MARC BARRECA, Bankruptcy Judge.
On July 10, 2009, several banks commenced an involuntary Chapter 7 bankruptcy
At the beginning of trial, the Guardian Ad Litem for defendant Mastro moved for entry of a stipulated default judgment against Mastro in the amount demanded by the Trustee. Mastro and his attorney joined in the motion. The Court postponed ruling on the motion while the parties discussed entry of a stipulated judgment against Mastro. On April 25, 2011, the Court entered a Stipulated Judgment Against Michael R. Mastro and His Marital Community (the "
Plaintiff Trustee brought this action solely in his capacity as Trustee for the Mastro estate.
Mastro and several of his family members are defendants in this proceeding. Defendant Linda A. Mastro ("
Defendant LCY, LLC is a Delaware limited liability company and defendants LCY, LLC—Series Home, LCY, LLC—Series Jewelry, and LCY, LLC—Series Automobiles are Delaware series limited liability companies (collectively the "
Defendants Compass Trust Corporation and Compass, S.A. (the "
Defendant Hendrik J. Dorssers is a married person who resides primarily in
Defendant Avatar Income Fund I LLC ("
Mastro refused to testify and produce documents regarding his financial condition during the time period from December 1, 2007 to the present, and refused to testify and produce documents regarding the transactions at issue in this adversary proceeding. Mastro based his refusal to testify and produce documents on his Fifth Amendment right against self-incrimination.
Similarly, Thomas R. Hazelrigg, III ("
Mastro has been in the business of developing real estate since 1967. According to his 2008 Financial Report, Mastro developed and constructed in excess of $2 billion of real estate projects during the previous four decades, consisting primarily of multi-family housing, commercial buildings, and single family residential lot plat projects.
Mastro also was heavily involved in "hard money" lending. Hard money loans are loans too risky to meet the criteria of a bank or other conventional lender, typically involving loan fees and interest rates substantially higher than those charged by conventional lenders. Mastro primarily made hard money loans to cash-strapped real estate developers. The secondary financing Mastro provided was typically collateralized with second or third deeds of trust on the developer's real estate project.
Mastro's development operations and hard money lending generated negative cash flows. He depended on borrowed money and property sales to keep his operations afloat. He had two principal sources of financing. One source was short-term loans from banks, and the other was loans from investors known as "
By early 2008, the real estate market began to decline both nationally and in the Pacific Northwest. The decline in the real estate market severely impacted Mastro's business. By August 2008, the real estate market for single family homes and condominiums in the Pacific Northwest had been in a significant and prolonged state of decline. Moreover, Mastro's hard money borrowers—mostly real estate developers-were unable to pay, and Mastro's second and third collateral positions declined significantly in value. Mastro was unable to comply with all the demands that lenders were making for payment or additional collateral on his maturing bank debt.
As set forth above, Mastro's business operations generated negative cash flow, requiring Mastro to borrow money from lenders and Friends and Family or to sell off assets with sufficient equity after paying off secured lenders to provide cash to his business. During the second half of 2008, Mastro was experiencing a negative
Many of Mastro's hard money loans had become worthless by August 2008, or were severely impacted. For instance, in August 2008 Mastro had in excess of $25 million in cash losses on five loans related to Hazelrigg III. Not a single payment was made on these five loans in 2008. In August 2008, Mastro's projected receipts on hard money loans totaled less than $50,000 per month compared to Mastro's obligation to pay more than $900,000 in interest per month to lenders from whom Mastro borrowed funds to enable him to make the hard money loans.
Throughout 2008, Mastro owed approximately $100 million to Friends and Family investors. All the Friends and Family obligations were payable on demand. During the period June through September, 2008, Mastro's repayments on the Friends and Family obligations (net of any funds received) averaged approximately $680,000 a month. On or about September 30, 2008, Mastro attempted to alleviate the concerns of Friends and Family investors by sending them a letter that stated, inter alia, "Our organization is strong and healthy, in no small part because of the relationship we value so greatly with lenders including you, our friends and family. I hope this report has eased any concerns you may have." This letter was followed by a letter dated October 10, 2008, in which Mastro wrote that he found it necessary to "rescind our long-standing policy of re-paying any Friends and Family loan, in any amount, immediately upon demand."
