R. KIMBALL MOSIER, U.S. Bankruptcy Judge.
This matter is before this Court on the United States District Court's order remanding the case for further proceedings (Remand Order) consistent with the District
The Trustee's complaint asserted claims based on alter ego, resulting trust, and constructive trust and sought damages and turnover for violation of the automatic stay and avoidance and recovery of the unauthorized post-petition transfer of certain real property referred to as the "Ballard Property."
The Trustee appealed this Court's judgment to the United States District Court for the District of Utah. The District Court disagreed with this Court's conclusion that the Trustee had failed to prove the requisite elements for imposition of a constructive trust and ruled that "a constructive trust should be imposed to reflect Eugene McCauley's interest in REM and REM's assets, including the Ballard Property and the REM bank account." After making that determination, the District Court ordered that "the September 30, 2014 decision of the United States Bankruptcy Court for the District of Utah in Adversary Proceeding No. 12-2313, Bankruptcy Case No. 10-30907, is REVERSED and REMANDED for a determination of whether the post-petition transfer of the Ballard property was an avoidable transfer." On remand, the parties were given an opportunity to submit additional briefing and present oral argument.
It is clear from the District Court's Remand Order that this Court's decision on the Trustee's constructive trust claim was reversed. It does not appear that the District Court intended to reverse this Court's decision with respect to the Trustee's resulting trust and alter ego claims.
The Trustee commenced this adversary proceeding seeking a judicial determination under theories of constructive trust, resulting trust, and alter ego that RE McCauley, LLC (REM) and its remaining assets, including real property in Uinta County, Utah (Ballard Property), belonged to Eugene V. McCauley, Jr. (Debtor) on the date that the Debtor filed his bankruptcy petition. To the extent that the Trustee seeks a determination that REM and its remaining assets are property of the Debtor's bankruptcy estate, the Trustee's complaint is a "core" proceeding, and
Federal courts have long recognized a "probate exception" to otherwise proper federal jurisdiction. "[T]he probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court."
The decision of this Court is limited to the narrow issue of whether the Debtor had a legal or equitable interest in REM and its remaining assets, including the Ballard Property, under one of three doctrines: (a) constructive trust, (b) resulting trust, or (c) alter ego, and whether there was an avoidable post-petition transfer of property of the estate.
There is no inconsistency between this Court's factual findings and the District Court's factual findings. This Court's prior factual findings are restated here and are augmented by the District Court's additional express factual findings, which are italicized.
The Court did not find any of the Defendants' testimony particularly credible. They all failed to remember facts and events of significance, except in those instances where their testimony supported facts or events that may be helpful to their case. Notwithstanding the lack of witness credibility, the following facts are clearly established by the record.
Ruth E. McCauley had four children: Eugene V. McCauley, Jr., Michael G. McCauley, Susan K. Knorr, and Nancy L. Gallegos. On June 1, 2000, the Debtor was incarcerated. At the time of his incarceration, the Debtor was married to Elizabeth McCauley.
Four days after Eugene was incarcerated, Ruth created the Trust. Ruth was the sole beneficiary under the Trust and she
In December 2003, the Trust sold its interest in the Lehi property to Wentworth Development LLC. As part of the transaction, Ruth received a quitclaim deed to some of the real property the Trust had sold to Wentworth. The quitclaim deed conveyed proposed lots 1 and 2 of the Bull River Ridge subdivision to Ruth. In connection with the sale of the Lehi property, the Trust also entered into a 1031 tax exchange with Everet and Janet West whereby the Trust was to receive the Ballard Property.
On January 23, 2004, Ruth formed REM with herself as the sole member and manager. The Trust's 1031 exchange for the Ballard Property was completed in March 2004. In June 2004 the Trust conveyed the Ballard Property to REM. Susan testified that Ruth transferred the Ballard Property to REM to avoid liability for any potential personal injury claims. REM never engaged in any business activities, maintained any business records, or filed any tax returns. REM did maintain a bank account at Mountain America Credit Union (REM Account.)
In February 2004 Susan formed EMSN, LLC. Susan was EMSN's only member and manager but Susan testified that EMSN was formed at Ruth's request. In April of that same year, Ruth conveyed lots 1 and 2 of the Bull River Ridge subdivision to EMSN. There was a home on lot 2, but lot 1 was raw land. Susan testified that lot 2 was transferred to EMSN to hold for Nancy but she didn't know what was going to happen to lot 1. There were also water shares associated with the Lehi property that were transferred to EMSN.
