Kaesler v. Schulz, No. 880-03 CnC (Katz, J., Dec. 23, 2003)

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STATE OF VERMONT                                      SUPERIOR COURT
Chittenden County, ss.:                            Docket No. 880-03 CnCv




KAESLER and
DeKEERSGIETER

v.

SCHULZ




                        FINDINGS OF FACT
                     CONCLUSIONS OF LAW AND
                       NOTICE OF DECISION
       This matter was tried to the court November 17 and 19, 2003. On
the basis of the evidence presented, the following decision is announced.

                            FINDINGS OF FACT
1.      Plaintiffs Kaesler and DeKeersgieter are married, with three
children, although currently separated. They moved to Vermont
approximately 1998, from Florida. Kaesler started an acupuncture
practice, self-employed. DeKeersgieter had been in the moving and
storage business in Florida, and kept that Florida business running, while
residing here.

2.      The two of them became friendly with defendant Schulz. As the
friendship ripened, it appears that Schulz desired to enter into some sort of
business, as he did not want to spend the rest of his career working for
others. DeKeersgieter had experience in the moving and storage business,
but no capital. They eventually formed a partnership, which
DeKeersgieter would run, Schulz would put up capital, and a third partner,
Goldsmith, would supply warehouse space. The business was soon up
and running and apparently succeeding.

3.       Plaintiffs then began to desire owning their own home, close to
their respective businesses. They began to look around Burlington’s
South End, with a real estate broker, Gintoff. As partner and friends with
Schulz, plaintiffs mentioned their search to him. Being relatively new to
town, and both self-employed, it soon became apparent to plaintiffs that
they lacked the credit rating to obtain a mortgage. Mentioning this fact to
Schulz, he responded that he would “do anything” to assist them, which
appeared to mean that he would co-sign or guaranty a mortgage note and
application.
4.       Plaintiffs learned of a duplex dwelling at 59-61 Catherine Street,
drove past it, and were very interested. It seemed to meet their personal
needs, particularly location within the school districts where their children
were then enrolled. To see the interior, plaintiffs contacted Broker
Gintoff, who could not immediately gain entrance. But Plaintiff Kaesler
knew that one tenant was a patient of hers, and thereby obtained an entrée.
Plaintiffs viewed the house with Gintoff, and determined to make an offer
on it.

5.      Plaintiffs did all this selecting, and viewing, and making of an
offer without any input from defendant.

6.      Defendant had almost no interaction with the broker, Gintoff.
The broker had looked at a number of houses with the plaintiffs, and had
discussed with them their family considerations regarding location. The
broker met with defendant only once, at defendant’s office. The broker
understood that defendant would guarantee the mortgage instrument,
although this ultimately turned out to take a different turn.

7.      Plaintiffs paid the original $2,000 deposit on the house, to secure
the purchase and sale agreement. When that deposit was returned,
apparently at the closing, it was returned to plaintiffs.

8.       At some point, it came to be understood that the mortgage
company would not accept a transaction with defendant as a guarantor,
but that it could go through if structured with defendant as purchaser, title
holder, mortgagee and sole maker of the mortgage note. That is how it
was done at the closing, and in the applications to the mortgage company.
Plaintiffs did not know they would not receive title, prior to it actually
passing at closing.

9.       Although the original Purchase and Sale Agreement with the
sellers was made out in the names of both plaintiffs and defendant, it was
quickly, perhaps even the same day, rewritten in defendant’s name alone.

10.      The actual cash paid down for the house, at closing, was paid
entirely by plaintiffs. The closing statement from the August 9, 2000
indicates that “Cash from Borrower” totaled $22,569.21. It all came from
plaintiffs and represented the inheritance plaintiff Keasler received from
her father’s estate. In addition to the down payment on the real estate,
plaintiffs paid all closing costs.

11.      Neither party retained an attorney for the purchase of the house, in
any traditional sense. An attorney did search the title and handle the
closing, George Faris. Neither plaintiffs nor defendant ever consulted
with Faris about the plan to place title in defendant, although all the
money was coming from plaintiffs.

