Bankr. L. Rep. P 76,068 in Re Acequia, Inc., an Idaho Corporation, Debtor. Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton, and Rosemary Haley, Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton Rosemary HaleyBankr. L. Rep. P 76,068 in Re Acequia, Inc., an Idaho Corporation, Debtor. Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton, and Rosemary Haley, Acequia, Inc., an Idaho Corporation v. Vernon B. Clinton Rosemary Haley
In this case, we consider issues arising from chapter 11 debtor Acequia, Inc.‘s ten-year effort to recover certain prebankruptcy conveyances made to Vernon Clinton, founder and former controlling shareholder of the corporation. Clinton appeals the magistrate judge‘s determination that he fraudulently transferred Acequia‘s assets to himself. Acequia, now under the control of adverse parties, cross-appeals the magistrate judge‘s calculation of Clinton‘s liability for the transfers.
Resolution of the multitude of issues in this case requires consideration of the common law of restitution, Idaho‘s community-property law, the equitable doctrine of setoff, and, most importantly, the fraudulent conveyance provisions of both the Bankruptcy and Idaho Codes. We scrutinize each doctrine and, ultimately, conclude the magistrate judge correctly determined that Clinton made transfers with an actual intent to hinder and delay Acequia‘s creditors. We hold, however, that the magistrate judge erred by limiting Acequia‘s recovery of the fraudulent transfers to the amount of unsecured claims against the bankruptcy estate. Accordingly, we affirm in part, reverse in part, and remand.
In 1974, while married to Rosemary Haley, Vernon Clinton formed Acequia, Inc., a Subchapter S family corporation, to conduct farming and management operations on his land in Idaho. In 1981, Clinton and Haley divorced and, pursuant to a marital settlement agreement, each took fifty-percent ownership of the corporation. Acequia filed a petition under chapter 11 of the Bankruptcy Code the following year. Shortly thereafter, Haley and several creditors requested the bankruptcy court to appoint a trustee, alleging that Clinton had failed to disclose material information in Acequia‘s bankruptcy schedules and had engaged in blatant mismanagement. In response, Clinton eventually gave an irrevocable voting proxy to Haley, who took control of the corporation.
In 1984, Acequia confirmed a plan of reorganization over Clinton‘s objection. Both the district court and the Ninth Circuit subsequently affirmed. See Acequia, Inc. v. Clinton (In re Acequia, Inc.), 787 F.2d 1352 (9th Cir.1986) [Acequia I ]; see also Clinton v. Acequia, Inc. (In re Acequia, Inc.), No. 91-36176, 996 F.2d 1223 (9th Cir. June 21, 1993) (mem.) (affirming the bankruptcy court‘s denial of Clinton‘s motion to terminate the plan) [Acequia II ]. Led by Haley, Acequia then commenced an eleven-count action in bankruptcy court, seeking to recover as fraudulent certain prepetition transfers the corporation made to Clinton.
After the district court withdrew reference to the bankruptcy court, the parties consented to adjudication by magistrate judge. The magistrate judge conducted a two-month bench trial and rendered judgment in favor of Acequia on several counts and in favor of Clinton on one counterclaim. In total, the magistrate judge entered a final judgment against Clinton for $233,346.72 plus prejudgment interest, with an allowed deduction against Acequia of $117,000.00 plus prejudgment interest. Both parties appeal.
II.
(a) The trustee may avoid any transfer of an interest of the debtor in property ... that was made ... on or within one year before the date of the filing of the petition, if the debtor ...
(1) made such transfer ... with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made ..., indebted....
As a debtor-in-possession, Acequia invoked
The transfer the Court is concerned with is the transfer of Acequia funds to Clinton‘s personal name. Such transfers could not help but hinder and delay payment to Acequia‘s creditors[,] a fact Clinton would certainly have been aware of as the Chief [O]perating [O]fficer of the corporation in charge of all books and records. By then Acequia had missed the two principal payments due to Prudential [a secured creditor] on March 15, 1979 and 1980. Clinton was negotiating a settlement with Prudential to fend off a foreclosure action. Other suits were pending involving KLW [another creditor] and its operation of [Clinton‘s] ranch. The bankruptcy filing was imminent and[,] when filed[,] Clinton only listed cash from which Acequia could meet its debts in the amount of $2,000.00. Clinton has not attempted to explain the transfer[s] other than that the funds were used for personal expenses. Therefore, Clinton will be required to return the funds to Acequia as the transfer[s] hindered and delayed Acequia creditors.
