Fraudulent transfer counts dismissed

Where the trustee sought to set aside an alleged fraudulent transfer of real property, but the property didn’t belong to the debtors and was instead held by an LLC in which they had an interest, the fraudulent conveyance and transfer counts were dismissed.

Background

Legacy Wealth Properties LLC is a Virginia limited liability company. It owns (or owned, as discussed below) real property. The debtors, Jerome Alan Johnson and Michele Anita Johnson, are or were members of the LLC, with 52% and 24% membership interests, respectively. Gabrielle Johnson and Emeri Johnson own or owned the other 24% membership interests, with 12% each. Gabrielle Johnson and Emeri Johnson are the debtors’ daughters and allegedly live at the property.

In October 2016, the four members executed a consent to action in which they agreed to transfer “100% (one hundred percent) of the property” to Mary Ella Johnson. The LLC did not transfer the property at that time and continued to own the real property up until the petition date in this case. The debtors filed a voluntary petition under Chapter 7 with this court on July 25, 2019. More recently, in July 2021, Legacy, acting by Jerome Alan Johnson as managing member, transferred title to the property to Mary E. Johnson, by a deed of gift and a correction deed of gift.

This matter comes before the court on the motion of defendants Emeri M. Johnson, Gabrielle A. Johnson and Legacy to dismiss the trustee’s complaint.

Fraudulent transfer

The trustee’s fraudulent transfer and voluntary conveyance counts allege that both the transfer of the property and the consent itself were fraudulent transfers or voluntary conveyances under the bankruptcy code or state law. However the trustee cannot bring an action to avoid a transfer of the property because the property was never owned individually by the debtors. The court, therefore, will grant the motion to dismiss insofar as these counts seek to avoid the transfer of the property.

The counts also seek to avoid the consent, which appears to have had the effect of transferring the debtors’ membership interests, as a fraudulent transfer or a voluntary conveyance. The consent had certain badges of fraud associated with it. The plaintiff has stated a plausible claim for relief under the bankruptcy code and state law with respect to the consent.

Voidable

The trustee asserts that the transfer of the property is voidable. However, the property was not property of the bankruptcy estate, for the reasons stated above. Section 544(a)(3) applies only to interests in real property and not to interests in personal property. The court, therefore, will grant the motion to dismiss Count Two.

Sale

Count One seeks to compel a sale of the property. Section 363(h), however, is limited to property “in which the debtor had, at the time of the commencement of the case, an undivided interest as a tenant in common, joint tenant, or tenant by the entirety[.]” Again, the debtors did not have a direct interest in the property in this case, whether as tenants in common, joint tenants or tenants by the entirety. They had membership interests in Legacy, which were owned by them individually and not jointly with any of the other members. Section 363(h) does not permit a sale under these circumstances. This count is dismissed.

Dissolution

Count Three seeks a dissolution of the LLC and a sale of its property. The defendants argue that Virginia Code provisions prevent the trustee from seeking a judicial dissolution of the LLC. The court finds that the federal bankruptcy interest expressed in § 541(c)(1) takes priority by virtue of the Supremacy Clause. The court, therefore, will deny the motion to dismiss Count Three.

Motion to amend

The trustee requests leave to amend the complaint, should the court grant the defendants’ motion to dismiss. The court will require the trustee to file a motion for leave to amend the complaint, along with a proposed amended complaint, so that the court and the defendants can determine whether the proposed amendment is futile. The proposed amended complaint may also assert the bankruptcy estate’s rights, if any, arising out of the recent, post-petition, transfer of the property.

Defendants’ motion to dismiss granted in part, denied in part.

King v. Johnson, No. 21-01046, Nov. 19, 2021. EDVA Bankr. at Alexandria (Kenney). VLW No. 021-4-013. 15 pp.