Myers v. Malone et al

Filing 15

MEMORANDUM AND ORDER that the findings and recommendations 1 of the United States Bankruptcy Judge are adopted. The note payments made between July 7, 2006 and July 27, 2009 were fraudulent transfers. The purchase of the 25% interest in Via Ch riste in the defendant's name was outside any applicable statute of limitations and therefore, is not recoverable as a fraudulent transfer. The July 27, 2009, note payment was also a preferential transfer. Judgment will be entered in favor of the plaintiff, and against the defendant, in the total amount of $309,877.19. A separate judgment will be entered. Ordered by Judge John M. Gerrard. (JSF)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
RICHARD D. MYERS, Chapter 7
Trustee of the Daniel M. Malone
bankruptcy estate,

8:13-CV-353

Plaintiff,
MEMORANDUM AND ORDER
vs.
JEANNE MALONE,
Defendant.
This matter is before the Court on the findings and recommendations
(filing 1) of the United States Bankruptcy Judge finding that certain
transfers were fraudulent or preferential and recommending that those
transfers be set aside and judgment entered in favor of the plaintiff. The
Court will adopt the findings and recommendations of the bankruptcy judge.1
The Court's responsibility, before entering a final order or judgment, is
to consider the bankruptcy's judge's proposed findings and conclusions and
review, de novo, those matters to which any party has timely and specifically
objected. 28 U.S.C. § 157(5)(c)(1); Exec. Benefits Ins. Agency v. Arkison, 134 S.
Ct. 2165, 2174 (2014). The Court has done so, and agrees with the findings
and conclusions of the bankruptcy judge, for the reasons explained by the
bankruptcy judge. For the sake of completeness the Court will, however,
more specifically address the defendant's three objections to the bankruptcy
judge's findings of fact, and two of her objections to the bankruptcy judge's
conclusions of law.
FINDINGS OF FACT
The defendant takes issue with three particular findings of fact. First,
she questions the finding that "[d]espite the appointment of a new managing
member [in November 2010], Mr. Malone continued to participate in [Via
Christe's] management." Filing 1 at 2. The defendant argues, "Mr. Malone
still had a membership interest in Via Christe in November 2010, and it was
natural that he would continue to participate in management decisions. He
was not the managing member after November 2010." Filing 9 at 2.

Because the bankruptcy judge's findings and recommendations are comprehensive, the
Court will not restate them here. The Court will assume the reader's familiarity with them.
1

The Court finds no merit to this objection for three reasons. First, the
defendant does not explain why it matters. The transfers set aside here took
place during or before 2009. Second, the Court agrees with the bankruptcy
judge's assessment of the evidence—to the extent that the defendant's
objection relies on Mr. Malone's testimony, the Court does not find his
testimony particularly credible. And finally, the defendant's objection, on its
face, does not even disagree with the bankruptcy judge's finding. The
defendant implicitly admits that Mr. Malone, even after November 2010,
"continue[d] to participate in management decisions[,]" and that is all that
the bankruptcy judge found.
Next, the bankruptcy judge found that "In January 2009, Via Christe
obtained a loan from an Omaha church in the amount of $250,000.00. Via
Christe then paid at least $200,000.00 to Mr. and Mrs. Malone." Filing 1 at 3.
The defendant argues that the funds were actually "earmarked" for payment
of the Rockbrook note, so the defendant disagrees with the implication that
the defendant and her husband received the money free and clear. Filing 9 at
2. Again, to the extent that the objection relies on the Court finding Mr.
Malone's testimony credible, the objection is not well-founded: while the
testimony is not "controverted," that does not mean the Court is obliged to
accept it at face value. The Court will also address this issue, of whether the
funds were actually "earmarked," in a bit more detail below.
Finally, the bankruptcy judge found that the defendant "did not
participate in the arrangements to obtain the [Rockbrook] note or to pay it
off." Filing 1 at 3. The defendant contends that this finding of fact is
irrelevant, but then seems to suggest that it is also factually inaccurate.
Filing 9 at 2. Whether a finding of fact is "relevant" is only a meaningful
objection if it resulted in an erroneous legal conclusion. But more to the point,
the Court, having reviewed the parties' testimony, agrees with the
bankruptcy judge that while the defendant may have cooperated with the
legal arrangements her husband made, that cooperation was form over
substance—the defendant did not, in fact, "participate" in those
arrangements so much as she followed instructions.
The defendant's factual objections are not well-taken.
"EARMARK" DOCTRINE
As noted above, the defendant contends that the funds disbursed from
Via Christe to the defendant and her husband were, in fact, "earmarked" for
repayment of the Rockbrook note. Filing 10 at 12. According to the
earmarking doctrine, there is no avoidable transfer of the debtor's property
interest when a new lender and a debtor agree to use loaned funds to pay a
specified antecedent debt, the agreement's terms are actually performed, and
the transaction viewed as a whole does not diminish the debtor's estate. In re
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Heitkamp, 137 F.3d 1087, 1088-89 (8th Cir. 1998). No avoidable transfer is
made because the loaned funds never become part of the debtor's property.
Id. Instead, a new creditor merely steps into the shoes of an old creditor. Id.
The Court is unpersuaded that the earmarking doctrine is applicable
here. First, it is generally understood that the "new lender" for earmarking
purposes should be a third party. See, In re Straightline Invs., Inc., 525 F.3d
870, 881-82 (9th Cir. 2008); In re Flanagan, 503 F.3d 171, 184 (2d Cir. 2007).
The debtor's control of the funds is important. See Flanagan, 503 F.3d at 185.
The earmarking doctrine could be abused unless a court ascertains that it is
the new lender, not the debtor, who earmarks the funds for a particular
creditor. See In re Hartley, 825 F.2d 1067, 1072 (6th Cir. 1987).
At the time the funds were disbursed from Via Christe to the defendant
and her husband, both had ownership interests in Via Christe, and Mr.
Malone was still the managing member. The Court finds the earmarking
doctrine inapplicable where the "new lender" is effectively under the debtor's
control, because the "agreement" to pay the antecedent debt is a sham under
those circumstances. See In re Plechaty, 201 B.R. 486, 491-93 (Bankr. N.D.
Ohio 1996).2
JOINT OWNERSHIP OF FUNDS
The defendant contends, in the alternative, that because the funds
issued from Via Christe in 2009 were issued to her and her husband, half
should have been regarded as hers. Filing 10 at 14. The defendant correctly
states the law: where a conveyance of property is made to two or more
persons, and the instrument is silent as to the interest which each is to take,
the presumption is that their interests are equal. In re Roberts' Estate, 264
N.W.2d 865, 866-67 (Neb. 1978); Hoover v. Haller, 21 N.W.2d 450, 454-55
(Neb. 1946); see Buford v. Dahlke, 62 N.W.2d 252, 258-59 (Neb. 1954). That
rule applies to negotiable instruments. Hoover, 21 N.W.2d at 455.
But the presumption is a rebuttable one. Id.; see Roberts, 264 N.W.2d at
866-68. And it was rebutted here. The money disbursed by Via Christe was
purportedly provided to refund a "capital contribution" that had, in fact, been
derived from the Rockbrook note: a note that the defendant did not make
payments on, and that was secured by property that was not hers. As the
bankruptcy judge found, the circumstances suggest "that Mr. Malone
The Court also notes that, at least according to Mr. Malone, the money paid from Via
Christe to the defendant was satisfaction of a debt Via Christe owed her. Hr'g Tr. at 131. If
that was true, then there would be no exchange of one creditor for another—instead, an
asset (an account receivable) would have been used to pay a debt. Such a transfer may or
may not be avoidable, but it is certainly a transfer. That is not to say that the Court finds
Mr. Malone's testimony on this point particularly credible. It is simply to note that the
defendant's theory of "earmarking" is inconsistent even with her husband's testimony.
2

