Fink v. Arregui

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE WESTERN DISTRICT OF MISSOURI

In re: )

) Case No. 22-40516-btf

Miguel Angel Arregui and Angela )

Marie Arregui, ) Chapter 13

)

Debtors. )

)

)

Richard V. Fink, )

)

Plaintiff, ) Adversary No. 22-04027-btf

)

vs. )

)

Miguel Angel Arregui and Angela )

Marie Arregui, )

)

Defendants. )

MEMORANDUM OPINION

Defendants Miguel and Angela Arregui owned their residence as joint tenants

from 1999 to 2022. Though the Arreguis married in 2007, they waited until three

days before they filed their chapter 13 petition to record a quit claim deed transferring

title in their residence from themselves as joint tenants to themselves as husband

and wife. The purpose of this transfer was to take advantage of the tenancy by the

entireties exemption, which would shield the $127,322.00 equity that existed in the

residence before the transfer and relieve the Arreguis of a would-be obligation to pay

100% of their individual general unsecured creditors.

Chapter 13 trustee Richard Fink seeks in this adversary proceeding to recover

the Arreguis’ joint tenancy in the residence and include the equity in the residence in

the “best interests of creditors” calculation under 11 U.S.C. § 1325(a)(4). The trustee

argues that the Arreguis’ recordation of the quit claim deed was an actually and

constructively fraudulent transfer under the Bankruptcy Code and the Missouri

Uniform Fraudulent Transfer Act (MUFTA).

The Arreguis oppose this adversary proceeding. They first argue the trustee

cannot succeed under either theory because the Arreguis’ recordation of the quit claim

deed was not a “transfer” under either the Bankruptcy Code or the MUFTA. The

Arreguis further argue the transfer was not actually fraudulent because they

effectuated it as part of permissible pre-bankruptcy exemption planning, and,

therefore, necessarily lacked fraudulent intent. Finally, the Arreguis argue the

transfer was not constructively fraudulent because they received at least reasonably

equivalent value.

For reasons explained below, the court determines the trustee has established

actual but not constructive fraud under the Bankruptcy Code and the MUFTA.

JURISDICTION

The court has jurisdiction over this adversary proceeding under 28 U.S.C.

§ 1334 and 28 U.S.C. § 157(a). This proceeding is statutorily core under 28 U.S.C.

§ 157(b)(2)(H) and is constitutionally core. The court, therefore, has the authority to

hear this proceeding and make a final determination. No party has contested

jurisdiction or the court’s authority to make final determinations.

BACKGROUND

This adversary proceeding comes before the court as a consequence of the

Arreguis’ pre-bankruptcy efforts to increase their exemptions in their residence. The

parties have stipulated to many of the relevant facts.

The Arreguis purchased their residence in 1999.1 At the time, the Arreguis

were not married and held title to their residence as joint tenants with the right of

survivorship.2 Miguel and Angela married in 2007.3 And though loan documents the

Arreguis executed after they married recognize that the Arreguis were then husband

and wife, nothing in the record suggests that any transaction converted the Arreguis’

joint tenancy in the property to a tenancy by the entireties until they recorded a quit

claim deed in April 2022.4

The bankruptcy case currently pending before this court is not the Arreguis’

first attempt to obtain a chapter 13 discharge. The Arreguis commenced a prior joint

chapter 13 case in July 2019.5 During the 2019 case, the Arreguis reported that their

residence was worth $138,000.00, scheduled $108,690 in total claims secured by the

residence, and claimed a $15,000 homestead exemption.6 Thus, the total nonexempt

1 Agreed Stipulation of Undisputed Facts ¶ 1, ECF No. 13.

2 Id. at ¶ 2.

3 Id. at ¶ 5.

4 See id. at ¶¶ 6–7, 9 (explaining that refinancing and home equity line of credit documents identify

the Arreguis as husband and wife and describing quit claim deed filed three days before the petition

date).

5 Chapter 13 Voluntary Petition, Case No. 19-41895, ECF No. 1.

6 Id.

equity in the residence during the Arreguis’ 2019 case was $14,310. The court

dismissed the Arreguis’ 2019 case on June 24, 2021.7

On Friday, April 29, 2022, the Arreguis filed a quit claim deed transferring

title to the residence from themselves as single persons to themselves as husband and

wife.8 The next business day, on Monday, May 1, 2022, the Arreguis commenced their

current chapter 13 case.9

The Arreguis now value their residence at $230,700.00.10 The Arreguis claim

two exemptions in their residence, a $15,000.00 homestead exemption and a

$127,322.00 tenancy by the entirety exemption.11 The Arreguis scheduled debts

secured by the residence totaling $88,378.65.12 Creditors have asserted a total of

$57,673.21 general unsecured claims against the Arreguis’ chapter 13 estate.13 Of

that amount, only $12,912.89 is joint debt.14

In September 2022, the trustee filed an adversary proceeding, seeking to avoid

the Arreguis’ transfer of the residence and recover the joint tenancy for the estate.15

The parties stipulated to several of the relevant facts, and the court conducted

a trial. Angela Arregui was the only witness to testify at trial. In her testimony,

Angela explained that the Arreguis transferred the property from themselves as joint

7 Order Dismissing Case on Trustee’s Motion to Dismiss Case for Default in Plan Payments, Case

No. 19-41895, ECF No. 63.

8 Agreed Stipulation of Undisputed Facts, Case No. 22-40516, ¶ 9, ECF No. 13.

9 Id. at ¶ 10.

10 Id. at ¶11.

11 Id. at ¶ 12.

12 Id. at ¶13, 14.

13 Id. at ¶ 17.

14 Id. at ¶¶ 18, 19.

15 Complaint to Avoid Fraudulent Transfer, Adv. No. 22-04027, ECF No. 1.

tenants to themselves as tenants by the entireties on advice of counsel, and that she

understood the transfer was necessary because the value of the residence had

increased significantly in the time since their 2019 case. When Angela’s counsel

asked her about the Arreguis’ motivation for changing their form of ownership,

Angela explained that she and Miguel would have otherwise had to pay back all of

their unsecured debts in their chapter 13 case, and that they did not earn enough

income to repay all of their unsecured debts. And though Angela initially testified

that she thought she and Miguel had disclosed the transfer on their statement of

financial affairs, she later appeared to remember that she and Miguel chose not to

disclose the transfer because they did not believe the change in ownership qualified

as a transfer.

