Thomas P. Agresti, Judge United States Bankruptcy Court
Chapter 7 Related to Doc. No. 13 Hearing: June 15, 2015 at 1:30 P.M. Appearances: Richard W. Roeder, Esq., Counsel for the Plaintiff
Stephen B. Hutzelman, Esq., Counsel for the Defendants
Gary V. Skiba, Esq., Counsel for the Debtor
MEMORANDUM ORDER
The Chapter 7 Trustee, as Plaintiff, filed a Complaint to Avoid and Recover a Post Petition Transfer, Doc. No. 1. Following the close of the pleadings, Defendants filed a Motion for Summary Judgment ("Motion") at Doc. No. 13, together with supporting Affidavits and a Brief. The Trustee has responded and the Court has heard argument. After careful consideration, the Court will deny the Motion for the reasons set forth below.
The Court's jurisdiction under 28 U.S.C. §§157 and 1334 was not at issue. This is a core proceeding pursuant to 28 U.S.C. §§157(b)(2)(H) and (O).
BACKGROUND
The Defendants in this case are the Debtor, Carl Avers ("Carl"), his wife Priscilla Avers ("Priscilla"), their son Mark Avers ("Mark"), and the Priscilla Avers Family Trust ("PAFT"). PAFT is a revocable trust that was created on March 17, 1993. A copy of the document whereby PAFT was created is attached as an exhibit to the Motion. Priscilla was the settlor of PAFT and Priscilla and Carl are its beneficiaries during the lifetime of Priscilla. Priscilla and Carl originally served as co-trustees of PAFT, but on October 3, 2007 Carl resigned from that position and was replaced by Mark. The Trustee takes the position that over the years almost all of the funding into PAFT has come from the earnings and other income of Carl, and he alleges that PAFT has been used by Carl as a device to escape creditors. PAFT has long maintained an account at J.P. Morgan Chase Bank, N.A. in Columbus, Ohio, and over the years it has owned various items of real estate and motor vehicles.
During a status conference held on April 20, 2015, Counsel for the Defendants informed the Court that another document for PAFT had been discovered which might actually be the operative trust document. Even though they had submitted the original PAFT document in support of the Motion, the Defendants had made no effort to supply that newly-discovered document. The Trustee did, however, submit the new document on May 4, 2015, just as this Memorandum Opinion was being finalized. See Doc. No. 49. The Court has reviewed that document, which is entitled "Modification and Restatement of Trust Agreement for the Priscilla Avers Family Trust" and it is dated September 28, 1995. The Court has not gone through and compared the two documents in detail but upon a quick review they look to be substantially the same with the notable exception that the "Modification" has a Florida choice of law provision rather than Ohio as in the original. Whether it is the original PAFT document or the Modification that is used does not have a bearing on the Court's ruling on the Motion. The Court assumes the Defendants agree with this conclusion since, despite plenty of time to do so, they have made no attempt to modify their arguments in any fashion so as to support a contrary conclusion.
The beneficiary changes after Priscilla's death, the time in which PAFT is to divide into two parts - the A and B trusts - which the Court understands to be a commonly-used strategy to deal with estate tax issues for married couples. Since Priscilla is still alive, this part of the PAFT document is of little relevance for present purposes.
In addition to this case, see also Roeder v. PAFT, et al, Adv. No. 14-1051 and Roeder v. Carl Avers, et al, Adv. No. 14-1059, for other adversary proceedings wherein the Trustee is challenging transactions involving PAFT.
The particular transfer that is the subject of this case involved a residential property formerly owned by PAFT that is commonly known as 122 Smock Avenue, Neptune, N.J. ("the Neptune Property"). PAFT acquired the Neptune Property on November 5, 2007, for $312,000. On June 18, 2013, PAFT transferred ownership of the Neptune Property to Mark by quitclaim deed, for a stated consideration of $1. This was only four days after Carl's bankruptcy case was filed. Accordingly, the Trustee asks that the Court find this transfer to have been fraudulent, order that the Neptune Property be re-transferred to PAFT, and provide ancillary relief.
