Emily Bennett owned an real property in fee simple in Rockingham County. In December 2019, she executed a Power of Attorney appointing Lisa Bennett-Smith as her attorney-in-fact. A few days later on December 9, 2016, Ms. Bennett-Smith transferred the property to herself, reserving a life estate for Emily Bennett but without receiving any consideration. This transfer, coupled with her debts, made Emily Bennett insolvent. Emily Bennett then filed a voluntary Chapter 7 bankruptcy on June 20, 2019 and the Trustee brought an action to avoid this as a voidable transaction as constructively fraudulent ad seeking to either recovery the property or the value of the property for the estate. The Trustee served, among other discovery requests, a Request for Admission, to which Ms. Bennett-Smith failed to respond, with the Trustee then seeking Summary Judgment.
Due to the failure of Ms. Bennett-Smith to respond to the Request for Admissions, pursuant to Rule 36(a)(3), the facts as set forth by the Trustee were deemed admitted. As a result, the bankruptcy court granted summary judgment against Ms. Bennett-Smith, finding that the Trustee had met the necessary elements for a claim of constructive fraudulent transfer, namely if, pursuant to N.C. Gen. Stat. § 39-23.5:
- the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and
- the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
As such, the Trustee could avoid the transfer pursuant to 11 U.S.C. § 544(b).
In then determining whether the Trustee could recover the actual property or the value of the property under 11 U.S.C. § 544(b), the bankruptcy court has discretion in how to best “restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.” The factors it considered included:
- Whether the value of the property is contested;
- Whether the value of the property is not readily determinable; or
- Whether the value of the property is not diminished by conversion or depreciation.
Because, despite the admissions, the record was insufficient to determine the value of the property and any diminution of its value, the bankruptcy court ordered the property to be turned over to the Trustee.
Ms. Bennett-Smith's failure to respond to discovery was decisive in this case, as it resulting in the Trustee's allegations being deemed as admitted. That her attorney withdrew from representation shortly after those were due, with that being under seal, adds mystery.
As the Debtor, Emily Smith, retained a Life Estate in the Property following the transfer, which she unfortunately, inaccurately and ultimately inexplicably, appears to have valued her Life Estate at $0.00. As she only had a total of $21,448.68 in debts, it would not be impossible to have pled that the value of the Life Estate (together with her other real and personal property was valued at $10,000 as of the date of the petition) exceeded the amount of debt, leaving her solvent even after the transfer. Then the transfer of the remainder interest to Ms. Bennett-Smith would not have been constructively fraudulent, but with the Life Estate fully exempt as her homestead.
This is an example where the usual inclination to use the lowest reasonable value for property was incorrect.
For a copy of the petition, please click here: