaddy Trust was indebted to Metropolitan in the amount of $835,000, which was secured with a personal guarantee of the debtor and a first mortgage on property referred to as the Oakland Zion Road property. In 2008, while indebted to Metropolitan, the Lora Gaddy Trust received life insurance proceeds as a result of the death of the debtor's father. The debtor, as trustee, used some of these proceeds to purchase a certificate of deposit in the name of the Lora Gaddy Trust. In late February 2009, the debtor, as trustee, caused the Lora Gaddy Trust to liquidate the certificate of deposit and transfer approximately $500,000 from the Lora Gaddy Trust to the debtor, individually, and her then husband. The debtor, individually, used these funds in December 2009 to purchase the residential property that is the subject of this adversary proceeding, the Juneway Terrace property. The debtor initially titled the Juneway Terrace property in the name of the Lora Broberg Revocable Trust; on November 9, 2011, the debtor transferred the property from the Lora Broberg Revocable Trust to the debtor, individually, by quit claim deed. According to the debtor, she needed that the trusts failed to otherwise respond to the complaint. In its order, the court also granted Metropolitan's motion to dismiss the debtor, individually, from the action. The default judgment for fraudulent conveyance contains the following findings and conclusions:
12. That the transfer of funds by Lora Dean Gaddy, as Trustee for The Lora Dean Gaddy Broberg Trust, from the United Missouri Bank CD to the personal account of Lora Dean Gaddy be declared a fraudulent transfer under
Ark. Code Ann. § 4-59-204 and § 4-59-205 in the name of The Lora Dean Gaddy Broberg Trust.
13. That pursuant to Ark. Code Ann. § 4-59-207(b), and by virtue of the Consent Judgment and Foreclosure Decree entered in Metropolitan National Bank v. Lora Dean Gaddy Broberg, et al., Washington County Circuit Court Case No. CV10-473-5, Plaintiff may levy execution on the Juneway Terrace Property purchased with fraudulently transferred funds to cover the remaining balance of the Consent Judgment and Foreclosure Decree as set forth in this judgment.
14. The Judgment of the previous paragraph constitutes a lien against the Juneway Terrace Property described as follows:
Lot Eight (8) in Block "F," North Ridge Subdivision to the City of Fayetteville, Arkansas as per plat of said subdivision on file in the Office of the Circuit Clerk and Ex-Officio Recorder of Washington County, Arkansas.
15. This Court grants the judgment lien described herein in order to secure the payment of the Consent Judgment and Foreclosure Decree entered in Metropolitan National Bank v. Lora Dean Gaddy Broberg, et al., Washington County Circuit Court Case No. CV10-473-5 Judgment, which Judgment lien is paramount to any right, title, claim, interest or equity of any of the Defendants herein, or any other person or party whose rights attach or are perfected after Plaintiff's Lis Pendens was filed in this case. Theliens and interest of Defendants herein and the liens and interests of any other person or party whose rights attach or are perfected after Plaintiff's Lis Pendens was filed, shall be and hereby are barred and foreclosed by Decree of this Court.
The debtor objected to the entry of the order and moved to set it aside, arguing that her answer should inure to the benefit of both trusts under the Common Defense Doctrine because she had a beneficiary interest in both trusts. The state court denied the debtor's motion, finding that the Common Defense Doctrine did not afford the trusts relief from the judgment.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The debtor filed her voluntary chapter 7 bankruptcy petition on July 8, 2012. On August 13, 2012, she filed her schedules and, on Schedule C, claimed the state exemptions and listed the Juneway Terrace property as exempt under the Arkansas Constitution as her homestead. In Arkansas, the homestead exemption states that:
The homestead of any resident of this State, who is married or the head of a family, shall not be subject to the lien of any judgment or decree of any court, or to sale under execution, or other process thereon, except such as may be rendered for the purchase money, or for specific liens, laborers' or mechanics' liens for improving the same, or for taxes, or against executors, administrators, guardians, receivers, attorneys for moneys collected by them, and other trustees of an express trust, for moneys due from them in their fiduciary capacity.
Ark. Const. art. IX, § 3. When a debtor claims state exemptions, bankruptcy courts must look to state law to determine the debtor's state homestead exemption rights.
In re Batchelor, 97 B.R. 993, 996 (Bankr. E.D. Ark. 1988). On September 14, 2012, Metropolitan timely filed its objection to the debtor's claim of homestead exemption, arguing that the debtor was not entitled to claim an exemption in the Juneway Terrace property because the state court found that the property was obtained through fraudulent means. However, more accurately, the state court found that the transfer of funds "by Lora Dean Gaddy,
as Trustee for The Lora Dean Gaddy Broberg Trust, from the United Missouri Bank CD to the personal account of Lora Dean Gaddy" was a fraudulent transfer. Also relevant is that the state court authorized "execution on the Juneway Terrace Property
purchased with fraudulently transferred funds" to cover the deficiency owed to Metropolitan. To bring clarity to the state court finding, the Court must look to the Lora Gaddy Trust.
The Lora Gaddy Trust was formed under a trust agreement dated September 28, 2001, at which time the debtor served as a co-trustee with her father and Jeffrey Lane Broberg. The trust was amended on October 28, 2008, after her father died, to "amend and restate the said Trust, in its entirety" and remove Jeffrey Lane Broberg as co-trustee; the debtor remained as sole trustee from that date forward. Article VIII of the trust stated the powers and duties of the trustee "in extension of and not by way of limitation of the powers, authority and discretion vested in the TRUSTEE by Arkansas law." Under the Arkansas Trust Code,
which applies to express trusts in Arkansas,
A trustee is personally liable for torts committed in the course of administering a trust, or for obligations arising from ownership or control of trust property, including liability for violation of environmental law, only if the trustee is personally at fault.
Ark. Code Ann. § 28-73-1010 (Repl. 2012) (emphasis added). As stated above, the state court found that the debtor,
as trustee for the Lora Gaddy Trust, fraudulently transferred funds from the certificate of deposit to the debtor's personal account. Fraud is generally recognized as a tort in Arkansas.
See, e.g., Hampton v. Taylor, 887 S.W.2d 535, 539 (Ark. 1994) ("The tort of fraud, misrepresentation, or deceit consists of five elements"). As such, under the Arkansas Trust Code, the Court must find that the debtor is personally liable for the fraudulent transfer of funds from the certificate of deposit to the debtor's personal account. Further, the parties stipulated that the debtor used the certificate of deposit funds to purchase the Juneway Terrace property. (Stip. ¶ 13.) This stipulation is in agreement with the state court's recognition that the Juneway Terrace property was purchased with fraudulently transferred funds. The Juneway Terrace property was initially titled in the name of the Lora Broberg Revocable Trust, not the debtor. However, Arkansas courts recognize that a person who holds a beneficiary interest in property that is maintained as a principal residence and in
petition under chapter 7, the Court finds that the property is not necessary to an effective reorganization. Accordingly, the Court grants Metropolitan's motion for relief from stay to the extent it was not previously terminated as a matter of law. IT IS SO ORDERED.
Ark. Code Ann. § 28-73-101 et seq. (Repl. 2012).
--------
___________
Ben Barry
United States Bankruptcy Judge
cc: Stanley V. Bond and Erin Curry, attorneys for the debtor
Russell Atchley and Kyle Unser, attorneys for Metropolitan National Bank
Jill Jacoway, chapter 7 trustee