United States Court of Appeals
For the First Circuit
No. 02-2609
In Re: Rowanoak Corporation,
Debtor.
______
JOSEPH BRAUNSTEIN, CHAPTER 7 TRUSTEE
FOR THE ESTATE OF ROWANOAK CORPORATION,
Appellant,
v.
ANN WALSH,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Joseph L. Tauro, U.S. District Judge]
Before
Selya, Circuit Judge,
Stapleton,* Senior Circuit Judge,
and Baldock,** Senior Circuit Judge.
Jeffrey D. Ganz with whom Michael H. Theodore and Riemer
& Braunstein LLP were on brief for appellant.
Gary W. Cruickshank for appellee.
September 18, 2003
*
Of the Third Circuit, sitting by designation.
**
Of the Tenth Circuit, sitting by designation.
BALDOCK, Senior Circuit Judge. Chapter 7 Trustee Joseph
Braunstein appeals the district court’s order reversing the
bankruptcy court’s findings of fact and conclusions of law. The
Trustee alleged certain payments by the Debtor, Rowanoak
Corporation, to Appellee Ann Walsh were fraudulent transfers under
Mass. Gen. Laws ch. 109(a), §§ 5 and 6(a). Walsh contends the
transfers were payments on loans Walsh had made to the Debtor.
After holding an evidentiary hearing, the bankruptcy court found
the payments were fraudulent transfers and ordered Walsh to
reimburse the Debtor’s estate $63,344. Walsh appealed to the
district court. The district court reversed, finding the
bankruptcy court made several errors of law and fact. We have
jurisdiction pursuant to 28 U.S.C. § 158(d). We reverse the
district court’s judgment.
I.
The Debtor, Rowanoak Corporation, was incorporated in
July 1994 by its president and sole shareholder, Darragh Murphy.
Rowanoak did business as a general contractor of construction
projects, primarily with the City of Boston. Rowanoak performed
virtually no labor on its contracts. Instead, Rowanoak, whose only
full-time employee and officer was Murphy, hired subcontractors and
occasional part-time labor to perform the labor on its projects.
On January 8, 1999, Rowanoak filed a voluntary petition
for Chapter 7 relief. During the course of the bankruptcy
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proceeding, the Trustee requested that Rowanoak turn over all of
its books and records, as well as its canceled checks and bank
statements. In response, Rowanoak turned over only canceled checks
and bank statements. In reviewing these documents, the Trustee
discovered that from March 5, 1997, through May 20, 1997, Rowanoak
made six payments from its bank account to Murphy’s mother, Ann
Walsh. The checks totaled $63,344.1
Uncertain about the basis for these checks, the Trustee
filed a motion to compel Rowanoak to turn over other books and
records to the Trustee. In response to the motion, Murphy, as
president of Rowanoak, filed an affidavit stating that Rowanoak
“did not maintain any books and records with respect to the
financial operations of the corporation,” and did “not have any
documents in its possession, custody or control that are relevant
to payments made by the Debtor to Ann Walsh.” The Trustee
subsequently commenced an adversary proceeding against Walsh to
avoid and recover the payments as fraudulent pursuant to Mass. Gen.
Laws ch. 109A, §§ 5 and 6(a). In response, Walsh claimed the
checks represented payments on various pre-petition loans made by
Walsh to Rowanoak.
1
The six checks were as follows: (1) check number 1235 dated
March 5 for $12,000; (2) check number 1237 dated March 6 for
$14,000; (3) check number 1282 dated March 21 for $10,000; (4)
check number 1306 dated April 7 for $18,244; (5) check number 1308
dated April 7 for $4,100; and (6) check number 1371 dated May 20
for $5,000.
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The bankruptcy court held an evidentiary hearing at which
Walsh, Murphy, and the Trustee testified.2 Walsh and Murphy
testified that Walsh made several pre-petition loans to Rowanoak as
evidenced by various canceled checks, check registers, and credit
card statements. No promissory note, security interest, mortgage,
or other documentation existed between Walsh and Rowanoak to
substantiate the alleged loans. Instead, Walsh contended the loans
were evidenced by credit card statements and canceled checks drawn
from bank accounts in the name of Walsh, her husband, and The
Dorchester, Inc., d/b/a Ross Common Quilts, a corporation of which
Walsh is president. All canceled checks were payable to Murphy
individually, except for one check made payable to Home Depot.
