S. MARTIN TEEL, JR., Bankruptcy Judge.
The debtor, Max E. Salas, has claimed an exemption under D.C. Code § 15-501(a)(14) of the real property located at 1610 Riggs Place, NW, Washington, D.C. (the "Property") even though he is not the record owner of the Property in the District of Columbia land records. For the reasons stated below, I will overrule the pending objection to the claimed exemption of the Property.
On June 3, 2015, Michael Patrick McLoughlin and Nina Brekelmans, two roomers at the Property, were killed in a fire at the Property. The parents of McLoughlin and Brekelmans, as personal representatives of their children's estates brought actions in the Superior Court of the District of Columbia (respectively the McLoughlin plaintiffs in Case No. 2015 CA 008054 B and the Brekelmans plaintiffs in Case No. 2015 CA 008061 B), pursuing wrongful death and survivorship claims against both the debtor, Max Salas, and one of his sons, Len Salas.
The events relevant to the disposition of the objection to Max's exemption claim began in 1995, when Vickie L. Bruff (later Vickie Salas) purchased the Property, with Max making the $80,000 down payment. Vickie bought the Property because Max had financial and credit problems that prevented him from obtaining a mortgage to purchase the Property. Thereafter, Max and Vickie began living at the Property, with Max making the mortgage payments. Max has resided at the Property since 1995, except for when he was forced to live elsewhere temporarily after the fire pending the restoration of the Property.
Max married Vickie on March 1, 2002. In April 2007, they decided to get divorced. In contemplating a divorce agreement, Max wanted to keep the Property as his home and Vickie wanted to realize cash out of the Property. They determined that if Vickie transferred the Property to Max and Max refinanced the mortgage, he could pay Vickie her share of equity in the Property and otherwise retain the Property. This plan could not be carried out because Max's poor credit record would have impeded him from refinancing the mortgage on the Property upon the conveyance of the Property to him. However, they realized that if the Property were transferred to Max's son, Len, Len would be able to refinance the mortgage and pay Vickie the cash to which she was entitled under the divorce arrangement.
Vickie, Max, and Len took a series of steps to achieve that goal on April 16, 2007: Vickie conveyed the Property to Max pursuant to a deed duly recorded in the District of Columbia land records; in turn, Max conveyed the Property to Len pursuant to a deed similarly recorded in the land records;
Len represented in the loan documents that the Property would serve as his sole residence for at least a year, and that he would maintain the Property. Nevertheless, Len and Max agreed that the Property would, in actuality, remain Max's home. In accordance with this, Len treated Max as the real owner of the Property. Indeed, Len paid Max rent when Len and his girlfriend (later his wife) lived in the house for approximately six to eight months after the transactions with Vickie closed.
Max and Len also agreed that Max would make the mortgage payments even though only Len was an obligor on the note secured by the deed of trust. There is no writing evidencing an agreement to that effect, but the existence of that agreement is demonstrated by that fact that over the years Max alone made all monthly mortgage payments. Len made none of the payments, even though he on occasion did receive communications from SunTrust whenever a payment was missed.
Max and Len contemplated that within a few years after Len's execution of the promissory note in favor of SunTrust on April 16, 2007, Max would have an improved financial status enabling him to take steps to eliminate Len's financial obligations in relation to the Property. The existence of the SunTrust debt in Len's name was an impediment to Len's ability to obtain financing to purchase real property for his own use. Over the years, Len contacted Max to urge Max to take steps to eliminate his responsibility for the debt owed SunTrust secured by the Property. Max told Len that he was working with SunTrust to replace Len as the obligor on the debt, but such efforts did not succeed. Len's wife, Karen, nagged Len continually regarding eliminating Len's obligations under the SunTrust debt. Len hoped his father would sell or refinance the Property and thereby eliminate Len's obligations regarding the Property. The issue was increasingly a sore point for Len.
Because of Max's income tax liabilities, Max's credit was shot and he could not get refinancing for the Property to remove Len as the obligor. Max thought, based on discussions with Sylvia Jones, an acquaintance who was active in real estate transactions, that transferring the Property to a trust in his favor might make refinancing the Property easier than placing title to the Property in his own name: a business entity with no credit record would have a better chance of success in obtaining financing than would Max, an individual with a bad credit record. Max also may have been concerned that transferring title to the Property directly to himself would create a risk of the outstanding income tax liens against him being enforced against the Property. In 2010, Max, Len, and Karen spent the July 4th holiday in Colorado with Ron Salas, Max's eldest son. Ron had recently graduated from law school and had begun practicing law in Colorado. On July 6, 2010, Max, Len, Karen, and Ron met at Ron's office. Using Colorado legal forms, Ron prepared (or had already prepared) an Irrevocable Trust Agreement and a Quitclaim Deed.
At the July 6, 2010 meeting, Len executed the Irrevocable Trust Agreement as "Len Salas, Grantor," and Max executed it as "Max Salas, Trustee." Karen and Ron witnessed the execution of the document and Lori King, a notary public, certified that Max and Len executed the document before her. The Irrevocable Trust Agreement purports to create a trust named the 1610 Riggs Property Trust ("the Trust"), and recites that the Grantor (Len) "desiring to create a trust for the benefit of his father and for other good and valuable consideration, irrevocably assignees [sic] to the Trustee the [Property], in trust, for the purposes and on the conditions hereinafter stated." The Irrevocable Trust Agreement names Max as the sole trustee and the sole beneficiary of the Trust and makes clear Len's intent to grant Max complete authority regarding management of the Property and the sole right to enjoy income generated by the Property, with, for example, the right to sell or encumber the Property.
At the same meeting, Len and Max (as Trustee of the Trust) executed the Quitclaim Deed, which Lori King notarized as executed before her. The Quitclaim Deed recites:
Despite the mis-description of the Trust in the Quitclaim Deed as the 1611 Riggs Property Trust, the entire transaction, including Max's execution of the Quitclaim Deed as "Trustee, 1610 Riggs Property Trust" and the terms of the Irrevocable Trust Agreement reciting that the Property was being transferred into the 1610 Riggs Property Trust, of which Max was to be the Trustee, makes clear that the Quitclaim Deed was conveying the property to the 1610 Riggs Property Trust.
