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#2180 signed 11-17-95; order on reconsideration signed 1-18-96 (appended)

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In re:

BILLY DEAN DEROWITSCH, CATHERINE AVIS DEROWITSCH,

DEBTORS

CHAPTER 7

CASE NO. 92-41754-7

JOSEPH I. WITTMAN, Trustee,

PLAINTIFF,

v.

BILLY DEAN DEROWITSCH,

CATHERINE AVIS DEROWITSCH,

KEVIN DEROWITSCH,

CINDY DEMPSTER and

LINDA MARIA KETTERMAN,

DEFENDANTS

ADV. NO. 94-7014



ORDER ON OPPOSING MOTIONS FOR SUMMARY JUDGMENT

This proceeding is before the Court on opposing motions for summary judgment. The plaintiff-trustee appears pro se. The defendants all appear by counsel Jan Hamilton. The parties have agreed on many of the facts and briefed certain issues. The Court has reviewed the materials submitted and is ready to decide the issues presented.

FACTS

The debtors and their three children are the defendants in this proceeding. Through their motions, the parties have agreed on the following facts. Debtor Billy Dean Derowitsch owned an incorporated construction business. Sometime before December 1989, he had bought four pieces of equipment, a backhoe loader, a motor grader, and two tractors, for use in his trade as a construction contractor. He filed a 1989 personal property tax return showing he owned this equipment and paid the tax owed on it. In December 1989, he transferred all the stock in the business to his son. That same month, though Mr. Derowitsch continued to engage in his trade, he and his wife also transferred the equipment to their son, and they transferred certain real property to their son and two daughters. Deeds showing the transfers of the real property were filed a short time later. In February 1990, Mr. Derowitsch filed a return declaring he owned no personal property subject to taxation. In March, the debtors' son filed a return declaring he owned the equipment. In November 1990, the corporation filed an annual report which showed the debtors' son owned all the corporate stock.

At the time of the transfers, Mr. Derowitsch owed money to Nichols Hills Bank (Bank IV has succeeded Nichols Hills Bank; to simplify matters, the Court will refer to the holder of the claims against Mr. Derowitsch as "the Bank") based on his guarantees of debts owed by another company in which he was a shareholder. The Bank notified the company late in October 1989 of default, and the company's line of credit expired in November. In March 1990, in an Oklahoma state court, the company sued the Bank, and by mid-May, the Bank had made third-party claims against Mr. Derowitsch and other guarantors. The Bank obtained a judgment against Mr. Derowitsch on September 17, 1990.

On October 7, 1990, the Bank registered the Oklahoma judgment in the Kansas county where the debtors live, the real property they had transferred to their children is located, and the construction business is headquartered. In November 1990, Mr. Derowitsch and others appealed the Oklahoma state court's judgment. Execution was issued on the judgment in Kansas on May 11, 1992, and a hearing in aid of execution was held on September 8. The debtors filed a chapter 7 bankruptcy proceeding on September 23, 1992. The trustee filed this adversary proceeding on February 4, 1994, seeking to set aside the transfers of the stock, equipment, and real property as fraudulent, pursuant to K.S.A. 33-102 and 11 U.S.C.A. §554(b).

Besides these agreed facts, the trustee alleged in his complaint that: (1) the transfers were made for no consideration; (2) the transfers were made while the debtors were insolvent; (3) the children knew of Mr. Derowitsch's debt to the Bank; (4) the children knew the transferred assets were essentially the last assets subject to execution which the debtors had; and (5) the transfers were made with actual intent(1) to hinder, delay, or defraud the debtors' creditors. The defendants obtained two extensions of time to answer the complaint, and then filed their motion for summary judgment in lieu of an answer. Neither the defendants' motion nor their response to the trustee's motion contains any response to these five allegations. Consequently, the defendants have conceded these allegations are true. Instead, they contend that the trustee's claims are all barred by limitations or laches, and that at any rate the equipment used in the construction business was exempt as tools of Mr. Derowitsch's trade.

