WILLIAM T. THURMAN, U.S. Bankruptcy Judge.
This matter comes before the Court on the Trustee's motion for summary judgment and the Defendant's cross-motion for summary judgment. Louis Christensen ("Debtor") filed for chapter 7 bankruptcy on July 22, 2011. The Trustee filed a complaint on July 11, 2013 against Defendant Marlese Christensen ("Defendant"), the Debtor's former wife, to recover an alleged fraudulent transfer or a preferential transfer in the amount of $120,000.
A hearing on the second motion for summary judgment was conducted on May 5, 2016. At that hearing, the Court questioned the impact of the divorce court's division of marital property on this proceeding and requested the parties to brief how the Rooker-Feldman doctrine or res judicata may affect this Court's ruling. The parties submitted briefs, and the Court deems further oral argument to be unnecessary. After considering the arguments of counsel, and conducting an independent review of the law, the Court makes the following findings of fact and conclusions of law.
The jurisdiction of this Court is properly invoked under 28 U.S.C. § 1334. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(F) and (H) and this
Debtor and Defendant were married. It was a second marriage for both of them, and they came into the marriage owning separate property that would remain separate according to a prenuptial agreement. In March 2010, while married, they purchased a home on Bonita Bay Drive in St. George from the Debtor's secretary that they used as a marital residence (the "Bonita Bay Property"). They purchased the property together with a down payment in excess of $40,000.
The Debtor and the Defendant put another $40,000 into the home for landscaping and remodeling in the nine or ten months that they owned it. The Defendant received regular income from a charitable remainder trust established by her parents, which she used to pay household expenses, to help pay rent and mortgage payments, and for the upkeep of the home. The Defendant also earned money doing makeup and facials for clients, which she contributed to the household. The Debtor could not make a substantial contribution to the household because he was struggling with health issues. The Debtor's dental license was suspended on April 26, 2010, only eight weeks after they purchased the home, which further reduced his ability to pay any expenses for the home.
The Debtor acquired title to the Bonita Bay Property from his secretary on March 1, 2010. A few weeks after the purchase, the Debtor gave the Defendant signature pages to sign that he untruthfully said would put her on the title to the Bonita Bay Property. One of the papers the Defendant signed was actually a Quit Claim Deed granting the Debtor an ownership interest in a home in Weber County that belonged solely to the Defendant under the prenuptial agreement. The other paper was a Deed of Trust that allowed the Debtor to get a line of credit from Bank of the West for up to $120,000, using the Defendant's Weber County home as collateral. The Debtor had the signatures notarized later, when the Defendant was not present.
When the Defendant learned of this loan about six months later, she contacted a lawyer for assistance. In response, on November 3, 2010, the Debtor told the Defendant to move out. On December 6, 2010, the Debtor filed for divorce and put the Bonita Bay Property up for sale. It was at this point that the Defendant discovered that she was not on the title to the home. The Defendant's divorce attorney recorded a Notice of Interest against the Bonita Bay Property to let any purchaser know that she claimed an interest in it "by virtue of [her] marital interest in said home and real property."
The Bonita Bay Property sold in January 2011 for $290,000. The proceeds of the sale were paid to Terra Title Company, and the funds went into its bank account. On January 26, 2011, the Defendant signed a release of her Notice of Interest in the Bonita Bay Property, which enabled the Debtor to receive a partial share of the proceeds from the sale of the Bonita Bay Property. On January 27, 2011, Terra Title Company issued a check to the Defendant for $120,000, which she used to pay off the Debtor's loan with Bank of the West that encumbered her home in Weber County. The payoff amount was $109,381.05.
The Debtor filed a chapter 7 bankruptcy petition on July 22, 2011, about six months after the sale of the Bonita Bay Property.
The Trustee filed a complaint on July 11, 2013 against the Defendant seeking to
The Defendant's first motion for summary judgment was denied because there were genuine issues of material fact in dispute. After fact discovery closed, Defendant filed a second motion for summary judgment. The motion for summary judgment was granted in part on all claims involving fraud, and the Trustee's claims for relief under § 548 were dismissed. Summary judgment was denied as to the claims based on allegations of a preferential transfer under § 547.