Max originally intended to record the Quitclaim Deed around the time of its creation. Before doing so, he sought the legal services of Stan Goldstein and his title company. Max was counseled that because the Quitclaim Deed transferred the Property from Len to a trust, the recordation of the Quitclaim Deed would require payment to the District of Columbia of transfer and recordation taxes. Though he desired to eliminate Len's financial obligations in regard to the Property, because he could not obtain a refinancing at that time, Max decided that there was no present reason to record the Quitclaim Deed and incur the resulting transfer and recordation taxes. Because Max lacked sufficient funds at the time to pay such taxes, he chose to wait to record the Quitclaim Deed until he, as trustee, sought to sell or refinance the Property to make the Trust the obligor under a new mortgage. Max never intended to sell the Property and remains uninterested in doing so. However, since the execution of the Quitclaim Deed and continuing through today, he has continually and unsuccessfully desired and sought to refinance the SunTrust mortgage via obtaining a new loan. Accordingly, Max never recorded the Quitclaim Deed. He merely stored copies of the executed documents at the Property with other personal files.
Len understood the Irrevocable Trust Agreement and the Quitclaim Deed as papers Max needed in order to attempt to refinance the SunTrust debt. After executing those documents, Len continued to treat Max as the true owner of the Property. He did not recall afterwards that his execution of those documents had conveyed title to the Property to the Trust. Len never checked with Max to see if the Quitclaim Deed had been recorded, and his involvement regarding the Property after July 2010 was only periodically checking with Max regarding efforts to remove Len from the Property mortgage debt. His focus was not on removing himself as an owner of the Property in the land records.
After the July 6, 2010, meeting, Len put his copies of the Irrevocable Trust Agreement and the Quitclaim Deed in a file cabinet. He eventually forgot that he had received copies and put them there, and, indeed, completely forgot about the execution of those documents, as did his wife.
Len's focus was on eliminating his indebtedness to SunTrust, but it became clear that was not going to occur without a sale of the Property because of the inability of Max, alone, to refinance the debt. In early 2015, Len and Max supplied information concerning their finances to SunTrust for an application for refinancing. Under the terms of the proposed refinancing, Len would have remained the obligor on the debt but the mortgage would have had a more favorable interest rate for Max to pay. The existing note called for interest-only payments at 6% per annum, and the refinancing that Max and Len sought would have been in the form of a conventional 30-year mortgage that would call for a lower interest rate, and that would include amortizing payments of principal. However, they did not succeed in obtaining such refinancing.
Prior to 2009, Max had a company, CLR, Inc., that he used in running food businesses, and had BB&T bank accounts in that corporation's name. The letters "CLR" are the first letters of the first names of Max's three sons, Chase, Len, and Ron. Max hoped that CLR, Inc.'s businesses eventually would be successful and the CLR, Inc. bank accounts would contain considerable sums of money that he could transfer to his three sons. However, those businesses never became a success, and CLR, Inc.'s charter was revoked in 2009.
By 2010, Max, who had already been renting out the basement of the Property for years, began leasing two of the five bedrooms in the Property to roomers while continuing to live at the Property himself. Once Max began renting to roomers, he used one of the CLR, Inc. BB&T bank accounts for depositing rents received from the roomers, and used those deposits to make the mortgage payments on the Property. BB&T insisted that all deposited rent payment checks indicate CLR as the payee. Accordingly, Max drafted leases to indicate that the lessor was "Max Salas (CLR) Landlord" or "Max Salas CLR Landlord" with the leases directing that payments be made to "Max Salas (CLR)" or "Max Salas CLR."
On June 3, 2015, almost five years after execution of the Irrevocable Trust Agreement and the Quitclaim Deed, the fire in which McLoughlin and Brekelmans were killed occurred at the Property. Their parents, as representatives of their respective children's estates, filed complaints commencing the Superior Court actions against Max and Len on October 20, 2015, before Max had completed his medical treatments related to his physical injuries resulting from his escape from the fire. The two separate cases were later consolidated as a single action.
The basis for the McLoughlin plaintiffs and Brekelmans plaintiffs suing Len was that he was the record owner of the Property. If Len, who played no role in the management of the Property, could show that he had conveyed ownership to Max before the fire occurred, there would be no basis upon which Len could be liable to the plaintiffs.
Remarkably, Max and Len failed to recall for many months in the course of the Superior Court action, until a few weeks before the trial began in March 2018, the formal papers they had executed to establish the Trust and to convey title of the Property to the Trust. However difficult it is initially to view without skepticism the testimony of Max and Len regarding their forgetting about the existence of the documents executed on July 6, 2010, I credit that testimony. They had no reason to hide the existence of the documents; indeed, they had every reason to disclose the documents so that Len would not be held liable, as owner of the Property, to the plaintiffs. The circumstances demonstrate that their testimony is credible.
Len is highly unsophisticated in financial and legal matters. The Trust was created in 2010 at Max's instigation, not Len's. Len knew at the time he executed the documents that he was signing papers that might help his father obtain refinancing for the Property, but he failed to recall, when sued in 2015, that the documents he had executed on July 6, 2010, had been intended to effect a transfer of the Property from him to the Trust, with the consequence of terminating his ownership of the Property. Before he executed the Irrevocable Trust Agreement and the Quitclaim Deed in 2010, he already viewed Max as the true owner of the Property, and, from his perspective, formalizing Max's ownership via the execution of those documents was not altering anything. When sued in 2015, Len simply did not appreciate the legal significance of the Irrevocable Trust Agreement and the Quitclaim Deed he had executed in 2010.
