Knoll, C. v. Uku, E. , 154 A.3d 329 ( 2017 )

J-A20001-16
2017 Pa. Super. 6
CHARLES A. KNOLL IN THE SUPERIOR COURT OF
PENNSYLVANIA
Appellant
v.
EUSTACE O. UKU, YALE DEVELOPMENT &
CONTRACTING, INC. AND EXICO, INC.
Appellee No. 1181 WDA 2015
Appeal from the Order Entered July 2, 2015
In the Court of Common Pleas of Allegheny County
Civil Division at No(s): G.D. 12-007435
BEFORE: BOWES, STABILE AND MUSMANNO, JJ.
OPINION BY BOWES, J.: FILED JANUARY 12, 2017
Charles A. Knoll, Jr. appeals from the July 2, 2015 order denying his
petition for supplementary relief in aid of execution. We reverse.
The following pertinent facts were contained in this Court’s
memorandum addressing the direct appeal in this litigation:
In 2004, Uku and Knoll created Yale, a construction
company, which worked on various projects, including The
Meadows Racetrack and Casino ("Meadows"), the Carpenter's
Training Facility, and the Consol Energy Center. Uku was the
president of Yale, and Knoll was the vice president of Yale.
Pursuant to an agreement, Knoll and Uku split the profits of Yale,
with Knoll receiving 49% and Uku receiving 51%. The
agreement also stated that Uku and Knoll could only receive
funds from Yale as a distribution of profit. Between 2008 and
2012, Uku withdrew or received $59,983.00 from Yale's various
accounts. Between 2008 and 2012, Exico, a corporation of which
Uku is the president and sole shareholder, withdrew
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$228,565.35 from Yale's various accounts. Knoll received no
payments during this period.
On April 27, 2012, Knoll filed a Complaint against Yale and
Uku, alleging that Knoll was due his share of profits from Yale.
Yale and Uku filed an Answer, denying Knoll's allegations. On
June 10, 2013, Knoll filed an Amended Complaint against the
Appellants, alleging that profits from Yale were improperly
diverted to Uku and Exico. [Yale and Uku] filed an Answer and
New Matter to the Amended Complaint. Following a non-jury
trial and the filing of proposed findings of fact and conclusions of
law by both parties, the trial court issued a verdict in favor of
Knoll. [Yale and Uku] filed a Motion for Post-Trial Relief, which
the trial court denied. Subsequently, a Judgment in the amount
of $175,882.09 was entered in favor of Knoll and against [Yale
and Uku].
Knoll v. Uku, 136 A.3d 1033 (Pa.Super. 2016) (unpublished memorandum
at 1-2). This Court affirmed the judgment in Knoll’s favor.
Knoll thereafter instituted garnishment proceedings in order to collect
his judgment, and Shelley Fant, Uku’s wife, was named as a garnishee. On
December 18, 2014, Knoll filed a petition for supplementary relief in aid of
execution under Pa.R.C.P. 3118.1 Therein, Knoll sought to void under the
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1
That rule states in relevant part:
(a) On petition of the plaintiff, after notice and hearing, the court
in which a judgment has been entered may, before or after the
issuance of a writ of execution, enter an order against any party
or person
....
(5) directing that property of the defendant which
has been removed from the county or concealed for
(Footnote Continued Next Page)
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Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa.C.S. §§ 5101-5110
(“PUFTA”), Uku’s transfer of three parcels of real estate that he owned
individually into the names of himself and Fant.
The transfers in question occurred on February 9, 2010, and
concerned these properties then owned by Uku: 1) 241 Fourth Avenue,
Pittsburgh; 2) a one-story rental home located at 8260 Chaske Street,
Verona; and 3) 214 Farmington Road, Pittsburgh, a residential dwelling.
During discovery, it was established that the Fourth Avenue property had
been sold. Simultaneously with those transfers by Uku, Fant placed three
properties, which she solely owned, in her and Uku’s names as tenancies by
the entireties. The properties that Fant transferred from her name and into
joint names included a residence on 821 Old Mill Road, Pittsburgh, and two
rental homes located on Third Street and Ninth Street, respectively, in
Clairton. Each of the six parcels of real estate was transferred without
consideration.