(emphasis added). On Clinton‘s motion for reconsideration, the magistrate judge clarified his analysis:
... The Court agrees with Clinton that[,] if the sole indicia of fraud was that Clinton personally used the funds[,] that Acequia did not meet its burden of proof. However, the Court found and sets forth more clearly at this point, that Acequia presented evidence that by the beginning of 1981 numerous badges of fraud existed which shifted the burden of proof to Clinton to explain or uphold the transfer. It was Clinton‘s sole explanation that the funds were used for personal expenses that [led] this Court to find that Clinton had not met his burden of proof to explain the transfer.
(emphasis added) (citation and footnotes omitted).
We review for clear error the magistrate judge‘s factual determination that Clinton intended to hinder and delay Acequia‘s creditors. E.g., Harman v. First Am. Bank (In re Jeffrey Bigelow Design Group, Inc.), 956 F.2d 479, 481 (4th Cir.1992) (“For a finding of fraudulent intent in an actual fraudulent transfer, a reviewing court must apply a clearly erroneous standard.“); Gough v. Titus (In re Christian & Porter Aluminum Co.), 584 F.2d 326, 335 (9th Cir.1978); 4 Collier on Bankruptcy p 548.02 at 548-49 n. 62 (15th ed. 1994) (“A finding of a trial judge, ... who has heard the oral testimony that a transfer has or has not been effected with actual fraudulent intent, is undoubtedly entitled to great weight on appeal in view of the peculiar importance in
B.
Clinton argues that, instead of intending to defraud Acequia‘s creditors, he considered the corporate conveyances to be personal loans or, alternatively, reimbursement for living expenses in lieu of salary. Uniquely, Clinton grounds this contention in his complete failure to observe corporate formalities and his consistent treatment of Acequia “merely as an extension of himself.”
We cannot agree. Although novel, Clinton‘s “white heart, empty head” argument ignores the use of circumstantial “badges of fraud” in fraudulent transfer cases:
It is often impracticable, on direct evidence, to demonstrate an actual intent to hinder, delay or defraud creditors. Therefore, as is the case under the common law of fraudulent conveyance, courts applying Bankruptcy Code Sec. 548(a)(1) frequently infer fraudulent intent from the circumstances surrounding the transfer, taking particular note of certain recognized indicia or badges of fraud.
Among the more common circumstantial indicia of fraudulent intent at the time of the transfer are: (1) actual or threatened litigation against the debtor; (2) a purported transfer of all or substantially all of the debtor‘s property; (3) insolvency or other unmanageable indebtedness on the part of the debtor; (4) a special relationship between the debtor and the transferee; and, after the transfer, (5) retention by the debtor of the property involved in the putative transfer.
The presence of a single badge of fraud may spur mere suspicion; the confluence of several can constitute conclusive evidence of actual intent to defraud, absent “significantly clear” evidence of a legitimate supervening purpose.