Mastro's financial records were kept on a cash basis. However, his financial statements were not prepared in accordance with generally accepted accounting principles and were not audited or reviewed by independent accountants. The asset values shown in Mastro's financial statements were not based on the acquisition cost of the properties. Instead, the asset values were based on appraisals or on Mastro's own estimates of value. Many of the appraisals were outdated. Consequently, Mastro's financial statements did not provide a reliable assessment of his financial condition.
Mastro's financial statements showed his net worth at the end of 2008 to be approximately $125.6 million. Mastro's amended bankruptcy schedules, filed nine months later, show Mastro's net worth to be negative $196.4 million. In the amended bankruptcy schedules, Mastro valued his assets at approximately $384.6 million and his liabilities at approximately $581.0 million.
In sum, beginning sometime before August 21, 2008, and continuing through August 21, 2009, the date of the court order granting the Chapter 7 petition, Mastro had an unreasonably small amount of capital for the business in which he was engaged, was unable to pay obligations to his lenders as the obligations became due, and his liabilities exceeded his assets. Mastro became insolvent sometime before August 21, 2008, and remained insolvent at all times through August 21, 2009.
Generally, this Court found Linda to be a witness lacking veracity as her testimony was often transparently vague, contradictory, and self-serving. For example, at trial she disavowed having signed numerous
It is clear to this Court that although Linda claimed she was unaware of her husband's activities regarding their financial and personal affairs, and hid behind her husband's control of their affairs, she very much wanted to reap the benefits of his activities and willingly acquiesced in his management of their affairs. Moreover, she repeatedly testified that she was aware Mastro signed her name on various documents, and that she had, either expressly or implicitly, given him unconditional, absolute permission to do so. Despite her prior work experience as a banker, she testified that she totally deferred to Mastro with regard to financial matters. She indicated that she had always relied on Mastro in such a manner, and his having control of their financial affairs had always worked out well for her in the past. Indeed, Linda substantially benefited from Mastro's management of their affairs. In essence, Mastro controlled every aspect of their financial affairs with Linda's unconditional blessing.
Mastro and Linda met in the mid-1970s and, following a long courtship, married on June 3, 1989. Prior to their wedding, Mastro and Linda entered into a Premarital Agreement (the "
The Premarital Agreement provided, in part:
In essence, Mastro's and Linda's separate property at the time of their marriage was to remain their separate property, any enhancements from their separate property were also to remain their separate property, and they were to create a very limited amount of community property by establishing the "Mastro Special Account" and "Mike and Linda Mastro Account."
The actions and inactions of Mastro and Linda following their marriage were directly and substantially in contravention of the terms of the Premarital Agreement. For example, Mastro and Linda failed to open the two bank accounts described in the Premarital Agreement. No "Mastro Special Account" was opened to provide for the gradual accumulation of community property in the amount of $200,000 per year. Likewise, no new "Mike & Linda Mastro Account," described as an account into which Mastro was to make a monthly deposit and to be primarily managed by Linda for her personal use, was opened.
Rather, Mastro and Linda held and enjoyed a wide array of property together, including their residences, vehicles, various items of jewelry, and funds in various bank accounts on which they were both signators.
As of July 2008, Mastro and Linda owned three vehicles, all titled in Linda's name—(1) a 2007 Bentley (the "
Linda testified during trial that she does not now know the location of the 15.93 Carat Ring or the 27.80 Carat Ring. She testified that she gave them to Mastro because she was "sick of those rings." According to Linda's attorney, Mastro refused to tell Linda where the rings are located. Linda testified that she does not believe they have been sold, but does not know for sure. The Court finds that as of the time of Linda's testimony to the Court Mastro and Linda still held the rings and that Linda knew where the rings were and had joint control of the rings with her husband.