Max is somewhat unsophisticated in legal and financial matters, albeit not to the extent that Len is. However, Max also suffers from depression, anxiety, and memory loss problems, due in part to the traumatic effects of the fire of June 3, 2015. Max was severely injured escaping from the fire, suffering burns and a broken ankle, and spent six weeks hospitalized. Even upon his release from the hospital, Max was unable to move back into the Property because it required restoration from the fire damage. Pending restoration of the Property, he lived in an apartment paid for by his insurance company, but he always intended to return to living in the Property once he was able to do so. He was in convalescence at the apartment and suffered an infection that required him to receive drip antibiotics for three months, and was heavily sedated during that time. Afterwards, he lived with home care for some time. Max also suffered from the emotional trauma of having the two young roomers killed in the fire in his home. He did not return to work for eight months after the fire (approximately February 2016). The restoration of the Property was completed in March 2018, at which point he moved back into the Property.
Shortly after the filing of the plaintiffs' complaints in the Superior Court, Max and Len each discussed with Ron the existence of the pending litigation. Max had counsel supplied by his insurance company in the Superior Court litigation, but the insurance company did not supply Len with counsel. Ron advised Len to obtain counsel, which he did. Ron was chary of meddling in the handling of the litigation by the attorney that Len would hire. For that reason, Ron did not mention to Len the existence of the documents executed in July 2010 (the Irrevocable Trust Agreement and the Quitclaim Deed), as the handling of Len's defense would be by Len's counsel in the litigation, and Ron assumed that such counsel would provide competent advice to Len. Ron also had personal troubles involving the death of his son that distracted his attention and he did not stay abreast of developments in the litigation.
Max, in the answers to the Superior Court complaints he served on November 2, 2015, and November 5, 2015, indicated that Len was the owner of the Property and that he managed the Property for the owner. Len similarly served answers indicating that he technically was the title owner of the Property but denying that he was an operator and/or property manager. However, at the start of the litigation, before the trust documents were found, Max revealed that he believed the Property to be held in trust for his benefit, and Len revealed that he viewed Max as the true owner of the Property (as had always been the case).
In answers to interrogatories served on November 17, 2015, Max made this response:
In answers to interrogatories served on November 30, 2015, Len filed this response:
In a deposition of February 24, 2016, in the Superior Court litigation, Max was asked about the 1610 Salas Trust to which he had referred in his answers to interrogatories. His answers demonstrate his confusion about the trust that he believed owned the Property, not an attempt to hide anything. Max, at first, took the position that nobody but he owned the Property when asked about his interrogatories answers that a 1610 Salas Trust was the owner of the Property. But then when asked who and what the 1610 Salas Trust was he said: "I don't know — I mean it's a trust that — there's a trust called CLR, CLR Trust, it's our trust." Max said the trust was for him and his sons. Deposition of Max Salas (Feb. 24, 2016) [hereinafter "Max Dep."] at 42. However, there never was a CLR Trust; there was only a corporation of that name, CLR, Inc., that Max had hoped would eventually contain funds he could give his sons. Importantly, Max then stated: "There is a 1610 Trust doing business as CLR." Max Dep. at 43.
This is consistent with Max's testimony in this court regarding how he had rent checks paid to him. Additionally, the lease with Brekelmans, executed on August 14, 2014, was signed by Max as "Agent/Land Lord/Agent" but his title was indicated to be "Trustee." Her rental payments, as all other rental payments Max received by renters, were deposited into CLR, Inc.'s bank account. But during the deposition for the Superior Court action, Max could not recall any important information regarding the trust. When asked when the trust was created, he did not know; when asked who was the trustee of the trust, he said he believed he was but was not sure; when asked who was the beneficiary of the trust, he said he thought it was his property; and when asked if there was a written trust agreement signed by anyone, he said he did not know.
Later in the deposition, when asked about the reference to CLR on leases he had entered into with roomers, Max said he used that designation "because I was depositing the money in the trust account named like this," Max Dep. at 89, and then this testimony ensued:
Id. Even later in the deposition Max was asked about CLR again and said: "It is a corporation and then there was a trust in the corporation's name I think." Max Dep. at 209. This varying testimony demonstrated Max's confusion as to the corporate entity, CLR, Inc., and its associated bank accounts, one of which was used for deposits of rent, and the Trust.
As to what Max referred to in the deposition as the CLR Trust, but what was actually CLR, Inc., he explained that it was set up to protect him from liability, and identified an attorney, David Fernandez, who he had not seen in ten years (which would have been in 2006, before Vickie Salas ceased to be the owner of the Property in 2007 and long before the execution of the Irrevocable Trust Agreement and the Quitclaim Deed on July 6, 2010), as the one who set up and handled the incorporation of CLR. The intent was that Max, as the owner of CLR, Inc., would have protection from personal liability for the debts of the corporation. This explains why Max referred to a CLR entity as protecting him from liability.
Max then indicated that the entities he referred to as the "1610 Salas Trust" and the "CLR Trust" were not separate trusts. Rather, he testified, there was only one trust, and the bank account for the rental checks went to a trust account (which, at that time in the deposition, he mistakenly thought the bank called "1610 Salas").
The bottom line is that during his deposition for the Superior Court action, and for a long time afterwards, Max vaguely recalled there being some trust that held an interest in the Property, and at times remembered a trust with a name similar to the actual name of the Trust ("1610 Riggs Property Trust") but he was unable to recall any details establishing the existence of the Trust. He also confused the Trust with CLR, Inc.
This continued to be the case even as late as (or shortly before) February 9, 2018. In the Amended Joint Pretrial Statement filed in the consolidated Superior Court actions on February 9, 2018, both Max and Len conceded that Len was the title owner of the Property but noted that Len had taken title to enable Max to continue to reside in the Property and exercise all indicia of ownership (and recited the ways in which Max acted as owner of the Property). Len disputed that he was a property manager of the Property or had any possession, control or authority of the Property; disputed that he owed any duty to the tenants of the Property "as he [was] merely the bare
Late in the Superior Court litigation, the attorney that the insurance company had hired for Max suggested that Max ought to consider hiring a separate attorney to represent his interests. Max contacted Ron for advice in hiring an attorney. Ron suggested that Max consider hiring a bankruptcy attorney in case he needed to utilize the protections afforded by bankruptcy, and gave Max the names of several attorneys in the District to consider.