Although on its face the transfer of the Neptune Property does look suspect on fraudulent transfer grounds, the Defendants have provided additional factual evidence that they say puts matters in a different light. According to the Defendants, a proper consideration of the transfer must begin with events occurring back in 1997. At that time Mark was living and working in New York City and wanted to buy a residence in Peekskill, N.Y ("the Peekskill Property"). Because of his personal situation, Mark determined that it would be best if the Peekskill Property were to be placed in Carl's name. The purchase price for the Peekskill Property was $125,950. Approximately $20,000 of that purchase price was paid by Carl, allegedly as a gift, and the balance was paid by Mark either through his own funds or through a mortgage loan of $100,700 which he obtained. The Defendants further allege that a part of the understanding was that Mark could have the Peekskill Property transferred into his name at any time. Mark resided in the Peekskill Property and paid taxes, insurance, and mortgage payments on it. He also did considerable work in repairing and upgrading the Peekskill Property while residing in it, claiming to have spent more than $40,000 of his money and "countless hours" for those purposes during the time he lived there.
For some reason, which is not well explained in the materials the Defendants have presented with their Motion, Carl transferred ownership of the Peekskill Property to PAFT in 2002 pursuant to a "family agreement," allegedly subject to the same terms and conditions vis-a-vis Mark as with the 1997 acquisition. Mark continued to reside in the Peekskill Property until 2007. At that time he decided for personal and professional reasons to move his residence to New Jersey and identified the Neptune Property as something he was interested in. The Peekskill Property was sold by PAFT for $351,000, resulting in a capital gain of $186,000.
Mark's Affidavit states in Paragraph 22 that "[t]he income tax consequences of this transaction were handled in a manner consistently with the prior tax treatment of all income of [PAFT]". Regarding the gain on the sale of the Peekskill property, Carl's Affidavit states in Paragraph 13 that:
Based upon accounting advice [PAFT] was recognized as an ignored entity for Federal Income tax purposes meaning that its income and expenses could be detected on the personal return filed by myself and Priscilla Avers. The gain was solely reported on schedule C as a capital gain, but due to other losses and carry-overs, no federal income tax was payable with respect to said gain.
The Neptune Property was then acquired by PAFT on November 7, 2007. The purchase price was $312,000 , with expenses and prorations bringing the final total to $315,459.77. Although it is not entirely clear, it appears that the bulk of the funds used to acquire the Neptune Property consisted of the proceeds realized from the sale of the Peekskill Property. While the deed showed PAFT as the grantee, the HUD closing statement for the Neptune Property transaction identifies Mark as the "borrower" and indicates this was a cash transaction.
Mark's Affidavit states that the Neptune Property was placed in the name of PAFT based on the same understanding as had applied with respect to the Peekskill Property, and that he would not have agreed to do so absent such understanding. The Neptune Property had termite damage when it was acquired and it required substantial work before it was habitable, all of which was paid for by Mark. The Neptune Property was subsequently damaged by hurricane Sandy in 2012, necessitating further repairs. The total cost of repairing the Neptune Property for the existing damage and the subsequent storm damage was slightly over $100,000, none of which was paid by PAFT. Mark has also paid the taxes and insurance on the Neptune Property.
As indicated above, the Neptune Property was transferred by deed from PAFT to Mark on June 18, 2013. The actual process to effect the transfer purportedly began months earlier, in late 2012. The Defendants have identified two major reasons why the transfer was made. First, that Mark was by then sufficiently confident as to the state of his personal relationship, and as to the state of the law pertaining thereto, to have the Neptune Property titled in his name. Second, that following the damage from hurricane Sandy he discovered that FEMA disaster assistance was not available to repair damage to homes that were not occupied by the owner, which left him ineligible for assistance and determined to avoid that same result if another storm or disaster should hit in the future. Priscilla and Mark, as co-trustees of PAFT, as well as Carl, agreed to the transfer of the Neptune Property from PAFT to Mark. The Defendants have not explained why it took from late 2012 until June 18, 2013, before the transfer was actually effected.
SUMMARY JUDGMENT STANDARD
Fed.R.Bankr.P. 7056 incorporates Fed.R.Civ.P. 56 into bankruptcy adversary proceedings. Fed.R.Civ.P. 56(a) provides that the Court shall grant summary judgment to the moving party "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." The Defendants, as the moving parties, therefore have the burden to prove the absence of genuine issues of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). A fact is material for summary judgment purposes if, under applicable substantive law, it may affect the outcome of the case. Id. at 325. If the movant shows the absence of genuine issues of material fact, the nonmoving party must "set forth specific facts showing there is a genuine issue for trial." Id. at 322, n. 3. Throughout the analysis, the Court must view the facts in the light most favorable to the non-moving party, here the Trustee, and draw all inferences in that party's favor. Abramson v. William Paterson College of New Jersey, 260 F.3d 265, 276 (3d Cir. 2001).
