In re O’Gorman

October 18, 2024

Dear constituency list members of the Insolvency Law Committee, the following is a case update written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, analyzing In re O’Gorman, No. 23-60005, 2024 WL 4113544 (9th Cir. Sept. 9, 2024), a recent case of interest:

SUMMARY

In In re O’Gorman, the Court of Appeals for the Ninth Circuit upheld a bankruptcy court decision granting summary judgment to the trustee who sought to avoid a fraudulent transfer by the debtor Debbie O’Gorman. Debtor transferred her property with the intent of delaying foreclosure initiated by Grant Reynolds, an attorney who had represented Debtor. The Ninth Circuit ruled that the debtor’s intent to hinder or delay creditors was sufficient for a fraudulent transfer claim under Section 548(a)(1) of the Bankruptcy Code, and actual harm to a creditor is not required.

To read the full published decision, click here.

FACTS

Debbie O’Gorman (“Debtor”) owned a 30-acre parcel of land in Calistoga, California. In 2010, she recorded a second deed of trust against the land in favor of Grant Reynolds (“Grant”) for services he had provided. In 2019, Debtor was in default on her mortgage, which was the senior lienholder on the land. Grant wanted to protect his interest, so he cured the default on the mortgage by paying approximately $300,000 to the lender.

In 2020, Grant initiated foreclosure on his deed of trust. As often happens, someone contacted Debtor offering to “help” her save her home from foreclosure by transferring the property into an entity. In this case, the champion was an attorney, Willilam Utnehmer (“Attorney”), who contacted Debtor and offered to put Debtor’s property into an irrevocable land trust.

In early 2021, Debtor agreed and transferred the property valued at $2.5 million to the Lovering Tubbs land trust. The Lovering Tubbs trust agreement stated its purpose was to “take and hold title to the property … and to preserve the same until its sale or other disposition.” Beneficiaries of the irrevocable land trust were the O’Gorman Trust (a 20% share), and Pacific Equities (an 80% share), a real estate investment group in which Attorney held an interest. The agreement specified that upon sale of the property, Debtor would receive a priority disbursement of $235,000 before disbursements to any beneficiaries. Debtor testified she received no money in exchange for the transfer, and neither the mortgage company nor Grant received notice of the transfer.

Later in 2021, Debtor terminated Attorney’s representation of her and filed a Chapter 7 bankruptcy petition. She scheduled an interest in the property at $3 million comprising substantially all of her assets, along with a note claiming that she was wrongfully induced to convey her interest in a transfer which she believed was voidable. Timothy W. Hoffman (“Trustee”) was appointed Chapter 7 trustee for the bankruptcy. Grant filed a secured claim for $1.5 million, and Trustee objected to it. The bankruptcy court disallowed the claim in its entirety (this ruling was the subject of a separate appeal to the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”), which affirmed, citing lack of evidence supporting a lien as opposed to a loan). Trustee then filed an adversary proceeding against the Lovering Tubbs trust and other entities created by Attorney for the transfer (“Appellants”), alleging actual fraudulent transfer under 11 U.S.C. § 548(a)(1)(A), constructive fraudulent transfer under § 548(a)(1)(B), and for avoidance of preferential transfers under § 547(b).

After Appellants filed an answer denying the allegations, Trustee moved for partial summary judgment. Trustee argued that the transfer was intentionally fraudulent with the intent to hinder and delay Grant’s efforts to foreclose. Trustee argued that six of the eleven “badges of fraud” from Cal. Civ. Code § 3439.04(b)(1)-(11) were present. Further, Trustee provided a declaration signed by Debtor in early 2022 that she did not receive any funds for clean-up, development, or sale of the property, nor was she aware of anyone who received funds for those purposes. Further, she declared that the transfer would prevent or delay Grant from foreclosing on the property, which was the only reason she followed Attorney’s advice to do so. She also testified that she believed Attorney’s ultimate goal in arranging the transfer was to defraud her, but she was desperate to save her home from foreclosure. Appellants filed an opposition three days late asking for more time for discovery, arguing none had yet been done and the motion was premature. Also, they alleged that genuine issues of fact were in dispute but did not submit a declaration or any evidence with their opposition.