Max employed Marc E. Albert. Albert reviewed Max's deposition testimony that a trust owned the Property. Albert asked Max about that testimony, and pointed out to Max that the creation of any trust would have entailed the execution of a written document. He pressed Max as to whether there was some written document he had executed regarding a trust. That finally triggered Max's memory that in July 2010 he had executed the documents relating to the Trust at Ron's office. Max notified Ron that Albert planned to call him to request copies of the documents relating to the Trust. When Albert called Ron, Ron located his electronic copies of the Irrevocable Trust Agreement and the Quitclaim Deed as of February 14, 2018, and sent them to Albert. Len was also provided Ron's copies of the Irrevocable Trust Agreement and the Quitclaim Deed.
On March 19, 2018, in advance of the Superior Court trial set for March 26, 2018, Len filed an Emergency Motion for Summary Judgment ("Emergency Motion") in the Superior Court litigation based on the existence of the Irrevocable Trust Agreement and the Quitclaim Deed, in which his counsel explained the delay in filing the Emergency Motion by saying: "the discovery of this document occurred very recently and [Len] has filed this motion as quickly as possible given its discovery and investigative work to ensure that it is legitimate." Memorandum in Support of Defendant Len Salas's Emergency Motion for Summary Judgment at 9. However, on the day of the trial, the Superior Court declined to grant the Emergency Motion, and in doing so did not take evidence as to whether there was an explanation for the delay in the Irrevocable Trust Agreement and the Quitclaim Deed coming to light. The Superior Court barred presentation of evidence regarding the Irrevocable Trust Agreement and the Quitclaim Deed in the jury trial. The court's decision rested on various reasons, including that:
The Superior Court did not take evidence regarding whether there was any explanation for the late production of the Irrevocable Trust Agreement and the Quitclaim Deed, and did not hear from Max Salas or his counsel in regard to Len's Emergency Motion. Max (who had no standing as a defendant to move for an adjudication of his ownership of the Property as, regardless of that issue, he could be found liable on the basis of his management of the property) did not respond to Len's Emergency Motion, and was not asked by the Superior Court to address the issue of the Trust.
The Superior Court orally supplemented its ruling of March 26, 2018, the next day, noting as to the last point that "indeed, this Court was confronted with, in my view, the untenable position that the insurer for the defendant had made a business decision, and that was to, essentially, provide coverage for Max Salas, but not Len Salas, and this was the theory, okay?" and stated: "Insurance companies do not direct the Court in matters of this nature. And so I can't speak to what negotiations or arrangements are made outside of this Court. . . ." Transcript of Proceedings (Mar. 27, 2018) [hereinafter "Tr. Day 2"] at 340-41.
Based on Len's belated disclosure of the Irrevocable Trust Agreement and the Quitclaim Deed, the plaintiffs had filed a motion in the Superior Court for leave to amend their complaints to add the Trust as a party. The Superior Court heard that motion at the same time as it heard the Emergency Motion for Summary Judgment. The attorney for the Brekelmans plaintiffs requested that "the Court sever" the claim that the title was divested to the Trust and that the trial proceed with "no mention of the trust." Tr. Day 1 at 15. Similarly, the attorney for the McLoughlin plaintiffs indicated that:
Tr. Day 1 at 16-17. The Superior Court indicated to Len's attorney that Len "would stand to benefit from the Court's ruling acknowledging the existence of a trust and, therefore, relieving [Len] of any responsibility to defend or indemnify if the — or to be responsible for an adverse judgment." Tr. Day 1 at 19.
The Superior Court granted (or the clerk of the Superior Court understood the Superior Court to have granted) the plaintiffs' motion for leave to amend their complaints,
The plaintiffs rely on principles of judicial estoppel, collateral estoppel (issue preclusion), and res judicata (claim preclusion) in objecting to the claimed exemption.
"Courts may invoke judicial estoppel `[w]here a party assumes a certain position in a legal proceeding, . . . succeeds in maintaining that position, . . . [and then,] simply because his interests have changed, assume[s] a contrary position.'" Comcast Corp. v. FCC, 600 F.3d 642, 647 (D.C. Cir. 2010) (quoting New Hampshire v. Maine, 532 U.S. 742, 749 (2001) (internal quotation marks omitted)). See also Moses v. Howard Univ. Hosp., 606 F.3d 789, 792 (D.C. Cir. 2010) (quoting Comcast Corp. v. FCC, 600 F.3d at 647). The issue of ownership in the Superior Court trial was only pertinent to whether Len could be held liable. Max, having managed the Property, was liable regardless of who owned the Property. Max was not attempting to succeed on a position that Len was the owner of the Property: he had no desire to have his own son held liable to the plaintiffs. It was the plaintiffs who were attempting to hold Len liable as owner of the Property, not Max. Max cannot be viewed as succeeding in the Superior Court based on taking a position that Len, not Max, owned the Property.
Max made clear early on in the Superior Court that he believed the Property was held in trust for him, but for years he could not recall the existence of the Irrevocable Trust Agreement and the Quitclaim Deed. When, late in the litigation, Albert pressed Max on Max's belief that a trust existed and pointed out that such a trust would entail an executed trust instrument, Max recalled that Ron had prepared documents that Max and Len had executed. That led to locating the Irrevocable Trust Agreement and the Quitclaim Deed. When that in turn led to Len's Emergency Motion for Summary Judgment which disclosed to the Superior Court the existence of the Irrevocable Trust Agreement and the Quitclaim Deed, Max did not contest the existence of those documents. He would have been delighted had Len's Emergency Motion for Summary Judgment been granted, and Len had been held not liable to the plaintiffs.
