Heilman v. Habitech, Inc. et al
ORDER affirming bankruptcy court's decision of June 28, 2011. So Ordered by Judge Joseph A. DiClerico, Jr.(dae)
UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF NEW HAMPSHIRE
Georgina C. Heilman
Civil No. 11-cv-408-JD
Opinion No. 2012 DNH 008
Habitech, Inc. and D. Bruce Wheeler
O R D E R
During her bankruptcy case, Georgina Heilman brought an
adversary proceeding to avoid the transfer of certain property to
Habitech, Inc. and D. Bruce Wheeler, contending the transfer was
fraudulent under 11 U.S.C. § 548(a).
The bankruptcy court
granted Heilman’s claim in part and avoided the transfer of her
personal property and her interest, but not her husband’s
interest, in their house.
Heilman appealed, arguing that the
entire transfer, including the transfer of her husband’s interest
in the house, was fraudulent and should be avoided.
Wheeler filed a cross-appeal, arguing that the transfer of the
property was not fraudulent.
Georgina Heilman and her husband, Robert, rented a house in
Windham, New Hampshire, (the “Windham House”) from 1995 until
In August of 2000, Erin, the couple’s daughter, purchased
the Windham House.
The Heilmans continued to reside in the house
and paid Erin rent until February 2003, when Erin transferred the
house to the Heilmans for $1.00.
At the same time, the Heilmans
obtained a mortgage for $175,000.
Shortly thereafter, the
Heilmans began renovating the Windham House, which included
adding rooms and remodeling the kitchen.
In the spring of 2005,
the Heilmans obtained an $80,000 home equity line of credit.
few months later, they added a two-car garage with a bedroom to
the Windham House.
Beginning in January of 2000 and continuing
throughout the Heilmans’ purchase and improvements of the Windham
House, Robert was employed by Habitech.
In the fall of 2007, Habitech discovered that Robert had
been embezzling funds from the company for several years.
total, Robert embezzled between $700,000 and $1.1 million during
his employment with the company.
On October 12, 2007, D. Bruce
Wheeler, the co-founder and principal of Habitech, along with an
The background facts are taken from the parties’ briefs and
the record submitted on appeal, including the transcript of the
bankruptcy court’s “findings of fact” set forth on May 26, 2011.
outside accountant and a private investigator, confronted Robert
about the embezzlement.
Robert admitted to embezzling an
undisclosed amount of money over several years.
asked Robert to transfer to Habitech the deed to the Windham
House, as well as some of the Heilmans’ personal property, as
partial repayment of the embezzled funds.
Robert called Georgina that same day, and made arrangements
to meet her at the Windham House later that evening.
arrived home from work that night after 11:00 p.m., to find
Robert, Wheeler, and the others waiting for her.
insinuated that Georgina’s cooperation would be helpful in terms
of Robert’s potential criminal liability and both of their
continuing health coverage.
Wheeler and the others also gave
Georgina the impression that they would not leave until the
Heilmans transferred their property to Habitech.
Georgina signed a Quitclaim Deed and a document titled “Transfer
of all Property.”
Both documents were executed in the Windham
House and signed by a notary public.
Habitech represents that the “Transfer of all Property”
document purported to transfer to Habitech “[a]ll of the property
owned by [the Heilmans] . . . real and personal, tangible and
intangible, contingent and non-contingent, including but
expressly not limited to, all of the furnishings and other
contents in the [Windham House].”
Wheeler took a computer and
several pieces of Georgina’s jewelry that night, and Georgina
delivered an additional piece of jewelry to him a few days later.
Georgina was not implicated in, and had no knowledge of, Robert’s
embezzlement, and had no liability to Habitech.
On or about January 14, 2008, Georgina filed for bankruptcy
under Chapter 13 of the Bankruptcy Code.
On or about April 2,
2008, Georgina filed a complaint against Habitech and Wheeler
(hereinafter, “Habitech”), seeking to avoid her transfer of
property that she made on October 12, 2007, on the ground that it
was a fraudulent transfer.
Robert, who is currently
incarcerated, moved to intervene shortly before the adversary
proceeding was set to begin.
The bankruptcy court denied the
After a hearing, the bankruptcy court entered judgment in
favor of Georgina on the fraudulent transfer claim and avoided
the transfer of her personal property and furnishings, as well as
her interest in the Windham House.
This appeal and cross-appeal
Standard of Review
This court has jurisdiction to hear appeals from final
judgments, orders, and decrees of the bankruptcy court.
U.S.C. § 158(a); see also L.R. 77.4(c).
