Tavenner v. Smoot (In re Smoot)

2000 WL 33988972 (4th Cir.)

For opinion see 257 F.3d 401

Briefs and Other Related Documents

United States Court of Appeals, Fourth Circuit.

Lynn Lewis TAVENNER, Plaintiff - Appellee,

Kenneth R. SMOOT; Home Check Services; Glass Apple, Incorporated, Defendants -

Appellants,

Katina Smoot a/k/a Katina Lombardo; Cory R. Smoot; Gina Smoot, Defendants.

Nos. 00-1912(L), 00-1913.

November 27, 2000.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF VIRGINIA AT RICHMOND

Brief of Appellee

Dion W. Hayes, John H. Maddock, III, McGuire Woods LLP, One James Center, 901 East Cary Street, Richmond, Virginia 23219, (804) 775-1144, Counsel for Appellee.

*i TABLE OF CONTENTS

TABLE OF AUTHORITIES ... ii

STATEMENT OF CASE ... 1

STATEMENT OF FACTS ... 5

SUMMARY OF ARGUMENT ... 6

ARGUMENT ... 7

APPLICABLE STANDARD OF REVIEW ... 7

DISCUSSION OF THE ISSUES ... 7

I. The Bankruptcy Court Properly Interpreted and Applied Code § 522(g) ... 7

II. The Bankruptcy Court Properly Concluded the Debtor Made the Transfer to Glass Apple When He Was Insolvent ... 26

CONCLUSION ... 32

CERTIFICATE OF COMPLIANCE

CERTIFICATE OF FILING AND SERVICE

*ii TABLE OF AUTHORITIES

FEDERAL CASES

Aweida v Cooper (In re Cooper), 150 B.R. 462 (D. Colo. 1993) ... 10

Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279 (9th Cir. 1996) ... 9

Carpenter v. Valley Wholesale Building Products, Inc. (In re Carpenter), 56 B.R. 704 (Bankr. D. R.I. 1986) ... 19, 20

DeVan v. Simon DeBartolo Group, L.P. (In re Merry-Go-Round Enterprises, Inc.), 180 F.3d 149 (4th Cir. 1999) ... 7

In re Downs, 205 B.R. 93 (Bankr. N.D. Ohio 1996) ... 18, 19

Equitable Life Assurance Society v. James River Associate (In re dames River Associate), 156 B.R. 494 (E.D. Va. 1993) ... 7

First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339 (9th Cir. 1986) ... 9

Future Time, Inc. v. Yates, 26 B.R. 1006 (M.D. Ga.), aff'd, 712 F.2d 1417 (11th Cir. 1983) ... 10

Hyman v. Porter (In re Porter), 37 B.R. 56 (Bankr. E.D. Va. 1984) ... 26, 28, 29

*iii Lasich v. Wichstrom (In re Wichstrom), 113 B.R. 339 (Bankr. W.D. Mich. 1990) ... 24, 25

Perez v. Campbell, 402 U.S. 637 (177) ... 25

Schieffler v. Beshears (In re Beshears), 182 B.R. 235 (Bankr. E.D. Ark. 1995) ... 17, 18

Shaia v. Meyer (In re Meyer), 206 B.R. 410 (Bankr. E.D. Va. 1997) ... 29

Shirley v. Leake, 715 F.2d 859 (4th Cir. 1983) ... 21

Smiley v. First National Bank (In re Smiley), 864 F.2d 562 (7th Cir. 1989) ... 9

T.R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396 (Bankr. E.D. Va. 1992) ... 14, 15, 16, 17

In re Trevino, 96 B.R. 608 (Bankr. E.D.N.C. 1989) ... 14

Webster v. Hope (In re Hope), 231 B.R. 403 (Bankr. D. D.C. 1999) ... 10, 16, 17

DOCKETED CASES

Zanderman, Inc. v. Sandoval (In re Sandoval), No. 96-2391, 1998 WL 497475 (4th Cir. May 7, 1998) ... passim

*iv FEDERAL STATUTES

11 U.S.C. § 101 ... 1

11 U.S.C. § 101(5) ... 27

11 U.S.C. § 101(12) ... 27

11 U.S.C. § 101(32)(A) ... 27, 31

11 U.S.C. § 101(32)(A)(I) ... 29

11 U.S.C. § 101(50) ... 24

11 U.S.C. § 522(g) ... passim

11 U.S.C. § 544 ... 13

11 U.S.C. § 544(a) ... 13, 14

11 U.S.C. § 544(b) ... 1, 19, 20

11 U.S.C. § 548 ... 5, 13, 27

11 U.S.C. § 548(a) ... passim

11 U.S.C. § 548(a)(1) ... 10, 16

11 U.S.C. § 548(a)(1)(A) ... 3

11 U.S.C. § 548(a)(1)(B) ... 3, 17, 31

11 U.S.C. § 548(a)(2) ... 26

11 U.S.C. § 550 ... passim

11 U.S.C. § 550(a) ... 12

*v 11 U.S.C. § 550(a)(2) ... 1 3

11 U.S.C. § 727 ... 16

11 U.S.C. § 727(a) ... 8

11 U.S.C. § 727(a)(2) ... passim

STATE STATUTES

Va. Code Ann. § 34-28.1 ... passim

Va. Code Ann. § 34-3.1 ... 22

Va. Code Ann. § 55-80 ... 1

Va. Code Ann. § 55-81 ... 1

*1 STATEMENT OF CASE

Appellant, Kenneth R. Smoot (the "Debtor") filed a voluntary petition for bankruptcy relief under chapter 7 of the U.S. Bankruptcy Code, 11 U.S.C. § 101 et seq. (the "Code"), on December 23, 1998 (the "Petition Date"). Appellee, Lynn Lewis Tavenner, is the duly appointed trustee in the Debtor's bankruptcy case (the "Trustee").