LEGAL DISCUSSION
Even assuming the Defendants' version of the facts to be true for purposes of deciding the Motion, the Court finds that summary judgment is not appropriate. There are a number of reasons for that conclusion, but essentially they all come down to the Court finding that a trial on the merits will be necessary because (a) it is not entirely clear what legal theory the Defendants are relying upon, and, (b) there are still open questions of fact, or the application of law to fact. Without attempting to be comprehensive about it, the Court will set forth some of the areas of uncertainty that have led it to deny the Motion.
In the first place, the Court cannot be sure whether the Defendants are claiming that the Neptune Property was being held pursuant to an express trust, or a resulting trust, which are two very different things. The recitation by the Defendants of the terms of the alleged "understanding" by which the Peekskill Property and then the Neptune Property were acquired would suggest a contention that there was an express trust. See Motion at ¶¶ 7, 10. However, elsewhere the Defendants contend that the Neptune Property was being held in a resulting trust, Motion at ¶15, and the Brief filed in support of the Motion also refers to and relies upon cases involving resulting trusts.
Black's Law Dictionary (6th Ed. 1990) defines an express trust, in part, as "A direct trust. A trust created or declared in express terms and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties. A trust directly created for specific purposes in contrast to a constructive or resulting trust which arises by implication of law or the demands of equity." A resulting trust, by contrast, is defined, in part, as "One that arises by implication of law or by the operation and construction of equity and which is established as consonant to the presumed intention of the parties as gathered from the nature of the transaction." Id.
There are complex factual and legal issues that will need to be resolved under either of these trust "theories." For instance, the "understanding" which the Defendants seem to rely upon in support of an express trust theory was apparently an oral one because there is no mention of any writing having ever been prepared to memorialize it. However, is it even possible to have an express trust in land without a writing? That looks to be an issue going to the particular version of the Statute of Frauds that is in effect under the law of the relevant state. See, e.g., George Gleason Bogert, The Law of Trusts and Trustees § 61, et seq, (2014).
The Defendants take the position that Ohio law applies because there is a provision in the PAFT instrument to that effect. As it happens, Ohio is one of the states that does allow an express trust in land to be proven by parol evidence, though to prove it the evidence must be "clear, certain and conclusive." Otto v. Keegan, 1983 WL 7263, at *2 (Ohio Ct. App. 1983). That is a demanding standard of proof, and the Court does not believe the Defendants have met it, particularly since the facts must be viewed in a light most favorable to the Trustee as the non-moving party. Furthermore, and in any event, it is by no means clear to the Court that Ohio law would apply in this instance.
Even though the Defendants advised the Court on April 20th about the existence of another PAFT document that has a Florida "choice" of law provision, see n. 2, supra, they have not supplemented their Motion or Brief to include any argument as to Florida law and how it might affect the Motion. This is yet another area of uncertainty and reason to deny the Motion.
It will be recalled that the Defendants point to the initial acquisition of the Peekskill Property in 1997 as the proper starting point for an overall analysis of what happened here. Although PAFT was in existence at that time, it was not involved in that initial acquisition; Carl, not PAFT initially took legal title to the Peekskill Property. The trust created as part of the 1997 transaction, if any, was therefore between Mark and Carl and there is no apparent reason why Ohio law would be applied rather than, say, the law of New York, the situs of the Peekskill Property. New York, unlike Ohio, does have a Statute of Frauds that encompasses express trusts in land. The Court will make no effort at this time to determine the exact contours of New York law on this point, and whether it would allow the creation of an express trust in land based solely on an oral understanding as alleged here, but that may well be an issue that will have to be resolved at some point in deciding this case and the Defendants have failed to address it at all.
To the extent that New Jersey law becomes relevant since that state is the situs of the Neptune Property, it appears that since a 1995 revision to its Statute of Frauds, an oral express trust in land has been possible, but as under Ohio law it must be proven with clear and convincing evidence. See, e.g., Morton v. 4 Orchard Land Trust, 849 A.2d 164 (N.J. 2004).
Another issue presented is the effect of the 2002 transfer of the Peekskill Property from Carl to PAFT pursuant to a "family agreement." If Carl was not holding the Peekskill Property in trust for Mark because New York law would not recognize an oral express trust in land, then the same question arises as to how PAFT could have taken it in trust for Mark.