None were payable directly to Rowanoak. Rowanoak’s 1996 and 1997
tax returns did not identify any outstanding loans to Walsh. At
the hearing, however, Walsh and Murphy both testified the checks to
Murphy were intended to be loans to Rowanoak.
Murphy testified that Rowanoak often had cash flow
problems, as it needed to pay subcontractors and laborers before it
received payment from the City for completed projects. Because
Rowanoak’s customers often took sixty days or more to settle their
2
The bankruptcy court held the hearing in conjunction with
another adversary proceeding brought by the Trustee against Murphy
based on several payments from Rowanoak’s bank accounts used for
Murphy’s personal expenses. The bankruptcy court found in favor of
Murphy, and the Trustee appealed to the district court. The
district court affirmed. The Trustee does not appeal the ruling in
favor of Murphy to this Court.
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accounts, Murphy asked her mother, Walsh, for money to pay
subcontractors, and then paid the advanced funds back when Rowanoak
received payment. Walsh claimed she fronted Rowanoak approximately
$144,000, and that Rowanoak still owed her $25,000 when Rowanoak
filed for bankruptcy. Walsh did not file a proof of claim until
one week before the trial, however, and Rowanoak did not include
Walsh on its list of creditors when it filed, under oath, its
bankruptcy petition. Based on this testimony and the documentary
evidence, the bankruptcy court entered judgment in favor of the
Trustee, concluding Rowanoak fraudulently transferred the payments
to Walsh in violation of Mass. Gen. Laws ch. 109A, §§ 5 and 6(a).
Walsh appealed to the district court. The district court
reversed, finding the bankruptcy court (1) erred as a matter of law
by using a preferential transfer analysis when the Trustee had
alleged only fraudulent transfers, (2) erred as a matter of law by
considering the absence of potentially exculpatory bank statements
against Walsh; (3) erred as a matter of law by characterizing the
payments to Walsh as capital contributions when the Trustee did not
raise that issue; and (4) erred as a matter of fact and law by
concluding Rowanoak reasonably should have believed it was
incurring or intending to incur debts beyond its ability to pay as
they became due.
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II.
“In an appeal from the district court reviewing
proceedings before the bankruptcy court, we independently review
the bankruptcy court’s decision, applying the ‘clearly erroneous’
standard to findings of fact and de novo review to conclusions of
law.” In re Perry Hollow Mgmt. Co., Inc., 297 F.3d 34, 38 (1st
Cir. 2002). We owe no special deference to the district court’s
determinations. Id.
A.
The Trustee first challenges the district court’s ruling
that the bankruptcy court erred as a matter of law by employing a
preferential transfer analysis. The Trustee undisputably did not
bring a preferential transfer claim under 11 U.S.C. § 547.3
Rather, the Trustee sought to avoid and to recover fraudulent
transfers under Mass. Gen. Laws ch. 109A, §§ 5 and 6. Pursuant to
§ 5, the Trustee must show the debtor made the transfer or incurred
the obligation–
(2) without receiving a reasonably equivalent
value in exchange for the transfer or
obligation, and the debtor:
(ii) intended to incur, or believed or
reasonably should have believed that he would
3
Pursuant to 11 U.S.C. § 547, the Trustee may avoid a transfer
to a creditor made within 90 days of the petition’s filing for an
antecedent debt owed by the debtor if the transfer was made while
the debtor was insolvent, and the transfer enabled the creditor to
receive more than the creditor would receive if the transfer had
not been made and the creditor received payment to the extent
provided by the Bankruptcy Code.
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incur, debts beyond his ability to pay as they
became due.
Pursuant to § 6(a), the Trustee also may avoid fraudulent transfers
“if 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 became insolvent as a
result of the transfer or obligation.”
The district court concluded the bankruptcy court
erroneously used a preferential transfer analysis based on the
following comments the bankruptcy court made during its findings of
fact and conclusions of law:
If, indeed, Ms. Walsh was owed anything by the
debtor, in receiving payments of $63,344
during 1997 and holding no security in the
debtor’s assets, Ms. Walsh essentially came
ahead of all other creditors, and it’s a basic
tenet of the Bankruptcy Code that all
creditors who are not protected by valid
security interests must share and share alike
in whatever dividends can be paid out of the
debtor’s assets. One creditor can’t be paid
in preference to others.