On January 19, 1999, the Trustee filed her Complaint to Avoid and Recover Fraudulent Transfers and Objecting to Debtor's Discharge. The Trustee filed her Complaint against the Debtor, Katina Smoot (the Debtor's wife), Cory R. Smoot (the Debtor's son), Gina Smoot (the Debtor's daughter), Glass Apple, Inc. (a Virginia corporation owned by the Debtor's immediate family), and Home Check Services, a division of Glass Apple involved in home repair services (hereinafter, Glass Apple, Inc. and Home Check Services are referred to collectively as "Glass Apple") (collectively, the "Defendants"). In her Complaint, the Trustee sought: (a) to avoid and recover certain transfers by the Debtor as fraudulent transfers and voluntary conveyances under Code §§ 544(b), 548(a) and 550 and Va. Code §§ 55-80 and 55-81; and (b) the denial of the Debtor's discharge under Code § 727(a)(2). On March 3, 1999, with leave of Court, the Trustee amended her *2 Complaint (hereinafter, as amended, the "Complaint") to assert under Virginia law an alter ego/reverse veil piercing claim against Glass Apple.

The only Defendants to file Answers to the Complaint were the Debtor and Glass Apple. Further, none of the Defendants offered into evidence any exhibits at trial.

With her initial Complaint, the Trustee filed a Motion for Preliminary Injunction (the "Motion") seeking to enjoin the disposition of certain assets held by the Defendants which, the Trustee asserted, were the proceeds of avoidable fraudulent transfers and voluntary conveyances. On February 3, 1999, after an evidentiary hearing on the Motion for Preliminary Injunction, the Bankruptcy Court entered its Order Granting Trustee's Motion for Preliminary Injunction, in which it found, inter alia, that the Trustee had made "a strong showing that she will succeed on the merits with respect to the claims asserted in the [then unamended] Complaint." (JA 36).

In his Amended Schedules of Assets and Liabilities (the "Schedules"), filed with the Bankruptcy Court on December 31, 1998 pursuant to Code § 521, the Debtor asserts an exemption in the amount of $217,000 in certain "[f]unds received pursuant to workmen's compensation suit (FELA injury settlement)" *3 under Va. Code § 34-28.1. On February 1, 1999, the Trustee filed her Objection to Debtor's Claimed Objections (the "Objection"), objecting to the Debtor's claimed exemption in certain personal injury settlement proceeds.

On March 29, 1999, the Bankruptcy Court conducted a consolidated trial on both the Trustee's Complaint and Objection. Witnesses at trial were the Debtor, Katina Smoot and Cory Smoot.

On September 30, 1999, the Bankruptcy Court entered its Memorandum Opinion. On October 8, 1999, the Bankruptcy Court entered its Final Judgment Order Following March 29, 1999 Trial (the Memorandum Opinion and the Final Judgment Order are referred to hereinafter collectively as the "Judgment").

In its Judgment, the Bankruptcy Court ruled in pertinent part that: (1) the Debtor had made an actual fraudulent transfer under Code § 548(a)(I)(A), which the Trustee may recover from the Defendants under § 550; (2) the Debtor also made a constructive fraudulent transfer under § 548(a)(1)(B), which the Trustee may recover under § 550; and (3) the Debtor is not entitled to a discharge because of the actual fraudulent transfer, under § 727(a)(2).

The Debtor and Glass Apple (collectively, the "Appellants") filed separate appeals to the District Court of the Bankruptcy Court's Judgment, assigned Case *4 Nos. 3:99CV738 and 3:99CV739. The District Court consolidated the two appeals. On June 1, 2000, the District Court affirmed the Bankruptcy Court. On June 30, 2000, the Appellants noted their appeal of the District Court's decision to this Court.

*5 STATEMENT OF FACTS

The Appellee adopts in their entirety the Statement of Facts contained in tine Appellants' Brief and in the Bankruptcy Court's September 30, 1999 Memorandum Opinion. (JA 62).

*6 SUMMARY OF ARGUMENT

The Bankruptcy Court properly interpreted and applied Code § 522(g) in concluding that: (1) the Trustee could avoid and recover the Debtor's transfer as a fraudulent transfer under the Code even though the funds may have been exempt raider Virginia law before the challenged transfer; and (2) the Debtor cannot claim an exemption in the Trustee's recovery of the transferred funds under the Code avoidance provisions in §§ 548 and 550. Further, on the uncontroverted evidence at trial, consisting of the Debtor's own testimony and his Schedules filed under penalty of perjury, the Bankruptcy Court properly concluded that the Debtor was insolvent on June 5, 1998 when he made the $210,000 transfer to Glass Apple.

*7 ARGUMENT

APPLICABLE STANDARD OF REVIEW

In bankruptcy appeals, findings of fact made by tine bankruptcy court, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous. Fed.R.Bankr.P. 8013. The appellate court's review of the bankruptcy court's legal conclusions is de novo. DeVan v. Simon DeBartolo Group, L.P. (In re Merry-Go-Round Enterprises, Inc.), 180 F.3d 149, 154 (4th Cir. 1999); Equitable Life Assurance Society v. James River Assoc. (In re James River Assoc.), 156 B.R. 494, 496 (E.D. Va. 1993).