The Amended Joint Pretrial Statement in Superior Court, filed before the Irrevocable Trust Agreement and the Quitclaim Deed were located, offered a stipulation of fact that at "the time of the occurrence, Len Salas held legal title to the building." Amended Joint Pretrial Statement at 9. However, the Amended Joint Pretrial Statement went on to note Len's contention that he was "merely the bare record owner of the property" and Len's disputing that he "had any possession, control or authority at the Property," or that he "received any benefit from his bare title ownership of the property." Amended Joint Pretrial Statement at 10-11. Accordingly, when the Amended Joint Pretrial Statement is viewed as a whole, the stipulation that Len "held legal title" to the Property refers to the fact that at the time of the occurrence, as well as now, Len's interest in the Property was limited to being the displayed record owner for the Property in the land records, and is entirely consistent with Max's position that he is the true owner of the Property, and thus entitled to exempt the Property.
Even if the stipulation could be viewed as Max's taking a position contrary to the position that Max takes now, Max later acted consistently with his current position by providing the information that led to the Irrevocable Trust Agreement and the Quitclaim Deed being uncovered in Ron's office. Max did not oppose Len's Emergency Motion for Summary Judgment which sought to show that Len should not be held liable as the owner of the Property. Max's conduct in the Superior Court demonstrates that he was not attempting to succeed in the Superior Court on a position that Len is the owner of the Property, and is consistent with the position he has taken in this court that he is the true beneficial owner of the Property, through the existence of the Irrevocable Trust Agreement and the Quitclaim Deed, and entitled to claim the Property exempt.
The doctrine of collateral estoppel is also known as issue preclusion, and the doctrine:
Davis v. Davis, 663 A.2d 499, 501 (D.C. 1995) (quoting Washington Med. Ctr. v. Holle, 573 A.2d 1269, 1283 (D.C. 1990)). See also Modiri v. 1342 Rest. Grp., Inc., 904 A.2d 391, 394 (D.C. 2006). In the Superior Court, Max, as the manager of the Property, was liable regardless of whether he owned the Property or not, and thus a finding that he lacked ownership was not necessary to hold him liable. A finding in that regard was not "essential to the judgment" against Max, and thus the judgment against Max cannot be given collateral estoppel effect on the issue of ownership of the Property.
The determination that Len owned the Property was "essential to the judgment" against Len. However, Max was not a party to the claims against Len. Max was liable regardless of whether Len was liable, and he had no standing to defend against the claims against Len. In that sense, he was a non-party regarding the claim against Len and Len's legal rights in that regard.
As a nonparty to the judgments against Len, Max, unless an exception applies, is entitled to the protection of "the general rule that a litigant is not bound by a judgment to which she was not a party." Taylor v. Sturgell, 553 U.S. 880, 898 (2008); see also Richards v. Jefferson County, 517 U.S. 793, 798 (1996). Only the privity exception is of possible relevance to that general rule.
Under the privity exception, the judgment against Len cannot apply to Max unless Max was in privity with Len. As stated in Modiri, 904 A.2d at 396-97:
(Footnote omitted).
The tort claims against Len are not the same cause of action as Max's claim of ownership of the Property. However, for issue preclusion purposes, an "issue" is not limited to a "cause of action." Jackson v. District of Columbia, 412 A.2d 948, 953 (D.C. 1980). Accordingly, privity could apply.
Nevertheless, the three categories of the privity exception enumerated in Modiri do not apply to Max. First, the facts do not show that collateral estoppel applies on the basis that Max is "a successor to a party's property interest." That latter exception applies to successors who acquired their interest in property after the commencement of the litigation leading to the judgment declaring ownership of property.
Second, Max did not control the defense of the claims against Len: Max had counsel supplied by the insurance company, and that counsel was not defending Len, who had separate counsel. Third, Len did not represent Max with respect to any ownership claim Max might make to the Property. As noted by the Court in Taylor, 553 U.S. at 894 "`in certain limited circumstances,' a nonparty may be bound by a judgment because she was `adequately represented by someone with the same interests who [wa]s a party' to the suit." (Quoting Richards, 517 U.S. at 798). Representatives under the Restatement (Second) of Judgments § 41(1) are restricted to five specific categories: trustees, persons authorized by the nonparty, executors, authorized public officials, and class representatives designated by a court. However, privity may be based on "adequate[] representation" of the "same interests" in other circumstances.
In Franco v. District of Columbia, 3 A.3d 300, 306 (D.C. 2010), the court viewed with favor the Supreme Court's rejection in Taylor of the doctrine of "virtual representation," observing:
Len was not representing Max's interests with respect to Max's claim of ownership of the Property, and given the posture of the claims in the Superior Court, there is no evidence that Len understood himself to be representing Max's interests in that regard. Nor did Max view Len as representing Max's ownership interest. They each had separate counsel.
More fundamentally, as in Lassiter v. District of Columbia, 447 A.2d 456, 462 (D.C. 1982), the question is whether Max "had a `full and fair' opportunity in the first trial to litigate to a final judgment the issue raised in the second suit. See Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 333, 91 S.Ct. 1434, 1445, 28 L.Ed.2d 788 (1971); Jackson v. District of Columbia, D.C.App., 412 A.2d 948, 953 (1980)." As stated in Allen v. McCurry, 449 U.S. 90, 95 (1980), "one general limitation the Court has repeatedly recognized is that the concept of collateral estoppel cannot apply when the party against whom the earlier decision is asserted did not have a `full and fair opportunity' to litigate that issue in the earlier case." (Citations omitted). In that regard, collateral estoppel ought not apply when a party "may have little incentive to defend vigorously, particularly if future suits are not foreseeable." Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 330 (1979). In determining whether a party had a "full and fair opportunity" to litigate an issue, "the decision will necessarily rest on the trial courts' sense of justice and equity." Blonder-Tongue, 402 U.S. at 333-34. Moreover, "the Parklane requirement that the defendant in the first action have incentive in that action to litigate the lawsuit fully and vigorously also mandates conflict-free representation of issues sought to be precluded." Universal Am. Barge Corp. v. J-Chem, Inc., 946 F.2d 1131, 1140 (5th Cir. 1991) (citing Parklane Hosiery Co., 439 U.S. at 652).