When the acquisition of the Peekskill Property is viewed under a resulting trust theory, additional difficult issues are presented. In the archetypal resulting trust scenario, "A" furnishes the entire consideration for property that is placed in the name of "B," with the courts generally having little difficulty concluding that "B" holds the property in a resulting trust for the benefit of "A." However, in the present case, by the Defendants' own acknowledgment, Mark did not furnish the entire consideration for the purchase of the Peekskill Property since approximately $20,000, the vast bulk of the downpayment, was paid by Carl. The Defendants argue that the payment was a gift by Carl, but the Court has been provided with no evidence beyond the Defendants' own self-serving assertions to support that argument. For instance, the Court would note that the annual exclusion from gift tax in 1997 was $10,000, so presumably Carl would have been required to pay gift tax on at least a portion of the $20,000 if a gift was truly intended, but no tax or accounting records have been provided to show if that was done.
If the $20,000 payment from Carl was not a gift, was it a loan, with title to the property serving as security? Or, was it a part payment by Carl and a part payment by Mark, in which case the "great majority" of American courts would be likely to find that any resulting trust in favor of Mark would be limited to a pro tanto fractional interest corresponding to his part of the payment? See, George Gleason Bogert, The Law of Trusts and Trustees § 457 (2014). In such a "part payment" situation then, Carl would have held at least a portion of the legal title to the Peekskill Property free of any resulting trust interest of Mark, which free portion would presumably have enured to PAFT once Carl made that transfer.
The Court also has some concerns regarding the sale of the Peekskill Property and the way the gain was reported for income tax purposes. As indicated above, see n. 5, the gain was reported on the individual tax return of Carl and Priscilla, and no tax was paid on it because of offsetting losses and carryovers that they had. Without attempting to get into the intricacies of federal income tax law, it would seem that if the Peekskill Property were truly being held in trust for the benefit of Mark, the occasion of its sale and the subsequent use of the sale proceeds to purchase the Neptune Property would have triggered some sort of reporting obligation to tie the asset to the purported beneficiary. Put another way, if Mark was really the sole equitable owner of the Peekskill Property, as the Defendants assert, by what logic was the gain reported on Carl and Priscilla's tax return? Perhaps there is a reasonable explanation, but the Court does not find the mere bland explanation of "accounting advice" to be a sufficient basis to ignore the issue and grant summary judgment.
The purchase of the Neptune Property in 2007 raises its own issues. To begin with, the Defendants acknowledge that the proceeds from the sale of the Peekskill Property, which was then titled in the name of PAFT, was used to buy the Neptune Property, which was also titled in the name of PAFT, so the Court assumes that all of the various questions outlined above would carry over to the new property. The Defendants contention that PAFT never paid anything toward the Neptune Property, and did not give up anything of value when it transferred the Neptune Property to Mark for no consideration, see Motion at ¶6, is therefore called into question because, as discussed above, depending on what the facts ultimately show there is at least some basis for the proposition that there was no trust on the Peekskill Property in favor of Mark, or only a trust as to a fractional share. If either of those propositions is correct, then indeed PAFT did provide value for the acquisition of the Neptune Property when it allowed the proceeds from the sale of the Peekskill Property to be used for that purpose, and gave up value when it transferred the Neptune Property to Mark for no consideration. These are matters the Court cannot decide on the current state of the record.
Another area that requires additional evidence is whether PAFT was even authorized to act as a trustee for the benefit of Mark, as the Defendants seem to allege. See, e.g., Motion at ¶¶ 3(j), 4, and 7. The Court's own review of the PAFT document does not indicate the existence of such authority. The only beneficiaries during the life of Priscilla and Carl named in the PAFT document are Priscilla and Carl themselves. There are provisions for the creation of trusts for the benefit of their children (Mark and their daughter), but only after the death of the survivor of Priscilla and Carl. The Court sees nothing in the document that would allow PAFT to act as a trust vehicle or a trustee for Mark while Priscilla and Carl are still alive. True, the PAFT document provides that Priscilla was free to amend it at any time, but such is subject to the written consent of the trustee. There is a question whether the alleged oral understandings involving the Peekskill and Neptune Property would be an effective amendment of the PAFT document. If not, the PAFT trustees may have acted beyond their authority if they agreed to hold property in trust for Mark and/or when they transferred title of the Neptune Property from PAFT to Mark for no consideration.
The Defendants argue that any lack of authority issue was obviated because Carl and Priscilla consented to and ratified PAFT's actions, including the transfer to Mark. The Court recognizes that ratification can potentially save an act that would otherwise be beyond the authority of a trustee. However, in this case there is a question whether Carl could effectively ratify the transfer to Mark because that transfer occurred after he (Carl) had filed bankruptcy. Carl's beneficial interest in PAFT, presumably including any right to ratify actions of the trustees that exceeded their authority, may have by then become property of the bankruptcy estate pursuant to 11 U.S.C. §541. If so, then Carl would not have had the ability to ratify the post-petition transfer to Mark.