The trustee claims in his brief that Mr. Derowitsch testified at the hearing in aid of execution that the debtors transferred all the property for no consideration. However, in the portions of the transcript attached to the trustee's brief, Mr. Derowitsch said only that he gave his son all the stock in his construction company for free; no mention is made of the consideration that might have been paid for any of the other transfers. The defendants have not addressed this claim.

Through Mr. Derowitsch's affidavit, the debtors allege the construction equipment they gave their son was worth between $4,200 and $6,000 at the time of the transfer. They also contend the property was exempt at that time under K.S.A. 60-2304(e) as tools of Mr. Derowitsch's trade. The trustee responds that Mr. Derowitsch did not qualify for a tool of trade exemption because he was a corporate employee and his son had been operating the corporation for a number of years before the transfer. In the alternative, the trustee continues, if the exemption was available, it was limited to property worth $7,500 and, about three months before the transfer, Mr. Derowitsch gave the Bank a financial statement in which he reported the property was worth $15,000.

ISSUES FOR DECISION

1. Does Kansas or Oklahoma law apply to the trustee's claims?

2. Under the applicable law, are the claims barred by the statute of limitations or laches?

3. Did the equipment qualify as tools of Mr. Derowitsch's trade when the debtors transferred it to their son?

4. If so, was the equipment worth more than $7,500, the limit on the Kansas tool of trade exemption, when the debtors transferred it?

5. Is either side in this dispute entitled to summary judgment on the trustee's claims?

DISCUSSION AND CONCLUSIONS

1. Kansas or Oklahoma law

The trustee contends that the basis of this proceeding is the written contract which created the debtor-creditor relationship between the Bank and Mr. Derowitsch, and because that contract has more connections with Oklahoma than Kansas, choice of law rules require this Court to apply Oklahoma statutes of limitations and laches law. He presses this argument even though he is relying on K.S.A. 33-102 to attack the debtors' transfers. The debtors respond that the contract between the parties is merely incidental and that Kansas law should apply because the transfers involved real and personal property located in Kansas which was transferred in Kansas between Kansas residents. The Court must agree with the debtors. If the defendants defrauded the debtors' creditors, they did so when the transfers were made in Kansas, not when one of the debtors incurred the debt to the Bank. Under the trustee's theory, debtors' Kansas transfers could be attacked under the laws of any state in which they might have incurred a debt, or whose laws the creditor could otherwise convince a court to apply. Kansas residents who had one or more creditors, either at the time of transfer or perhaps only when they later filed for bankruptcy, could make transfers that were perfectly legal in Kansas only to have them declared void or voidable under the law of some other state. The Court concludes Kansas law controls the propriety of the transfers the debtors made.



2. Statute of limitations or laches

K.S.A. 60-510 provides that Kansas statutes of limitations run from the time a cause of action accrues. K.S.A. 60-513(a)(3) provides that actions based on fraud must be brought within two years but cannot accrue before the fraud is discovered. A creditor must exercise reasonable diligence in discovering the fraud. Donaldson v. Jacobitz, 67 Kan. 244, 246-48 (1903).  The recording of a conveyance of real property gives constructive notice of the transfer and the contents of the document but not, without more, notice of the fraudulent purpose of the transfer. Causemaker v. DeRoo, 153 Kan. 648, 651 (1941); see also K.S.A. 58-2221 and 58-2222. Either something in the language of the recorded document itself or some other knowledge the creditor possesses must combine with the constructive notice of the transfer to give notice of the fraud. 153 Kan. at 651. In addition, the creditor must have some duty to examine the public records that are kept as a source of information concerning property rights and interests before the recording constitutes constructive notice of the transfer. Hutto v. Knowlton, 82 Kan. 445, 448-49 (1910); see Armstrong v. Cities Service Gas Co. 210 Kan. 298, 310-11 (1972) (quoting and approving Hutto's discussion and justification of this rule ). The Court notes it is not aware of any Kansas statutes or decisions which conclude that a corporation's annual report gives constructive notice of the transfer of its stock or that personal property tax returns give constructive notice of the transfer of personal property. The purpose of filing such documents is probably not to give notice of such transfers.