Having outlined the relevant facts, the court turns to the legal issues in this

adversary proceeding.

ANALYSIS

The Eighth Circuit has long permitted debtors to transform assets into exempt

forms to maximize available exemptions in anticipation of bankruptcy. See, e.g.,

Panuska v. Johnson (In re Johnson), 880 F.2d 78, 81 (8th Cir. 1989) (“The law permits

debtors to intentionally transform property into exempt assets.”); Forsberg v. Sec.

State Bank of Canova, 15 F.2d 499, 501 (8th Cir. 1926) (discussing policy in favor of

exemption planning). And though permissible pre-bankruptcy planning sometimes

involves transfers of assets to exempt forms, there is a threshold beyond which

debtors become vulnerable to allegations of fraud. See Norwest Bank Neb., N.A. v.

Tveten, 848 F.2d 871, 874–75 (8th Cir. 1988) (discussing distinction between

permissible exemption planning and exemption planning with fraudulent intent).

When debtors cross that threshold, the Bankruptcy Code empowers a trustee to avoid

prebankruptcy fraudulent transfers for the benefit of the debtors’ creditors. See, e.g.,

11 U.S.C. §§ 544, 548.

In this case, the trustee alleges that the Arreguis’ transfer of their residence

from themselves as joint tenants to themselves as tenants by the entireties crossed

the line. Accordingly, the trustee asks the court to avoid the transfer as actually and

constructively fraudulent under both the Bankruptcy Code and the MUFTA.

In the following sections, the court first analyzes whether the Arreguis’

transfer was actually fraudulent under federal and Missouri law, then analyzes

whether the Arreguis’ transfer was constructively fraudulent under federal and

Missouri law.

A. Actual Fraud Under 11 U.S.C. § 548(a)(1)(A) & Mo. Rev. Stat.

§ 428.024.1(1)

The Bankruptcy Code empowers a trustee to avoid a transfer as actually

fraudulent both under § 548(a)(1)(A) of the Bankruptcy Code and under state law.

§ 548(a)(1)(A) (authorizing trustee to avoid fraudulent transfers); 11 U.S.C.

§ 544(b)(1) (authorizing trustee to avoid any transfer that would otherwise be

voidable by a creditor under applicable law). Though the evidentiary standard under

§ 548 is a preponderance of the evidence, Kelly v. Armstrong, 206 F.3d 794, 801 (8th

Cir. 2000), the standard under relevant state law—§ 428.024.1(1) of the MUFTA—is

clear and convincing evidence. Patrick V. Koepke Constr., Inc. v. Paletta, 118 S.W.3d

611, 614 (Mo. Ct. App. 2003).

Under either the Bankruptcy Code or the MUFTA, to avoid a transfer as

actually fraudulent, a plaintiff must prove two elements: (1) the debtor transferred

property, and (2) the debtor acted with actual intent to hinder, delay, or defraud

creditors. 11 U.S.C. § 548(a)(1)(A); Mo. Rev. Stat. § 428.024.1(1). The court will

discuss each element in turn.

1. The debtors transferred the property

The first element of a fraudulent transfer under § 548(a)(1)(A) and

§ 428.024.1(1) is that the debtor transferred property. 11 U.S.C. § 548(a)(1)(A); Mo.

Rev. Stat. § 428.024.1(1).

Initially, the parties appeared to agree that the Arreguis’ April 29 quit claim

deed effectuated a transfer within the meaning of § 548 and Missouri law. In fact,

the Arreguis characterized the transaction as a transfer in their brief, stating, for

example, “[§ 442.025] specifically allows the type of transfer at issue in this case.”

Debtor Defs. Brief in Opposition to Trustee’s Compl. to Avoid Fraudulent Transfer,

at 4, ECF No. 15 (emphasis added). But at trial, counsel for the Arreguis contradicted

this characterization by arguing that the quit claim deed did not effectuate a transfer,

and Angela testified that the Arreguis did not disclose the transaction because they

did not believe the transaction constituted a transfer.

Their argument and belief contradict applicable law. “A party . . . need not

surrender ownership in an asset in order to effectuate a transfer.” Kaler v. Craig (In

re Craig), 144 F.3d 587, 591 (8th Cir. 1998). The effect of the transaction determines

its characterization as a transfer, “not the circuity of the arrangement.” Id.

The court determines that when a fraudulent-transfer defendant transforms

his or her ownership interest from joint tenancy to tenancy by the entireties, the

transaction that alters the form of the defendant’s interest is a “transfer” of property

under the Bankruptcy Code and the MUFTA. See, e.g., Konopasek v. Konopasek, No.

SC99816, 2023 WL 4201660, at *5 (Mo. June 27, 2023) (explaining that

transformation of husband’s interest in individual property to tenancy by the

entireties was a “transfer” under the MUFTA); Olsen v. Paulsen (In re Paulsen), 623

B.R. 747, 754–55 (Bankr. N.D. Ill. 2020) (determining that husband and wife’s

transformation of property from a joint tenancy to a tenancy by the entireties was a

transfer). The Bankruptcy Code and the MUFTA each broadly define the term

“transfer” to include any “mode, direct or indirect, absolute or conditional, voluntary

or involuntary, of disposing of or parting with” “an interest” in property. 11 U.S.C. §

101(54)(D); Mo. Rev. Stat. § 428.009(12). When a former joint tenant transforms his

or her joint tenancy to a tenancy by the entireties, the owner “part[s] with”

“interest[s]” in property: the joint tenancy interest and all of the characteristics that

accompany that form of ownership, including the automatic severance of the joint

tenancy at alienation. See e.g., A/C Supply Inc. v. Botsay (In re Botsay), Case No. 20-

51440-KMS, Adv. No. 21-06001-KMS, 2022 WL 106580, at *6 (Bankr. S.D. Miss. Jan.

11, 2022) (explaining that transformation from joint tenancy to tenancy by the

entireties was a transfer); United States v. Craft, 535 U.S. 274, 279–84 (2002)

(describing property rights as a “bundle of sticks” and explaining how the joint

tenancy “bundle” differs from the tenancy by the entirety “bundle”). Thus, the

transformation of an interest from a joint tenancy to a tenancy by the entireties

constitutes a “transfer” under the MUFTA and Bankruptcy Code.