12.     At the closing sellers “congratulated” plaintiffs for their purchase
of the house.

13.      In terms of anything communicated, 59 Catherine Street was
plaintiffs’ new home.

14.     Plaintiffs moved in with their children. Their family has inhabited
the house at all times since; defendant never once.
15.     Plaintiffs paid all mortgage, tax and insurance payments.

16.     Plaintiffs began substantial renovation to the house. It had been a
duplex, rented to two tenants. Plaintiffs began to convert it to a single-
family dwelling, knocking down walls and obviously altering its physical
appearance, its utility and its ability to be rented out.

17.      Defendant visited plaintiffs frequently at the house, as they
remained friends and partners for a substantial period of time after
purchase of the house. He saw and understood all the changes they were
making, but neither objected nor played any role regarding those changes
which would be consonant with what might be expected of an owner
whose property was being seriously altered in ways that probably affect
its value. The effect on value is perhaps best proved by defendant’s
disapproval or distrust of what plaintiffs were doing, voiced during his
testimony at trial–“disrepair,” bringing a contractor friend to view the
house.

18.      In October, 2001, plaintiffs separated, and the husband moved
back to Florida, to run his ongoing moving and storage business there.
That left the Burlington partnership with defendant with no one to manage
it. It was an ongoing business at the time.

19.     In the Fall of 2001, plaintiffs bounced a check for a monthly
mortgage payment. That may have briefly put them in default, but the
check was quickly made good. When plaintiff Keasler told defendant
about the bounced check, he said “no problem.” A few other monthly
payments were probably late.
20.     By April, 2002, defendant retained attorney Dennis Hill and
appointed him an escrow agent to receive mortgage payments from
defendants. Plaintiffs thereafter made their payments to Hill.

21.       Later on, in the course of this unfortunately descending
relationship, settlement negotiations occurred between Hill and one Beals,
a Florida attorney representing plaintiffs. We are persuaded that a
settlement document was exchanged between the attorneys, but an
addendum was confusing to Hill, and was never agreed to. The agreement
was never signed, there was never a meeting of the minds, or agreement as
to all terms.

22.      In March, 2002, defendant refinanced the house, to which he held
sole legal title. (PL EX 7) The new mortgage was in the amount of
$171,000. At that time, the balance on the original mortgage should have
been $142,134. (PL EX 15) Hence, the loss of equity through refinancing
is apparently $28,866. Defendant apparently took the funds released by
the refinancing, and paid off his personal credit card debt. Since the
refinancing, defendant has been paying the property taxes. Plaintiffs have
been making approximately the same payments. It may be that, with a
lower interest rate, each such payment reduces principal more than it
would have previously, but of course the outstanding principal is $28,866
greater, because of the funds paid over to defendant. Finally, because the
entire payment now goes to the mortgage, with defendant paying the
taxes, an accounting will be needed actually to determine what the
financial effect of refinancing has turned out to be.

23.     Defendant never told either plaintiff about his refinancing. They
learned of it only after it was accomplished.
24.     The house has probably appreciated in value, rising with the
Burlington real estate market, probably twelve to fifteen per cent each
year. (Gintoff testimony) If the house has increased in value, twelve per
cent per year, compounded for three years, the $160,000 price would
suggest a current value of $225,000.

25.      Defendant justified his later actions by saying his “credit rating
had dropped.” Although his testimony on this point was admitted without
objection, it is obviously hearsay, as any rating is the conclusory
statement of some credit reporting agency, about which defendant may
have been told, and without which statement he would not know of the
issue. What one’s “credit rating” is at any point, how it comes to be
created, what causes it to rise or fall and what harm may flow from one or
another decline in that rating are all subtle questions. The gnomes of
consumer credit may understand these issues, but the court is not
persuaded that the rest of us are particularly knowledgeable on the subject.
For these reasons, the court is not persuaded that defendant actually
suffered any harm by reason of plaintiffs having been late one month in
making a mortgage payment. At the same time, defendant may well have
become a somewhat greater credit risk merely by undertaking the
mortgage obligation of the original transaction.

                         CONCLUSIONS OF LAW

26.     Where a transfer of property of property is made to one person
and the purchase price is paid by another, a resulting trust arises in favor
of the person by whom the purchase price is paid. Restatement (Second)
of Trusts §440 (1959). “As a general rule, when a ‘conveyance of land is
made to one person, and the purchase money is paid by another, a
resulting trust is thereby created ... for the use and benefit of the person
paying the money.’” Tokarski v. Gates, 

, 222 (1980), quoting
Dewey v. Long, 

, 568 (1853).