Here, Max's insurance company supplied counsel for Max, but the insurance policy only related to defending Max regarding liability, not ownership of the Property. Regarding the view that collateral estoppel does not apply to issues not actually litigated, the Restatement (Second) of Judgments § 27, Comment e notes:
This case well illustrates the wisdom of not according issue preclusion to an issue that insurance-company-supplied-counsel did not litigate because it was immaterial to such counsel's representation of the insured. The existence of the Trust was immaterial to the issue of Max's liability, and was thus not a topic germane to Max's insurance-company-supplied-counsel's defense of him as to liability in the Superior Court litigation. Moreover, Max's insurance company's interests diverged from Max's with respect to Max's claim of ownership: it was in the insurance company's interest for Len to be held liable. If the plaintiffs made collections from Len, that might reduce the amount that the insurance company would have to pay. Early in the Superior Court litigation, Max's counsel in that litigation ought to have alerted Max regarding the need for independent counsel regarding Max's claim of ownership, and the divergence of the insurance company's interests and Max's in that regard. Not until late in the litigation did Max's insurance-company-supplied-counsel suggest that Max should consider employing independent counsel.
When the insurance-company-supplied-counsel belatedly suggested that Max hire independent counsel, Max hired Marc Albert. It was Albert's making a probing inquiry of Max regarding whether trust papers were ever executed that led to the discovery of the Irrevocable Trust Agreement and the Quitclaim Deed. Max had no standing to take a position on the Emergency Motion for Summary Judgment, and at the argument on that motion, the Superior Court did not ask Max to state his position on that motion. Moreover, Max never had an opportunity to explain the reasons for his delay in uncovering the Irrevocable Trust Agreement and the Quitclaim Deed. In addressing and ruling on Len's Emergency Motion, the Superior Court heard no evidence as to whether Max could explain reasons for the delay, and the Superior Court barred presentation of evidence regarding the Irrevocable Trust Agreement and the Quitclaim Deed in the Superior Court jury trial. Here, in contrast, Max has explained the reasons for the delay. I find his explanation is credible and I find that the Irrevocable Trust Agreement and the Quitclaim Deed have existed and have an impact on whether Max owned the Property. In these circumstances, my "sense of justice and equity" (see Blonder-Tongue, 402 U.S. at 333-34) is that Max has not had a "full and fair opportunity" (see Allen v. McCurry, 449 U.S. at 95) to litigate the issue of his ownership of the Property.
Moreover, under Parklane, 439 U.S. at 330, the lack of foreseeability bars preclusion. Max was not reasonably in a position (until he hired independent counsel) to foresee that his ownership of the Property (including Max's right to exempt the Property) could be affected by Len being held liable as the owner of the Property in the Superior Court litigation. The court in Tutt v. Doby, 459 F.2d 1195, 1200 (D.C. Cir. 1972), stated "the principle of collateral estoppel is not properly applicable `to unlitigated issues underlying default or consent judgments . . . unless it could be said that the parties could reasonably have foreseen the conclusive effect of their actions." Moreover, "[e]ven where issues have been litigated, the criterion of foreseeability serves to limit the estoppel effect of the first judgment." Id. at 1200 n.5.
The foregoing analysis is supported by Casco Indem. Co. v. O'Connor, 755 A.2d 779, 782-83 (R.I. 2000), the only decision I have found dealing with issue preclusion when there was a failure of insurance-company-supplied-counsel to warn the insured that the insured might need to consult with independent counsel. In Casco, the court stated:
In Casco, 755 A.2d at 783-84, Kevin O'Connor, as a driver of a car owned by Carol Interlini, was involved in a two-car collision with another driver, Melissa Defelice. O'Connor was considered an additional insured under Interlini's insurance policy with Casco Indemnity Company (Casco) with respect to the accident. When Defelice (who was uninsured) sued O'Connor, Casco hired defense counsel for O'Connor. While Defelice's suit was proceeding, O'Connor (through independent counsel) filed a written claim for personal injuries against Casco, pursuant to the uninsured motorist provision of the policy. Defelice's suit went to arbitration. When an arbitration award was issued, defense counsel acted contrary to O'Connor's interests: she did not provide him with a copy of the arbitrator's award, never informed him that he had a right within 20 days to reject the arbitration award, never told him that the arbitration award could or would have an impact on his own uninsured motorist claim against Casco, and never informed O'Connor's independent counsel about the arbitration award. The arbitration award went to judgment, and in the litigation of O'Connor's uninsured motorist claim against Casco, the judgment pursuant to the arbitration award was invoked by Casco as collateral estoppel against O'Connor. The Supreme Court of Rhode Island held:
Id. Accordingly, the Supreme Court of Rhode Island held that collateral estoppel did not apply.
Here, in a situation similar to Casco, Max's insurance-company-supplied-counsel in the Superior Court ought to have recognized early on that Max's claim of ownership of the Property through a trust presented a matter (separate from the issue of whether Max could be held liable to the plaintiffs) as to which Max should obtain independent counsel. The insurance company's interests potentially diverged from Max's. However, the insurance-company-supplied-counsel waited until late in the litigation to advise Max that he might want to have independent counsel. Had Max been advised to discuss the litigation with independent counsel early on, the existence of the Irrevocable Trust Agreement and the Quitclaim Deed might have come to light much sooner, and the outcome in the litigation on the issue of whether Len owned the Property might have been different. Max ought not suffer a loss of the Property arising from the consequent delay in his obtaining independent counsel.
Moreover, for collateral estoppel to apply there must be a final judgment. The judgments in the Superior Court are not final because the Superior Court has not adjudicated the claims the plaintiffs are pursuing against the Trust.