As set forth above, during the course of Mastro's and Linda's relationship, Mastro controlled every aspect of their financial affairs with Linda's unconditional approval. At trial, Linda testified that she believed she had executed a general power of attorney in favor of Mastro, even though she said the signature on the version submitted into evidence was not definitively her own. Whether a legally enforceable power of attorney was executed or not, Linda's testimony was clear that she had authorized Mastro to manage her financial affairs and to sign her name on documents at his pleasure. Linda repeatedly testified that Mastro handled all of their financial affairs, that she was aware Mastro signed her name on various documents, and that this arrangement was wholly acceptable to her. Mastro's management of his and Linda's affairs was broader than mere management of their marital community. Linda's testimony indicated that her ongoing approval of Mastro's discretion in managing their affairs was absolute and unconditional—regardless of what property was affected by his actions.
On or about October 2, 2002, Mastro and Linda as grantors, and Mastro, as trustee, entered into the Mastro Revocable Living Trust Agreement, forming the Mastro Revocable Living Trust (the "
On or about October 2, 2002, Mastro and Linda, as husband and wife, executed a quitclaim deed conveying the "
On or about July 19, 2006, Mastro and Linda acquired a house located at 3435 Evergreen Point Way, Medina, WA (the "
On or about July 7, 2008, Mastro as trustee of the Revocable Trust, acquired a residence located at 153 N.W. Highland Drive, Shoreline, WA (the "
On or about August 21, 2008, Mastro and Linda, as grantors, and Mastro and Michael K, as co-trustees, entered into the Mastro Irrevocable Trust Agreement, forming the Mastro Irrevocable Trust (the "
At all times, Mastro had de facto control over transactions involving the Irrevocable Trust. The concurrence of both co-trustees of the Irrevocable Trust was technically required for any transfer of property out of the Irrevocable Trust. However all transactions involving the Irrevocable Trust were done pursuant to Mastro's directions. Michael K's participation in the Irrevocable Trust appears to have been motivated by his personal relationship with his father.
Michael K did not have the ability to use the assets of the Irrevocable Trust for his own personal purposes, and did not do so. All documents effecting transfers of property into or out of the Irrevocable Trust name Michael K solely in his capacity as co-trustee. He never had a beneficial interest in any of the assets held in the Irrevocable Trust. Further, he did not derive any personal benefit from transfers of property into and out of the Irrevocable Trust, nor were such transfers intended to benefit him.
On or about September 17, 2008, Avatar made a loan in the amount of $3,360,000 to the Irrevocable Trust and received a deed of trust on the Clyde Hill House and the Highlands House as security for the loan (the "
On or about October 28, 2008, Mastro and Michael K caused the Irrevocable Trust to sell the Highlands House for $1,950,000. All sale proceeds were paid to Mastro or for his benefit. Avatar received $1,100,000 of the sale proceeds as a payment on the Avatar Loan; another secured creditor, Al Monjazeb received $250,000 as a payment on a different loan; Mastro took $417,978.41 in cash; and the balance went to closing costs. Mastro did not provide any consideration for the funds paid to him or for his benefit from the sale of the Highlands House.
On or about October 10, 2008, Mastro formed an offshore asset protection trust named the
From the time of formation, the LCY Trust was the owner and sole member of a series of Delaware limited liability companies known as: (1) LCY, LLC, (2) LCY, LLC—Series Home, LCY, (3) LCY, LLC—Series Jewelry, and (4) LCY, LLC—Series Automobiles (again, collectively the "
After establishing the LCY Trust and LCY LLC Entities, Mastro and Linda undertook a series of transactions to transfer their most valuable assets into the entities. Linda testified that Mastro signed her name on most of the documents related to the LCY Trust, and that she was unaware of her husband's activities related to the LCY Trust and LCY LLC Entities. The Court does not believe Linda's assertion that she did not participate in utilizing the LCY Trust and LCY LLC Entities to protect Mastro's and her assets. The Court finds that although Mastro appeared to have signed Linda's name on various LCY Trust-related documents, Linda also actually signed various LCY Trust-related documents and had knowledge of the LCY Trust from its inception.