The court conducts a de
novo review of legal determinations of the bankruptcy court, In
re Gonic Realty Trust, 909 F.2d 624, 626 (1st Cir. 1990), but
will not reverse the bankruptcy court’s factual findings unless
clearly erroneous, Briden v. Foley, 776 F.2d 379, 381 (1st Cir.
A factual finding “is clearly erroneous when[,] although
there is evidence to support it, the reviewing court on the
entire evidence is left with the definite and firm conviction
that a mistake has been committed.”
Anderson v. City of Bessemer
City, 470 U.S. 564, 573 (1985) (internal quotation marks and
Heilman appeals part of the bankruptcy court’s order,
arguing that the court’s decision avoiding the transfer of her
interest in the Windham House applies, or should apply, to the
transfer of the Windham House in its entirety, not just to her
interest in the house.
Habitech cross-appeals, arguing that the
transfer of Heilman’s property, including her interest in the
Windham House, was not fraudulent.
Although the parties did not address the issue, the court
notes that § 548 authorizes a bankruptcy trustee to avoid a
debtor’s fraudulent transfer.
Based on the language of the
statute, Heilman, as the debtor, would not have standing to avoid
a transfer under § 548.
Habitech moved to dismiss the adversary
proceeding on this ground.
The bankruptcy court denied the
motion, but the parties did not provide the court with a copy of
the bankruptcy court’s decision.
11 U.S.C. § 522(h) gives a Chapter 13 debtor standing to
avoid a fraudulent transfer under § 548 if certain conditions are
See, e.g., In re Dickson, 655 F.3d 585, 592 (6th Cir.
The court is unable to determine, based on the appellate
record, whether Heilman meets those conditions.
did not raise the issue on appeal, the court will assume, without
deciding, that Heilman has standing to avoid the transfer of her
interest in the property under § 522(h).
Heilman does not contest the bankruptcy court’s factual
findings or legal rulings.
She contends that the bankruptcy
court’s determination that the transfer of her interest in the
Windham House was fraudulent under § 548 applies with equal force
to the transfer of her husband’s interest in the house.
Alternatively, Heilman contends that because she and her husband
held the house as tenants in the entirety, her interest is 100%
of the house.
Interest of the Debtor
Section 548 provides in pertinent part that a bankruptcy
trustee “may avoid any transfer . . . of an interest of the
debtor in property” if the transfer was fraudulent.
the debtor in the Chapter 13 proceeding, but Robert is not a
debtor in that proceeding.
The bankruptcy court denied Robert’s
motion to intervene in the adversary proceeding, stating,
[W]e’re addressing [Georgina’s] interest in the
property at stake, and any ruling that I make is going
to address her interests in the property, either in
terms of property that’s identified as 100 per cent
[sic] hers potentially, or a partial ownership interest
in the property. I would be -- it would be
inappropriate, since we’ve set this for trial and are
going forward now –- to grant an intervenor status with
the notion that we were going to rule definitively with
regard to any of [Robert’s] interests in the property,
because he’s not here to participate.
Because Robert is not a debtor, § 548 does not apply to his
interest in the Windham House.
The bankruptcy court properly did
not make any ruling with respect to Robert’s interest in the
Therefore, the bankruptcy court’s decision to avoid the
transfer of Georgina’s interest in the house does not apply to
Joint Tenants in the Entirety
Heilman also argues that her interest in the Windham House
was 100% because she and Robert held the house as tenants in the
Therefore, she contends, the transfer of the entire
house should be set aside as fraudulent.
interests in the Windham House on the date of the transfer is a
matter of state law.
Butner v. United States, 440 U.S. 48, 54
A tenancy in the entirety gives each tenant a 100% interest
in the property.
See In re Snyder, 249 B.R. 40, 46 (B.A.P. 1st
New Hampshire, however, does not recognize the
ownership form of tenancy in the entirety.
See Estate of Croteau
v. Croteau, 143 N.H. 177, 180 (1998); see also Boissonnault v.
Savage, 137 N.H. 229, 231 (1993).
New Hampshire law provides
that every conveyance of real estate made to two or more persons
creates an estate in common or, if otherwise provided in the
conveying deed, a joint tenancy.
See Revised Statutes Annotated
Neither a tenant in common nor a joint tenant
holds a 100% interest in the property.
See Land Am. Commonwealth
Title Ins. Co. v. Kolozetski, 159 N.H. 689, 692 (2010) (joint
tenant holds an undivided one-half interest in property); see
also Walshire v. United States, 288 F.3d 342, 348 (8th Cir. 2002)
(tenants in common hold a property “in equal or unequal undivided
shares”) (quoting Black’s Law Dictionary 1478 (17th ed. 1999)).