The Missouri statute that enables the transformation of a joint tenancy into a

tenancy by the entireties interest, Mo. Rev. Stat. § 442.025, supports the conclusion

that the transformation constitutes a transfer. The statute repeatedly characterizes

the transformation as a “conveyance,” and states that even if the owner does not

effectuate the transformation by first conveying property to a third party, “the

conveyance [of an owner’s interest in property from himself or herself to himself or

herself] has the same effect as to whether it creates a . . . tenancy by the entireties

. . . as if it were a conveyance from a stranger who owned the real estate to the persons

named as grantees in the conveyance.” Mo. Rev. Stat. § 442.025. The term

“conveyance” means “[t]he voluntary transfer of a right or of property.”

CONVEYANCE, Black’s Law Dictionary (11th ed. 2019). Thus, Missouri law

supports the court’s conclusion that a transaction that transforms an owner’s interest

from a joint tenancy to a tenancy by the entireties is a “transfer.”

In this case, the Arreguis executed and recorded a quit claim deed transferring

their residence from themselves as joint tenants to themselves as tenants by the

entireties. Because this form of transaction constitutes a transfer under the

Bankruptcy Code and Missouri law, the court determines the April 2022 quit claim

deed satisfies the “transfer” element under § 548(a)(1)(A) and § 428.024.1(1).

The court next analyzes whether the Arreguis acted with the requisite

fraudulent intent.

2. The Arreguis transferred the property with intent to hinder, delay,

or defraud creditors

The second element under § 548(a)(1)(A) and § 428.024.1(1) is that the debtor

acted with actual intent to hinder, delay, or defraud creditors. 11 U.S.C.

§ 548(a)(1)(A); Mo. Rev. Stat. § 428.024.1(1). Although § 548(a)(1)(A) and Mo. Rev.

Stat. § 428.024.1(1) each use the disjunctive phrase “hinder, delay, or defraud,” courts

generally interpret the phrase as establishing a single test: whether the debtor acted

with fraudulent intent. See Panuska v. Johnson (In re Johnson), 880 F.2d 78, 79 n.1

(8th Cir. 1989) (declining to separately analyze the terms hinder, delay, and defraud).

Because direct evidence of fraudulent intent is rarely available, courts analyze

all relevant facts and circumstances surrounding a transfer to infer whether the

debtor acted with fraudulent intent. Addison v. Seaver (In re Addison), 540 F.3d 805,

811 (8th Cir. 2008). Courts have identified the following common law “badges of

fraud” that may support the inference that a debtor acted with fraudulent intent:

(1) a conveyance to a spouse or near relative; (2) inadequacy of

consideration; (3) transactions different from the usual method of

transacting business; (4) transfers in anticipation of suit or execution;

(5) retention of possession by the debtor; (6) the transfer of all or nearly

all of the debtor’s property; (7) insolvency caused by the transfer; and (8)

failure to produce rebutting evidence when circumstances surrounding

the transfer are suspicious.

Fink v. Wright (In re Wright), 611 B.R. 319, 324 (Bankr. W.D. Mo. 2019). The

Missouri legislature has similarly adopted a list of the following eleven statutory

factors a court may consider, among other factors, in determining whether a debtor

acted with fraudulent intent:

(1) The transfer or obligation was to an insider; (2) The debtor retained

possession or control of the property transferred after the transfer; (3)

The transfer or obligation was disclosed or concealed; (4) Before the

transfer was made or obligation was incurred, the debtor had been sued

or threatened with suit; (5) The transfer was of substantially all the

debtor’s assets; (6) The debtor absconded; (7) The debtor removed or

concealed assets; (8) The value of the consideration received by the

debtor was reasonably equivalent to the value of the asset transferred

or the amount of the obligation incurred; (9) The debtor was insolvent or

became insolvent shortly after the transfer was made or the obligation

was incurred; (10) The transfer occurred shortly before or shortly after

a substantial debt was incurred; and (11) The debtor transferred the

essential assets of the business to a lienor who transferred the assets to

an insider of the debtor.

Mo. Rev. Stat. § 428.024.2. Because the common law badges of fraud and statutory

factors are similar, courts may use either the common law badges of fraud or the

statutory factors to analyze fraudulent intent. Brown v. Third Nat’l Bank (In re

Sherman), 67 F.3d 1348, 1354 (8th Cir. 1995).

a. The circumstances of this case support the inference that the

Arreguis acted with fraudulent intent

In this case, the parties focused on Missouri’s statutory factors rather than the

common law badges of fraud in analyzing fraudulent intent. The trustee does not

argue that the following Missouri factors apply: (1) (“The transfer or obligation was

to an insider”), (4) (“Before the transfer was made or obligation was incurred, the

debtor had been sued or threatened with suit”), (6) (“The debtor absconded”), (10)

(“The transfer occurred shortly before or shortly after a substantial debt was

incurred”), or (11) (“The debtor transferred the essential assets of the business to a

lienor who transferred the assets to an insider of the debtor”). Accordingly, the court

focuses its analysis on the Missouri statutory factors the trustee raised.

The court determines Missouri factors (3) (“The transfer or obligation was

disclosed or concealed”); and (5) (“The transfer was of substantially all the debtor’s

assets”) weigh in favor of finding fraudulent intent. Factor (2) (“The debtor retained

possession or control of the property transferred after the transfer”) also weighs in

favor of finding fraudulent intent, though not strongly. In contrast, factors (7) (“The

debtor removed or concealed assets”) and (8) (“The value of the consideration received

by the debtor was reasonably equivalent to the value of the asset transferred or the

amount of the obligation incurred”) do not weigh in favor of finding fraudulent intent.

Because the federal formula defining insolvency differs materially from the

Missouri’s insolvency formula, the court’s determination of Missouri factor (9) (“The

debtor was insolvent or became insolvent shortly after the transfer was made or the

obligation was incurred”) differs under the Bankruptcy Code and Missouri law. As

the court explains below, the Arreguis were insolvent under the Bankruptcy Code’s

definition but were not insolvent under Missouri law. The court will analyze the

Missouri factors the trustee raises in order.

i. Missouri’s second factor: the debtor retained possession or

control of the property transferred after the transfer

Under the second statutory factor, evidence that a debtor retained exclusive

possession or control of purportedly transferred property may support the inference

that the debtor acted with fraudulent intent.