Moreover, Linda's knowledge of the LCY Trust and involvement therewith is confirmed by the documentary evidence. For example, on January 20, 2009 Linda received a check written on the LCY Account, in the amount of $125,000. She admitted at trial that as of January 20, 2009, she was aware of the LCY Account. She testified that she sent the $125,000 to Compass Trust Corporation to assist in setting up yet a new trust. Moreover,
By Quit Claim Deed dated October 10, 2008, Mastro and Michael K, as co-trustees of the Irrevocable Trust, conveyed the Medina Residence into LCY, LLC—Series Home. The Medina Residence was not encumbered by any perfected lien at the time it was transferred.
By Assignment, dated October 10, 2008, and Gift Statement, dated October 10, 2008, Linda conveyed the Rolls Royce, titled in her name (although the vehicle was in fact a community asset), to LCY, LLC—Series Automobiles. Mastro, as manager of LCY, LLC—Series Automobiles, executed a Letter of Acceptance dated October 10, 2008. The Rolls Royce was not encumbered by any perfected lien at the time it was transferred. Although the LCY, LLC—Series Automobiles formation agreement also contemplates transfer of the Bentley and Range Rover, no assignment documents or other evidence of transfer regarding the Bentley or Range Rover was offered into evidence.
By Assignment, dated October 10, 2008, Mastro and Linda transferred ownership of the following jewelry to LCY, LLC— Series Jewelry: (a) the 27.80 Carat Ring; (b) the 15.93 Carat Ring; (c) one 18 karat yellow gold diamond solitaire ring with one 14.17 carat round diamond; (d) one 18 karat yellow gold ring with one 9.68 carat diamond; (e) one 18 karat yellow gold ring with two rows of seven diamonds, two rows of five diamonds and two rows of three diamonds; (f) two 2.5 carat earrings; and (g) one ring with one 10.25 carat diamond (collectively, the "
Linda claimed that five of the seven items of LCY LLC Jewelry did not exist at the time of the transfer (specifically, items (c)-(g) above), and that only the 27.80 Carat Ring and 15.93 Carat Ring (together the "
On approximately December 2, 2008, Mastro opened a bank account in the name of "LCY LLC" at JP Morgan Chase ("
Hendrik J. Dorssers ("
Through work contacts, Dorssers developed a friendship with Hazelrigg III, a long-time friend of Mastro. Hazelrigg III introduced Dorssers to Mastro. Dorssers had little personal contact with Mastro, but successfully made a few investments with Mastro over the years, including in a fund Mastro termed "Friends and Family" lenders.
On November 5, 2008, Mastro and John Mastandrea
The November Note indicated that payments to Dorssers were to begin on December 5, 2008. Consistent with the November Note, from December 2008 to July or August of 2009, Dorssers received at least seven interest-only payments in the amount of $9,876.13 each.
Dorssers became concerned with the quality and extent of his security interest in the Cascade Lots and requested that Mastro provide him with additional security for the November Note loan. Dorssers and his wife, Dina, communicated back and forth with a Mastro associate regarding same.
In a separate purported transaction, on or about February 16, 2009, Mastro, Linda, and LCY, LLC—Series Home executed a promissory note in favor of Concept Dorssers (the
The Medina Deed of Trust was recorded on February 20, 2009. However, there was no intent by Linda, Mastro, or LCY LLC—Series Home to encumber the Medina Residence to secure any obligation to Dorssers. Rather, the recording of the Medina Deed of Trust was intended by Mastro to hinder, delay or defraud his creditors by giving the appearance that the Medina Residence was encumbered for a $12,000,000 obligation while it really was not.
On an unknown date, it appears that Mastro, Linda, and LCY LLC-Series Home signed an undated one-page agreement called Loan Fee (the
The February Note transaction was never consummated and was a sham. Although Dorssers advanced approximately $1,200,000 in connection with the November Note, Dorssers did not advance new funds as contemplated by the express terms of the February Note. The November 2008 Promissory Note was not canceled and remains unpaid. And, the plain terms of the February Note and Medina Deed of Trust are blatantly inconsistent with the transaction that Dorssers asserts occurred. Thus, nothing is owed on the February Note and Medina Deed of Trust.
Further, Dorssers did not receive delivery of the February Note. Although Dorssers testified that in 2009, while staying at a property owned by or rented to Hazelrigg III, he briefly held a stack of papers containing the original February Note and Medina Deed of Trust, the Court finds his version of events to be self-serving and inaccurate. Although the Court found Dorssers to be a generally truthful witness, his memory often seemed poor and he appeared particularly confused about the timing and sequence of these events.