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engaged in conduct where he intentionally used his business assets to
purchase an asset in his wife’s name in order to protect it from his creditors,
and then used that asset to distribute funds to pay off a loan on which he was
liable." Filing 1 at 8. Those circumstances rebut any presumption of an
equality of interest. Cf. Roberts, 264 N.W.2d at 867-68.3
REQUEST TO ADDUCE ADDITIONAL EVIDENCE
One final note: the defendant requested, in passing, to be allowed to
adduce additional evidence. E.g., filing 10 at 20. The Court may do so, but is
not required to. Fed. R. Bankr. P. 9003(d). The defendant has neither advised
the Court of what evidence she would adduce, nor explained why such
evidence (if any) could not have been presented to the bankruptcy judge in
the first instance. Therefore, the Court finds no basis to invite additional
evidence, and has not done so. See, Doe v. Chao, 306 F.3d 170, 183 (4th Cir.
2002); United States v. Howell, 231 F.3d 615, 622-23 (9th Cir. 2000);
Paddington Partners v. Bouchard, 34 F.3d 1132, 1137-38 (2d Cir. 1994); cf.,
Ridenour v. Boehringer Ingelheim Pharms., 679 F.3d 1062, 1067 (8th Cir.
2012); United States v. Chavez Loya, 528 F.3d 546, 555 (8th Cir. 2008).
IT IS ORDERED:
1.

The findings and recommendations (filing 1) of the United
States Bankruptcy Judge are adopted.

2.

The note payments made between July 7, 2006 and July 27,
2009 were fraudulent transfers.

3.

The purchase of the 25% interest in Via Christe in the
defendant's name was outside any applicable statute of
limitations and therefore, is not recoverable as a fraudulent
transfer.

4.

The July 27, 2009, note payment was also a preferential
transfer.

And, it should be noted, the intent of the disbursement was to pay the Rockbrook note on
which both Malones were jointly and severally liable. If the circumstances suggest any sort
of intended common ownership, it would seem to be joint tenancy—the proceeds were
intended to discharge a joint obligation, so it would make sense for them to be held jointly
as well. But as noted above, the stronger inference from the evidence is that this was part
of Mr. Malone's shell game, and that there was no intent to create a common interest. Cf.
Roberts, 264 N.W.2d at 867-68.
3

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5.

Judgment will be entered in favor of the plaintiff, and
against the defendant, in the total amount of $309,877.19.

6.

A separate judgment will be entered.

Dated this 31st day of March, 2015.
BY THE COURT:

John M. Gerrard
United States District Judge

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