DISCUSSION OF THE ISSUES

1. The Bankruptcy Court Properly Interpreted and Applied Code § 522(g).

The Appellants argue that the Debtor's prepetition transfer of the FELA settlement proceeds could not have been made with fraudulent intent and cannot be the subject of a fraudulent transfer and voluntary conveyance action because the FELA settlement proceeds were exempt from the claims of his creditors under Virginia Code § 34-28.1. Pursuant to § 34-28.1, proceeds received by a debtor on account of a personal injury cause of action or settlement, are exempt from creditor process. Virginia Code. § 34-28.1. Based on the Virginia exemption statute, the Appellants argue that, because the Debtor's creditors could not have reached the FELA settlement proceeds to satisfy their claims, they were not *8 harmed by the Debtor's prepetition transfers of the funds. Thus, the creditors (and therefore, the Trustee) cannot maintain a fraudulent transfer action against the Debtor to avoid the transfers of the FELA settlement proceeds.

The Fourth Circuit, in a 1998 unpublished opinion, rejected this reasoning and refused to impose upon creditors the burden of proving an injury as a result of a transfer before they can maintain a fraudulent transtfer action. See Zanderman. Inc. v. Sandoval (In re Sandoval), No. 96-2391, 1998 WL 497475, at *1 (4th Cir. May 7, 1998) (copy attached as Exhibit A). In so ruling, the Fourth Circuit also refused to recognize the legal fiction that a debtor cannot formulate tine intent necessary to fraudulently transfer exempt property.

In Sandoval, the debtor, prepetition, transferred his residence and automobile from himself individually to himself and his wife as tenants by the entireties. In re Sandoval, 1998 WL 497475, at *1. A creditor of the debtor fired a complaint to deny the debtor a discharge under § 727(a) on the grounds that the debtor, with intent to hinder, delay or defraud a creditor, transferred the residence and automobile within a year prior to the date of the filing of the bankruptcy petition. Id. The debtor argued that, because his interest in the residence and automobile had only nominal value, the creditors were not harmed by his prepetition transfer of the residence and automobile. Therefore, the debtor argued, *9 the transfers could not have been made with the requisite fraudulent intent. Id. at *.3.

In rejecting the debtor's argument, the Fourth Circuit ruled that whether a transfer actually harms the plaintiff/creditor is irrelevant for fraudulent transfer purposes. Id. In so ruling, the Fourth Circuit joined what it terms as a majority of circuits that have held that no harm requirement exists. Id. (citing Davis v Davis (In re Davis)), 911 F.2d 560, 561 (11th Cir. 1990) (rejecting debtor's argument that transfer of real property to his wife, was not made with fraudulent intent since the real property was re-transferred back to the debtor prepetition and, therefore, the transfers did not reduce the value of assets available to creditors); Smiley v. First Nat'l Bank (In re Smiley), 864 F.2d 562, 569 (7th Cir. 1989) (holding that proof of harm is not a required element for a cause of action under § 727(a)(2)); First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1343 (9th Cir. 1986) (holding that debtor transferred real property with the intent to hinder, delay and defraud his creditors despite fact that debtor had reversed a majority of the transfers prior to involuntary petition being filed); see also Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281-82 (9th Cir. 1996) (quoting In re Adeeb, 787 F.2d at 1343, for the proposition that "a debtor need not succeed in harming creditors co warrant denial of discharge because 'lack of injury to creditors is *10 irrelevant for purposes of denying a discharge in bankruptcy."'); Aweida v. Cooper (In re Cooper), 150 B.R. 462, 467 (D. Colo. 1993) (holding that the central focus or a fraudulent transfer action is whether the debtor acted with fraudulent intent, not whether the debtor had an equity in the transferred property); Webster v. Hope (In re Hope), 231 B.R. 403, 413 n. 14 (Bankr. D. D.C. 1999) (stating that "if a transfer was made with an intent to delay, hinder or defraud a creditor, §§ 548(a)(1) and 727(a)(2) apply even if. in hindsight, the estate would have been no greater had the transfer not been made"). Put another way, the Bankruptcy Court could not overlook the fact that the Debtor acted with fraudulent intent when he transferred the FELA settlement funds merely because the Debtor later discovered that the FELA settlement funds may have been exempt under Virginia law. Cf. Future Time. Inc. v. Yates, 26 B.R. 1006 (M.D. Ga.), aff'd, 712 F.2d 1417 (11th Cir. 1983) (holding that the debtor's subsequent realization that property he had transferred to his wife was valueless did not obviate the bankruptcy court's finding that the debtors acted with fraudulent intent when he transferred the property to his wife).

*11 A. There is No Statutory Requirement that a Creditor Be Harmed in Order to Maintain a Fraudulent Transfer or Voluntary Conveyance Action.

At the outset, the Fourth Circuit held that there is no statutory basis to support the argument that a lack of value in the transferred property, and, therefore, a lack of harm to creditors, is a valid defense to a fraudulent transfer or voluntary conveyance action. In re Sandoval, 1998 WL 497475, at *3.