Ruth died on July 22, 2006, and Susan became the sole trustee of the Trust. In addition, the Trust became irrevocable. Under the terms of the separate will, all of Ruth's non-Trust assets were to "pour over" and become assets of the Trust upon her death. So when Ruth McCauley died, the Trust became the owner of Ruth McCauley's membership interest in REM. Susan also served as executor of Ruth's will. Susan failed to maintain any accounting, informal or otherwise, with respect to Ruth's assets or the Trust assets. The evidence before the Court is, at the time of Ruth's death, the Trust had bank accounts at Mountain America Credit Union, a
The Defendants offered no accounting of the Trust assets. The Trustee did introduce into evidence selected statements and checks for one of the Trust's bank accounts. The statements and checks are clearly only a small portion of the total statements and checks, and the Trustee did not attempt to create a complete picture with respect to the disposition of Trust assets. The statements show that the Trust's combined accounts totaled over $225,000 in July and August 2005. By February and March 2007 the Trust's accounts totaled just under $60,000. At the beginning of November 2007 the accounts totaled just over $90,000. By the end of November, Susan had transferred approximately $40,000 to herself and $50,000 to the REM Account. The funds transferred to the REM Account can be traced to a savings account designated "EVM," originally opened while Ruth was alive. All of the Trust's accounts were apparently closed near the end of November 2007. The selected checks drawn on the Trust's accounts establish that Michael received just over $58,000 from the Trust in 2006. There were also some selected statements and checks from the REM Account introduced into evidence. Again, these records are incomplete, but the checks show that Nancy or her designees received over $18,000 from REM in 2006.
In January 2007 Nancy was added as a member of EMSN. In September 2007 Susan sold the water shares owned by EMSN for $90,000. The sale proceeds were distributed to Susan and Nancy. In December of that year, Susan, as the managing member of EMSN, conveyed lot 1 in the Bull River Ridge subdivision to Michael.
By May 2008 Susan had distributed substantially all of the cash assets of the Trust. The evidence shows that Michael received over $58,000 from the Trust's accounts, Susan received approximately $40,000, and approximately $50,000 was transferred to REM. The balance of the Trust's cash assets in excess of $125,000 are unaccounted for. In May 2008 the home that was Trust property and the Trust's interest in REM, including the REM Account, remained in the Trust.
Eugene was released from prison on May 20, 2008, and about that time Susan arranged for Eugene and Elizabeth to move into and live at the Ballard Property, which was still held by REM. Within three weeks of Eugene's release, Susan also arranged to make him a signatory on the REM Account. On the signatory application prepared under Susan's direction, the Debtor was identified as an "authorized signer/manager" for REM, his address was listed as REM's address, his phone number was listed as REM's phone number, and his e-mail address was listed as REM's e-mail address. When Susan made Eugene a signatory, there was $49,303.20 in the REM Account. After becoming a signatory on the REM Account, the Debtor was the only party who wrote checks against the account.
After moving into the Ballard Property, the Debtor paid no rent; was responsible for all maintenance and repairs; paid for utilities, water, and taxes; identified himself as the owner and loss payee in an application for homeowner's insurance; and signed and recorded an easement in favor of Moon Lake Electric that burdened the Ballard Property. Susan disputes that the Debtor had authority to execute the easement.
On March 5, 2009, Susan updated REM's filings with the Utah Department of Commerce to reflect that Elizabeth had become a member and that Susan's status had changed from member to manager. When asked about the March 5, 2009 change in membership that named Elizabeth as the sole member of REM, Susan testified that she did not remember making the change or the reason for doing so. In April 2009, Susan, as the managing member of EMSN, conveyed lot 2 of the Bull River Ridge subdivision to Nancy.