Under Sup. Ct. Civ. R. 54(b), any order or decision "that adjudicates fewer than all the claims or
In addition, not all of Len's rights and liabilities had been adjudicated, including Len's right to seek indemnity from the 1610 Riggs Property Trust, as the true title holder of the Property. The Superior Court specifically recognized that Len "would stand to benefit from the Court's ruling acknowledging the existence of a trust and, therefore, relieving [him] of any responsibility to defend or indemnify if the — or to be responsible for an adverse judgment." Tr. Day 1 at 19. The attorney for the Brekelmens' estate specifically requested that "the Court sever" the claim that the title was divested to the Trust and that the trial proceed with "no mention of the trust." Tr. Day 1 at 15. The Superior Court deferred ruling on whether the Trust could be the title owner of the Property. There was no holding that the Trust is not a legal entity that holds title to the Property by a Quitclaim Deed properly executed by Len. The court held only that Len was the record title holder of the Property for purposes of the trial regarding liability for the deaths of Michael Patrick McLoughlin and Nina Brekelmens.
Res judicata, also known as claim preclusion, is the doctrine that "a final judgment on the merits bars further claims by parties or their privies based on the same cause of action." Montana v. United States, 40 U.S. 147, 153 (1979). "Whether two cases implicate the same cause of action turns on whether they share the same `nucleus of facts.'" Drake v. F.A.A., 29 F.3d 59, 66 (D.C. Cir. 2002) (quoting Page v. United States, 729 F.2d 818, 820 (D.C. Cir. 1984).
This doctrine is easily dismissed as these cases are not from the same cause of action. The Superior Court case involved the liabilities of Len in a civil wrongful death and survivorship action, whereas this case is regarding Max's right under D.C. Code § 15-519(a)(14) to exempt the Property in his bankruptcy. The only possibility of res judicata coming into play is if there were privity between Len and Max, but as already discussed in the section on collateral estoppel, there is no privity in this case. Also, as already discussed, there is not a final judgment. For all theses reasons, I do not find res judicata applicable here.
The plaintiffs contend that should the court find that the doctrines of judicial estoppel, collateral estoppel, or res judicata do not apply to this case, then the conveyance of the Property never occurred because the Trust was a nullity ab initio, under the law of the District of Columbia and Colorado, and the Quitclaim Deed was defective with a typo referring to the "1611 Riggs Property Trust." For the reasons stated below, I reject the plaintiffs' contentions.
The court must first determine whether District of Columbia or Colorado law controls before the court proceeds to determine whether a valid transfer took place. A federal court must apply the choice of law principles of the state in which it is located. Klaxon Co. V. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941). The District of Columbia's conflict of laws analysis is governed by the Restatement (Second) of Conflict of Laws. Pearce v. E.F. Hutton Group, Inc., 664 F.Supp. 1490, 1495-96 (D.D.C. 1987). Under the Restatement (Second) of Conflict of Laws § 278 "the validity of a trust of an interest in land is determined by the law that would be applied by the courts of the situs." The law of the situs also governs conveyance transfers of an interest in land and the nature of any interest. Restatement (Second) of Conflict of Laws § 223.
The District of Columbia has also adopted the "governmental interest analysis" approach. Williams v. Williams, 390 A.2d 4, 5 (D.C. 1978). However, the District has also modified the "government interest analysis" approach to include the "most significant relationship" approach and has adopted the observation that "the state with the `most significant relationship' should also be that whose policy would be advanced by application of [its] law." Estrada v. Potomac Elec. Power Co., 488 A.2d 1359, 1361 n.2 (D.C. 1985).
The Irrevocable Trust Agreement provides that Colorado law would apply.
All of this evidences that it was not a deliberate choice to choose Colorado law over District of Columbia law. For all these reasons, the court does not find a sufficiently reasonable relationship with Colorado, nor an intent from the parties, that Colorado law should govern a land conveyance transaction that would take place in the District of Columbia.
As noted above, the District of Columbia follows the Restatement (Second) of Conflict of Laws. Under the Restatement § 278, the validity of a trust regarding an interest in land is governed by the law of the situs. The Property is real property located in the District of Columbia, not Colorado, and accordingly, District of Columbia law applies. Additionally, the conveyance of real property is governed by the law of the situs. The Quitclaim Deed was executed and delivered in Colorado, but the Property is located in the District. Accordingly, District of Columbia law applies to the conveyance of the Property.
The court would come to the same conclusion if the court is required to apply the "governmental interest" and "most significant relationship" tests, as adopted and applied by the District. The only connection Colorado has to the Irrevocable Trust Agreement is that the attorney who wrote the instrument is a bar member in Colorado, and the Irrevocable Trust Agreement and Quitclaim Deed were executed and delivered in Colorado. On the other hand, the Property was located, and both Len and Max lived, in the District.
Because the Irrevocable Trust Agreement governed neither property nor people located in Colorado, Colorado would likely have either no interest or an extremely limited interest in the validity or the effect of the Trust. On the other hand, the District had a far greater interest governing the types of trusts that may exist and own property within the District's jurisdiction where the District is the collector of property taxes and its laws govern the use and maintenance of the Property.
The 2015 fire is a useful example of the District's interest regarding the Property. It was a violation of the District's laws that contributed to the deaths of two residents of the District in the 2015 fire. It was the District's fire department that put out the fire, and the District's streets that were blocked by the events surrounding the fire. Additionally, it was other property located in the District that was threatened by the fire. It was the District's courts that handled and resolved liability suits related to the fire.
For the same reasons mentioned above, the District has a superior interest over the conveyance of the Property. Accordingly, the court holds that the law of the District of Columbia governs the formation of the Trust and the conveyance of the Property.