The Fourth Circuit's holding on this ground is supported by the language of the avoidance statutes applicable in this case. For example, § 548(a) states "[t]he trustee may avoid any transfer of an interest of the debtor in property that was made within one year before the date of the filing of the petition . . . ." 11 U.S.C. § 548(a). Section 548(a) does not require that a trustee first establish that creditors were injured by tine transfer. Nor does § 548(a) exclude transfers of exempt property from its scope. Thus, the Appellants' argument that the exempt nature of the FELA settlement proceeds precludes tine Trustee From prosecuting a Fraudulent transfer action to avoid the transfer of the proceeds lacks support from any statutory authority.

Moreover, the plain language of § 522(g) of the Bankruptcy Code expressly contemplates that a transfer of exempt property is subject to avoidance under *12 either a fraudulent transfer or voluntary conveyance rationale. Section 522(g) states:

Notwithstanding §§ 550 and 551 of this title, the debtor may exempt under subsection (b) of this section property that the trustee recovers under § 510(c)(2), 542, 543, 550, 551, or 553 of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if--

(1) (A) such transfer was not a voluntary transfer of such property by the debtor, and (B) the debtor did not conceal such property.

11 U.S.C. § 522(g). Thus, under § 522(g)(1), when a debtor has involuntarilytransferred property prepetition and the debtor did not conceal the property, § 522(g) allows the debtor to claim exemptions in that property if the property is later recovered by the trustee under § 550 and the debtor would have been entitled to claim an exemption in the recovered property but for the debtor's involuntary prepetition transfer of the property.

As the language of § 522(g) indicates, the types of property which a debtor may exempt if such property is recovered by the

trustee are limited to that property which is recovered by the trustee pursuant to one of the avoiding powers listed in the statute. Included within this limited scope is property recovered by a trustee under § 550. Section 550(a), in turn, states that a trustee may recover from *13 an immediate and/or mediate transferee, property which was the subject ora transfer avoidable under §§ 544 and 548. 11 U.S.C. § 550(a)(2). Thus, the Code sets forth a procedure whereby, tinder certain circumstances, a debtor can claim exemptions in property recovered by the trustee in a fraudulent transfer action, assuming such property was exempt prior to tile debtor's prepetition, involuntary transfer of the property. The inclusion in the Code of such a procedure severely undermines fine Appellants' argument that it is not possible for a debtor to transfer fraudulently an exempt asset.

In fact, what the Appellants argue is that tine Court should read out of § 522(g), property recovered by a trustee under § 550 and treat such property (assuming the property was exempt before the debtor's prepetition transfer) as exempt regardless of whether the debtor has met the requirement of § 522(g). This the Court should not do. Section 522(g) is very specific as to the types of property in which a debtor may claim an exemption. Specifically included in this property is property recovered by a trustee pursuant to § 550 (which, in turn, references transfers avoided under §§ 544(a) and 548(a)). See 4 COLLIER ON BANKRUPTCY § 522.12[1] (Lawrence P. King et al. eds. 15th ed. 1999) (stating that for § 522(g) purposes, the trustee's ability to avoid transfers under § 550 is especially significant). Surely if Congress intended that property that was *14 previously exempt should not be recoverable as a fraudulent transfer, it would not have included a mechanism for debtors to claim an exemption in such property following its recovery. Section 522(g) would have instead been drafted to exclude property which is subject to avoidance and recovery under §§ 544(a) or 548(a). See In re Trevino, 96 B.R. 608 (Bankr. E.D.N.C. 1989) (rejecting debtors' argument that creditors receive a windfall by having access to property which would otherwise be exempt by stating that Congress, by enacting § 522(g), clearly intended that debtors who voluntarily transfer their property give up their right to claim exemptions in that property.) Thus, § 522(g) lends further support to the Fourth Circuit's conclusion in Sandoval that there is no statutory requirement that a creditor first establish harm as a result of a transfer in order to maintain an action to set aside that transfer as a fraudulent transfer.

B. In Sandoval, the Fourth Circuit Specifically Rejected the Holding in T.R. Press. Inc. v. Whitcomb (In re Whitcomb) That Exempt Property Cannot be the Subject of a Fraudulent Transfer.

In T.R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396 (Bankr. E.D. Va. 1992) (Bostetter, C.J.), the debtor owned real property along with her husband as tenants by the entireties. Id. at 397. Before filing her chapter 7 bankruptcy petition, the debtor and her husband transferred for no consideration the real property to a partnership in which the husband was a partner. Id.

*15 An individual creditor of the debtor filed a complaint objecting to the debtor's discharge under § 727(a)(2) on the ground that the debtor's prepetition transfer of the real property was a fraudulent transfer, made with the intent to hinder, delay or defraud creditors. Id. The bankruptcy court ruled in favor of the debtor holding that, since the real estate was held by the debtor and her husband as tenants by the entireties before the transfer, the real property, if it had not been transferred, would have been exempt From the claims of the debtor's individual creditors, Id. at 399. Since tine debtor's individual creditors were not harmed by the transfer, the bankruptcy court held that, as a matter of law, the debtor could not have formulated the intent to hinder, delay or defraud her individual creditors when she made the transfer. Id at 399.

In Sandoval, the Fourth Circuit expressly rejected the conclusion reached by Judge Bostetter in In re Whitcomb. The Fourth Circuit stated:

Sandoval relies on Whitcomb, which . . . held that since the debtor transferred entireties property and entireties property is exempt under Virginia law, it had no value and therefore was not fraudulently transferred. We agree with the district court and the bankruptcy court, and decline to follow . . . Whitcomb . . . on this issue.