We disagree with the district court’s conclusion that
this statement indicates the bankruptcy court engaged in a
preferential transfer analysis. After the above-quoted comment,
the bankruptcy court stated:
The defendant, Ms. Walsh, has not provided
sufficient evidence to rebut the Trustee’s
allegations, either under Mass. General Law
Chapter 109(a), Section 5, or Section 6(a).
First, there is no credible evidence that Ms.
Walsh gave any value to the debtor in exchange
for its payments to her. . . .
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Second, pursuant to Section 5 of Mass.
General Law 109(a), during 1997 when the
transfers to Ms. Walsh occurred, I find that
the debtor reasonably should have believed
that it was incurring or intending to incur
debts beyond its ability to pay as they become
due.
. . . Likewise, pursuant to Section
6(a) of Mass. General Law Chapter 109(a),
although there is insufficient evidence that
the debtor was insolvent at the time the
transfers were made, I find that the debtor
was rendered insolvent as a result of the
transfer to Ms. Walsh.
The bankruptcy court explicitly stated it was analyzing the case
under sections 5 and 6, as alleged by the Trustee. And the
bankruptcy court’s findings that Walsh gave no reasonably
equivalent value to Rowanoak in exchange for the payments, that
Rowanoak reasonably should have believed it was incurring or
intending to incur debts beyond its ability to pay as they become
due, and that the transfers to Walsh rendered Rowanoak insolvent
are elements of fraudulent transfers under sections 5 and 6 of the
Massachusetts fraudulent transfer law. These are not elements of
the Bankruptcy Code section governing preferential transfers.
Indeed, the bankruptcy court never mentions § 547 in its findings
of fact and conclusions of law. See 11 U.S.C. § 547. We therefore
conclude the district court erroneously reversed the bankruptcy
court on this ground.
B.
The Trustee next challenges the district court’s holding
that the bankruptcy court erred as a matter of law by ruling that
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Walsh’s failure to introduce Rowanoak’s bank statements into
evidence could be used against her. At the hearing, neither the
Trustee nor Walsh introduced Rowanoak’s bank statements into
evidence. After the close of the Trustee’s case but before Walsh’s
case-in-chief, the bankruptcy court inquired about the bank
statements, and both parties indicated they would not be
introducing the statements into evidence. In closing, the Trustee
argued no evidence showed deposits into Rowanoak’s accounts
reflecting the alleged loans. In making findings of fact, the
bankruptcy court noted that no documentary evidence supported
Walsh’s contention that she loaned money to Rowanoak other than
canceled checks made out to Murphy individually.
The district court concluded the bankruptcy court “could
only have drawn this conclusion if it believed that Rowanoak’s
absent bank statements would not have shown deposits equal in value
to [Walsh’s] canceled checks.” The district court determined the
bankruptcy court erroneously held the lack of documentary evidence
against Walsh, because the Trustee bore the burden of proving no
consideration supported the transfers from Rowanoak to Walsh.
According to the district court, “since the burden here was on the
[Trustee] to show the absence of consideration, the [Trustee’s]
failure to prove that Rowanoak did not make deposits equal to the
alleged loans was a failure of proof.” (Emphasis in original).
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We disagree with the district court. The Trustee
undisputably has the burden of proving the transfers were
fraudulent, and this burden never shifts to Walsh. But the
district court seemed to equate the burden of proof with the burden
of production.
The burden of the issue and the duty of going
forward with evidence are two very different
things. The former remains on the party
affirming a fact in support of his case, and
does not change at any time throughout the
trial. The latter may shift from side to side
as the case progresses, according to the
nature and strength of the proofs offered in
support or denial of the main fact to be
established.
9 Wigmore, Evidence § 2487 (Chadbourn rev. 1981); see e.g., In re
Minnesota Utility Contracting, Inc., 110 B.R. 414, 418-19 (D. Minn.
1990) (discussing the difference between shifting the burden of
proof and shifting the burden of production in response to a prima
facie case); In re Uhlmeyer, 67 B.R. 977, 980 (Bankr. D. Ariz.
1986) (“The trustee has the burden of proof to establish the
conveyance was made under conditions that bring it within [11
U.S.C.] § 548 [fraudulent transfers], although the burden of going
forward with the evidence may shift if the trustee establishes a
prima facie case.”). If Walsh believed the bank statements would
assist her in convincing the bankruptcy court that she loaned
Rowanoak certain funds, nothing prevented her from introducing the
statements. By choosing not to produce such evidence, Walsh took
the risk the bankruptcy court would find against her.