After delivery of the February Note became an issue in this case, possession of the February Note was requested by Dorssers' present counsel. The Court ordered Trustee's counsel to hold the original February Note.
On or about September 11, 2009, Dorssers was awakened in the middle of the night at his Monaco home by an incoming fax from Hazelrigg III. The fax was a
Hazelrigg III hired Cairncross & Hempelmann, P.S. ("Cairncross") to represent Concept Dorssers with regard to the February Note and Medina Deed of Trust. In September 2009, on behalf of Concept Dorssers and other investors ostensibly covered under the Medina Deed of Trust, Cairncross caused a Notice of Default to be issued, asserting the entire February Note was in default. Dorssers eventually obtained separate counsel and terminated efforts to foreclose on the entire $12,000,000 February Note.
Mastro and Linda distributed to themselves or spent for their benefit $995,106 from the LCY Account, net of amounts that they withdrew and later re-deposited back into the account. They used the LCY Account funds to pay for luxury automobiles, fine dining, designer clothing, trips to ski resorts, travel to Europe and Palm Springs, gold and lawyers. Examples include: (a) a cash payment of $125,000 to Linda on January 20, 2009, (b) the purchase of 100 gold coins
On July 10, 2009, the date of Mastro's bankruptcy filing, the balance in the LCY
On or about February 2009, Mastro and Linda undertook a series of transactions with Jaguar Land Rover Bellevue (the
By check dated February 18, 2009, Bentley Bellevue (an entity affiliated with the Bellevue Dealership), paid Linda $300,000 in "loan proceeds." The Rolls Royce was the purported collateral for the loan. The $300,000 was deposited into Mastro's and Linda's joint account at Charles Schwab.
The $300,000 check from Bentley Bellevue was effectively a tender of funds for the purchase of Mastro's and Linda's Rolls Royce. In addition, pursuant to similar transactions, at least $65,000 was received for the Land Rover, and at least $50,000 was received for the Bentley.
Following receipt of the funds, Mastro and Linda then executed purported purchase agreements to buy back each of their "used" vehicles from the Bellevue Dealership. The Court does not believe Linda's assertions that she was not involved in the Bellevue Dealership transactions.
Notably, the transactions with the Bellevue Dealership coincide almost exactly in time with the purported encumbrance of Mastro's and Linda's Medina Residence.
On approximately March 23, 2009, Mastro purchased 100 gold bars (the
Mastro and Linda have refused to disclose the location of the Gold Bars or to reveal whether they have been disposed of. Linda asserted that she had no knowledge of the Gold Bars. The Court finds it inconceivable that Linda did not know that the Gold Bars existed, were delivered to her house, and were property of the estate. Thus, this Court finds that the Gold Bars existed on the date of petition, that Mastro and Linda have at all times known where the Gold Bars are located, and that the
On July 28, 2010, in direct violation of the Agreed Order, Mastro and Linda sold the Rolls Royce that Linda had previously transferred to LCY LLC—Series Automobile to a third party buyer for $272,000. The sales proceeds were in the form of checks payable to the order of Linda Mastro. These checks were deposited into Mastro's and Linda's account at U.S. Bank.
Toward the beginning of 2010, Linda sought a determination that she was the owner of the Big Rings as her separate property. Linda submitted a declaration to Judge Steiner
As the case progressed, Linda's statements in her declarations ultimately proved to be false. On June 17, 2011, by oral ruling, Judge Barreca vacated the Partial Summary Judgment Order Regarding Rings, and entered the Order Granting Trustee's Motion to Set Aside Partial Summary Judgment Order Regarding Rings on June 22, 2011. Further, on June 20, 2011, the Court entered an Order Granting Trustee's Motion for Order Preserving Assets (
On approximately December 14, 2009, Hazelrigg III wrote a $160,000 check to Pacific Funding Group, an entity owned by a business associate of Hazelrigg III. The funds were used to (1) purchase gold coins (the
Despite proving that these transactions occurred, the Trustee presented no evidence that the funds from Hazelrigg III ($160,000) or from Centurion ($28,645) constituted property of the estate or depleted estate assets through any setoff or other effect of the post-petition transactions.