The implication of fraudulent intent under this factor is straightforward in a

typical fraudulent transfer case. Fraudulent transfer causes of action typically arise

when a debtor has transferred property to a third party, often a friend or relative,

while in financial peril. D. Christopher Carson, Analyzing and Pursuing Fraudulent

Transfer Claims, in LEADING LAWYERS ON NAVIGATING FRAUDULENT TRANSFER

CLAIMS, DEVELOPING AN EFFECTIVE LITIGATION STRATEGY, AND RESPONDING TO

RECENT TRENDS AND DEVELOPMENTS (2009), 2009 WL 2510926, at *3. If the debtor

retains control or possession of the property despite the purported transfer, the post-

transfer retention suggests the debtor intended to create the false appearance of a

transfer while retaining a secret interest—not to effectuate a genuine transfer. See

Rosen v. Bezner, 996 F.2d 1527, 1532 (3d Cir. 1993) (explaining implication of fraud

when the debtor “represents to the world that the debtor has transferred away all his

interest in the property while in reality he has retained some secret interest.”). The

sham transfer and secret interest suggest the debtor acted with intent to hinder,

delay, or defraud creditors. See id. at 1533 (“In many and perhaps most cases, . . .

the very fact that the debtor has created and retained a secret interest will be

sufficient to hold . . . [the debtor acted to] hinder creditors.”).

In contrast, when a debtor effectuates an allegedly fraudulent transfer as a

part of pre-bankruptcy exemption planning, the debtor’s post-transfer retention does

not strongly support the inference that the debtor acted with fraudulent intent.

Specifically, debtors who transfer property as a part of pre-bankruptcy exemption

planning do so with the express purpose of maintaining the interest they claim as

exempt. See 11 U.S.C. § 522(b) (permitting a debtor to exempt property “from the

estate”); 11 U.S.C. § 541 (defining property of the estate by reference to the debtor’s

interests in property). But the Eighth Circuit has repeatedly held that the intent to

pursue exemption planning is not inherently fraudulent, even if the transfer was “for

the express purpose of placing [transferred] property beyond the reach of creditors”

and into exempt forms. Hanson v. First Nat’l Bank in Brookings, 848 F.2d 866, 868

(8th Cir. 1988). Because openly and overtly retaining exempt property is

inconsistent with the intention to create the false appearance of a transfer while

retaining a secret interest (the intention that suggests fraudulent intent outside of

the exemption-planning context), post-transfer retention of exempt property does not

strongly support the inference that the debtor acted with fraudulent intent.

Here, though the Arreguis retained exclusive possession and control of the

residence after they transferred title from themselves as joint tenants to themselves

as tenants by the entireties, their apparent intent was to effectuate pre-bankruptcy

planning, not to create the false appearance of a transfer. Accordingly, though this

statutory factor is present, the post-transfer retention does not strongly support the

inference that the Arreguis acted with fraudulent intent in this case.

ii. Missouri’s third factor: the transfer or obligation was

disclosed or concealed

Missouri’s third factor requires the court to analyze whether the debtor

disclosed or concealed the transfer. Mo. Rev. Stat. § 428.024.2(3). Debtors have an

affirmative “duty to truthfully disclose these transactions on their bankruptcy

schedules.” See Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348, 1354 (8th

Cir. 1995) (analyzing effect of omission from a “bankruptcy schedule”). A violation of

the duty to disclose a transfer is tantamount to concealment and may support an

inference of fraudulent intent. Id.

The court determines this factor weighs heavily in favor of fraudulent intent.

The Arreguis transferred title to themselves three days before the petition date, then

egregiously and without a valid explanation failed to disclose the transfer on their

statement of financial affairs. Angela’s trial testimony (which is inconsistent with

the Arreguis’ previous apparent concession that a transfer occurred) makes clear that

the Arreguis decided not to disclose the transfer in reliance on the unfounded legal

argument that the quit claim deed did not give rise to a “transfer” under the law. But

the Arreguis’ erroneous legal argument concerning the proper characterization of the

transfer does not absolve them of their duty of candor to this court. Instead, the

Arreguis’ legal argument in favor of nondisclosure suggests the Arreguis’

nondisclosure was part of a scheme to escape the scrutiny that the integrity of the

bankruptcy system demands. Their deliberate nondisclosure strongly supports the

inference that they acted with fraudulent intent.

iii. Missouri’s fifth factor: the transfer was of substantially all of

the debtors’ assets

Next, under the fifth factor, the debtor may have acted with fraudulent intent

if the debtor transferred “substantially all the debtor’s assets.” Mo. Rev. Stat.

§ 428.024.2. The phrase “substantially all” connotes close to the entirety of, or “some

percentage which is very near 100%.” Cent. States Se. & Sw. Areas Pension Fund v.

Bellmont Trucking Co., Inc., 610 F. Supp. 1505, 1511 (N.D. Ind. 1985). In a case

involving a transfer from a debtor to himself or herself, the court must consider the

transfer’s effect on the sum of the debtor’s nonexempt assets. See Addison v. Seaver

(In re Addison), 540 F.3d 805, 816–17 (8th Cir. 2008) (distinguishing the facts in that

case with the facts in Norwest Bank Neb., N.A. v. Tveten, 848 F.2d 871 (8th Cir. 1988),

where the debtor “converted almost all of his nonexempt property (approximately

$700,000) into exempt life insurance policies and annuities” (emphasis added)). This

factor imposes a “principle of too much; phrased colloquially, when a pig becomes a

hog it is slaughtered.” Tveten, 848 F.2d at 879 (Arnold, J., dissenting) (quoting

Albuquerque Nat’l Bank v. Zouhar (In re Zouhar), 10 B.R. 154, 157 (Bankr. D.N.M.

1981)).