_______________________
(Footnote Continued)
the purpose of avoiding execution shall be delivered
to the sheriff or made available for execution; and
(6) granting such other relief as may be deemed
necessary and appropriate.
Pa.R.C.P. 3118
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Uku and Fant filed answers to Knoll’s petition in aid of execution, and
both were subsequently deposed. During her deposition, Fant testified that
the property transfers were for the purpose of estate planning. She also
reported that she remained in complete charge of the three properties that
previously belonged to her while Uku remained in total control of the Chaske
Street and Farmingham Road real estate. Fant acknowledged that she had
not executed and thus was not financially responsible under the mortgages
for the Chaske Street and Farmington Road properties.
Uku refused to answer any probative questions during his deposition
and instead exercised his right against self-incrimination under the Fifth
Amendment. At the time, Uku was facing criminal charges related to his
businesses. Not only did Uku refuse to answer questions regarding the three
property transfers, but he declined to respond to any inquiries about his
finances.
On July 2, 2015, the trial court denied Knoll’s petition for
supplementary relief in aid of execution. Thereafter, Knoll filed this timely
appeal, wherein he raises the following issues for our review:
A. Did Uku conduct fraudulent transfers when, after stealing
$137,010.35, Uku then transferred all of his individually owned
real property into his wife’s name for no consideration, rendering
himself insolvent and unable to repay the amounts he stole,
while Uku continued to control those properties after the
transfers and then continued stealing an additional
$151,538.00?
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B. Did the lower court abuse its discretion when it refused to
render an adverse inference against Appellees despite the fact
that Uku refused to provide any testimony or produce any
documents regarding the property transfers at issue?
Appellant’s Brief at 3.
Knoll first claims that the trial court abused its discretion and
erroneously applied PUFTA when it decided that the transfers in question
were not fraudulent. The following standard of review applies:
In prior matters involving review of alleged fraudulent
conveyances, we have stated that our standard of review of a
decree in equity is particularly limited and that such a decree will
not be disturbed unless it is unsupported by the evidence or
demonstrably capricious. The findings of the [judge] will not be
reversed unless it appears the [judge] clearly abused the court's
discretion or committed an error of law. The test is not whether
we would have reached the same result on the evidence
presented, but whether the [judge’s] conclusion can reasonably
be drawn from the evidence.
Fell v. 340 Assocs., LLC, 125 A.3d 75, 81 (Pa.Super. 2015) (citation
omitted).
Herein, Knoll argues that the transfers are invalid under PUFTA on
three bases: they were made with actual fraud, as outlined in 12 Pa.C.S. §
5104(a)(1); they were constructively fraudulent, as set forth in 12 Pa.C.S. §
5104(2); and they must automatically be set aside since the language of 12
Pa.C.S. § 5105 applies to the transfers. We first examine § 5104, which
states:
(a) General rule.—A transfer made or obligation incurred by a
debtor is fraudulent as to a creditor, whether the creditor's claim
arose before or after the transfer was made or the obligation
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was incurred, if the debtor made the transfer or incurred the
obligation:
(1) with actual intent to hinder, delay or defraud any
creditor of the debtor; or
(2) without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor:
(i) was engaged or was about to engage in a
business or a transaction for which the
remaining assets of the debtor were
unreasonably small in relation to the business
or transaction; or
(ii) intended to incur, or believed or reasonably
should have believed that the debtor would
incur, debts beyond the debtor’s ability to pay
as they became due.
(b) Certain factors.—In determining actual intent under
subsection (a)(1), consideration may be given, among other
factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the
property transferred after the transfer;
(3) the transfer or obligation was disclosed or concealed;
(4) before the transfer was made or obligation was
incurred, the debtor had been sued or threatened with
suit;
(5) the transfer was of substantially all the debtor's assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
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(8) the value of the consideration received by the debtor
was reasonably equivalent to the value of the asset
transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly
after the transfer was made or the obligation was incurred;
(10) the transfer occurred shortly before or shortly after a
substantial debt was incurred; and
(11) the debtor transferred the essential assets of the
business to a lienor who transferred the assets to an
insider of the debtor.