When the Mastro bankruptcy was filed in July 2009, Mastro and Linda failed to turn over to the Trustee various property in the Medina Residence that Linda asserted belonged to her as separate property. The Trustee retained the firm of James G. Murphy, Inc. to inventory the personal property in the Medina Residence. The Appraisal Report by James G. Murphy, Inc. (the
Linda asserted four sources of separate property: (1) property she brought into the marriage, as set forth in her Premarital Agreement (2) property she inherited from her mother and sister (cash, a residence, jewelry, personal property, and household furnishings), as set forth in their respective wills, (3) property gifted to her by Mastro during their marriage, and (4) property gifted to her from others.
Specifically, Linda asserted that the wine collection described in the Murphy Appraisal was gifted to her as hostess gifts over the years. She also asserted that the Chihuly Chandelier described in the Murphy Appraisal was a gift to her from the artist. In rebuttal, the Trustee produced a letter from the Chihuly Studio to Mastro indicating that the Chihuly chandelier was purchased by Mastro and Linda. Linda claimed she had documentation to prove the Chihuly chandelier was a gift to her, but rested her case without offering the alleged documentation.
The Trustee filed the present adversary proceeding on September 29, 2009. The summons and complaint were served on the LCY Trust, Compass Trust Corporation and Compass S.A. (the
The Belizean Entities filed an answer to the complaint and asserted that the Court had no personal jurisdiction over them. The Court confirms the earlier finding that Vigal and Simon were agents of the Belizean Entities at the time of service and that the Court has personal jurisdiction over the Belizean Entities.
The Belizean Entities refused to participate in discovery in this lawsuit. On March 26, 2010, the Court granted the
On March 25, 2010, the Trustee filed a motion for partial summary judgment asking the Court to rule that the Irrevocable Trust and LCY Trust were self-settled trusts and that the assets of the trusts were property of the bankruptcy estate. On March 26, 2010, the Belizean Entities produced documents purporting to show that Compass Trust Corporation and Compass S.A. had resigned their positions relating to The LCY Trust, terminated The LCY Trust, and transferred the assets of The LCY Trust to Mastro and Linda. The documents purported to be dated March 19, 2010.
On May 28, 2010, Judge Steiner entered an Order Granting Plaintiff's Motion for Partial Summary Judgment Regarding Self-Settled Trusts (
On July 16, 2010, the Court entered an order granting the Trustee's motion to sell the Clyde Hill house "free and clear of all liens" for a sale price of $1,925,000. The net proceeds of the sale were $1,769,470.18. Pursuant to a court-approved settlement agreement with Avatar, the bankruptcy estate recovered $750,000 of the net proceeds and the remainder was paid to Avatar.
On December 3, 2010, the Court entered an order authorizing the Trustee to transfer the Medina Residence from LCY LLC—Series Home to the bankruptcy estate and to sell the Medina Residence. Pursuant to this order, the Trustee sold the Medina Residence on December 8, 2010. The total net proceeds of the sale were $8,358,989.64. The Trustee placed the net proceeds of the sale of the Medina Residence into an interest-bearing account pending resolution of claims asserted by Concept Dorssers and Hendrik Dorssers seeking recovery of a portion of the proceeds.
This Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a)-(b), § 1334(a)-(b), and 11 U.S.C. §§ 105, 542, 544, 547, 548, 549, 550 and 551.
Based on Mastro's and Hazelrigg III's refusal to testify and produce documents based on the Fifth Amendment right against self-incrimination, the Court draws a negative inference with respect to Mastro's financial condition during times material to this case, and with respect to all transactions in which Mastro and Hazelrigg III were participants. See e.g., Baxter v. Palmigiano, 425 U.S. 308, 318, 96 S.Ct. 1551, 47 L.Ed.2d 810 (1976); In re Babbidge, 175 B.R. 708, 721 (Bankr. W.D.Mo.1994); In re Bailey, 145 B.R. 919, 927 (Bankr.N.D.Ill.1992). However, the Trustee presented sufficient evidence to support the Court's findings independent of the Court's need to draw any negative inferences. In essence, the negative inferences the Court draws with regard to transactions in which Mastro and Hazelrigg III participated buttress, but do not dictate, any finding or conclusion set forth herein.