The Defendant requested relief from the automatic stay to allow her and the Debtor to return to the divorce court and litigate the division of their marital property and the Defendant's interest in the $120,000 that was transferred to her. The Trustee expressed an intent to participate in that litigation, though he later decided not to participate in the divorce court action. Relief from stay was granted on August 11, 2015.
On January 8, 2016, the divorce court awarded each party one-half of the marital assets, and this decision was further memorialized in the Findings of Fact, Conclusions of Law, and Final Judgment entered on August 11, 2016 (the "Divorce Court Property Division"). When this was reported to the bankruptcy court, the Defendant suggested that the Divorce Court Property Division disposed of the matter, but the Trustee still questioned whether or not the Defendant had an ownership interest in the money transferred to her as a result of the sale of the Bonita Bay Property. The Trustee filed a third motion for summary judgment, and this is the matter currently before the Court as well as the Defendant's cross motion.
At this point in the adversary proceeding, the threshold issue for deciding the Trustee's remaining preferential transfer claim is whether or not the $120,000 transferred to the Defendant belonged to the Defendant or the Debtor. A trustee may only avoid a "transfer of an interest of the debtor in property."
"For the purposes of most bankruptcy proceedings, property interests are created and defined by state law. Once that state law determination is made, however, [the Court] must still look to federal bankruptcy law to resolve the extent to which that interest is property of the estate."
On the date the bankruptcy petition was filed, the bankruptcy estate received the "legal or equitable interests of the debtor in property."
The Trustee asks this Court to rule that the award of sale proceeds under the divorce decree is an avoidable preference, arguing that the Defendant did not own the asset that was sold, and so her right to a share of the property settlement in the divorce is merely the claim of a creditor and not an award of property in which she had an ownership interest. The Trustee also argues that the divorce court did not rule on the specific issue of title ownership of the Bonita Bay Property, and so consideration of these claims by this Court is not barred by either the Rooker-Feldman
To determine whether the Rooker-Feldman doctrine applies to the Trustee's claim, the Court focuses on the relief sought by the Trustee.
"To determine the preclusive effect of a state-court judgment in a later federal action, we look to the preclusion law of the forum state."
The Court will discuss each element in turn.
The Defendant asserts issue preclusion against the Trustee. The Trustee was in privity with the Debtor through the portion of the divorce proceeding in which the property was divided. This element is satisfied.
The issue before the divorce court was ownership of the Bonita Bay Property and/or its proceeds of sale. The issue before this Court is also ownership of the Property. The divorce court applied equitable considerations to determine property ownership. The Trustee argues that this Court should apply the legal principles of title ownership to the factual question of property ownership. This distinction does not prevent issue preclusion from applying. "[T]he applicability of issue preclusion does not depend on whether the claims for relief are the same. What is critical is whether the issue that was actually litigated in the first suit was essential to resolution of that suit and is the same factual issue as that raised in the second suit."
The Defendant came to this Court for permission to lift the automatic stay to litigate the issue of ownership of the Property in the state divorce court. The Trustee's attorney was present during that hearing and expressed his intention to intervene in the state divorce court proceeding to represent the bankruptcy estate's interests. The Trustee later elected not to participate.
"In the context of res judicata, `merits' has been interpreted to mean real or substantial grounds of action or defense as distinguished from matters of practice, procedure, jurisdiction or form."
It is undisputed that the Defendant's name was never on the title to the Bonita Bay Property. While the record does not contain many facts about the purchase transaction or its funding, it appears the purchase was concluded between two individuals, the Debtor as buyer and his secretary as seller. It appears that the Defendant expected to be added to the title of the house shortly thereafter, which is why she signed a paper when the Debtor told her that he would put her on the title to the Bonita Bay Property. Instead, the Defendant had unknowingly signed a quitclaim deed for another property, which the Debtor had notarized later when she was not present. The Defendant was never on the title to the Bonita Bay Property, although after she discovered the situation, her divorce attorney recorded a Notice of Interest, declaring her right to an ownership interest in it. In effect, the Defendant was defrauded by her then husband.
The Divorce Court Property Division did not find title ownership to be a bar to
From the plain language of the divorce court's ruling, the divorce court found that the Debtor and Defendant were equal owners of the Bonita Bay Property, despite the Debtor being the only one on the title at the time the divorce petition was filed due to the Defendant's substantial contribution to purchasing, maintaining and otherwise contributing to the home.