The court determines the fifth factor is present. The Arreguis’ schedule A/B

reveals that the total value of their assets equals $445,020.25. Absent the tenancy

by the entireties exemption in the residence, the Arreguis’ estate would include

nonexempt assets worth $129,482. But the quit claim deed transferring the Arreguis’

property to themselves as tenants by the entireties reduced the nonexempt assets

available to the estate to only $2,160. By reducing the available nonexempt equity

by $127,322 (from $129,482 to $2,160), the Arreguis’ transfer reduced their

nonexempt assets by 98.3 percent ($127,322 divided by $129,483). Because this

percentage is “very near 100%,” the court determines the transfer at issue was of

“substantially all the debtor’s assets” under the fifth statutory factor.

iv. Missouri’s seventh factor: the debtor removed or concealed

assets

Under the seventh factor, the court must analyze whether the debtor removed

or concealed assets. Mo. Rev. Stat. § 428.024.2. This factor applies only if the debtors

removed or concealed the nature and existence of an asset or transfer from their

creditors at the time they made the transfer. Maxus Liquidating Tr. v. YPF S.A. (In

re Maxus Energy Corp.), 641 B.R. 467, 520–21 (Bankr. D. Del. 2022).

The court determines the seventh factor is not present. The trustee does not

allege that the Arreguis removed or concealed the residence itself or concealed the

transfer at the time they made it, but instead argues that this element is satisfied

because the transfer made the equity in the residence unavailable to the Arreguis’

individual creditors. The trustee cited no authority supporting the proposition that

a transfer of non-exempt property to an exempt form constitutes the removal or

concealment of the property itself, and the court is aware of none. Because the

Arreguis did not remove or conceal the residence when they made the transfer, the

court determines the trustee has not established this factor.

v. Missouri’s eighth factor: the value of the consideration

received by the debtor was reasonably equivalent to the

value of the asset transferred or the amount of the obligation

incurred

Under Missouri’s eighth factor, the court must determine whether the value

the debtor received as a result of the transfer was at least reasonably equivalent to

the value transferred. Though reasonably equivalent value is a factor that may

support a finding of actual fraud, it is also a “hallmark” of constructive fraud, 5 Collier

on Bankruptcy ¶ 548.05[3] (Richard Levin & Henry J. Sommer eds., 16th ed. 2018),

and is critical to the court’s constructive fraud analysis in Part B.4 of this opinion.

For the reasons explained in Part B.4 below, the court determines the Arreguis

received at least reasonably equivalent value for the transfer at issue in this case.

See infra Part B.4. As a result, the reasonably equivalent value statutory factor does

not weigh in favor of fraudulent intent here.

vi. Missouri’s ninth factor: the debtor was insolvent or became

insolvent shortly after the transfer was made or the

obligation incurred

The ninth statutory factor requires that the court determine whether the

debtor was insolvent or became insolvent shortly after the transfer was made or the

obligation incurred. Mo. Rev. Stat. § 428.024.2.

The Bankruptcy Code and the MUFTA each define the term “insolvent”

differently. Under the Bankruptcy Code,

“The term ‘insolvent’ means (A) . . . financial condition such that the sum

of such entity’s debts is greater than all of such entity’s property, at a

fair valuation, exclusive of—(i) property transferred, concealed, or

removed with intent to hinder, delay, or defraud such entity’s creditors;

and (ii) property that may be exempted from property of the estate under

section 522 of this title.”

11 U.S.C. § 101(32). Under the MUFTA,

“A debtor is insolvent if the sum of the debtor’s debts is greater than all

of the debtor’s assets at a fair valuation; … (4) Assets under this section

do not include property that has been transferred, concealed, or removed

with intent to hinder, delay, or defraud creditors or that has been

transferred in a manner making the transfer voidable under sections

428.005 to 428.059; and (5) Debts under this section do not include an

obligation to the extent it is secured by a valid lien on property of the

debtor not included as an asset.”

Mo Rev. Stat. § 428.014. Thus, the definitions of insolvency under Bankruptcy Code

and the MUFTA include common elements. For example, under both the Bankruptcy

Code and the MUFTA, a debtor is insolvent if the sum of the debtor’s debts exceeds

the fair value of its assets. See Mo. Rev. Stat. § 428.014 (defining insolvency under

Missouri law); 11 U.S.C. § 101(32) (defining insolvency under bankruptcy law). And

under both the Bankruptcy Code and the MUFTA, the court must exclude the value

of allegedly fraudulently transferred property from its calculation of the debtor’s

assets. 11 U.S.C. § 101(32); Mo. Rev. Stat. § 428.014.

But the calculations for insolvency otherwise differ under the Bankruptcy Code

and the MUFTA. Compare 11 U.S.C. § 101(32) (defining insolvency under the

Bankruptcy Code), with Mo Rev. Stat. § 428.014 (defining insolvency under Missouri

law). Specifically, though both the Bankruptcy Code and MUFTA require that the

court exclude fraudulently transferred property from its calculation of debtor’s assets,

the Bankruptcy Code additionally requires that the court exclude the value of exempt

property from the calculation. See 11 U.S.C. § 101(32) (“exclusive of—(i) property

transferred, concealed, or removed with intent to hinder, delay, or defraud such

entity’s creditors; and (ii) property that may be exempted from property of the estate

under section 522 of this title”) (emphasis added). In contrast, the MUFTA does not

require that the court exclude exempt property. See Mo. Rev. Stat. § 428.014

(requiring exclusion of fraudulently transferred property but not exempt property).

And though the Bankruptcy Code does not require that the court exclude any specific

categories of liabilities from its debt calculation, the MUFTA directs the court to

exclude from the debt component of the equation the value of the any debts secured

by the allegedly fraudulently transferred property. Compare 11 U.S.C. § 101(32)

(making no exclusion for debts secured by fraudulently transferred assets), with Mo

Rev. Stat. § 428.014 (“Debts under this section do not include an obligation to the

extent it is secured by a valid lien on property of the debtor not included as an asset.”).

Because the calculations under the Bankruptcy Code and MUFTA differ, the court

independently analyzes each below.

The court determines the Arreguis were insolvent during the relevant period

under the Bankruptcy Code. The Arreguis listed debts totaling $177,173.27 on their

schedules D and E/F. The Arreguis listed assets totaling $445,020.25 on their

schedule A/B. After subtracting from the Arreguis’ total assets the value of the

alleged fraudulently transferred residence ($230,700) and the value of the Arreguis’

other exempt property ($201,399), the remaining value of the Arreguis’ assets equals

$12,921.25. The sum of the Arreguis’ debts ($177,173.27) exceeds the sum of their

assets ($12,921.25) under the Bankruptcy Code. As a result, the ninth factor is

present under the Bankruptcy Code.