Pursuant to the Code, "insolvent" means a "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of—(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under Section 522 of this title." 11 U.S.C. § 101(32).
Similarly, RCW 19.40.021 provides that,
RCW 19.40.021(a)-(b), (c)-(d).
Prior to August 21, 2008, and continuing through August 21, 2009, the date of the court order granting the Chapter 7 petition, Mastro was insolvent. First, Mastro had an unreasonably small amount of capital for the business in which he was engaged. Given (a) the extremely poor and declining economic conditions, especially regarding real estate property values, (b) the distressed condition of financial markets, and (c) the illiquid nature of Mastro's assets and his available sources of liquidity, Mastro retained an unreasonably small amount of capital at August 21, 2008, and at all times through August 2009, to support his ongoing operations. In essence, his operations were doomed to fail.
Second, Mastro was unable to pay obligations to his lenders as the obligations became due. Most of Mastro's financing from banks was short term secured and unsecured notes. Declining real estate values and a decrease in real estate sales made it impossible for Mastro to comply with all the demands that his bank lenders were making for payment or additional collateral on his maturing bank debt.
Mastro was insolvent on or before August 21, 2008—the date of the formation of the Mastro Irrevocable Trust Agreement. The transfers of the Clyde Hill House, Highlands House, and Medina Residence from the long-standing Revocable Trust into the Irrevocable Trust were undertaken by Mastro with intent to hinder, delay or defraud his creditors. The Clyde Hill House, Highlands House, and Medina Residence were among Mastro's and Linda's most valuable assets, and they were transferred for no consideration—at a time when Mastro's businesses were suffering and Mastro was getting pressure from Friends and Family and other creditors. The Irrevocable Trust was designed to give Mastro and Linda use of the Clyde Hill House, Highlands House, and Medina Residence, or proceeds of such properties, while depriving their creditors of the ability to recover from the assets. Although the Irrevocable Trust Agreement had language appearing to give some vague protections to Friends and Family, these apparent protections were more cosmetic than substantive. Moreover, the exhibit purporting to list the "protected" Friends and Family, attached to the executed Irrevocable Trust Agreement, is blank. Further, even if the protections for Friends and Family were enforceable, the Irrevocable Trust Agreement would have placed the assets beyond the reach of most of Mastro's creditors.
Only two months after forming the Irrevocable Trust, as the economy and real estate markets suffered continued decline, Mastro and Linda utilized an increasingly complex series of transactions and entities—the Delaware LCY Entities and Belizean LCY Trust—to supersede the Irrevocable Trust. They also attempted to shield even more assets from creditors. In October 2008, while Mastro was insolvent, Mastro and Linda transferred to the LCY Trust not only the Medina Residence
In February 2009, growing increasingly desperate, Mastro and Linda went to the Bellevue Dealership to extract the equity from their vehicles. Around this same time, the Medina Deed of Trust was recorded against the Medina Residence—despite the lack of any intent by Linda, Mastro, or LCY LLC—Series Home to actually encumber the property. Rather, the recording of the Medina Deed of Trust was an attempt to hinder, delay or defraud Mastro's creditors by giving the appearance that the Medina Residence was encumbered while it really was not. Additionally, beginning in early 2009 and continuing through early 2010, Mastro acquired Gold Bars and Gold Coins—portable and difficult-to-trace assets which could be easily liquidated.
The Trustee is entitled to recover the property and amounts set forth below. The Court notes that Mastro's and Linda's affairs were intentionally structured in a manner so as to make legal liability confusing and uncertain. Thus, where appropriate, this Court bases its conclusions regarding liability on alternate conclusions of law.
In some cases, multiple defendants have liability with respect to the same property. In other cases, there are multiple grounds for a defendant's liability. Notwithstanding multiple defendants being liable or multiple grounds for recovery, the Trustee's maximum recovery is limited to the total value of the property at issue (plus any other awardable amounts such as interest, fees, and costs).