12 Pa.C.S. § 5104. Section 5104(a)(1) nullifies a transfer committed with
actual fraud. Section 5104(b) “identifies factors—‘badges of fraud’—that a
court may consider in ascertaining whether the debtor executed a voidable
transfer” based upon the existence of actual intent to defraud a creditor.
Fell, supra at 82. The § 5104(b) fraud factors are reviewed qualitatively
rather than quantitatively. Id.
A transfer is set aside as fraudulent under § 5105 under the following
circumstances:
A transfer made or obligation incurred by a debtor is
fraudulent as to a creditor whose claim arose before the
transfer was made or the obligation was incurred 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 was insolvent at
that time or the debtor became insolvent as a result of the
transfer or obligation.
12 Pa.C.S. § 5105. Thus, § 5105 applies if (1) the creditor’s claim arose
before the transfer, (2) the debtor made the transfer without receiving a
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reasonably equivalent value in exchange for the transfer, and (3) the debtor
became insolvent as a result of the transfer. See Gallaher v. Riddle, 850
A.2d 748 (Pa.Super. 2004).
While Knoll invokes § 5104(a), § 5104(b), and § 5105, we conclude
that the record herein establishes that § 5105 applies and invalidate the
transfers herein on that basis. Initially, we observe that the trial court found
that Uku became insolvent as a result of the transfers. It did not consider §
5105 since it also concluded that, even though Uku became insolvent as a
result of the transfers, Uku’s three properties were exchanged for items of
reasonably equivalent value, i.e., Fant’s three properties. We first examine
the issue of insolvency, as that decision was in Knoll’s favor and is not
disputed by Uku on appeal.
(a) General rule.— A debtor is insolvent if, at fair valuations,
the sum of the debtor’s debts is greater than all of the debtor’s
assets.
(b) Presumption of insolvency.— A debtor who is generally
not paying the debtor’s debts as they become due is presumed
to be insolvent. This presumption shall impose on the party
against whom the presumption is directed the burden of proving
that the nonexistence of insolvency is more probable than its
existence.
12 Pa.C.S. § 5102.
We conclude that the record evidence supported the trial court’s
finding that Uku became insolvent within the meaning of § 5102 after he
deeded his three individually owned properties from his name and into those
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of himself and Fant. While Uku refused to answer any questions about his
finances, Fant was frank about Uku’s situation. Fant admitted that her
husband had no assets in his sole name. Specifically, Fant was asked a
series of questions as to the assets Uku owned, including bank accounts,
stocks bonds, real estate or retirement funds. She reported, “He has
nothing.” Deposition of Shelley Fant, 1/12/15, at 70. She stated that Uku
had some tangible personal property of nominal value.
The PUFTA defines an “asset” as, “[p]roperty of a debtor,” but also
specifically excludes “an interest in property held in tenancy by the entireties
to the extent it is not subject to process by a creditor holding a claim against
only one tenant.” 12 Pa.C.S. § 5101(b). Thus, prior to the transfers, Uku
had three assets, 241 Fourth Avenue, Pittsburgh, 8260 Chaske Street,
Verona; and 3214 Farmington Road. On February 9, 2010, he placed them
into entireties property and thereafter, he owned no assets, as defined by
PUFTA. The three properties transferred by Fant to Uku were likewise
entireties property and were not assets of Uku under PUTFA. Hence, Uku
became insolvent as a result of the transfers in question.
We now ascertain if Knoll was a creditor whose claim arose prior to the
transfers. A creditor means a “person who has a claim,” and a “claim” is
“[a] right to payment, whether or not the right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured.” 12 Pa.C.S. § 5101(b).