A cause of action to set aside a conveyance as fraudulent also cannot ordinarily accrue before the debtor defaults and the creditor reduces its claim to judgment and has an execution returned unsatisfied. Causemaker, 153 Kan. at 651-53. However, the creditor cannot indefinitely postpone accrual of the fraudulent transfer action by delay in bringing the action to reduce its claim against the debtor to judgment. Donaldson, 67 Kan. at 248-49; Causemaker, 153 Kan. at 653.

The defendants contend the two-year limitation on the Bank's causes of action to set aside their transfers began to run on the dates the deeds transferring the real estate were recorded, and the corporation's annual report and the relevant personal property tax return were filed. They overlook the fact that Kansas law prevents such a cause of action from accruing until the creditor has obtained a judgment against the debtor and had an execution returned satisfied, so long as the creditor diligently pursues its original claim against the debtor. Here, the Bank became engaged in litigation with Mr. Derowitsch's principal only three months after the principal was in default and the transfers had been made. It then sued Mr. Derowitsch two months later. Four months after that, in September 1990, it obtained a judgment against him. No unreasonable delay had occurred at this point. The Bank had the judgment filed in Kansas as a foreign judgment in October 1990. No unreasonable delay had occurred at this point. Even if the Bank must be charged with having had constructive knowledge of the transfers as soon as the first of them was publicly recorded, the Bank's causes of action to set them aside would not have accrued before its judgment was filed in Kansas. Thus, without regard to any other facts, the two-year limitations period had not expired yet in September 1992 when the debtors filed for bankruptcy.

The trustee was appointed promptly upon the filing of the bankruptcy petition. Bankruptcy Code §544(b) authorizes the trustee to avoid "any transfer of an interest of the debtor in property . . . that is voidable under applicable law by a creditor holding an unsecured claim," as the Bank does. K.S.A. 33-102 permits a creditor to void a transfer made with intent to hinder, delay, or defraud creditors. Section 546(a) (both before and after its amendment in 1994) gave the trustee at least two years from the petition date to commence this proceeding. He commenced it in February of 1994, well within the time permitted by §546(a). While the Kansas statute of limitations might otherwise have expired before this lawsuit was filed, federal bankruptcy law intervened to extend that period for the trustee. Kaliner v. Load Rite Trailers (In re Sverica Acquisition Corp.), 179 B.R. 457, 466 (Bankr.E.D.Pa. 1995); Rosania v. Haligas (In re Dry Wall Supply), 111 B.R. 933, 935-37 (D.Colo. 1990). The trustee's claims are not barred by the statute of limitations.

Relying almost exclusively on the mere passage of time, the defendants assert that the trustee's claims should be barred by laches even if they are not barred by limitations. The defendants do not allege the delay in attacking the transfers has prejudiced them in any way with respect to the transfers of the real property or equipment. In Kansas, laches is a matter of equity and depends not just on the passage of time but also on the presence or absence of prejudicial consequences of delay. National Bank v. Walters, 129 Kan. 49, 51-52 (1929). The Kansas law of laches probably would not apply after the debtors filed for bankruptcy, but instead some federal law on the subject would have to be applied to the trustee's delay in filing this proceeding. Many federal courts have held that laches cannot bar a trustee's claims before the two-year period fixed by §546(a) has expired. See e.g., Gross v. Petty (In re Petty), 93 B.R. 208, 212-13 (Bankr. 9th Cir. 1988); Mancuso v. Continental Bank Nat'l Ass'n Chicago (In re Topcor, Inc.), 132 B.R. 119, 126 (Bankr.N.D.Tex. 1991). One court indicated this is the appropriate rule where Congress has provided a specific and relatively short limitations period, such as that applicable to the trustee under §546(a), but that laches could apply under exceptional circumstances to cut short an uncertain limitations period, such as one based only on the time a bankruptcy case is closed or dismissed. Brin-Mont Chemicals v. Worth Chemical Corp. (In re Brin-Mont Chemicals), 154 B.R. 903, 906-08 (M.D.N.C. 1993). The court indicated that when the defense of laches is available, the party claiming it has the ultimate burden of proving unreasonable delay by the opposing party and prejudice to the party asserting the defense. Id. at 907. In responding to the trustee's motion for summary judgment, the defendants chose to rest on the allegations contained in their own motion for summary judgment. Except with respect to the corporate stock, the defendants have not alleged any facts which might show that the trustee's delay was inexecusable or that the delay has prejudiced them. So even if laches could cut off the trustee's claims before the §546(a) time period expired, the defendants have not alleged a sufficient basis to apply laches to the transfers of the real property or the equipment.