In re Sandoval, 1998 WL 497475, at *3.

*16 The Fourth Circuit went on to state:

to the extent that . . . Whitcomb stand[s] for the broader proposition advanced by Sandoval - that a lack of value in the transferred property automatically excuses a debtor that would otherwise be liable for a fraudulent transfer under § 727 - we respectfully disagree and instead follow the greater weight of authority cited above.

Id. Other courts have also specifically rejected the holding in Whitcomb. For example, in Webster v. Hope (In re Hope), 231 B.R. 403, 413 n. 14 (Bankr. D. D.C. 1999), a case also involving the transfer of property held by tenants by the entireties, the Bankruptcy Court listed Whitcomb as one of those "decisions [that] have been soundly criticized as adopting a 'no harm, no foul' rule that §§ 548(a)(1) and 727(a)(2) simply do not embody."

The Fourth Circuit's express rejection of the holding in In re Whitcomb is determinative of the outcome of this case. In this case, as in In re Whitcomb, the Debtor made a prepetition transfer of an exempt asset for no consideration. The Appellants make the same argument as the debtor in In re Whitcomb, Specifically, the Appellants contend that, since the Debtor's creditors were not injured by the prepetition transfer, he could not have made the transfer with the intent to hinder, delay or defraud his creditors. Because Sandoval teaches us otherwise, the Appellants cannot rely on the fact that the FELA settlement proceeds may have *17 been exempt as a defense to the Trustee's claims under Code § 548(a). [FN1] Instead, the transfer of the FELA settlement proceeds must undergo scrutiny under §§ 548(a) and 727(a)(2) [FN2]. As the Bankruptcy Court found, the Debtor's transfer of the FELA settlement proceeds has failed to withstand such scrutiny; it, in fact, constituted an avoidable fraudulent transfer.

FN1. Certainly, the Appellants cannot raise this defense under § 548(a)(1)(B) because that statute does not require a finding that the debtor intended to hinder, delay or defraud creditors. See Webster v. Hope (In re Hope), 231 B.R. 403, 413 (Bankr. D. D.C. 1999) (holding that the "no harm, no foul" argument is not applicable to an action brought pursuant to § 548(a)(1)(B)).

FN2. Code § 727(a)(2) requires that a bankruptcy court deny a chapter 7 debtor a discharge if the debtor made an actual fraudulent transfer in the year before bankruptcy. 11 U.S.C. § 727(a)(2). The Bankruptcy Court here denied the Debtor his discharge in the judgment on appeal, but the Appellants do not mention § 727(a)(2) in their Brier.

C. The Fourth Circuit's Holding in Sandoval is Consistent with the Holdings of Other Courts Which Have Ruled That a Debtor May Fraudulently Transfer Exempt Property.

The Fourth Circuit's rejection of the contrary holding in In re Whitcomb and its conclusion that a transfer of exempt property can serve as the basis ora fraudulent transfer action is consistent with the rulings of several courts which have found that a debtor may fraudulently transfer an exempt asset. In Schieffler v. Beshears (In re Beshears), 182 B.R. 235 (Bankr. E.D. Ark. 1995), the debtor transferred to her parents her interest in real property prepetition For no *18 consideration. In re Beshears, 182 B.R. at 237. The bankruptcy court held that the debtor made the transfer with fraudulent intent. Id. at 239. Accordingly, the bankruptcy court avoided the transfer pursuant to Code § 548(a). Id. The bankruptcy court further held that, because the debtor's transfer to her parents was voluntary, the debtor was precluded by § 522(g) from claiming a homestead exemption in the real property upon its recovery by the trustee. Id. at 240.

Similarly, in In re Downs, 205 B.R. 93 (Bankr. N.D. Ohio 1996), the debtors made a prepetition transfer of their home by quitclaim deed to a relative for no consideration. In re Downs, 205 B.R. at 94. As in this case, the transfer in question took place after a judicial finding of liability against the debtors, but before the state court had entered judgment against the debtors in a liquidated amount, Id. at 95. Although the quitclaim deed was not properly witnessed, the bankruptcy court held that, under Ohio law, the deed was valid between the parties and therefore constituted a transfer, for fraudulent transfer purposes. Id. at 96.

The debtors each claimed a homestead exemption in the home to which their chapter 7 trustee objected. The bankruptcy court agreed with the trustee and held that, although the debtors' chapter 7 trustee had not initiated an adversary proceeding to avoid the transfer as a fraudulent transfer, there was sufficient evidence to find that the transfer was made with fraudulent intent. Thus, the home *19 was deemed recoverable under § 548(a). Id. at 96-97. Accordingly, § 522(g) applied, and the debtors, because tine execution of the quitclaim deed was a voluntary prepetition transfer of their interest in the home, were precluded from claiming homestead exemptions in the home. Id. at 96.

Lastly, in Carpenter v. Valley Wholesale Bldg. Prods., Inc. (In re Carpenter), 56 B.R. 704 (Bankr. D. R.I. 1986), the debtor transferred his interest in his family residence to his wife for no consideration just before the entry ora money judgment against him. In re Carpenter, 56 B.R. at 705. Following entry of the money judgment, the judgment creditor successfully prosecuted a fraudulent transfer action under Rhode Island law against the debtor and his wife, and the wife was ordered to reconvey tine debtor's interest in the family residence back to the debtor, Id. Approximately three weeks after the wife's reconveyance, the debtor tiled a chapter 7 bankruptcy petition and claimed a homestead exemption in the property. Id. The creditor objected to tine debtor's claimed homestead exemption.