Max Sugarman, 926 F.2d at 1254-55 (emphasis added) (citations and additional emphasis omitted). Accord, e.g., Hayes v. Palm Seedlings Partners (In re Agricultural Research & Technology Group, Inc.), 916 F.2d 528, 534-35 (9th Cir.1990); Kupetz v. Wolf, 845 F.2d 842, 846 (9th Cir.1988). Thus, once a trustee establishes indicia of fraud in an action under
As the magistrate judge noted, several badges of fraud exist in this case. At the time of the transfers at issue, lawsuits were pending, Acequia‘s bankruptcy filing was imminent, and Clinton maintained total control over the corporation‘s finances. Moreover, Clinton produced no documentation, other than ambiguous check memo-line notes, to confirm his “innocent” explanations for the transactions. These facts support an inference of actual fraudulent intent. See Max Sugarman, 926 F.2d at 1255 (fraudulent intent is properly inferred where debtors transferred assets “to two entities entirely owned and controlled by a judgment creditor with whom the debtors had long had an intimate financial relationship [and where] [t]he transfers were effected nine months before involuntary bankruptcy, while [the debtors] were in desperate financial condition“); Consove v. Cohen (In re Roco Corp.), 701 F.2d 978, 984 (1st Cir.1983) (“We may impute any fraudulent intent of [the transferee] to the transferor [the debtor] because, as the company‘s president, director, and sole shareholder, he was in a position to control the disposition of its property.“); Nordberg v. Republic Nat‘l Bank (In re Chase & Sanborn Corp.), 51 B.R. 739, 740-41 (Bankr.S.D.Fla.1985) (“The extensive and often circuitous movement of funds among the several entities controlled by [the debtor‘s principal], to his personal benefit and in this instance to the benefit of a ... relative, and to the injury of the debtor, coupled with the facts that the records of these transactions are in general disarray and no exculpatory explanation has been offered, ... [establish an] actual[ ] intent to hinder, delay and defraud this debtor‘s creditors.“); Collier, supra, p 548.02 at 548-41 to 548-46 (“Circumstances from which courts have been willing to infer fraud include ... a transfer for no consideration where the transferor and the transferee have knowledge of the claims of creditors and know the creditors cannot be paid ... [and] the fact that the transferee was an officer or was an agent or creditor of an officer of an embarrassed corporate transferor....“) (collecting cases).
III.
The trustee may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under ... this title.
Conveyance made with intent to defraud--Every conveyance made ... with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.
A.
Clinton argues that Acequia‘s entire
First, the existence of a
Second,
The two cases cited by Clinton are inapposite. In Allard v. DeLorean, 884 F.2d 464 (9th Cir.1989), we dismissed as moot the appeal of a bankruptcy trustee who had settled fraudulent conveyance litigation against the debtor: “[The trustee] is no longer a creditor in this action because ... [he] executed and filed a full satisfaction of judgment.... [He therefore] is not entitled to the remedy of setting aside [the debtor]‘s conveyance ... as fraudulent ... [and] does not have an interest in the outcome of the appeal.” Id. at 466 (citation omitted). In this case, on the other hand, Acequia continues to pursue
We therefore hold that Acequia may invoke
B.
Although determining that Acequia could in fact utilize
In the normal situation, a debtor-in-possession is attempting to set aside fraudulent transfers so that assets can be brought back into the estate so that unsecured creditors can hopefully receive some percentage of their claims. Under such circumstances case law has applied the broad language in Moore v. Bay [284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931) ] (“for the benefit of the estate“) so that the class of unsecured creditors will benefit from any recovery equally even if the action is brought on behalf of only one unsecured creditor so that the entire class of unsecured creditors can benefit. Such recovery rarely pays unsecured creditors fully. In this case the circumstances are such that the unsecured creditors, in whose shoes Acequia stands, were paid in full on the distribution date. Therefore, this Court will limit Acequia‘s standing, thus the right to recover for the benefit of the estate, to the amount of unsecured claims paid on the distribution date identified in the Plan of Reorganization....
We review de novo this question of statutory interpretation, e.g., Ernst & Young v. Matsumoto (In re United Ins. Management, Inc.), 14 F.3d 1380, 1383 (9th Cir.1994), and conclude that the magistrate judge erred by imposing a “cap” on Acequia‘s
1.
As noted above,
Specifically, after demonstrating the right to recover conveyances under
... [S]ection 550 specifies the conditions under which, once a transfer is avoided under section 544 or other provisions, a trustee can recover from various transferees. The legislative history explains that “Section 550 prescribes the liability of a transferee of an avoided transfer and enunciates the separation between the concepts of avoiding a transfer and recovering from the transferee.” There are, in effect, three conceptual steps to the trustee‘s case; the trustee must establish: 1) fraud or illegality under the applicable substantive law; 2) resulting voidness or voidability of the transfer under the applicable law so as to allow avoidance pursuant to 544(b); and 3) liability of the particular transferee pursuant to the provisions of section 550.