The Court uses the qualifier "may" because the Defendants argue that PAFT is a spendthrift trust, thereby impliedly suggesting Carl's interest in PAFT should be excluded as property of the estate pursuant to 11 U.S.C. §541(c)(2). However, as the Trustee points out, the spendthrift provision in the PAFT document is limited to "paragraph 5" beneficiaries, which is a provision that does not even become operative until after the death of Priscilla. Carl's status as a PAFT beneficiary at the time of the bankruptcy filing fell under paragraph 2, which does not appear to have a spendthrift provision attached to it, though the Court makes no ruling on that issue at this time.
A final reason that cuts against a grant of summary judgment is the uncertain nature of the estate's rights as against assets of PAFT, both those currently being held by PAFT and those which were transferred by PAFT and are now the subject of fraudulent transfer actions. The Defendants seek to minimize the estate's rights in this regard, essentially arguing that the estate stands in the shoes of Carl, who is simply a contingent beneficiary under PAFT, with limited ability or standing to object to PAFT transactions. The Plaintiff, however, sees things differently, arguing that PAFT was systematically used as a vehicle by Carl over the course of many years to improperly shield his assets from the reach of creditors, thereby giving the estate a broad interest in recovering assets of PAFT for the estate on fraudulent transfer grounds . The Trustee makes allegations of that nature in both the present case, see Complaint at ¶¶ 7-16, as well as in Adv. No. 14-1051, but it appears that the main battleground over that issue will be in the latter. The Defendants in 14-1051 have filed a motion for summary judgment which is also being denied this date due to issues of material factual dispute. Because a resolution of the nature of the estate's interest in PAFT - whether the narrow interest of a contingent beneficiary as urged by the Defendants or the broad interest as the Trustee maintains-will likely have a significant impact on the outcome of this case, that provides yet another reason to deny the Motion.
Although the Trustee does not use the term "alter ego" in his Complaint to describe what he believes to be the relationship between Carl and PAFT, that seems to be a fair reading of the import of his allegations, something recognized by the Defendants. See, Defendant's Brief at 9. Also, for instance, in response to the Motion the Trustee has submitted a "personal financial statement" for Carl dated February 19, 2010 that shows PAFT assets, including the Neptune Property, as being owned by him, which would be consistent with an alter ego theory.
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CONCLUSION
The court in In re Doctors Hospital of Hyde Park, Inc., 336 B.R. 367 (Bankr. N.D. Ill. 2005), in denying a motion for summary judgment on a rather complicated issue involving the disposition of rental proceeds by the debtor, stated:
Summary judgment is not necessarily precluded merely because the legal issues are complex. S.E.C. v. Research Automation Corp.,
585 F.2d 31, 33 (2d Cir.1978). In certain cases, however, summary judgment may be inappropriate when the legal issue is so complex, difficult, or insufficiently highlighted that further facts need to be explained for a prudently considered resolution. Eby v. Reb Realty, Inc.,
495 F.2d 646, 649 (9th Cir.1974); citing Kennedy v. Silas Mason Co.,
334 U.S. 249,
68 S.Ct. 1031,
92 L.Ed. 1347 (1948); Palmer v. Chamberlin,
191 F.2d 532, 540 (5th Cir.1951); 10 C.A. Wright & A. Miller, supra at § 2725, pp. 501-05. The Supreme Court has noted that "summary procedures, however salutary where issues are clear-cut and simple, present a treacherous record for deciding" very complex cases. Kennedy v. Silas Mason Co.,
334 U.S. 249, 256-257,
68 S.Ct. 1031, 1034,
92 L.Ed. 1347 (1948).
Id. at 367. This Court agrees with that approach and for the reasons indicated above finds that the facts need to be further developed and the legal issues more sharply defined before a proper decision can be made. The
Motion must therefore be denied.
AND NOW , this 13th day of May , 2015 , it is ORDERED , ADJUDGED and DECREED that,
(1) The Motion for Summary Judgment filed by the Defendants is DENIED .
(2) A Final Pretrial Conference in this case is scheduled for June 15 , 2015 at 1:30 P.M . in the Erie Bankruptcy Courtroom, U.S. Courthouse, 17 S. Park Row, Erie, Pa. 16501.
/s/_________
Thomas P. Agresti, Judge
United States Bankruptcy Court
Case administrator to serve:
Richard W. Roeder, Esq.
Stephen B. Hutzelman, Esq.
Gary V. Skiba, Esq.
Debtor