The Quitclaim Deed by which the Heilmans obtained the
Windham House conveyed the house to them “as tenants by the
Under New Hampshire law, such language creates a
See RSA 477:18 (“The addition, following the
names of the grantees in the granting clause of a deed or devise,
of the words . . . ‘as tenants by the entirety’ shall constitute
a clear expression to create a joint tenancy.”).
Heilman held the Windham House as a joint tenant with her husband
and did not have a 100% interest in the house.
Accordingly, the bankruptcy court’s order avoiding the
October 12, 2007, transfer of the Windham House applies to only
Georgina’s interest in the house, and not to Robert’s.
Georgina’s interest in the Windham House was less than 100%, the
bankruptcy court’s order does not require avoidance of the entire
Habitech appeals the bankruptcy court’s decision that
Heilman’s transfer of her interest in the Windham House was
In support, Habitech contends that the bankruptcy
court found that Heilman failed to meet the requirements of a
“A transaction may be avoided as a constructively fraudulent
transfer under federal bankruptcy law if it is proved that (1)
the debtor had an interest in the property transferred; (2) the
transfer occurred within one year of the petition date; (3) the
debtor was insolvent at the time of the transfer or became
insolvent as a result of it; and (4) the debtor received less
than reasonably equivalent value in exchange for the transfer.”
In re Jackson, 318 B.R. 5, 23 (Bankr. D.N.H. 2004) (internal
quotation marks and citation omitted).
Habitech argues that it
held a constructive trust on the Windham House at the time of the
transfer, and that, therefore, Heilman did not have an interest
in the house to transfer.
Further, Habitech argues that even if
Heilman did have an interest in the house, she received
reasonably equivalent value for her transfer of all of her
property, including her interest in the house.
Heilman’s Interest in the Windham House
Habitech argues that it held the Windham House in a
constructive trust at the time of the transfer because the house
was purchased and renovated with funds Robert embezzled from
Based on its theory that it owned the house through a
constructive trust, Habitech contends that Heilman cannot show
that she had any interest in the house at the time of the
Habitech asserts that the bankruptcy court erred in
concluding that Heilman had an interest in the house for purposes
of avoiding the transfer.
In the context of a bankruptcy proceeding, a party asserting
a right to property based on a constructive trust must establish
the elements of a constructive trust under state law and also
trace the trust funds to the property.
See In re Chew, 496 F.3d
11, 17 n.8 (1st Cir. 2007); Conn. Gen. Life Ins. Co. v. Univ.
Ins. Co., 838 F.2d 612, 618-19 (1st Cir. 1988).
court did not address the elements of a constructive trust under
New Hampshire law, and Habitech does not raise an issue with
respect to those elements on appeal.
Instead, the bankruptcy
court concluded that Habitech failed to trace adequately the
embezzled funds to the Windham House.
Habitech argues that the
bankruptcy court’s factual findings do not support the
When funds subject to a constructive trust have been
commingled with other property of the debtor, the party asserting
rights as a trust beneficiary bears the burden of sufficiently
tracing the trust funds to the property.
Conn. Gen. Life, 838
F.2d at 618-19; see also In re Fin. Res. Mortg., Inc., 454 B.R.
6, 17 (Bankr. D.N.H. 2011).
It is insufficient to show that the
trustee of the constructive trust was enriched by the funds or
that the funds generally added to the value of the trustee’s
Conn. Gen. Life, 838 F.2d at 619.
Instead, the trust
funds “must be clearly traced and identified in specific
Id. (internal quotation marks omitted); see also In
re DeSteph, 2010 WL 2206983, at *11 (Bankr. D.N.H. May 26, 2010)
(tracing requirement was not satisfied because plaintiff could
not directly trace a down payment on a condominium back to
embezzled funds as opposed to the debtor’s own money).
so because “the constructive trust encumbers the property only to
the extent of the funds traceable from the alleged fraud.”
Chew, 496 F.3d at 16 n.5 ; see also Restatement (Second) of
Trusts § 202, comment h (2011) (When trust property has been
mingled with the trustee’s personal property, a constructive
trust may be enforced on the mingled property “in such proportion
as the trust property so mingled bears to the whole of the
The bankruptcy court noted that Habitech’s constructive
trust theory was an “after-the-fact rationalization of value
for what was transferred.”
The court also noted that Habitech
did not have a pre-petition judgment that established a
Instead, Habitech was asserting the
constructive trust theory in the bankruptcy proceeding.