While Eugene had been incarcerated, Yukon Excavation, LLC obtained a judgment against him in the principal amount of $92,754.03. On July 22, 2010, just before its 2002 judgment was to expire, Yukon obtained a writ of garnishment directed to Susan as trustee for the Trust. On August 2, 2010 the writ of garnishment was personally served on Susan. On August 4, 2010 Susan conveyed the home in Roosevelt, owned by the Trust, to herself and her daughters, Sonja Gregersen and Chandra Tucker. On August 11, 2010 the Debtor paid a $200 overdraft charge and closed the REM Account. The following day, on August 12, 2010, the Debtor filed a petition commencing his chapter 7 bankruptcy. In his schedules filed on August 26, 2010, the Debtor identified Yukon as the only creditor having a significant claim against him.
On August 30, 2010 Susan (signing as manager of REM) conveyed the Ballard Property to Michael, Nancy, and herself. Notwithstanding this transfer of the Ballard Property, the Debtor continues to reside there rent-free. On September 9, 2010 Susan filed articles of dissolution for REM stating that the reason for the dissolution was to "PUT THE PROPERTY IN OUR INDIVIDUAL NAMES [and] DISSOLVE[] THE LLC." In the articles of dissolution Susan stated that the effective date of REM's dissolution was May 20, 2009. On September 9, 2010, and May 20, 2009, Elizabeth was the only member of REM listed on the records filed with the Utah Department of Commerce. In March 2014, at the time of trial, Eugene and Elizabeth continued to reside at the Ballard Property. Elizabeth testified that, until she learned of the adversary proceeding, she had never heard of REM and was not aware that she was a member. Michael testified that he had no interest or involvement in REM. Nancy testified that she knew nothing about REM until the adversary proceeding.
No information was provided at trial with respect to the value of any of the above-described real property distributed to Michael, Susan, and Nancy. Susan testified that she kept no summary or accounting of assets owned by the Trust, no record of the value of those assets, and no record of the distribution of such assets that she made to herself and her siblings. No information was provided at trial with respect to the amount of equity in the real property when it was distributed. No evidence was introduced at trial showing the value of REM. No information was provided at trial with respect to the value of the Ballard Property, the encumbrances, if any, on the Ballard Property, or the amount of equity in the Ballard Property.
The Trustee's theory of his case is fairly straightforward. At the time of Ruth's death there were substantial assets that
Although the Court is not deciding what Eugene should have received from the Trust, the Court can clearly consider evidence of what Eugene should have received as evidence that supports the Trustee's claims. For example, intent is an important or essential element of the Trustee's claims. Evidence that the value of the assets the Trustee seeks to recover is equal to the value of the assets Eugene should have received would support an intent to convey the beneficial interest in those assets to Eugene. The Trustee did not offer any evidence that REM and its assets equaled or approximated Eugene's equal share of assets to be distributed to him under the Trust.
The Trustee asserts that "each of the siblings (except the debtor) received at least one parcel of real property and cash of substantial value." The evidence does not support the Trustee's suggestion that all of the real property and cash the Debtor's siblings received was from the Trust. It is very plausible that Ruth intentionally put assets in EMSN to exclude them from her Trust and the claims of Eugene's creditors. The real property Michael and Nancy received was owned by EMSN. Nancy and Susan also received a significant amount of cash from the sale of the water shares owned by EMSN. Even though Susan's testimony with respect to EMSN was vague and evasive, there is no evidence that Ruth, or anyone else, intended that EMSN assets be included in the Trust. The Court cannot simply ignore EMSN as a separate entity at the Trustee's suggestion. Even though Susan failed to keep an accounting of Trust assets, the evidence that was offered and received by the Court clearly establishes that the Trust assets were not divided equally among the siblings and that Nancy may have received little or nothing from the Trust, other than distributions of REM's assets.
The Trustee seeks a judicial determination "that REM and its assets (including the Ballard Property) were property of the Debtor and became property of the estate upon filing of his bankruptcy." In seeking this determination, the Trustee glosses over any distinction between membership interests in REM, which are personalty, and the Ballard Property, which is real property. He simply equates the two. The Court cannot simply equate Ruth's, Susan's, or Elizabeth's REM membership interest with an interest in the Ballard Property. Under Utah law, a member of an LLC has no interest in specific property of the company.
One of the differences between this Court's conclusions of law and the District Court's conclusions relates to the membership interest in REM. This Court concluded that Ruth's membership interest was not extinguished when she died and remained an asset of the Trust that was not accounted for.