The defendants do suggest that the corporation Mr. Derowitsch gave to his son is subject to fluctuations in value related to the efforts of its principal and so the trustee's delay should defeat his claim. The case they rely on for this argument involved a company's sale of an oil and gas lease for $1 million during a time when oil and gas prices were fluctuating greatly. McMan Oil & Gas Co. v. Hurley, 24 F.2d 776, 777 (5th Cir. 1928). After the sale, the company went into receivership and was successfully reorganized without any attack on the sale, even though the receiver already knew all the facts he relied on when he finally did attack it as a fraudulent conveyance. Id. at 777 and 779. Instead the receiver waited to file suit until one year after knowing all those facts, by which time the lease had turned out to be profitable for the buyer. Id. at 779. The Fifth Circuit ruled that it would be inequitable to allow the receiver "so to speculate on the value of the property." Id. at 779. The Court believes the receiver would have had to return the purchase price to the buyer in order to set aside the sale as fraudulent, and so waited to be sure the income, which he would recover along with the lease, would exceed the price--an uncertain result in light of the fluctuating oil and gas prices--before attacking the sale. Since Mr. Derowitsch received nothing from his son in return for the corporate stock, the trustee here had no similar motive to delay his attack on the transfer and, so far as the Court can tell, gained no benefit from the delay. In addition, other than asserting in their argument that the value of the stock in a closely-held family corporation "is directly related to the efforts of the principals and, in this case, to their success in obtaining construction contracts and performing them on a profitable basis," the defendants have not alleged any facts to show that the value of the corporation actually did fluctuate or that the trustee waited to be sure the corporation would have some value to the estate before attacking the transfer.

In sum, the defendants have not raised a genuine issue of material fact that would require a trial on their laches defense, much less established that the trustee's claims are barred by laches as a matter of law.

3. Tools of Mr. Derowitsch's trade

The defendants assert, and the trustee does not question, that a debtor cannot ordinarily defraud his creditors by transferring exempt property. Kansas cases actually seem to establish a rule that a debtor cannot ever defraud his creditors this way. See Matthewson v. Richards, 114 Kan. 500, 505 (1923); Roser v. National Bank, 56 Kan. 129, 131-32 (1895); Wilson v. Taylor, 49 Kan. 774, 776 (1892). Therefore, the trustee cannot set aside the debtors' transfers to the extent the property transferred was exempt. The defendants claim the four pieces of construction equipment were exempt as tools of Mr. Derowitsch's trade.

K.S.A. 60-2304(e) gives "[e]very person residing in Kansas" an exemption for the "tools, implements and equipment, . . . or other tangible means of production regularly and reasonably necessary in carrying on the person's profession, trade, business or occupation in an aggregate value not to exceed $7,500." The trustee does not contest the defendants' assertion that the four pieces of equipment belonged to Mr. Derowitsch and were used in his trade as a construction contractor or that he was still engaged in that trade on the date he and his wife transferred the equipment to their son. Instead, the trustee argues simply that: (1) Mr. Derowitsch's business was a corporation, (2) his son had "operated [the corporation] for the last 10 to 12 years," and (3) as an employee of the corporation, Mr. Derowitsch did not qualify under K.S.A. 60-2304(e) for the tools of trade exemption.