The bankruptcy court sustained the creditor's objection. The bankruptcy court held that, pursuant to Code § 544(b), the debtor's prepetition transfer of his interest in his family residence would have been avoidable by the debtor's chapter 7 trustee if the transfer had not already been avoided by the creditor prepetition. *20 Id at 706-07. Because the creditor's prepetition state court action to avoid tine debtor's transfer under Rhode Island law was the type of action which would normally be prosecuted by a debtor's chapter 7 trustee, the creditor's prepetition state court avoidance action was considered an avoidance action under § 544(b) for purposes of § 522(g). Id. As a result, § 522(g) governed the debtor's ability to claim a homestead exemption in the family residence. Id. Because the debtor's transfer of the family residence to his wife had been voluntary, tine debtor was precluded from claiming a homestead exemption in the property, Id.

In sum, the Appellants' contention that the Debtor could not fraudulently transfer an exempt asset fails because: (a) the language of the avoidance statutes at issue here and Code § 522(g) indicate otherwise; (b) the Fourth Circuit in Sandoval, expressly rejected a bankruptcy court's ruling to that effect; and (c) the Fourth Circuit's ruling in Sandoval is supported by the decisions of numerous other courts outside this Circuit.

D. The Bankruptcy Court Did Not Err in its Application of tine Supremacy Clause with Regard to Bankruptcy Code § 522 and Section 34-28.1 of the Virginia Code.

The Appellants argue further that the Bankruptcy Court committed reversible error by holding that, to the extent that the limitations on the debtor's claim of exemptions as provided in § 522(g) conflicts with allowable exemptions *21 under Virginia Code § 34-28.1, the Supremacy Clause of the U.S. Constitution provides that the federal law is supreme, and tine conflicting state law is rendered void. The Appellants appear to argue that because Congress authorized tine states under § 522(b) to opt out of the federal exemption scheme provided for in the Bankruptcy Code, state exemption laws in those states which have chosen to opt out, such as Virginia, are somehow incorporated into the Bankruptcy Code. The Appellants then apparently argue further that to the extent § 522(g) conflicts with Virginia exemption law, the matter should be characterized as a conflict between two federal statutes. [FN3]

FN3. Thus, it is unclear how the Supremacy Clause, which concerns conflicts between federal and state law, is implicated.

At the outset, because the Appellants have not done so, it is important to discuss the proper role that § 522(g) plays in the exemption scheme provided for in the Bankruptcy Code. When a debtor files a bankruptcy petition, all property in which the debtor holds an interest becomes part of his or her bankruptcy estate, including potentially exempt property. See Shirley v. Leake, 715 F.2d 859, 863 (4th Cir. 1983). The debtor may then choose to claim an exemption for certain property on his or her schedules. Pursuant to § 522(b), each state may choose to opt out of the federal exemption scheme provided for in the Bankruptcy Code and establish its own exemptions. Virginia has elected to opt out of the federal *22 exemption scheme. See Va. Code Ann. § 34-3. 1. Thus, a debtor who files a bankruptcy petition in Virginia can only claim exemptions in accordance with Virginia law.

Section 522(g) has nothing to do with a debtor's ability to claim exemptions for property which becomes part of the debtor's bankruptcy estate upon the filing of the debtor's bankruptcy petition. As stated earlier in great detail, § 522(g) concerns only a debtor's ability to claim an exemption in property that is recovered by the trustee pursuant to § 550, among others. Property recovered by a trustee under § 550 becomes part of the debtor's bankruptcy estate pursuant to § 541 (a)(3). It is only after the trustee has recovered property under § 550 that § 522(g) becomes applicable as § 522(g) states under what conditions a debtor may claim exemptions in property recovered by the trustee under § 550.

The Appellants argue that § 522(g) conflicts with section 34-28.1 because it impairs a debtor's ability to claim an exemption in personal injury proceeds. Nothing in § 522(g) impairs a debtor's ability to claim the exemption. As the Bankruptcy Court stated, "there is no dispute that had the proceeds received by debtor in the injury settlement been left in the debtor's account and not been transferred to Glass Apple, the proceeds would have been exempt in this bankruptcy case." However, because the Debtor had voluntarily transferred the *23 settlement proceeds to Glass Apple prior to filing his bankruptcy petition, he no longer had in interest in the settlement proceeds at the time he filed his bankruptcy petition. Because he did not have an interest in the funds at the time he filed his bankruptcy petition, he could not schedule them as an asset and claim an exemption for them under section 34- 28.1. Thus, it was the Debtor's own voluntary actions which rendered section 34-28.1 inapplicable when he filed his bankruptcy petition.