The District Court agreed that Ruth's interest in REM poured over into the Trust but concluded that "after [Ruth's] death [Susan] held or controlled 100% of the REM membership interest and did so as trustee and personal representative of Ruth McCauley's estate." (emphasis added). The District Court concluded that "[i]t is not clear when Ruth McCauley's interest in REM was transferred from the Trust or to whom it was transferred. But, as of May 25, 2008, the Trust no longer held any interest in REM. And nearly a year later, [Susan] updated REM's public records to list Elizabeth as REM's sole member. This filing, combined with the fact that the Trust no longer held an interest, confirms that Elizabeth held a 100% membership interest in REM." Based on its analysis, the District Court reversed this Court's ruling that the Trustee had failed to establish that Elizabeth held a 100% membership interest in REM.
Although the District Court came to a different conclusion than this Court, it would appear that this is not the principal basis for remand. Even though Elizabeth held a 100% interest in REM, it does not necessarily follow that she held this interest in constructive trust for Eugene.
The Trustee fails to specifically address the elements necessary to establish his claims for constructive or resulting trust, but consistently refers to them jointly as if they were equivalent remedies simply because the end result the Trustee seeks is the same. Resulting trusts and constructive trusts are both equitable remedies that arise by operation of law and may be proved by use of parol evidence,
The Utah Supreme Court has observed that "the most notable distinction between constructive trusts and other types of trusts, such as express and resulting trusts, is generally the `intention' element."
One exception to the general rule that constructive trusts are not based on the intention of the parties is where a constructive trust is imposed to give effect to an oral express trust. Oral express trusts, like traditional trusts, are the manifestation of a settlor's intent to impose obligations on a trustee to act for the benefit of others.
In other words, the difference between an intent to convey the beneficial interest as opposed to an intent to retain the beneficial interest.
In summary, a court may impose a resulting trust if it finds that the circumstances give rise to an inference that the transferor had no intention to convey the beneficial interest to the transferee. A court may impose a constructive trust to give effect to an oral express trust when the circumstances give rise to an inference that the transferor intended to create a trust or where a party has been unjustly enriched.
"[T]he proof required to impose a resulting trust `must be strong, clear, and convincing, such as to leave no doubt of the existence of the trust,' and that it is the intention `at the time of the transfer and not at some subsequent time which determines whether a resulting trust arises.'"
Prior to REM's formation, the Ballard Property was an asset of the Trust and under Ruth's control. Ruth acquired her membership interest when she formed REM. Although Susan was subsequently listed as a member, the evidence, including Susan's own testimony, is that Ruth intended to retain the beneficial interest in REM. Ruth was the manager of REM and retained control of REM's assets, including the Ballard Property. The evidence is that all the beneficial interest in REM was still retained by Ruth when she listed Susan as a member of REM and that Susan held the membership interest in her capacity as trustee of Ruth's Trust. There was no evidence that Ruth intended to convey the beneficial interest in REM or the Ballard Property to Eugene.
The Court must look to state law "to determine when the constructive trust doctrine applies,"
In the Rawlings case, the Utah Supreme Court explained the elements of an oral express trust as follows:
Oral express trusts will be given effect and "constructive trusts may be imposed in the circumstances set forth in section 45 of the Restatement (Second) of Trusts.... This section applies when the transferor of land intends for the transfer to benefit someone other than the transferor or the transferee."
"In short, the imposition of a constructive trust under this section of the Restatement of Trusts requires proof that the transferor of land intended to create a trust and that one of the three identified circumstances existed at the time of the transfer."
The Trustee argues that "[t]he Debtor's legal interest is proved by the fact that Elizabeth held her membership interest as trustee under an express trust (which can be implied under the circumstances)."
Under Utah law, "[c]ourts recognize a constructive trust as a matter of equity where there has been (1) a wrongful act, (2) unjust enrichment, and (3) specific property that can be traced to the wrongful behavior."
The District Court disagreed and reversed this Court's decision. The District Court concluded that "[i]n Utah, there are multiple legal standards that courts apply to determine whether a constructive trust should be imposed. Section 160 of the Restatement (Second) of Trusts [sic]
The District Court concluded that the Trustee met his burden to provide clear and convincing evidence to support his claim for constructive trust. The following portion of the District Court's Remand Order is specifically incorporated herein:
A constructive trust is an equitable remedy, a legal fiction, that adopts the analogy of a trust. The unjustly deprived person is labeled the "constructive
"Where property is held by one person upon a constructive trust for another, and the former transfers the property to a third person who is not a bona fide purchaser, the interest of the beneficiary is not cut off. In such a case he can maintain a suit in equity to recover the property from the third person."