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And contrary to the district court’s holding, the
Trustee did not suffer a failure in proof by declining to
demonstrate the funds did not reach Rowanoak’s accounts. Once the
Trustee establishes his prima facie case, he need not affirmatively
disprove every other potential theory. Cf. In re Senty, 42 B.R.
456, 458 (Bankr. S.D.N.Y. 1984) (“The creditor, however, does not
have the burden to disprove all explanations. Upon the
establishment of a prima facie case that a debt is
nondischargeable, the burden shifts to the Debtor to go forward and
offer a credible explanation.”). To establish a prima facie case
under § 5, the Trustee must show the debtor made the transfer (1)
without receiving a reasonably equivalent value in exchange for the
transfer or obligation, and (2) the debtor intended to incur, or
believed or reasonably should have believed that he would incur,
debts beyond his ability to pay as they became due. See Mass. Gen.
Laws ch. 109A, § 5.
Whether Rowanoak’s bank statements reflect deposits
matching Walsh’s transfers to Murphy is relevant only to whether
Walsh gave reasonably equivalent value to the Debtor in return for
its payments to her. Walsh contends she gave reasonably equivalent
value in the form of loans. Hence, to meet his prima facie burden,
the Trustee had to present sufficient evidence to establish the
negative proposition that Walsh did not loan funds to Rowanoak.
The Trustee presented evidence that no documents, such as a
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promissory note, mortgage, or security interest supported Walsh’s
claim that she loaned money to Rowanoak. All Walsh’s checks were
made payable to Murphy individually, or to Home Depot. None were
made payable to Rowanoak. Rowanoak’s tax returns reflected no
outstanding loans to Walsh. Rowanoak did not list Walsh as a
creditor in its bankruptcy petition, even though Walsh alleged
Rowanoak still owed her approximately $25,000 in alleged loans.
And Walsh did not file a proof of claim until one week before the
hearing in this matter. By demonstrating that no documentary
evidence supported an inference Walsh loaned funds directly to
Rowanoak, that all funds were advanced to Murphy individually, and
that neither Rowanoak nor Walsh appeared to acknowledge an
outstanding loan until late in the proceedings, the Trustee
established a prima facie case that Walsh did not give Rowanoak
reasonably equivalent value in the form of loans.4 The bankruptcy
court did not err by crediting this evidence and concluding that
Rowanoak received nothing of value.
In addition, even if the bank statements did show
evidence of deposits, this would not necessarily disprove the
4
The district court did not reverse as clearly erroneous the
bankruptcy court’s finding that no credible evidence supported
Walsh’s contention she loaned funds to Rowanoak. The evidence
presented at trial, as detailed above, supports this finding. As
discussed in Part D below, the bankruptcy court’s finding that the
Trustee made a sufficient showing Rowanoak reasonably should have
believed it would incur debts beyond its ability to pay as they
became due, the second prong of a § 5 claim, also was not clearly
erroneous.
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Trustee’s theory. The Trustee asserts Walsh did not loan funds to
the corporate debtor. Walsh could have given or loaned money to
Murphy individually. Simply because Murphy then chose to deposit
the funds into Rowanoak’s bank account would not prove that Walsh
loaned the funds to Rowanoak. Rowanoak and Murphy are two separate
legal entities, and a gift or loan to one does not equate to a loan
to the other. Seagram Distillers Co. v. Alcoholic Beverages
Control, 519 N.E.2d 276, 281 (Mass. 1988) (“It is a basic tenet
that a corporation is a legal entity distinct from its
shareholders.”); In re Plantation Realty Trust, 232 B.R. 279, 282
(Bankr. D. Mass. 1999) (“In Massachusetts, corporations and their
shareholders . . . are generally deemed distinct legal entities.”).
Accordingly, we conclude the district court erroneously reversed
the bankruptcy court on this ground.
C.
The Trustee also challenges the district court’s holding
that the bankruptcy court erred as a matter of law by
characterizing Walsh’s transfers as capital contributions. In
announcing its findings of fact and conclusions of law, the
bankruptcy court stated that “[e]ven if these amounts did find
their way into the debtor’s bank account . . ., the basic question
is were they loans or additional capital? . . . [T]here is no
evidence that these were loans rather than additional capital.”