When the Trustee recovered the proceeds of the settlement funds under § 550, the Debtor was entitled to exempt them only if the conditions set forth in § 522(g) were met. These conditions are, of course, that a debtor must have been entitled to claim an exemption in the transferred property had the debtor not made the transfer and that the debtor's transfer of the property been involuntary. 11 U.S.C. § 522(g). The only difference, therefore, in a debtor's ability to claim an exemption in property which he or she has an interest at the time their petition is filed and the ability to claim an interest in property which the debtor transferred prepetition, is that, in the case of the latter, the debtor is not entitled to an exemption if he or she voluntarily transferred his or her interest in the property. This additional requirement imposed by § 522(g) does not impair a debtor's exemption rights under section 34-28.1 at all. Nowhere does section 34-28.1 *24 entitle a debtor to an exemption for personal injury proceeds once the debtor has transferred the proceeds to a third party. [FN4] Simply put, one cannot claim an exemption in property in which he does not have an interest. Therefore, once a debtor transfers his or interest in exemptible personal injury proceeds, the proceeds are no longer exempt tinder section 34-28.1. [FN5] Thus, it is impossible for a *25 statute such as § 522(g), which is not applicable until after a debtor has transferred his or her interest in exempt property, to conflict with section 34-28.1. Because there is no conflict between the operation of § 522(g) and section 34-28.1, there is no issue of preemption to address.

FN4. As stated more precisely by the Bankruptcy Court in Lasich v. Wichstrom (In re Wichstrom), 113 B.R. 339 (Bankr. W.D. Mich. 1990):

Prior to the filing of the petition, any property interest that the debtor had an interest in, cannot technically be termed exempt property for purposes of some future bankruptcy, only exemptible or potentially exempt. If any point in time prior to filing, the potentially exempt property is voluntarily transferred to a third party, all interests of the debtor in that property terminate. The property cannot subsequently be claimed as exempt under the Bankruptcy Code based upon some former interest held by the debtor. If the debtor disposes of an interest in property, 11 U.S.C § 101(50), and the debtor has no remaining legal or equitable interest as of the bankruptcy filing date, the transferred property is not property of the estate. Because only the debtor "may exempt from property of the estate", the transferred property may not be claimed as exempt.

Id. at 345-46 (emphasis in original) (footnotes omitted).

FN5. It is not clear whether section 34-28.1 would continue to protect as exempt any of the debtor's assets which were traceable to the personal injury proceeds, such as if the debtor were to purchase a vehicle with the proceeds. In any event, however, this is not the case in the Debtor's situation as he admitted he did not receive any consideration from Glass Apple in exchange for the FELA Settlement Proceeds.

Although the Bankruptcy Court's September 30, 1999 Memorandum Opinion did not make clear whether the Bankruptcy Court believed there was a conflict between § 522(g) and a debtor's right to claim an exemption under section 34-28. l, the Bankruptcy Court correctly surmised that, to the extent a conflict between the two statutes does exist, the Supremacy Clause of the U.S. Constitution, Art. 6, cl. 2, requires that full force and effect be given to § 522(g) and that section 34-28. I be abrogated to whatever degree necessary. The United States Supreme Court has made clear that when a conflict exists between a state statute and the Bankruptcy Code, the state statute is rendered invalid by the Supremacy Clause. See Perez v. Campbell, 402 U.S. 637, 652 (177) (holding Arizona statute, which continued to recognize the enforceability of judgments stemming from automobile accidents despite the fact that the judgment debtor had received a discharge under the Bankruptcy Act, invalid because the state statute "frustrated the full effectiveness of federal law"); Lasich v. Wichstrom (In re Wichstrom), 113 B.R. 339, 343 (Bankr. W.D. Mich. 1990) ("[T]o the extent that *26 governing bankruptcy law restricts, modifies or derogates state exemptions, federal law prevails pursuant to the Supremacy Clause.")

To summarize on this point, because § 522(g) does not impair a debtor's right to claim an exemption under § 34-28.1, no conflict exists between the two statutes. Thus, this case presents no issue under the Supremacy Clause of the U.S. Constitution. Moreover, to the extent it could be argued that a conflict does exist between the two statutes, the Supreme Court has stated that, pursuant to the Supremacy Clause, the Bankruptcy Code must be afforded full force and effect.

II. The Bankruptcy Court Properly Concluded the Debtor Made the Transfer to Glass Apple When Fie Was Insolvent.

One of the alternative bases upon which the Trustee successfully avoided the Debtor's initial transfer of $210,000 to Glass Apple was that the Debtor was insolvent at the time of the transfer and received less than reasonably equivalent value in exchange. See 11 U.S.C. § 548(a)(2). The Debtor indicated in his Schedules that the transfer to Glass Apple was a gilt and testified at trial that he did not receive anything "material" in exchange for the transfer. Courts have consistently held that love and affection do not constitute value for purposes of Code § 548. Hyman v. Porter (In re Porter), 37 B.R. 56, 61 (Bankr. E.D. Va. 1984). Thus. if the Debtor was insolvent at tine time of the initial transfer, the Trustee could properly avoid the transfer pursuant to Code § 548(a)(2). *27 Code § 101(32)(A) provides the following definition of "insolvency:" "insolvent" means

(A) With reference to an entity other than a partnership, financial conditions such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of-

(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and

(ii) property that may be exempted from property of the estate under § 522 of this title.

11 U.S.C. § 101(32)(A) (emphasis added). A "debt" means a liability on a claim. See 11 U.S.C. § 101(12). A "claim" is defined in Code § 101(5) which provides, in pertinent part:

"claim" means -

(A) Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.