27.       The essential elements of this rule are the payment of
consideration and the parties’ intent at the time of the conveyance.

. Here, the facts shown at trial command the
single conclusion that these parties shared no intention, at the time of the
conveyance, other than that the home would belong to plaintiffs. There
was absolutely no communication suggesting anything else; there was
affirmative communication that it would belong to plaintiffs.
        All the circumstances suggest the same conclusion, even beyond
communications between the parties. The consideration given was
Keasler’s entire inheritance. The property was selected solely by
plaintiffs for their particular needs. The property was substantially altered
subsequent to the closing to meet plaintiffs’ needs, with defendant’s
complete knowledge and without any complaint by him or any suggestion
that his input or consent was required regarding alterations. Other
significant conduct subsequent to the conveyance, supporting this
conclusion, is that all mortgage and tax payments were made by plaintiffs
up through the time of unilateral refinancing by defendant.
        It is therefore inconceivable that plaintiffs intended anything other
than that they would be the property’s beneficial owners, and beyond any
doubt that defendant understood that expectation and worked along with it
in receiving title in his sole name.

28.      There are several exceptions to Restatement §440, but none apply.
This is not a situation of title taken in the name of a relative. §442. It was
not done in order to accomplish an illegal purpose. §444. Although there
may have been some misstatement of facts to the mortgage lender, that
does not render the entire transaction one for an illegal purpose. See
Monahan v. Monahan, 

(1904) (enforcing a resulting trust
where the transaction was legal but whose main purpose was to avoid tax
payments). Moreover, to this point, no lender has actually been harmed.
The first lender has been paid off. The second is receiving its payments
and has the benefit of a valid recorded mortgage.
       Section 441 indicates that a “resulting trust does not arise where a
transfer of property is made to one person and the purchase price is paid
by another, if the person by whom the purchase price is paid manifests an
intention that no resulting trust should arise.” Restatement (Second of
Trusts § 441 (1959). We specifically decline to find that any such
manifestation here occurred.

29.      We are not unmindful of the fact that defendant undertook a risk
in making the mortgage note. As previously stated, as a question of fact,
we are not persuaded by his testimony about diminished credit rating. It
may well be that his credit “point score” is lower merely because he has
this substantial debt, to be measured against income, assets and payment
history, without regard to whether plaintiffs may have been late in two or
three payments. As a matter of law, we appreciate that he has provided
something of value to plaintiffs—he is effectively guaranteeing their
payment of substantial debt, under circumstances of some risk. But this is
not a contract action, in which the issue of consideration governs.
Compare Dunn v. Williams, 

, 452–54 (1935) (imposing a
resulting trust because of understanding between parties rather than any
exact consideration), with Webster v. Hildreth, 

(1860) (finding
no resulting trust because of a lack of an agreement despite contributions
to the property). Furthermore, a purchase-money resulting trust stems
from the inference that the expectation of those who pay for property is
not being met and not from trustee issues that would attach to the
formation of an explicit trust. See 5 A.W. Scott & W.F. Fratcher, The
Law of Trusts § 404.1, at 6–8 (1989).

30.      We therefore conclude that the imposition of a resulting trust is
both appropriate and necessary to avoid the unforeseen loss of equity by
plaintiffs and the unjust and fortuitous enrichment of defendant. G.G.
Bogert & G.T. Bogert, The Law of Trusts & Trustees § 455, at 266 (1991)
(“There can be no question that such a payment is a proper basis for a
resulting trust of this type . . .”). The question remains what remedy is
appropriate to the situation as it has evolved?

31.      The problem of remedy is one of several parts. First, to ensure
that plaintiffs end up with the real estate which is rightfully theirs; second,
to consider whether conditions should be placed on that basic remedy; and
third, to secure all the benefits for which plaintiffs are rightfully entitled.

32.      The first remedy issue seems clear. The court must declare that
defendant holds the real estate on Catherine Street in trust for plaintiffs,
and not otherwise. At this point, we presume that such a declaration will
suffice. Furthermore, for the reasons which follow we are reluctant to go
beyond the declaratory in the initial formulation of an equitable remedy.