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Even though Uku had not yet been sued by Knoll, Uku began to siphon
money from Yale, 49% of which he owed to Knoll, beginning in 2008 and
continuing until 2012. By 2010, when the transfers in question occurred,
Uku owed Knoll money due to his improper allocation of money from Yale to
himself without giving Knoll his share. Thus, Knoll was a creditor as he had
a claim in the form of a right to payment of funds from Uku prior to the
February 9, 2010 transfers. Uku was fully aware of this fact when he
deeded his property over to Fant and himself, rendering it immune from
execution as to any debtor to whom Uku alone owed money.
Finally, we examine whether the value of the consideration received by
Uku was reasonably equivalent to the value of the asset transferred. In this
connection, the trial court opined that Uku received consideration in the form
of the three properties Fant transferred to her and Uku as tenancies by the
entireties. We concur with Knoll that the trial court committed legal error in
this respect. The definition of “value” is as follows:
(a) General rule.—Value is given for a transfer or an obligation
if, in exchange for the transfer or obligation, property is
transferred or an antecedent debt is secured or satisfied, but
value does not include an unperformed promise made otherwise
than in the ordinary course of the promisor's business to furnish
support to the debtor or another person.
12 Pa.C.S. § 5103(a). However,
The definition in subsection (a) is not exclusive. “Value” is to be
determined in light of the purpose of this chapter to protect a
debtor's estate from being depleted to the prejudice of the
debtor's unsecured creditors. Consideration having no utility
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from a creditor's viewpoint does not satisfy the statutory
definition.
Fell, supra at 82 (citing 12 Pa.C.S. § 5103 comment 2 (emphasis added).
A transfer of property from Fant to Uku and herself as entireties property
had not a scintilla of value to any creditor of Uku. On the other hand, Uku
immunized his real estate from execution for his debts by placing his wife’s
name on the deeds.
Equally important is the fact that, at her deposition, Fant admitted that
the three properties that she transferred into Uku’s name had absolutely no
value. As noted, Fant transferred property on Third Street, Ninth Street,
and Old Mill Road into entireties property in exchange for the three
properties then separately owned by Uku. At her deposition, Fant was asked
whether she knew “the approximate value of the Third Street property?”
Deposition of Shelley Fant, 1/12/15, at 78. She responded, “I think it might
be about $8,000. There's a mortgage on there for more than that.” Id. As
to the Ninth Street property, Fant also admitted that it was worth about
$8,000 but had a mortgage on it for more than its worth. Id. When
questioned about the Old Mill Road real estate, Fant replied, “The Old Mill
Road property is probably worth $700,000, and there are two mortgages,
and it also secures a PNC commercial loan that I have, and there's also an
IRS lien on it, so that pretty much takes up the $700,000.” Id. Fant thus
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admitted that she transferred three properties with no monetary value
whatsoever to Uku on February 9, 2010.
We find decisions rendered under the prior Fraudulent Conveyances
Act particular instructive herein. We first note that § 5105 is “derived from
§ 4 of the Uniform Fraudulent Conveyance Act,” which is the enactment that
PUFTA supplanted. 12 Pa.C.S. § 5105, comment 1. Section four of Uniform
Fraudulent Conveyance Act stated, “Every conveyance made and every
obligation incurred by a person who is or will be thereby rendered insolvent,
is fraudulent as to creditors, without regard to his actual intent, if the
conveyance is made or the obligation is incurred without a fair
consideration.” 39 Pa.S. § 354 (repealed).
Under the present iteration of the same concept in § 5105, there is the
additional requirement that the creditor’s claim must have arisen prior to the
transfer. Although it may be present, the intent to defraud is not a
necessary aspect of the operability of § 5105. In Gallaher, supra, we
applied the provisions of § 5105 after the tripartite test set forth therein was
satisfied, and we did not examine the debtor’s intent behind making the
transfer in question. Under section 4 of the prior Fraudulent Conveyance
Act, a spouse’s conveyance of his or her separate property into entireties
property could be set aside. We observed in Garden State Standardbred
Sales Co. v. Seese, 611 A.2d 1239, 1243 (Pa.Super. 1992), that it was
settled that in Pennsylvania, “entireties property is unavailable to satisfy the
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claims of the creditor of only one of the tenants,” but that “when a spouse
conveys individual property to a tenancy by the entireties in fraud of
creditors, the creditor may nevertheless execute against the property so
conveyed.”