In contrast, the court determines the Arreguis were not insolvent during the

relevant period under the MUFTA. As discussed, the Arreguis listed a total of

$445,020.25 assets on their schedule A/B, and listed a total of $177,173.27 debts on

their schedules D, and E/F. Of their $445,020.25 aggregate asset value, $230,700 is

from their allegedly fraudulently transferred residence. And of their $177,173.27

aggregate debts, $88,378 are secured by their residence. Thus, the sum of the

Arreguis’ assets, after subtracting the value of their residence but not subtracting

their other exempt property, is $214,320.25. The sum of the Arreguis’ debts,

excluding the $88,378 debts secured by their residence, is $88,795.27. Because their

debts ($88,795.27) do not exceed their assets ($214,320.25) under the MUFTA

calculation, the ninth factor is not present for purposes of the MUFTA.

In summary, the court determines the statutory factors support the inference

that the Arreguis acted with fraudulent intent. In particular, that the Arreguis

retained possession or control of the property after the transfer supports the inference

of fraudulent intent, though not strongly. That the Arreguis did not disclose the

transfer on their statement of financial affairs despite making the transfer only three

days before the petition date strongly supports the inference that they acted with

fraudulent intent. Finally, that the transfer deprived the estate of substantially all

of the Arreguis’ nonexempt assets supports the inference of fraudulent intent. The

debtor’s insolvency under the Bankruptcy Code weighs in favor of fraudulent intent,

though the debtor’s lack of insolvency under the MUFTA undermines the implication

of fraudulent intent. Taken together, the presence of these factors support the

inference that the Arreguis acted with fraudulent intent.

b. The circumstances of this case establish extrinsic evidence of

fraud

Even when a debtor’s transformation of nonexempt assets to exempt forms

satisfies several badges of fraud or statutory factors, the Eighth Circuit also requires

evidence of fraud “extrinsic to the mere facts of conversion of non-exempt assets into

exempt.” Addison v. Seaver (In re Addison), 540 F.3d 805, 813 (8th Cir. 2008) (quoting

Jensen v. Dietz (In re Sholdan), 217 F.3d 1006, 1010 (8th Cir. 2000)). Examples of

extrinsic evidence include that the transferor (1) had been sued or threatened with

suit prior to the transfer, In re Addison, 540 F.3d at 814; (2) radically departed from

a previous lifestyle, In re Sholdan, 217 F.3d at 1010; (3) materially misled or deceived

creditors about the debtor’s position, Panushka v. Johnson (In re Johnson), 880 F.2d

78, 82 (8th Cir. 1989); (4) conveyed the property for less than fair consideration,

Graven v. Fink (In re Graven), 936 F.2d 378, 383–84 (8th Cir. 1991); (5) continued

retention, benefit, or use of property after the transfer, id.; (6) transferred property

after a creditor obtained a judgment, Ford v. Poston (In re Ford), 773 F.2d 52, 55 (4th

Cir. 1985); and (7) made false statements or failed to disclose the transfer on his or

her bankruptcy schedules, Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348,

1354–55 (8th Cir. 1995).

The court determines three circumstances provide extrinsic evidence of fraud

in this case. Several of those circumstances were also relevant to the court’s above

analysis of the statutory factors weighing in favor of actual fraud. First, the Arreguis

continue to retain, benefit from, and use their property after the transfer. Second,

the Arreguis transferred the property in close proximity to the petition date—within

one business day. Third, and most egregiously, despite transferring the property in

such close proximity to the petition date, the Arreguis appear to have deliberately

omitted the transfer from their statement of financial affairs. This omission is

inexcusable and might alone have been sufficient to establish that the Arreguis acted

with fraudulent intent.

Because these three circumstances provide extrinsic evidence of fraudulent

intent to supplement the statutory factors that are present in this case, the court

determines the Arreguis made the transfer “with the intent to hinder, delay, or

defraud” their creditors under both § 548 and the MUFTA. Thus, the transfer is

avoidable as actually fraudulent.

The court will now analyze whether the transfer is also avoidable as

constructively fraudulent under the Bankruptcy Code and the MUFTA.

B. Constructive Fraud Under 11 U.S.C. § 548(a)(1)(B)(ii) & Mo. Rev. Stat.

§ 428.024.1(2)

Many of the elements a plaintiff must prove to establish constructive fraud

under the Bankruptcy Code are identical to those a plaintiff must establish under the

MUFTA. Specifically, to succeed under § 548(a)(1)(B) of the Bankruptcy Code and

§ 428.024.1(2) of the MUFTA, a plaintiff must prove the following common elements:

(1) the debtor had a property interest; (2) the debtor voluntarily or involuntarily

transferred that interest; (3) the transfer occurred within a specified limitations

period—two years under § 548 of the Bankruptcy Code, and four years under

§ 428.024.1(2) of the MUFTA; (4) the debtor received less than reasonably equivalent

value for the transfer; and (5) the debtor suffered from at least one “fragile financial

condition,” such as insolvency or inadequate capitalization. 11 U.S.C. § 548(a)(1)(B);

Mo. Rev. Stat. § 428.024.1(2). See also 5 Collier on Bankruptcy ¶ 548.05[3] (Richard

Levin & Henry J. Sommer eds., 16th ed. 2018) (using the phrase “fragile financial

condition[]” to describe the requirement under § 548(a)(1)(B)(ii)). The fragile

financial condition that a plaintiff must prove under the fifth element above, however,

differs under each fraudulent transfer statute.

Section 548 lists four alternative fragile financial conditions the plaintiff may

prove to satisfy its burden under the fifth element: that the debtor (a) was insolvent

at the time of the transfer or became insolvent as a result of the transfer, (b) had or

was about to have unreasonably small capital, (c) intended to incur or believed it

would incur debts beyond its ability to pay, or (d) made the transfer to or for the

benefit of an insider under an employment contract and not in the ordinary course of

business. 11 U.S.C. § 548(a)(1)(B)(ii).

In contrast, § 428.024.1(2) of the MUFTA provides only two available fragile

financial conditions the plaintiff may prove to satisfy the fifth fraudulent transfer

element: that the debtor (a) had or was about to have unreasonably small capital, or

(b) intended to incur or “believed or reasonably should have believed” it would incur

debts beyond its ability to pay. Mo. Rev. Stat. § 428.024.1(2).