The Court initially notes that the Trustee's variant of the alter ego doctrine may not be recognized under Utah law. The alter ego doctrine permits courts to disregard the integrity of the corporation, view a controlling shareholder as indistinguishable from the corporation, and allow creditors of the corporation to reach assets of a controlling shareholder.
The doctrine of alter ego has also evolved in some states "to permit creditors of an individual shareholder to reach the assets of the corporation when the requirements of the doctrine are satisfied."
The Trustee's alter ego claim is a variant for which this Court finds no support. The Trustee does not assert his alter ego claim as a creditor of REM seeking to reach the Debtor's assets. The Trustee does not assert his alter ego claim as a creditor of the Debtor seeking to reach REM's assets.
But even assuming the Trustee's alter ego theory is recognized under Utah law, to invoke the alter ego doctrine:
There is little or no evidence that Eugene used REM as his alter ego. Although the Debtor was permitted by Susan, the manager of REM, to live on the Ballard Property and was given unfettered access to the REM Account, there is little or no evidence that Eugene conducted his and REM's business on an interchangeable or joint basis as if they were one.
The second prong of the alter ego test is "addressed to the conscience of the court, and the circumstances under which it will be met will vary with each case."
Clearly, the Trustee asserts that Eugene has used REM to shield his assets from creditors, but there is no evidence that REM ever incurred any debt or had any creditors, other than possibly real property tax creditors. Eugene's only creditor that was mentioned during the trial in this case was Yukon Excavation. Yukon's debt was unrelated to any of REM's activities. Even assuming that funds in the REM Account were Eugene's, that fact alone is not sufficient to establish the elements required for alter ego. One party's agreement to hold another party's property to hinder, delay or defraud creditors may give rise to a legal cause of action, but it does not necessarily establish that the parties are alter egos.
As a final observation, the Court notes that the Trustee cannot prevail on his alter ego claim because he failed to establish that Eugene was a controlling member or manager of REM. The alter ego doctrine, as defined by the Utah Supreme Court, permits courts to disregard the integrity of the corporation, view a controlling shareholder as indistinguishable from the corporation, and permit creditors of the corporation to reach assets of a controlling shareholder. It is clear from this definition that the issue to be resolved in an alter ego action is whether a controlling shareholder's assets should be answerable for corporate debts. What's implied is that the question of whether an individual is a controlling shareholder logically must be determined prior to application of the alter ego doctrine. Specifically, in order for the alter ego doctrine to apply, the evidence must show that the individual who is alleged to be the corporation's alter ego was a controlling shareholder.
While a court may hear some of the same or similar evidence when asked to make a determination that an individual is a controlling shareholder as opposed to whether the alter ego doctrine should be invoked against a controlling shareholder, the alter ego doctrine is not the basis for determining whether an individual is in fact a controlling shareholder. Here, the Trustee has attempted to use the alter ego doctrine to show that Eugene was a controlling member or manager of REM. The essence of the Trustee's argument is that Eugene took certain actions on behalf of REM, making REM his alter ego. Therefore, because REM was his alter ego, Eugene must be a controlling member or manager of REM. The Trustee has put the cart before the horse, and the evidence he has presented does not support his assertion that Eugene was a controlling member or manager of REM.
As part of the District Court's Remand Order, this Court was directed to determine whether the post-petition transfer of the Ballard Property was an avoidable transfer. The fact that the District Court determined that the Ballard Property was held in constructive trust precludes recovery of the Ballard Property under § 549.
As previously stated, a constructive trust is an equitable remedy, a legal fiction,
The Trustee is entitled to the imposition of a constructive trust to reflect Eugene McCauley's interest in REM and REM's assets, including the Ballard Property, and to an in personam order conveying the Ballard Property to him. The Trustee's claims for resulting trust and alter ego will be dismissed. The Trustee's claims under § 549 and for violation of the § 362 automatic stay will also be dismissed.