Lippi v. City Bank, 955 F.2d 599, 605 (9th Cir.1992) (citation omitted). Thus, “[w]hile the transfer or obligation must be voidable as against a creditor holding an allowable claim, the measure and distribution of recovery is not limited by the creditor‘s right.” Collier, supra, p 544.03 at 544-17 n. 12 (emphasis added). See Danning v. Miller (In re Bullion Reserve), 922 F.2d 544, 546 n. 2 (9th Cir.1991) (“The theory under which a transfer has been avoided is irrelevant to the liability of the transferee against whom the trustee seeks to recover [pursuant to] Section 550....“).
Under this statutory framework, the existence of a “triggering creditor” under
The case law recognizes this distinction. As several courts have noted, under
Clinton concedes these cases establish that “a single transfer is avoidable in its entirety when the amount of that transfer is necessary to meet the amount of unsecured creditors’ claims but [exceeds] them. For example, if unsecured creditors’ claims equal $20,000 and the transfer involves $50,000, the cases ... confirm that the transfer is voidable in its entirety.” Clinton asserts, however, that the cases do not justify invoking
... Let‘s assume that the president of a corporation transfers $3 million of corporate assets to his personal account over a period of three years prior to the filing of a bankruptcy petition. The transfers are made by writing separate checks of $1 million each year. The last $1 million transfer was made within one (1) year before the filing of the bankruptcy petition. At trial, the trustee is able to prove that all of the transfers were made with the intent to hinder and delay creditors. The controlling law of the state prohibits such transfers. At the time the bankruptcy petition was filed, there existed ten unsecured creditors with claims totalling $500,000.
In this scenario, under Sec. 548(a) the trustee may avoid only the $1 million transfer that occurred within one year before the filing of the bankruptcy petition. Under Sec. 544(b), the trustee may clearly avoid the $1 million transfer made two years before the filing of the bankruptcy petition.... Under [Clinton]‘s analysis, the trustee may not avoid the first $1 million transfer, even though it violated Sec. 544(b), because that transfer exceeds the claims of the unsecured creditors. If, however, the first and second transfers occurred by the president writing one $2 million check instead of two $1 million checks, then Clinton concedes that the entire $2 million would be voidable.
Clinton contends that, without a “cap” on
Thus, we conclude that the magistrate judge erred by “capping” Acequia‘s recovery under
2.
Our conclusion that Acequia has a right under
Although not expressly considering
Courts construe the “benefit to the estate” requirement broadly, permitting recovery under
Other courts find even more tenuous “benefits” to satisfy
More importantly, a contrary determination would lead to the anomalous conclusion reached by the magistrate judge that Clinton engaged in fraudulent conduct by transferring Acequia‘s funds with the actual intent to hinder and delay creditors, but that Acequia has no remedy for such conduct because it would not “benefit” from recovery of the funds. The magistrate judge was concerned about preventing a “windfall” to Acequia. We think, however, that requiring Clinton to disgorge wrongfully-transferred funds will merely make the bankruptcy estate whole. See Morris v. Kansas Drywall Supply Co. (In re Classic Drywall, Inc.), 127 B.R. 874, 876 (D.Kan.1991) (“Section 550(a) is intended to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.“); Pritchard v. Brown (In re Brown), 118 B.R. 57, 60 (Bankr.N.D.Tex.1990) (same). Moreover, even if the recovery did constitute a “windfall,” Acequia has a greater equitable claim to the transferred funds than does Clinton, the wrongdoer. We think it better to err on Acequia‘s side: “One simple truth is evident--if plaintiff is not permitted to seek recovery of the alleged fraudulent conveyances, there will be absolutely no benefit to the unsecured creditors.... Defendants will receive a windfall.” Southern Indus., 59 B.R. at 643.