\When the definitions of Code § 101 are applied to the insolvency provisions of Code § 548, the inescapable conclusion is that all liabilities whether liquidated, unmatured, disputed, or not vet reduced to judgment, must be considered in determining whether the Debtor was insolvent at the time of the transfer in *28 questions. Hyman, 37 B.R. at 61. Thus, the Debtor's liabilities to CSXT and the Union, which had been judicially determined but not vet liquidated at the time of the Debtor's June 5, 1998 transfer to Glass Apple, must be included as liabilities for the purpose of determining whether the Debtor was insolvent at the time of the transfer. Because the only assignment of value to the CSXT and Union judgments is that given to them by the Ohio District Court, that value is the appropriate value to be placed on the judgments for purposes of the insolvency analysis.

Although the Appellants failed to introduce any evidence at trial to contradict the Trustee's evidence that the Debtor was insolvent at the time he made the $210,000 transfer to Glass Apple, the Appellants now argue on appeal that the Bankruptcy Court erred in its calculation of whether the Debtor was insolvent at the time of the transfer. Specifically, the Appellants argue that the Bankruptcy Court should have treated certain debts of the Debtor that were in existence on June 5, 1998 as joint debts which the Debtor's wife was also obligated to pay. The Appellants, however, fails to identify in their brief which debts they are referring to. Nor do the Appellants explain why characterizing these debts as joint debts is relevant to the insolvency calculation.

The Debtor testified at trial that his financial condition on June 5, 1998 was the same as it was on December 23, 1998 when he filed his Chapter 7 bankruptcy *29 petition, except for the fact that the amounts due and owing to the Union and CSXT under the Ohio judgments had not yet been liquidated. (JA 74). Accordingly, the Bankruptcy Court looked to the Debtor's Schedules upon which to base its insolvency calculation. (JA 74) [FN6]. The Debtor's Second Amended Schedules indicate that the Debtor had assets with a value of $469,083. (JA 74). From this amount, the Bankruptcy Court correctly subtracted $448,083 for assets claimed by the Debtor as exempt leaving the Debtor with assets with a value of $21,000. (JA 74-75) [FN7]. In contrast, the Debtor's Second Amended Schedules indicated liabilities in the amount of $490,907.31. (JA 74). Of this amount, $445,847.31 constituted the Union's and CSXT's judgments (JA 74). Indeed, *30 even if one does not consider as liabilities the total judgments in favor of CSXT and the Union, the Debtor's remaining liabilities ($45,060) still exceed his assets ($21,000). Accordingly, the Debtor was clearly insolvent as of June 5, 1998, based on his Second Amended Schedules.

FN6. In fact, in its Memorandum Opinion, the Bankruptcy Court relied upon the Debtor's Second Amended Schedules of Assets and Liabilities (the "Second Amended Schedules"), which were filed with the Bankruptcy Court on September 2, 1999, well after the March 29, 1999 trial. (JA 62). The only difference between the Schedules filed on December 31, 1998 and the later Second Amended Schedules is that the Debtor disclosed for the first time an alleged legal malpractice claim against his prepetition litigation counsel and asserted the claim was exempt under state law. It could be argued that the Bankruptcy Court should not have looked to the Second Amended Schedules because they were not part of the record at trial. However, as set forth in the Bankruptcy Court's Memorandum Opinion, the Debtor's tardy scheduling of the alleged malpractice claim does not materially change the insolvency analysis. (JA 62).

FN7. Property allegedly transferred in fraud of creditors is not considered in determining whether the transferor was insolvent. See ll U.S.C. 101(32)(A)(1); Hyman 37 B.R. at 62 n.5; see also, Shaia v. Meyer (In re Meyer), 206 B.R. 410, 417-18 (Bankr. E.D. Va. 1997) (under Virginia law, holding that exempt asset is not included as an asset in insolvency analysis).

The Appellants contend that some of that $45,060 is joint debt with the Debtor's wife, Katina Smoot, and should therefore not be included on the liability side of the calculation. However, the Appellants fail to specify in their Brief which debts they believe were joint debts with the Debtor's wife. Secondly, the Debtor did not schedule any of the $45,060 as joint debt. For each debt listed on the Debtor's Schedules D, E and F, there is a column provided for the Debtor to indicate whether or not a codebtor was jointly obligated for that particular debt. For none of the debts listed on the Debtor's Schedules D, E off did the Debtor indicate that a codebtor was also liable for the debt. Accordingly, there was no basis in the record before the Bankruptcy Court to support a finding that any of the debts owed by the Debtor on June 5, 1998 were joint debts.

Finally, the joint debt issue is wholly immaterial when one includes CSXT's and the Union's judgments on the liability side. Those judgments themselves outweigh any of the scheduled assets and render the Debtor insolvent regardless of any of the consumer debt that may have been joint debt. Although the Bankruptcy *31 Court in dicta in its Memorandum Opinion, for "illustrative purposes," performed an alternative insolvency calculation in which it assigned a collective value of zero to the two judgments, it is clear under the Code's broad definitions of "claim" and "debt," as set forth above, that the amounts assigned to the judgments by the Ohio Court in August, 1998 must be included in the insolvency analysis.

In sum, the Bankruptcy Court correctly applied the insolvency analysis under Code" §§ 101(32)(A) and 548(a)(1)(B) in concluding the Debtor was insolvent on June 5, 1998 when he made the $210,000 transfer to Glass Apple.

*32 CONCLUSION

For the foregoing reasons, the Trustee respectfully requests the Court to affirm the District Court's ruling in all respects and award the Trustee her costs and expenses incurred in this appeal.

Appendix not available.