The trustee has not cited any authority for his theory that an employee cannot qualify for the exemption. If the trustee meant to assert that the corporation owned the equipment, he should not have conceded that Mr. Derowitsch owned it. Indeed, if the corporation owned it, then the purported transfer by the debtors could only have been made by the corporation and the trustee's attack would fail for that reason. If the trustee means a person who works for someone else cannot have a trade under the statute, he is simply wrong. Nothing in the wording of the statue suggests such a restriction. Some years ago in case involving a debtor who sought to exempt certain equipment he used to do farm labor on land he had leased to his sons, this Court declared that it "sees nothing in the Kansas exemption scheme which requires a debtor to farm his own property for himself, as opposed to performing farm labor for someone else." In re Massoni, 67 B.R. 195, 197 (Bankr.D.Kan. 1986). This situation is similar. The fact the person claiming the exemption uses his tools to provide labor for someone else has no bearing on the availability of the exemption.

4. Value of exempt equipment

Insufficient agreed facts have been submitted to enable the Court to determine whether at the time the debtors tranferred the equipment, its value exceeded the $7,500 limit on the Kansas tool of trade exemption. Although the defendants have submitted Mr. Derowitsch's sworn statement that the equipment was worth no more than $6,000 at the time, the trustee has responded with a financial statement in which Mr. Derowitsch declared that a few months before its transfer, the equipment was worth $15,000. This discrepancy in Mr. Derowitsch's statements raises a genuine issue of material fact which cannot be resolved by summary judgment.

5. Summary judgment for or against the trustee's claims

The defendants have not contested the truth of the allegations which, under K.S.A. 33-102, the trustee had to prove to be able to avoid the transfers he has attacked. Instead, they raised only defenses that would defeat his recovery despite the truth of those allegations. The Court has now determined that their defenses fail except for their claim the equipment was exempt as tools of Mr. Derowitsch's trade. Consequently, the trustee is entitled to summary judgment avoiding the transfers of the corporate stock and the real property pursuant to 11 U.S.C.A. §544(b) and K.S.A. 33-102. The defendants are entitled to summary judgment on their claim the equipment constituted tools of the trade. This claim protects the transfer of the equipment only to the extent of $7,500 of the value of the equipment on the date of the transfer. The value of the equipment cannot be resolved at this time.

For these reasons, the trustee's motion for summary judgment is hereby granted to the extent that the transfers of the corporate stock and the real property are declared to be void. The defendants' motion for summary judgment is hereby granted to the extent that the four pieces of construction equipment are declared to have been exempt as tools of Mr. Derowitsch's trade at the time they were transferred. However, both sides' motions are denied to the extent they asked the Court to determine the value of the equipment. Further proceedings will be required to resolve that question.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of November, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

signed 1-18-96





IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS









In re: )

BILLY DEAN DEROWITSCH, ) CASE NO. 92-41754-7 CATHERINE AVIS DEROWITSCH, ) CHAPTER 7

DEBTORS. )

)

JOSEPH I. WITTMAN, Trustee, )

PLAINTIFF, )

)

v. ) ADV. NO. 94-7014

)

BILLY DEAN DEROWITSCH, )

CATHERINE AVIS DEROWITSCH, )

KEVIN DEROWITSCH, CINDY )

DEMPSTER and LINDA MARIA )

KETTERMAN, )

DEFENDANTS. )



ORDER ON RECONSIDERATION OF SUMMARY JUDGMENT RULING

This proceeding is before the Court on the defendants' motion to reconsider the order entered on November 17, 1995, which largely granted the plaintiff-trustee's motion for summary judgment. The trustee opposes the motion and has also requested an expedited hearing or resolution of the motion. The defendants have also filed a related motion for permission to file a responsive pleading to the trustee's complaint. The trustee appears pro se. The defendants all appear by counsel Jan Hamilton. The Court has reviewed the relevant pleadings and is ready to decide the issues presented.