We therefore hold that, on the unique facts of this case, Acequia‘s
C.
In light of this conclusion, we must determine the transfers for which Clinton may be liable. As noted above, the magistrate judge applied
1.
Analysis under
The magistrate judge traced the transfers at issue in Counts XIII and IX and concluded that Clinton could not account for $64,000. Clinton‘s arguments against this conclusion take the same form as his arguments regarding liability under
By the time these transfers occurred, Clinton was separated from Haley and was involved in a contested divorce action. Acequia had made interest payments on the Prudential loan for 1978, 1979, and 1980 but had failed to make the principal payments due on March 15, 1979 and 1980. Several lawsuits were pending. There was no basis for Clinton to conclude that Acequia owed him money pursuant to the much discussed shareholder loan account because by this time even Clinton‘s own accounting, as evidenced by the tax returns prepared by Clinton‘s accountant, ... show that Clinton owed Acequia.
2.
After determining that a “cap” on Acequia‘s
A review of the record, however, reveals no evidence of the “several prior occasions” to which the magistrate judge referred. Unlike his analysis for other counts, the magistrate judge made no attempt to trace or otherwise account for the funds at issue in Counts V through VII. Rather, the magistrate judge simply declined to consider the transactions at issue in those counts, even after finding additional room under the
IV.
In addition to pursuing bankruptcy causes of action, Acequia sought to recover the transfers at issue in Counts V through XI on the alternative theory of common-law restitution. The magistrate judge initially refused to consider the issue, holding that Acequia‘s complaint did not put “Clinton on notice that he would be required to defend against” such an action. On reconsideration, however, the magistrate judge concluded that, in fact, Clinton was on notice of Acequia‘s restitution claims for Counts X and XI. Ultimately, the magistrate judge awarded Acequia $51,078 under Count X, and nothing under Count XI, pursuant to a restitution analysis. We affirm in all regards.
A.
Clinton argues that the magistrate judge erred by permitting restitution recovery because Acequia failed to plead such a claim. Acequia, on the other hand, contends the magistrate judge erred by not analyzing the restitution claims for Counts V through IX as well as Counts X and XI. Neither party is correct.
“[T]he main purpose of the complaint is to provide notice of what plaintiff‘s claim is and the grounds upon which the claim rests.... [The] plaintiff must at least set forth enough details so as to provide defendant and the court with a fair idea of the basis of the complaint and the legal grounds claimed for recovery.” Self Directed Placement Corp. v. Control Data Corp., 908 F.2d 462, 466 (9th Cir.1990) (emphasis added). Applying this standard, we agree with the magistrate judge‘s determination that Acequia adequately pleaded restitution claims in Counts X and XI but not Counts V through IX.
Acequia styled its complaint as a “COMPLAINT FOR RESTITUTION AND RECOVERY OF FRAUDULENT TRANSFERS.” Counts V through IX, however, allege only that Acequia is entitled to recovery pursuant to relevant provisions of the Bankruptcy and Idaho Codes. In contrast, Counts X and XI do not provide a statutory provision enabling recovery, stating only that, “[o]n the basis of the foregoing, the Debtor is entitled to recover from Clinton.” As Acequia acknowledges, this difference in pleading is crucial: “[U]nlike the other counts of the complaint which cite specific bankruptcy law provisions, Counts X and XI contain no such separate allegations. Rather, they are clean and straight-forward claims for restitution of misappropriated funds.” Therefore, the magistrate judge‘s conclusion that Acequia adequately alleged restitution causes of action in Counts X and XI, which failed to provide independent statutory grounds for recovery, but not in Counts V through IX, which did so provide, is both logical and correct.
“To establish implied consent, the [plaintiff] must demonstrate that [the defendant] understood evidence had been introduced to prove [the new issue], and that [the new issue] had been directly addressed, not merely inferentially raised by incidental evidence.” LaLonde v. Davis, 879 F.2d 665, 667 (9th Cir.1989). Accord Campbell v. Board of Trustees, 817 F.2d 499, 506 (9th Cir.) Acequia fails to make such a showing, arguing only that Clinton‘s defense of a restitution claim would require “exactly the same evidence” as that used to defend the
Thus, the magistrate judge correctly analyzed only Counts X and XI under a restitution theory.