The district court concluded this was error because the Trustee
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never raised the issue of whether the transfers from Walsh to
Rowanoak were loans or capital contributions. The district court
noted that Walsh was not a shareholder of Rowanoak, and hence could
not make capital contributions to Rowanoak.
We conclude the bankruptcy court did not make an error of
law. The bankruptcy court’s musings on capital contributions
constitute dicta. The bankruptcy court made the key finding on the
primary factual issue in the case when it found no credible
evidence established Walsh loaned money to Rowanoak. The
bankruptcy court discussed the capital contributions only in a
hypothetical sense, stating that even if the funds from Walsh to
Murphy somehow found their way into Rowanoak’s accounts, no
evidence supported the inference the funds were loans rather than
capital contributions. Because the bankruptcy court’s conclusion
that Walsh did not loan funds to Rowanoak was not clearly
erroneous, we find no reversible error in these extraneous
comments.
D.
Finally, the Trustee challenges the district court’s
ruling that the bankruptcy court erred as a matter of law and fact
when it found Rowanoak reasonably should have believed it was
incurring or intended to incur debts beyond its ability to pay. As
discussed above, a transfer is fraudulent under Mass. Gen. Laws ch.
109A, § 5 if the debtor made the transfer without receiving a
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reasonably equivalent value in exchange for the transfer, and the
debtor intended to incur, or believed or reasonably should have
believed that he would incur, debts beyond his ability to pay as
they became due.
The bankruptcy court found Rowanoak reasonably should
have believed it was incurring or intending to incur debts beyond
its ability to pay as they became due. The bankruptcy court based
its conclusion “partly on Darragh Murphy’s own testimony that the
debtor’s business and financial condition was declining during
1997.” The district court held the bankruptcy erred because it
mischaracterized Murphy’s testimony. According to the district
court, the bankruptcy court “incorrectly summarized” Murphy’s
testimony because Murphy “did not testify that Rowanoak was failing
financially throughout 1997, but rather that the business began to
perform poorly in October or the Fall of 1997.” (Emphasis in
original).
The bankruptcy court’s finding was not clearly erroneous.
Murphy testified that Rowanoak always had cash flow problems, and
had trouble paying its bills as early as 1996. Rowanoak had two
outstanding claims for unpaid corporate income tax against it when
it made the 1997 payments to Walsh. According to the fiscal year
1997 tax return, by July 1, 1997, liabilities far exceeded assets.
And Murphy testified that by October 1997, she realized “things
were going badly,” and she could not borrow any more money from her
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mother. Thus, the bankruptcy court’s finding that Rowanoak
reasonably should have believed that paying over $63,000 to Walsh
between March and May 1997 would leave it without sufficient assets
to pay debts as they became due was not clearly erroneous. We
cannot overturn the bankruptcy court’s findings under the clearly
erroneous standard simply because we might have decided the case
differently. Reich v. Newspapers of New England, Inc., 44 F.3d
1060, 1080 (1st Cir. 1995). We are not “‘left with the definite
and firm conviction that a mistake has been committed'” in this
case. Id. (quoting United States v. United States Gypsum Co., 333
U.S. 364, 395 (1948)).
III.
Having affirmed the bankruptcy court on all issues
pertaining to its finding Rowanoak’s transfers to Walsh were
fraudulent under Mass. Gen. Laws ch. 109A, § 5, we need not discuss
the bankruptcy court’s finding that Rowanoak’s transfers to Walsh
also were fraudulent under § 6(a).5 For the reasons stated, we
5
In reversing the bankruptcy court, the district court
appeared to confuse the elements of claims under these two
sections. The district court incorrectly identified the bankruptcy
court’s finding that the payments to Walsh rendered Rowanoak
insolvent as an element of a § 5 claim. But this finding goes to
the Trustee’s claim under § 6(a). See Mass. Gen. Laws ch. 109a,
§ 6 (transfer is fraudulent under § 6(a) “if 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 became insolvent as a result of the transfer or
obligation.”). Even if the bankruptcy court’s finding that
Rowanoak’s payments to Walsh rendered Rowanoak insolvent was
clearly erroneous, Walsh still must reimburse the payments as
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conclude the district court erred in reversing the bankruptcy
court. Accordingly, the judgment of the district court is
REVERSED.
fraudulent transfers under § 5.
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