Asserting his power under 11 U.S.C.A. §544(b), the trustee filed this proceeding to try to set aside as fraudulent the debtors' prepetition transfer of certain property to their children. As indicated in the Court's prior order, the trustee alleged in his complaint that: (1) the transfers were made for no consideration; (2) the transfers were made while the debtors were insolvent; (3) the children knew of Mr. Derowitsch's debt to the Bank; (4) the children knew the transferred assets were essentially the last assets subject to execution which the debtors had; and (5) the transfers were made with actual intent to hinder, delay, or defraud the debtors' creditors. Basically, these are the essential elements of a claim under K.S.A. 33-102. The defendants obtained two extensions of time to answer the complaint, and then filed their motion for summary judgment in lieu of an answer. Neither the defendants' motion nor their response to the trustee's motion contained any response to these five allegations. Although surprised that they would do so and wondering if they had really intended to, the Court concluded the defendants had conceded the allegations were true and chosen to rely only on the affirmative defenses asserted in their motion. When the Court determined those defenses largely failed, it granted summary judgment for the trustee on most of his claims.

The defendants now ask the Court to reconsider its decision in two respects. First, they suggest the Court incorrectly applied the ruling of Causemaker v. DeRoo, 153 Kan. 648, 651 (1941), regarding the running of the statute of limitations on fraudulent conveyance actions. They assert that the issue is diligence in the pursuit of the allegedly fraudulent conveyance rather than diligence in the pursuit of the underlying claim. A creditor's cause of action under K.S.A. 33-102 to set aside a conveyance as fraudulent does not accrue, and the statute of limitations on it does not begin to run, until its debtor defaults, and the creditor reduces its claim to judgment and has an execution returned unsatisfied. However, as indicated in the summary judgment ruling, Causemaker precludes a creditor from indefinitely postponing accrual of its fraudulent transfer action by delay in bringing the action to reduce its underlying claim to judgment. Clearly, diligence in pursuit of the underlying claim is relevant under Causemaker, and in this case was the only relevant consideration since that claim was diligently pursued and the debtors filed for bankruptcy before the statute of limitations on the fraudulent conveyance actions had expired.

Second, the defendants assert that they did not intend to concede the five elements of the trustee's claims against them. A review of the combined pleading which was the trustee's response to the defendants' motion for summary judgment and his own motion for summary judgment reveals that the trustee did not include those allegations in his statement of uncontroverted facts, and that he clearly addressed only those issues raised by the defendants in their own motion. The Court can easily understand how the defendants might not have realized that the allegations of the complaint were a part of the trustee's motion. The defendants' counsel points out that a motion made under Federal Rule of Bankruptcy Procedure 7012(a) tolls the time for filing an answer, which does not become due until ten days after the motion is denied. Of course, a motion for summary judgment is made under Rule 7056, not Rule 7012. However, even this fact is somewhat muddied by the incorporation into Rule 7012 of Federal Rule of Civil Procedure 12(b) and (c), which provide for motions under that Rule to be treated as motions under Rule 56 in certain circumstances. Given the trustee's failure to include these allegations as uncontroverted facts in his motion and their misconception about the Rules, the defendants got no clear warning of the need to controvert the allegations in the complaint until the Court issued its decision. On the whole, the Court believes it is more equitable to vacate that part of its prior ruling which relied on the defendants' inadvertent admission of those allegations, and to permit them to litigate this proceeding on the merits, rather than to lose by mistake.

The Court's November 17 ruling is hereby modified as indicated herein. The defendants' motion to file a responsive pleading to the trustee's complaint is granted. This ruling also resolves the trustee's motion for an expedited hearing or resolution of the defendants' motion to reconsider.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of January, 1996.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. The complaint reads: "actual attempt to hinder, delay and defraud the debtors' creditors" (emphasis added), mistakenly using the word "attempt" rather than the word "intent." However, the complaint alleges the transfers are void pursuant to K.S.A. 33-102, which does use the word "intent." The defendants, represented by experienced bankruptcy counsel, have not complained about the error, and the Court concludes they knew the trustee was alleging they made the questioned transfers with the intent required to violate K.S.A. 33-102.

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