B.
The magistrate judge awarded full restitution for Count X and no restitution for Count XI. In Idaho, “[w]hen a person has been unjustly enriched at the expense of another he must make restitution to the other.... The substance of [the] action ... lies in a promise, implied by law, that a party will render to the person entitled thereto that which in equity and good conscience belongs to the latter.” Smith v. Smith, 95 Idaho 477, 483, 511 P.2d 294, 300 (1973). “The simple, but comprehensive, question is whether the circumstances are such that equitably, respondent (defendant) should restore to appellants (plaintiffs) that which he has received.” Hixon v. Allphin, 76 Idaho 327, 333, 281 P.2d 1042, 1045 (1955). See e.g., Cozzetto v. Wisman, 120 Idaho 721, 726, 819 P.2d 575, 580 (1991) (“All that need be shown is that the defendant obtained something of value to which he was not entitled, to the detriment of another.“).
1.
The magistrate judge awarded full recovery under Count X: “Count X alleges that Clinton used Acequia funds to pay for private counsel. Under Idaho law, Acequia does not even have to prove fraudulent intent if it can establish that ‘in good conscience’ Clinton should not have withdrawn corporate funds to pay for private counsel. Acequia is entitled to judgment ... under the theory of unjust enrichment.”
Clinton‘s only response to the magistrate judge‘s decision is that (1) “Clinton was the sole shareholder of Acequia and, therefore, had the power, indeed the right, to make use of Acequia‘s assets,” and (2) Haley agreed to such payments. As the bankruptcy court noted in denying Clinton‘s motion for summary judgment, these arguments miss the point: “Neither the Divorce Decree nor any agreement between the parties is binding on the corporate-debtor as to obligations of the parties[ ] for their personal expenses. [Clinton] confuses the community and personal assets consisting of corporate stock with the corporate debtor‘s funds and assets. A stockholder has no authority to use corporate assets for personal debts.” (emphasis added).
Clinton admittedly used Acequia‘s money to pay his personal obligations and, as a result, the magistrate judge correctly ordered restitution of those funds at issue in Count X.
2.
The magistrate judge denied all recovery under Count XI:
In Count XI, Acequia seeks to recover from Clinton the sum of $1,989,126.38 based on unaccounted loan proceeds from a 1977 loan by Prudential Insurance Company in July of 1977. The Court finds that Acequia has failed to prove by a preponderance of the evidence that it is entitled to recovery based on unjust enrichment. The evidence at trial, presented by Clinton, established that this money did not go to his own personal benefit. At the time, Clinton was merging Clinton Ranches into Acequia. While some of the loan proceeds may well have gone to pay bank obligations under the name of Clinton Ranches, Acequia received the benefit of Clinton Ranches’ operating loans which in turn had been expended for items such as seed, deposits to power suppliers, fertilizer and crops and other improvements that Acequia in effect inherited from Clinton Ranches in the subsequent operating year. The benefits, such as they were, inured to the benefit of Acequia and not Clinton and the Court finds that in 1977 there was no unjust enrichment to which Acequia should now be able to assert a claim.
Second, Acequia disputes the magistrate judge‘s conclusion that Clinton‘s personal use of the money “inured to Acequia‘s benefit.” Acequia complains that the magistrate judge‘s conclusion “requires a complete disregard for Acequia‘s corporate identity.” This may be true. Unlike analysis under
We therefore affirm the magistrate judge‘s denial of recovery on Count XI.
V.