For the following reasons, the court determines the trustee has established

that the Arreguis (1) had a property interest; (2) voluntarily or involuntarily

transferred that interest; (3) made the transfer within the specified limitations

periods; and (5) suffered from at least one fragile financial condition. The trustee,

however, has not established under element (4) that the Arreguis received less than

reasonably equivalent value for the transfer. Because the trustee has not satisfied

his burden of establishing all elements under either the Bankruptcy Code or MUFTA,

the transfer at issue in this case is not avoidable as constructively fraudulent.

1. The Arreguis had a property interest in their residence

The Arreguis concede that they had a property interest in their residence.

Thus, this element is satisfied.

2. The Arreguis voluntarily transferred title in their residence to

themselves

For the reasons the court explained in Part A.1 above, the quit claim deed

transferring the Arreguis’ interest in the property from themselves as joint tenants

to themselves as tenants by the entireties effectuated a “transfer” under the

Bankruptcy Code and the MUFTA. This element is satisfied.

3. The Arreguis transferred title in their residence within the

appropriate timeframe under the Bankruptcy Code and the

MUFTA

Because the Arreguis effectuated the transfer three days prior to filing their

bankruptcy petition, they made the transfer within the applicable lookback periods:

two years under the Bankruptcy Code and four-years under the MUFTA. This

element is satisfied.

4. The Arreguis received reasonably equivalent value

Under the fourth element of constructive fraud, the court must determine

whether the value of the consideration the debtors received was at least reasonably

equivalent to the value they transferred.

The Bankruptcy Code defines “value” in relevant part as, “property, or

satisfaction or securing of a present or antecedent debt of the debtor.” 11 U.S.C.

§ 548(d)(2)(A). The value a debtor receives in a transfer is “reasonably equivalent” to

the value transferred if the property received and the property transferred are

“substantially comparable” in worth. BFP v. Resol. Tr. Corp., 511 U.S. 531, 548

(1994). A debtor also receives reasonably equivalent value if the debtor receives

property more valuable than the property the debtor transferred. See Rebein v.

Cornerstone Creek Partners, LLC (In re Expert S. Tulsa, LLC), 842 F.3d 1293, 1297–

99 (10th Cir. 2016) (determining fraudulent transfer claim failed because the debtor

received more than reasonably equivalent value from the sale of property).

The question of “reasonably equivalent value” commonly arises after a debtor

transfers an interest to a third party in exchange for nothing or for distinct property

of lesser value—not when the debtor transfers property to himself or herself to create

an exemption in a formerly nonexempt asset. See David G. Epstein, Bruce A. Markell,

Steve H. Nickles & Lawrence Ponoroff, Bankruptcy: Dealing With Financial Failure

for Individuals and Businesses 504 (West Academic, 5th ed. 2021) (describing the

“classic example” of a constructively fraudulent transfer as one in which the debtor

did not receive “any economic value in exchange for the [transfer]”). In circumstances

not involving exemption planning, the values at issue are the same whether the court

views them from the perspective of the debtor or from the perspective of the estate:

the estate is depleted by an amount equal to the value the debtor forfeited, and the

estate is enriched by an amount equal to the value the debtor received. See, e.g., BFP,

511 U.S. at 535–40 (analyzing reasonably equivalent value and making no distinction

between value to the debtor and the value to the estate).

But in the context of exemption planning, valuation is less straightforward.

When a debtor makes a transfer to transform nonexempt property to exempt

property, the debtor’s gain is inherently the estate’s (and creditors’) loss. Specifically,

the nonexempt property the debtor transferred (property vulnerable to creditors) was

less valuable to the debtor than the newly exempt property the debtor received as a

result of the transfer (property protected from creditors). Conversely, the nonexempt

property was more valuable to creditors than the exempt property. Thus, from the

debtor’s perspective, the value received was at least reasonably equivalent to the

value transferred. But from the creditors’ perspectives, the value received was less

than reasonably equivalent to the value transferred.

In this case, the trustee asks the court to analyze reasonably equivalent value

from creditors’ perspectives, rather than from the debtors’ perspective, because

fraudulent transfer causes of action exist to protect creditors’ interests. See Brief in

Support of Trustee’s Complaint to Avoid Fraudulent Transfer, at 4, ECF No. 14

(citing Mellon Bank, N.A. v. Metro Commc’ns, Inc., 945 F.2d 635, 646 (3d Cir. 1991)).

Reasoning that “[i]ndividual creditors of the [Arreguis] were harmed by the transfer

into tenancy by the entirety ownership,” the trustee argues this element is satisfied.

Id.

The court disagrees. The trustee’s argument makes sense both intuitively and

as a matter of policy,16 and has persuaded other courts. See, e.g., Rebein v.

Cornerstone Creek Partners, LLC (In re Expert S. Tulsa, LLC), 842 F.3d 1293, 1297

(10th Cir. 2016) (“Because fraudulent-transfer statutes are for the protection of

unsecured creditors, we measure the value received in terms of the effect on those

creditors.”); Mellon Bank, N.A., 945 F.2d at 646 (“The purpose of the laws is estate

preservation; thus, the question whether the debtor received reasonable value must

be determined from the standpoint of the creditors.”). But it suffers two fatal flaws.

First, it contradicts the language of the relevant statutes; and second, it would

severely restrict a debtor’s ability to engage in good faith pre-bankruptcy exemption

planning despite longstanding Eighth Circuit authority recognizing the ability to do

so. See, e.g., Fosberg v. Sec. State Bank of Canova, 15 F.2d 499, 501–02 (8th Cir. 1926)

(discussing policy in favor of exemption planning); Norwest Bank of Neb., N.A. v.

Tveten, 848 F.2d 871, 873–74 (8th Cir. 1988) (same).

First, the trustee’s argument contradicts the language of the relevant statutes,

which direct the court to analyze: “the value of the consideration received by the

debtor.” Mo. Rev. Stat. § 428.024.2(8); see also 11 U.S.C. § 548(a)(1)(B)(i) (“if the

16 The court notes that other features of federal fraudulent transfer law consider creditors’

perspectives. For example, the Bankruptcy Code defines insolvency to exclude the value of a debtor’s

exempt assets (an exclusion that increases the likelihood that a debtor’s liabilities will exceed assets).