The bankruptcy court denied Appellants’ request for more time to conduct discovery, and granted the Trustee’s motion for partial summary judgment. In an unpublished opinion, the Bankruptcy Appellate Panel of the Ninth Circuit (“BAP”) affirmed the bankruptcy court’s decision, finding that Trustee presented a prima facie case of fraudulent transfer, and Appellants showed nothing to create a genuine issue of material fact. Appellants appealed to the Ninth Circuit Court of Appeals (“Ninth Circuit”), which affirmed.

REASONING

Article III Standing

The Ninth Circuit started by addressing an argument brought by Appellants for the first time that the Trustee lacked Article III standing to bring a claim under § 548 because Debtor’s creditors (noting that Grant’s claim was disallowed in its entirety) were not harmed by the transfer. The Ninth Circuit noted that to “establish standing under Article III of the Constitution, “a plaintiff must show: (i) that he suffered an injury in fact that is concrete, particularized, and actual or imminent; (ii) that the injury was likely caused by the defendant; and (iii) that the injury would likely be redressed by judicial relief.” TransUnion LLC v. Ramirez, 594 U.S. 413, 423 (2021), citing Lujan v. Defs. of Wildlife, 504 U.S. 555, 56061 (1992). While it is factually correct that none of Debtor’s creditors sustained injury as a result of the transfer, the Ninth Circuit noted that Appellants’ argument “confuses justiciability with the merits of Trustee’s claim.” Id. at *12. The Ninth Circuit clarified that while § 548 aims to preserve assets for the benefit of creditors, the standard for establishing an injury in fact under Article III is a lower one, known as a “judicially cognizable interest” in avoiding transfers for the estate. E. Bay Sanctuary Covenant v. Biden, 993 F.3d 640, 664–65 (9th Cir. 2021).

The Ninth Circuit then distinguished Appellants’ argument, citing a Ninth Circuit ruling where a creditor lacked standing where injury-in-fact was too speculative. In re East Coast Foods, 80 F.4th 901 (9th Cir. 2023). However, the Ninth Circuit reconciled its position by pointing out that a trustee is the representative of the bankruptcy estate and stands in the shoes of the debtor. This is not the same where “a creditor lacked standing to challenge a fee award to the trustee where the award would not diminish payment to that creditor under the bankruptcy plan.” *13, citing Id. at 904-07. Instead, the Ninth Circuit ruled: for “standing to bring this suit, the Trustee was required to establish an injury to the estate—not, as Appellants argue, to Reynolds or any of O’Gorman’s other creditors. Because there is no question that O’Gorman’s transfer of the property to the Lovering Tubbs Trust depleted the assets in the estate, the estate suffered an injury-in-fact that is redressable by the avoidance sought here.” Id. at *14.

Creditor Harm Needed for Fraudulent Transfer?

Having dispensed with the standing argument, the Ninth Circuit then looked at whether injury to a creditor is an element of § 548. It started with the statute itself, which merely requires that the transfer have an intent to hinder, delay, or defraud. Id. at *15, citing § 548(a)(1)(A). The Ninth Circuit then noted that its case law is silent as to whether a transfer can be avoided under that section without showing that a creditor was harmed by the transfer, then surveyed other circuits for guidance. First, it saw that the Fourth Circuit read § 548(a)(1)(A) to avoid “any transfer of an interest of the debtor in property…” Tavenner v. Smoot, 257 F.3d 401, 407 (4th Cir. 2001) (emphasis in both original and Ninth Circuit’s opinion).

Continuing to cite from the Fourth Circuit: “[n]othing in § 548 indicates that a trustee must establish that a fraudulent conveyance actually harmed a creditor… Section 548 properly focuses on the intent of the debtor, for if a debtor enters into a transaction with the express purpose of defrauding his creditors, his behavior should not be excused simply because, despite the debtor’s best efforts, the transaction failed to harm any creditor.” Id. The Ninth Circuit also found support in a footnote by the Eighth Circuit: “actual harm is not required; the trustee must show only that the debtor acted with the intent to hinder, delay or defraud creditors.” In re Sherman, 67 F.3d 1348, 1355 n.6 (8th Cir. 1995) (citing 4 Collier on Bankruptcy, ¶ 548.02, 548-38 (15th ed. 1995)). The Ninth Circuit noted that efficiency and finality are key goals in bankruptcy when it comes to trustee administration of an estate, in concluding that “[w]e are persuaded by the reasoning of these cases and join our sister circuits in holding that ‘actual harm’ to creditors is not an element of a fraudulent transfer claim under § 548.” Id. at *16.