Despite this ruling, the Trustee continued to advocate that title ownership should override the Divorce Court Property Division.
The Trustee argued that the "Defendant asked the divorce court to classify the Bonita Bay house as marital property and to equitably divide all marital property and did not ask the divorce court to rule that Defendant owned the Bonita Bay property."
The Court disagrees with the Trustee's characterization. The ownership of the Bonita Bay Property in January 2011 was at issue in the divorce case, and when the Utah divorce court determined that the Bonita Bay Property was marital property, it answered the question of ownership. A divorce court is given authority to determine whether property is owned separately or together, and then to determine who owns the property once the divorce is final. If property is not "marital property" then it is "separate property." The divorce court found that the Bonita Bay Property was marital property, not the Debtor's separate property. There is no third category for property that is marital property but is owned solely by one spouse.
The above analysis relies principally on the findings and conclusions of the state Court after the stay was lifted. The Court believes that the opportunity for the Trustee to participate satisfies the complete, full and fair litigation element of issue preclusion, however, in the event that issue preclusion may not apply because the `complete, full, and fair litigation' element of the test may not be met by a decision rendered on an unopposed motion for summary judgment, the Court will rule on the merits of the Trustee's argument below and submits the following as an alternative basis to support the Court's decision.
The Trustee relies heavily on this
Title to the Bonita Bay Property was not held by either the Debtor or the Defendant at the time the bankruptcy petition was filed which distinguishes this matter a bit more from the facts in Harrell. Title to the Bonita Bay Property had been held by a third party purchaser for about six months before the Debtor's bankruptcy estate was created. That may be a difference without a distinction here. What is relevant is the parties rights as of the date of the petition in the Bonita Bay Property's sales proceeds. This Court is persuaded that it must follow state law for the determination of property rights.
This Court confirmed the divorce court's authority to grant property ownership rights in the Harrell case when it held that: "A divorce court has authority under its equitable powers to alter this arrangement [referring to title ownership], but until a divorce decree is entered one spouse does not have ownership to property titled in the other spouse."
Besides principles of comity that make one court reluctant to supplant the decision of another court, significant policy concerns also support the conclusion that a property division in a divorce should be treated as determinative in a subsequent bankruptcy.
The intersection of family law and bankruptcy law is already a difficult intersection due to conflicting policy concerns. The Court has been unable to find a case in Utah or the Tenth Circuit in which a Trustee challenged a property settlement in a divorce as a preference or fraudulent transfer. When looking further afield, the Court found a very small number of cases, characterized by cautious judges and trustees who did not succeed.
In side-stepping the minefield of reexamining and redetermining the parties' interests in marital property, Judge Yacos of the bankruptcy court in New Hampshire illustrated the same when he commented on "the difficult question of trying to reconcile the conflicting policies of the Bankruptcy Code and the family law."
Because of Utah's strong policy interest in accommodating a fair and equitable division of property in a divorce, this Court is hesitant about expanding a Trustee's powers to challenge a property division. The Trustee's argument that the record legal title owner of the property is the owner of the property for bankruptcy purposes, regardless of whether it is declared to be marital property by a divorce court, would in this Court's opinion, undermine the finality of property settlements in myriad situations.
The Divorce Court Property Division found the Bonita Bay Property to be marital property, with each spouse owning one-half interest. Thus, when the Defendant received her share of the proceeds from the sale of the Bonita Bay Property, she was not receiving a "transfer of an interest of the debtor in property" under 11 U.S.C. § 547(b), but received her own property. Thus, the threshold issue of a preferential transfer is not met.
Alternatively, based on the undisputed facts of the matter, the Court concludes that the Debtor and the Defendant were owners of one-half each of the Bonita Bay Property and/or the sales proceeds derived therefrom under principles of Utah law as of the date of the petition initiating this bankruptcy case. The decision is Harrell is either distinguishable or consistent with this decision, and to the extent it is interpreted any differently, this Court elects not to follow its holding.
There are no genuine issues of material fact in this case. The Defendant is entitled to judgment as a matter of law. The Trustee's motion for summary judgment will be DENIED with prejudice. The Defendant's cross-motion for summary judgment will be GRANTED.
A separate order will be entered.
Id. at 1145 (internal quotations and citations omitted).