Throughout the litigation below, Clinton contended that Haley was liable for half of any judgment against him as a community obligation of their former marriage. In fact, the bankruptcy court joined Haley as an indispensable party, reasoning that “[t]he claim before this Court is to retrieve estate property. If such property, if any, was used by the community and is to be recovered from community property, Rosemary Haley as a member of the community should be joined as a party.... At this time, the Court does not know which party may be the owner of any estate property which the Debtor-in-Possession may recover. This involves factual issues to be determined at trial.” Ultimately, however, the magistrate judge concluded that Haley was not liable for Clinton‘s obligations:
The basis for recovery ... is based on recognized tort concepts under theories of fraudulent conveyances. The general rule is that a spouse‘s interest in community property may be liable for the tort of the spouse if at the time of the tortious act the spouse was acting for the benefit of the community or whether he had deviated from the community business and was acting for his own personal benefit. In order for one spouse‘s interest in community property to be held liable for the tort of the other it must be affirmatively established that the act was expressly or impliedly authorized and was at the time of the act actually attending to the affairs or business of the community....
In this case, the court has found that all transfers [for which Clinton is liable] occurred after the parties had separated. Clinton used the funds for his own personal benefit and the court does not find that at the time he was acting on behalf of the community or attending community business.
We affirm the magistrate judge‘s refusal to enter judgment against Haley for Clinton‘s liability under Counts I through IV and XIII through XI. However, because we remand for further consideration of Counts V through VII, we also remand the issue of Haley‘s liability on those claims as well.
A.
In Idaho, “when either member of the community incurs a debt for the benefit of the community, the property held by the marital community becomes liable for such a debt and the creditor may seek satisfaction of his unpaid debt from such property.” Twin Falls Bank & Trust Co. v. Holley, 111 Idaho 349, 341, 723 P.2d 893, 897 (1986). Generally, courts presume that all obligations incurred during marriage inure to the benefit of the community. Simplot v. Simplot, 96 Idaho 239, 245, 526 P.2d 844, 851 (1974). This is true “despite a separation, until a decree of divorce.” Suter v. Suter, 97 Idaho 461, 466, 546 P.2d 1169, 1174 (1976).
B.
Haley and Clinton were married and not separated, however, at the time of the transfers at issue in Counts V through VII. As a result, because we remand for consideration of those additional transactions, we also remand the issue of Haley‘s liability for those claims.
VI.
In his answer to Acequia‘s complaint, Clinton asserted the following as his “Ninth Defense“:
Clinton is entitled to a set-off from any judgment for monies owed to Clinton by [Acequia] because Clinton ... received no salary from [Acequia] for services rendered to [Acequia]. Clinton is also entitled to set-off for monies allegedly owed because [Acequia] has retained payments made on the Desert Land Entry [“DLE“] Property.
The magistrate judge disagreed, concluding that Clinton was not entitled to any setoff claims: “[M]utuality of obligations is not met where the claimed set-off is based on fraudulent actions. As far as any funds that the Court has found were transferred to Clinton with the intent to hinder or delay creditors, there would be no set-off.” Nevertheless, the magistrate judge concluded that Clinton and Acequia had reached an agreement regarding rental of the DLE property after confirmation and, accordingly, the magistrate judge entered judgment for Clinton in the amount of rent due from the date of confirmation: “The Court sees this claim, not as one regarding a set-off, but for money due on a post-confirmation agreement between Acequia and Clinton. Acequia is leasing the land [from] Clinton and Haley and therefore owes them the fair rental value.”
We affirm the magistrate judge‘s determination to deny the setoff claims but reverse the decision to award Clinton affirmative relief on the rent claim.
A.
Accordingly, because Clinton received fraudulent transfers with the actual intent to hinder or delay creditors, the magistrate judge did not abuse his discretion by denying Clinton‘s setoff claims. See Riggs v. Government Employees Fin. Corp., 623 F.2d 68, 73 (9th Cir.1980) (“it is well settled that allowance of a setoff lies within the sound discretion of the trial court“); Bacigalupi v. Parkway Plaza Investors (In re Bacigalupi, Inc.), 60 B.R. 442, 445 (9th Cir. BAP 1986) (“The allowance or disallowance of a setoff is a decision which ultimately rests in the sound discretion of the bankruptcy court.“).