33.      We halt at the declaratory, and for now decline to order the
conveying of the property to plaintiffs. For defendant is still obligated
under the mortgage note for a very substantial sum. At least conceivably,
plaintiffs have diminished the value of the property by their unilateral
renovations. Although we state this in analyzing the appropriate use of
discretion, we make clear that it is not a finding of fact that such
diminution in value has occurred. At present, defendant is liable on a
mortgage note which may well have a present indebtedness of $170,000.
Until this obligation is lifted from his shoulders, he should not be ordered
to yield legal title. G.G. Bogert & G.T. Bogert, The Law of Trusts &
Trustees § 543(V), at 444, § 465, at 411–14 (1993).
        Although the present mortgage indebtedness is $170,000, the
indebtedness which plaintiffs undertook is probably much closer to
$140,000.

34.     Having come to the conclusion that defendant holds the property
as mere trustee for plaintiffs, we must inevitably move to the further
conclusions that his unilateral refinancing was in his sole interest; was
actually contrary to the interest of plaintiffs; and is therefore not
something for which they are responsible. Shelly v. Landry, 

,
628–29 (N.H. 1951) cited in Sparks Farm, Inc. v. C.I.R., T.C. Memo
1988-492 (“In a resulting trust, the legal owner holds the property for the
beneficial owner but cannot properly exercise any control or dominion
over the property in his own right.”). Instead, we conclude that the
defendant is in breach of the resulting trust and liable for the equity
removed from the Catherine Street property through refinancing.
Restatement (Second) of Trusts § 206 cmt. j (1959).

35.       The proper and equitable remedy is therefore to direct that at such
time as plaintiffs shall deliver up the extent of the original mortgage
indebtedness, they shall be entitled to conveyance by him of all his legal
title to the Catherine Street property. Restatement (Second) of Trusts §
410 cmt. b (1959); see also Little v. Watson, 

(Tenn.
Ct. App.) (Ordering titleholders to convey to beneficiaries as soon as the
latter obtains refinancing to release titleholders’ mortgage); 5 A.W. Scott
& W.F. Fratcher, The Law of Trusts § 410 (1989).

36.     This, however, will still not make plaintiffs whole. They bought
the property, defendant held it for them as mere trustee. They are
therefore entitled to the increase in value which the market has afforded.
He has no right to reach into the equity developing on the property and
help himself to some portion. Sparks Farm, Inc. v. C.I.R., T.C. Memo
1988-492; Restatement (Second) of Trusts § 206 (1959). For having done
so, defendant has been unjustly enriched through his fiduciary position.
See Restatement (Second) of Trusts § 206 (1959); 5 A.W. Scott & W.F.
Fratcher, The Law of Trusts § 501, at 523 (1989). The law imposes a
constructive trust on the equity removed from the house at refinancing,
which makes defendant liable to disgorge the value so obtained. Legault
v. Legault, 

, 529 (1983).

37.      The conclusions here reached do not compensate defendant for
the risk he undertook, the real service he performed. But he never sought
or bargained for any such compensation. He did not contract for
compensation and may not therefore obtain it unilaterally.

38.      The record presently before the court does not permit precise
calculation of the amount of such restitution. We cannot yet enter a
judgment. The matter is therefore appropriate for an accounting, to arrive
at a present sum representing appropriate restitution for the
misappropriated equity in the property.

39.      To sum up, the plaintiffs are entitled to a declaratory judgment
that they are the beneficial owners of 59-61 Catherine Street and are
entitled to all sums wrongfully taken from their equity by defendant
measured by the original amortization schedule, at such time as plaintiffs
proffer the principal amount still due plus actual costs of conveyance,
defendant shall be obliged to convey good legal title and discharge the
present mortgage. By so discharging, he will presumably make full
restitution of the equity wrongfully taken. Until such events occur,
defendant should continue to make tax payments, when due.

             If the parties cannot come to an agreed
             accounting, within 21 days hereof, they shall
             each submit their proffer thereof.
       Dated at Burlington, Vermont, _________________, 200__.




                                            __________________________
                                                                 Judge