11 U.S.C. § 101(32). The exclusion of property that would be unavailable to satisfy creditors’ claims

(due to its exempt status) suggests Congress views insolvency from the creditors’ perspectives.

debtor voluntarily or involuntarily—received less than a reasonably equivalent value

in exchange for such transfer or obligation.”) (emphasis added). Because both

statutes focus on the value the debtor received rather than the value that became

available to unsecured creditors as a result of the transfer, the relevant language does

not contemplate analysis from creditors’ perspectives. The court must follow the clear

statutory language and analyze whether the value the debtor received was at least

reasonably equivalent to the value transferred.

Second, viewing reasonably equivalent value from the creditors’ perspectives

under these circumstances would severely limit a debtor’s right to engage in good

faith exemption planning—a right the Eighth Circuit has repeatedly upheld. See,

e.g., Panuska v. Johnson (In re Johnson), 880 F.2d 78, 81 (8th Cir. 1989) (“The law

permits debtors to intentionally transform property into exempt assets.”); Forsberg v.

Sec. State Bank of Canova, 15 F.2d 499, 501 (8th Cir. 1926) (discussing policy in favor

of exemption planning). For the reasons explained above, from creditors’

perspectives, the value of exempt property is inherently less than reasonably

equivalent to the value of non-exempt property. Thus, transfers in pursuit of

exemption planning will typically satisfy the “less than a reasonably equivalent

value” element from the perspectives of creditors. Moreover, because exemption

planning in anticipation of bankruptcy inherently involves the deliberate transfer of

non-exempt property to an exempt form at a time when the debtor’s financial

condition has made bankruptcy appealing, transfers effectuating exemption planning

will satisfy the first and second elements of a constructively fraudulent transfer (that

the debtor had a property interest and voluntarily or involuntarily transferred that

interest, respectively) and will typically also satisfy the remaining elements (that the

debtor made the transfer within the specified limitations periods and while under a

qualifying fragile financial condition). Thus, viewed from creditors’ perspective,

transfers in pursuit of pre-bankruptcy exemption planning will almost always be

constructively fraudulent. This result is untenable because—though the Eighth

Circuit does not appear to have considered whether pre-bankruptcy exemption

planning transfers might qualify as constructively fraudulent transfers—it has long

held that “the conversion of non-exempt to exempt property for the purpose of placing

the property out of the reach of creditors, without more, will not deprive the debtor of

the exemption to which he otherwise would be entitled.” Norwest Bank Neb., N.A. v.

Tveten, 848 F.2d 871, 873–74 (8th Cir. 1988). Consequently, the court declines to

adopt the interpretation the trustee proposes.

The court determines the Arreguis received at least reasonably equivalent

value in this case. The Arreguis transferred title to their $230,700 residence as joint

tenants and received title to their $230,700 residence as tenants by the entirety, plus

“the sum of $10 and other good and valuable consideration.” Because these values

are substantially comparable in worth, the fair market value of the property the

Arreguis received was reasonably equivalent to the fair market value of the property

the Arreguis transferred. And from the Arreguis’ perspective, the intrinsic value of

the newly exempt residence was more than reasonably equivalent to the value of the

non-exempt residence they transferred because the transfer shielded the residence

from their individual creditors’ claims. The trustee has, therefore, not established

that the Arreguis received less than reasonably equivalent value under the

Bankruptcy Code and the MUFTA.

5. Fragile financial condition

The fragile financial condition the trustee relies on to establish its burden

under the Bankruptcy Code differs from the fragile financial condition the trustee

relies on under the MUFTA. The court separately analyzes the trustee’s arguments

under the Bankruptcy Code and the MUFTA below.

a. Fragile financial condition under the Bankruptcy Code

The fragile financial condition the trustee asserts under § 548(a)(1)(B) of the

Bankruptcy Code is that the Arreguis were insolvent at the time of the transfer. The

court analyzed insolvency under the Bankruptcy Code in Part A.2.a.vi above and

determined trustee satisfied his burden to prove insolvency under the Bankruptcy

Code. For the same reasons the court determined the Arreguis were insolvent in its

above analysis of actual fraud under § 548(a)(1)(A), the court determines this element

is also satisfied as to constructive fraud under § 548(a)(1)(B).

b. Fragile financial condition under the MUFTA

The fragile financial condition the trustee asserts under the MUFTA is that

the Arreguis intended to incur or believed or reasonably should have believed they

would incur debts beyond their ability to pay. Mo. Rev. Stat. § 428.024.1(2)(b). This

fragile financial condition contains a subjective component—the transferor must

have subjectively intended or subjectively held a belief that he or she was incurring

debts beyond his or her ability to pay. Sosne v. Van Vleck (In re Van Vleck), 211 B.R.

689, 693 (Bankr. E.D. Mo. 1997).

Here, the court determines the trustee has established the Arreguis “intended

to incur” or “believed or reasonably should have believed” they would incur debts

beyond their ability to pay. When Angela’s counsel asked her about the Arreguis’

motivation for the transfer, Angela explained that she and Miguel would have

otherwise had to pay back all of their unsecured debts in their chapter 13 case, and

that they did not earn enough income to repay all of their unsecured debts. This

testimony establishes that Arreguis made the transfer at a time when they

subjectively believed they lacked the ability to pay their debts. Thus, the trustee has

established a fragile financial condition under the MUFTA.

In summary, the court will avoid the Arreguis’ transfer as actually fraudulent

under § 548(a)(1)(A) of the Bankruptcy Code and § 428.024.1(1) of the MUFTA. But

the court determines the plaintiff has not established the Arreguis’ transfer was

constructively fraudulent under § 548(a)(1)(B) of the Bankruptcy Code or

§ 428.024.1(2) of the MUFTA.

CONCLUSION

For the reasons explained above, the court determines that the Arreguis’

transfer was actually fraudulent under the Bankruptcy Code and the MUFTA, the

transfer should be avoided, and the Arreguis’ joint tenancy ownership should be

recovered and reinstated for the benefit of the chapter 13 estate. The clerk of the

court is directed to set this matter for status hearing to address the appropriate

disposition of this adversary proceeding in light of other developments and

circumstances in the Arreguis’ main chapter 13 bankruptcy case.

Dated: 9/22/2023 /s/ Brian T. Fenimore

Chief U.S. Bankruptcy Judge