The magistrate judge reasoned that, although setoff was not appropriate, Clinton was entitled to half the fair rental value of DLE property based on a “post-confirmation agreement” he made with Acequia. We reverse this conclusion because the only “agreement” between Clinton and Acequia was a stipulation, made at the pretrial conference, that the postconfirmation rental value of the DLE property was $30,000 per month. At the pretrial conference, in fact, Acequia expressly refused to stipulate to ownership of the property.
The magistrate judge ultimately determined that Clinton and Haley had owned the property since 1978. Acequia correctly argues that, nevertheless, this conclusion does not automatically entitle Clinton to the relief granted by the magistrate judge:
Clinton pled his request for a set-off as a defense and never raised an affirmative claim for relief. Instead, Clinton pursued affirmative relief on the DLE property in a shareholder derivative suit filed against Acequia in United States District Court. Clinton indicated in that case, not in this action, that he would seek an “accounting” for the post-confirmation DLE rents. Misled by Clinton‘s duplicitous claims, Acequia was denied an opportunity to demonstrate that it has invested substantial monies into the DLE property over the years in the form of significant capital improvements, payment of property taxes and management fees, and payment of all other landlord expenses. Acequia did not consent to try the issue of post-confirmation DLE rents in this lawsuit.
We therefore reverse the magistrate judge‘s affirmative award of DLE rents to Clinton. If Clinton is entitled to such rent, he can receive it in the pending shareholder derivative action.
VII.
The magistrate judge awarded prejudgment interest to Acequia. Clinton contends that such an award was improper because it is “unjust” and because Acequia‘s damages were not easily calculable. This argument is without merit.
Regarding Acequia‘s claims under
Regarding Acequia‘s restitution claims and claims under
Under either standard, the magistrate judge clearly did not abuse his discretion by awarding prejudgment interest in this case, in which the amount of fraudulent transfer liability was easily calculable by examining the checks Acequia wrote to Clinton:
... In bankruptcy proceedings, the courts have traditionally awarded prejudgment interest from the time demand is made or an adversary proceeding is instituted unless the amount of the contested payment was undetermined prior to the bankruptcy court‘s judgment.
In the instant case, the award of prejudgment interest to the trustee would unquestionably serve to compensate the debtor‘s estate for appellants’ use of those funds that were wrongfully withheld from the debtor‘s estate during the pendency of the current suit. Additionally, an award of prejudgment interest would appear to be consistent with the balance of the equities.
Finally, there is no dispute that the amount of the contested payment was clearly determined prior to the bankruptcy courts judgment.
The award of prejudgment interest was proper.
VIII.
The magistrate judge declined Acequia‘s request for attorney‘s fees. On appeal, Acequia cites no statutory or contractual basis for such fees, arguing only that “exceptional circumstances” justify an award of fees. See Richardson v. Alaska Airlines, Inc., 750 F.2d 763, 765 (9th Cir.1984) (“The American rule denies attorney‘s fees to a litigant in federal court in the absence of contract, applicable statute, or other exceptional circumstances.... [A]ny exceptions to the American Rule will be narrowly circumscribed.“) (citation omitted). In view of the magistrate judge‘s determination that “Clinton‘s defense of this case was neither unreasonable, frivolous, nor vexatious,” the refusal to award attorney‘s fees was not an abuse of discretion.
IX.
In conclusion, we find that the magistrate judge correctly (1) held Clinton liable under
We therefore affirm in part, reverse in part, and remand for analysis under
AFFIRMED in part. REVERSED in part. REMANDED.
GOODWIN, Circuit Judge, dissenting:
The majority finds that the bankruptcy court did not clearly err in holding that Vernon Clinton acted “with actual intent to hinder, delay, or defraud” Acequia‘s creditors. See
Furthermore, at all material times Acequia was, and still is, controlled by Rosemary Haley or her estate. It appears that Haley‘s estate availed itself of the bankruptcy court after failing to obtain satisfaction in extended and rancorous divorce proceedings. I refuse to encourage this kind of litigation strategy by resorting to a legal fiction that creditors were “hindered, delayed, or defrauded” when none were.