D.C. Code § 19-1304.03 provides that:
This means that the Trust would be valid if it is valid either in Colorado or the District of Columbia. Under Colorado law, at the time the Trust was created, a trust would terminate if the entire beneficial interest and the entire legal interest fell upon the same person. Denver Found. v. Wells Fargo Bank, 163 P.3d 1116, 1125 (Colo. 2007) ("When the entire beneficial interest of a trust is held by the same person or entity that holds the entire legal interest, the trust terminates under the doctrine of merger; in other words, if the sole beneficiary also functions as the sole trustee, the trust ceases to exist."). The District of Columbia is in agreement with Colorado on this issue. D.C. Code § 19-1304.02(a)(5) provides that a trust can only be created if "[t]he same person is not the sole trustee and sole beneficiary." The Trust is therefore clearly invalid. Max was the sole trustee and the sole beneficiary of the Trust. Such a trust could never exist under Colorado or District of Columbia law, and a fortiori, the Trust could never have been formed. Accordingly, the court finds that the 1610 Riggs Property Trust never existed and was a nullity ab initio.
However, just because the court finds that the Trust never existed, does not mean that the conveyance failed from the beginning. Section 19-1304.03 only addresses what can and cannot constitute a trust. It does not address, however, what happens when parties attempt to convey property to a trust that is a nullity under § 19-1304.03. In the District of Columbia,
There are a couple of issues here. There is an issue of whether Max provided consideration to Len for the conveyance of the Property. The Quitclaim Deed states:
Thus, the Quitclaim Deed provides that a consideration of $100 was paid by Max to Len for the Property. The plaintiffs did not provide any evidence to contradict the Quitclaim Deed, and, therefore, the court finds that consideration was paid.
The next issue is whether $100 is valuable consideration to allow the Property to convey to Max. See Smith, 226 A.2d at 340. The court finds that $100 was valuable consideration, even though $100 is a nominal amount when considered against the value of the Property, because Len paid consideration of $10 when Max deeded the Property to Len in 2007. In effect, Len purchased the Property for $10 in 2007 and sold the Property for $100 three years later in 2010.
Additionally, while the mortgage was in Len's name, Max made all payments on the mortgage, and there was an agreement between Len and Max that Max would take Len's name off the mortgage when Max was able to refinance the Property on his own credit. Moreover, Max paid all bills, taxes, and other expenses related to the Property, and maintained and kept up the Property. Len put no investment into the Property, and got more out of the Property than he put into it. Accordingly, the court finds that there was valuable consideration.
There is also an issue of whether the Quitclaim Deed is valid for misspelling the Trust's name as "1611 Riggs Property Trust." This was clearly a scrivener's error. The Quitclaim Deed makes clear that Len was transferring the Property to the 1610 Riggs Property Trust, with the correct address of "1610 Riggs Pl NW" and the title next to Max's name as "Trustee, 1610 Riggs Property Trust." Furthermore, Max, if he had recorded the deed, could easily have provided the Recorder of Deeds with a notice of a name change, and a confirmatory deed, correcting the name on the Quitclaim Deed, under D.C. Code § 42-405,
Finally, there is the issue that Max failed to record the Quitclaim Deed. This, however, does not invalidate the transfer. A deed conveying property will be valid, even if that deed is never recorded as required by D.C. Code § 42-401,
Lumpkins v. CSL Locksmith, LLC, 911 A.2d 418, 425 (D.C. 2006) (quoting Clay Props., Inc. v. Wash. Post Co., 604 A.2d 890, 894 (D.C. 1992) (en banc) and Munsey Trust Co. v. Alexander, Inc., 42 F.2d 604 (D.C. Cir. 1930)); see also Juergens v. Urban Title Servs., Inc., 533 F.Supp.2d 64, 79 (D.D.C. 2008).
Accordingly, the court finds that under District of Columbia law, the Property was conveyed to Max and he holds both the legal and beneficial interests in the Property.
The plaintiffs contend that if a trustee was appointed in Len's bankruptcy case, the trustee would be able to avoid the transfer of the Property under the so called "strong arm statute," 11 U.S.C. § 544(a)(3), because even if the Property did pass into the possession of Max in 2010, Max failed to record the Quitclaim Deed. Section 544(a)(3) provides:
"A bona fide purchaser is one `who acquires an interest in property for a valuable consideration and without notice of any outstanding claims which are held against the property by third parties.'" Clay Props., Inc. v. Wash. Post Co., 604 A.2d 890, 894 (D.C. 1992) (en banc) (quoting 6A R. Powell & P. Rohan, The Law of Real Property § 904[2][b], at 82-10 (1989)). In the District of Columbia, a bona fide purchaser's claim over property is superior to a nonrecorded deed conveying interest in the property. D.C. § 42-401. However, "[w]hat constitutes notice varies among states and the trustee's status under § 544(a) is governed by state substantive law governing notice." Webster v. Hope (In re Hope), 231 B.R. 403, 423-24 (Bankr. D.D.C. 1999). Under District of Columbia law, a bona fide purchaser is subject to three types of notice: actual, constructive and inquiry. Clay Props., 604 A.2d at 895. "A purchaser is held to be on inquiry notice where he or she is aware of circumstances which generate enough uncertainty about the state of a title that a person of ordinary prudence would inquire further about those circumstances." Id.
The Clay Props. court recognized that mere possession would not give rise to inquiry notice except where "such possession [was] `sufficiently distinct and unequivocal so as to put the purchaser on his guard.'" Id. at 897 (quoting Hayward v. Mayse, 1 App. D.C. 133, 140 (1893)) (emphasis in original). There is thus an issue of fact as to whether a hypothetical purchaser of the Property would have inquiry notice of Max's ownership of the Property. However, that is an issue of fact that must be decided by the U.S. Bankruptcy Court for the Middle District of Tennessee. How a judgment regarding the right of Len's estate to recover the Property under § 544 would affect Max's homestead exemption in this case is an issue for another day. The issue before the court now is whether Max can claim the homestead exemption over the Property, and for the reasons already stated, the court holds that he can.
For the foregoing reasons, it is
ORDERED that the plaintiffs' Objection to the Debtor's Claim of Exemption (Dkt. No. 44) is overruled.