Pertinent to the constructive trust theory, the bankruptcy
court found that “[t]hrough the course of [Robert’s]
embezzlement[,] the funds that he took wrongfully from Habitech
found their way into purchase and improvements to real estate,
into vacations, into -- into some other acquisitions.”
bankruptcy court also found that the Heilmans’ legitimate
earnings were less than the amount of their expenditures during
the period when Robert was embezzling funds from Habitech.
Nevertheless, the court found that Georgina did not know about
the money Robert embezzled.
The court concluded that Habitech
did not trace adequately the embezzled funds to the house.
Contrary to Habitech’s argument on appeal, the bankruptcy
court did not find that the Heilmans paid for the Windham House
and the renovations with embezzled funds.
At most, the court
Habitech argues that the bankruptcy court erred by ruling
that a constructive trust had to have been in place by judgment
before the bankruptcy is filed. Habitech is correct to the
extent that under New Hampshire law, “[a] constructive trust
arises at the time of the occurrence of the events giving rise to
the duty to reconvey the property.” Curtis Mfg. Co., Inc. v.
Plasti-Clip Corp., 933 F. Supp. 94, 106 (D.N.H. 1995) (internal
quotation marks and citation omitted). The bankruptcy court,
however, stated only that absent a prior judgment of a
constructive trust, Habitech is in the position of an unsecured
creditor and must demonstrate to the court the existence of a
found that the embezzled funds were commingled with the Heilmans’
earnings and that together the funds and earnings paid for the
Heilmans’ home, vacations, and other expenses.
A finding of
commingled funds puts the burden on Habitech to clearly trace the
embezzled funds to the house, which the bankruptcy court found
Habitech failed to do.
Habitech has not shown that the
bankruptcy court’s conclusion was based on clearly erroneous
factual findings or on a legal error.
Reasonably Equivalent Value
Habitech argues that even if Heilman’s interest in the
Windham House was free from a constructive trust, the transfer of
all of Heilman’s property, including her interest in the Windham
House, was not fraudulent.
Habitech contends that Heilman
received reasonably equivalent value for the transfer.
“Determination of reasonably equivalent value under §
548(a)(1)(B) is a two-step process.
The Court must first
determine whether the debtor received value, and then examine
whether the value is reasonably equivalent to what the debtor
In re Feeley, 429 B.R. 56, 63 (Bankr. D. Mass. 2010)
(internal citation omitted); see also In re Nat’l Envtl. Sys.
Corp., 111 B.R. 4, 12 (Bankr. D.N.H. 1989).
The determination of
whether consideration is reasonably equivalent value is a
question of fact.
See In re Roco Corp., 701 F.2d 978, 981-82
(1st Cir. 1983); see also 5 Collier on Bankruptcy ¶ 548.05 (15th
ed. rev. 2005) (“Whether the transfer is for a reasonably
equivalent value in every case is largely a question of fact, as
to which considerable latitude must be allowed to the trier of
“[A] reasonably equivalent value determination should
be based on all of the facts and circumstances of the case.”
re Feeley, 429 B.R. at 63 (internal citation omitted).
Here, the bankruptcy court determined that Heilman did not
receive fair or adequate consideration for the transfer of her
property and, therefore, did not receive reasonably equivalent
Habitech asserts that the bankruptcy court erred because
embezzled funds were used to pay for the purchase and renovations
of the Windham House, and therefore, the transfer to Habitech
merely offset the value of the embezzled funds.
As discussed above, Habitech failed to trace adequately the
embezzled funds to the purchase and specific improvements to the
Therefore, Habitech cannot claim that the
transfer of Heilman’s interest back to Habitech is an offset of
the value of the embezzled funds.
Habitech further argues that the transfer of all of
Heilman’s property was the satisfaction of an antecedent debt and
therefore, should be considered reasonably equivalent value.
bankruptcy court found, however, that Heilman did not have any
liability to Habitech and thus, did not have an antecedent debt
Whether Robert had an antecedent debt is irrelevant,
as “the payment of another’s debt is held to be a transfer
without fair consideration.”
In re Gerdes, 246 B.R. 311, 313
(Bankr. S.D. Oh. 2000) (quoting In re B-F Bldg. Corp., 312 F.2d
691, 694 (6th Cir. 1963)).
Therefore, the bankruptcy court’s
determination that Heilman did not receive reasonably equivalent
value for the transfer of her property to Habitech was not
clearly erroneous or a legal error.
For the foregoing reasons, the bankruptcy court’s decision
of June 28, 2011, is affirmed.
Joseph A. DiClerico, Jr.
United States District Judge
January 11, 2012
Jennifer Turco Beaudet, Esquire
Eleanor Wm. Dahar, Esquire
Geraldine L. Karonis, Esquire
Thomas J. Pappas, Esquire
Lawrence P. Sumski, Esquire
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