In First National Bank of Marietta v. Hoffines, 239 A.2d 458 (Pa.
1968), the Court invalidated under section 4 of the former Fraudulent
Conveyance Act two conveyances of realty by a debtor who had owned the
properties in his individual name and placed them into the names of himself
and his wife as tenants by the entireties. It noted that the conveyances
rendered the debtor insolvent and that they were made for a stated
consideration of only one dollar. See also Stinner v. Stinner, 446 A.2d 651
(Pa.Super. 1982) (former wife owed money could garnish husband’s wages
placed in entireties account with his new wife).
Also instructive is In re Wettach, 811 F.3d 99 (3rd Cir. 2016),
wherein the Third Circuit Court of Appeals affirmed an award to a bankruptcy
trustee of various transfers made by the debtor of his separate earnings into
an entireties account. In 2000, Mr. Wettach was found personally liable for
unpaid rent under a lease that his partnership, which had been dissolved,
made with the owner of the partnership’s office space. Mr. Wettach joined
another law firm and placed his earnings from that firm into a checking
account that he owned with his wife. He claimed that the checking account
held by the entireties with his wife was exempt property under federal
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bankruptcy law and applicable Pennsylvania state law, both of which provide
that property in which the debtor holds an interest as a tenant by the
entirety cannot be executed upon by his debtors.
After Wettach declared bankruptcy, the trustee in bankruptcy initiated
adversarial proceedings claiming that the deposits were recoverable and
could be placed in the bankruptcy estate as fraudulent transfers. The
trustee took the position that the wage transfers were fraudulent since they
effectively prevented the debtor’s wages from being used to satisfy his debts
by converting the wages into entireties property. Therein, the trustee
claimed that the wage deposits were fraudulent under 12 Pa.C.S. §
5104(a)(2) and § 5105. The bankruptcy court awarded the trustee
approximately $430,000 plus interest from the entireties bank account. The
Wettachs appealed to the district court, which affirmed. The Third Circuit
likewise upheld the bankruptcy court’s ruling.
The Bankruptcy Code grants the bankruptcy trustee the power to
“avoid any transfer of an interest of the debtor in property or any obligation
incurred by the debtor that is voidable under applicable law by a creditor
holding an unsecured claim.” 11 U.S.C. § 544(b)(1). As noted the trustee
took the position that the transfers were voidable under PUTFA
§§5104(a)(2)(ii) and 5105. The Wettachs did not contest either that he was
insolvent or that the bankruptcy claim arose prior to the transfers. They did
maintain that the transfers were for reasonably equivalent value and thereby
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not fraudulent since the funds in the entireties account were used to pay for
reasonable and necessary household expenses.
The Wettach Court held that, once the person challenging the transfer
demonstrates by a preponderance of the evidence that the statutory
elements for application of §§ 5104(a)(2)(ii) and 5105 are met, the burden
shifts to the debtor to produce countervailing proof of the absence of those
factors. Since the Wettachs did not provide documentary proof, which was
within their possession, that the money in the entireties account was spent
on reasonable and necessary household expenses, the Third Circuit rejected
their argument on appeal. The Court thus ruled that a direct deposit of a
debtor’s individual wages into an entireties account can constitute a
fraudulent transfer of assets under the PUFTA.
The record establishes that all three conditions for application of §
5105 are present herein. Thus, Uku’s transfers of the properties from his
name into entireties property were fraudulent under § 5105.2 We therefore
direct the trial court to void the February 9, 2010 transfers by Uku of 8260
Chaske Street, Verona, and 214 Farmington Road, Pittsburgh.
Order reversed. Case remanded. Jurisdiction relinquished.
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2
We thus need not address Knoll’s second averment on appeal.
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Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 1/12/2017
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