Summary Judgment

Finally, the Ninth Circuit considered whether the bankruptcy court properly granted Trustee’s summary judgment. Federal Rule of Civil Procedure 56(a) says, in pertinent part, “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Intent to hinder, delay or defraud goes to someone’s state of mind; is it possible to conclude someone’s mental state for Rule 56(a) purposes? The Ninth Circuit answered generally in the negative, but in some situations, it is possible: “Questions involving a person’s state of mind, e.g., whether a party knew or should have known of a particular condition, are generally factual issues inappropriate for resolution by summary judgment… However, where the palpable facts are substantially undisputed, such issues can become questions of law which may be properly decided by summary judgment.” Braxton-Secret v. A.H. Robins Co., 769 F.2d 528, 531 (9th Cir. 1985).

Even without direct evidence, the Ninth Circuit noted that intent to show actual fraud can be inferred by so-called “badges of fraud.” *18, citing In re Acequia, Inc., 34 F.3d 800, 805 (9th Cir. 1994). It continued in stating the law: “[O]nce a trustee establishes indicia of fraud in an action under section 548(a)(1), the burden shifts to the transferee to prove some ‘legitimate supervening purpose’ for the transfers at issue.” Id.

Appellants provided several arguments why granting summary judgment was in error, but the Ninth Circuit shot them all down. First, Appellants mistakenly claimed that the courts below ruled intent to defraud wasn’t required, but the Ninth Circuit found that the bankruptcy court relied on the declaration and other direct evidence of Debtor’s fraudulent intent. The Ninth Circuit also pointed out that § 548(a)(1)(A) does not require an actual intent to defraud, but that the statute is disjunctive, and Debtor’s intent to hinder or delay Grant’s effort to foreclose is sufficient. *20. The Ninth Circuit then disregarded other documents as evidence of non-fraudulent intent, concluding that the bankruptcy court did not err in finding no genuine dispute of fact regarding Debtor’s intent.

The Ninth Circuit then rejected Appellants’ procedural arguments when it found that the bankruptcy court did consider its late-filed papers, and thus no violation of the principle that summary motion can’t be granted simply because a party fails to file opposition. Id. at *22, citing the rule from Ahanchian v. Xenon Pictures, Inc., 624 F.3d 1253, 1258 (9th Cir. 2010). Similarly, the Ninth Circuit noted that there was no authority cited that allowed Appellants the opportunity to conduct discovery as a matter of right prior to the court’s ruling on summary judgment. It dispensed with a few other arguments of Appellants, finding no abuse of discretion, and affirmed the order granting summary judgment in favor of the Trustee for the fraudulent transfer claim.

AUTHOR’S COMMENTARY

When facing foreclosure, it’s generally not a good idea to transfer all or even some of your house to a person or corporation. Reasonable people know this. However, desperation makes normally sane people into stressed people, and stressed people do all kinds of unwise things (any port in a storm). Unfortunately, when crisis strikes, there is another class of people who will seize upon distressed properties and people – especially vulnerable people like the elderly – who are facing foreclosure with a promised fix. Sure, I’m a debtor’s attorney, but it’s hard to judge too harshly the debtor who trusts and believes the promises of an attorney who, with an aura of credibility, offers a solution to keep her in her home when she’s about to be kicked to the curb.

Having said all that, it seems that the Ninth Circuit’s decision in this matter is the correct one. Section 548 does say that “any” transfer may be avoided if the stated requirements are met. Further, the statute includes no language about injury or harm. The statute only requires that the debtor enters into the transaction with the intention of hindering, delaying, or defrauding. Here, the Debtor’s own declaration provides direct evidence that the “transfer would prevent or delay” the foreclosure. There it is: the transfer was done to prevent (hinder) or delay. Two out of three isn’t bad, and as the Ninth Circuit noted, one is enough and three aren’t necessary.

These materials were written by Hale Andrew Antico, Chief Counsel of Antico Law Firm, and President of the Central District Consumer Bankruptcy Attorneys Association (email). Editorial contributions were provided by Maggie E. Schroedter of Robberson Schroedter LLP (maggie@thersfirm.com). 

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