Section 541 provides that the commencement of a bankruptcy case creates an estate comprised of
11 U.S.C. § 541(a). Separate property of a debtor's spouse is not property of the estate. The ultimate characterization of property as either separate or community property is determined according to applicable state law. See Dumas v. Mantle (In re Mantle), 153 F.3d 1082, 1084 (9th Cir. 1998).
Washington law recognizes the right of spouses to have separate property
When property is acquired during a marriage, it is presumed to be community property. Beam v. Beam, 18 Wn.App. 444, 452, 569 P.2d 719 (Wash. Ct.App.1977); Binge, 5 Wash.2d at 488, 105 P.2d 689. The burden of overcoming this strong presumption is on the party asserting the separate nature of the property. Beam, 18 Wash.App. at 452, 569 P.2d 719; see also e.g. Berol v. Berol, 37 Wn.2d 380, 381-82, 223 P.2d 1055 (1950) (finding that husband's "bald statement" that a payment was made from separate funds was insufficient to establish the separate character of the asset); In re Estate of Allen, 54 Wn.2d 616, 622, 343 P.2d 867 (1959) (finding an "unsupported statement" that stock purchases were separate property insufficient to rebut the presumption that the assets were community property). The presumption in favor of community property "can be overcome only by clear and convincing evidence." Beam, 18 Wash.App. at 452, 569 P.2d 719.
Premarital agreements are contracts subject to the principles of contract law. DewBerry v. George, 115 Wn.App. 351, 364, 62 P.3d 525 (Wash.Ct.App. 2003). Under Washington law, a prenuptial agreement may provide for management and classification of future assets and debts. As long as the agreement is freely and intelligently made, it is generally regarded with favor. Friedlander v. Friedlander, 80 Wn.2d 293, 301, 494 P.2d 208 (1972). However, "[w]hen the evidence and unchallenged findings show the parties did not mutually observe an antenuptial property agreement, the court is not bound to enforce it, but may determine the intentions of the parties, in light of the circumstances before and during marriage, to determine its binding effect." See In re Marriage of Fox, 58 Wn.App. 935, 938, 795 P.2d 1170 (Wash.Ct.App.1990) (following In re Marriage of Sanchez, 33 Wn.App. 215, 217-18, 654 P.2d 702 (1982)). "The burden is upon the spouse seeking to enforce such an agreement to show that it has been strictly observed in good faith." Fox, 58 Wash.App. at 938, 795 P.2d 1170. "The laws of contract respecting rescission of antenuptial agreements, whether in writing or not, are applicable: an agreement... to rescind may ... be in writing or inferred." Id. at 939, 795 P.2d 1170.
In Fox, a couple entered into a premarital agreement to protect the wife's separate property—$179,172 received from the estate of her first husband. The premarital agreement provided that "the separate property of each would remain separate after marriage." Id. at 936, 795 P.2d 1170. The trial court found that during the marriage the wife had transferred "all of her
Linda asserted four sources of separate property: (1) property she brought into the marriage, (2) property she inherited from her mother and sister, (3) property gifted to her by Mastro during their marriage, and (4) property gifted from others. Each is addressed in turn.
The Premarital Agreement between Linda and Mastro provided that she was to own and control her separate property and enhancements thereto, including property she brought into the marriage—allegedly cash ($204,301), a house ($450,000), a car ($20,000), jewelry ($1,000,000), furs ($200,000), and furniture ($100,000)—all totaling approximately $2,000,000. However, the itemization set forth above is the full extent of the itemization provided in the Premarital Agreement. Linda offered nothing in the record to (1) substantiate her annotations on the Murphy Appraisal designating various property as being acquired "before Mike", (2) demonstrate that any of this property still exists, or (3) explain what became of the proceeds from any of this property. For example, the furniture referenced in the Premarital Agreement was not specifically itemized or described, thus it cannot now be identified or traced. In sum, the Court cannot tell what furniture is encompassed by the Premarital Agreement. Likewise, no specific item of jewelry is itemized or described in the Premarital Agreement. The only jewelry referenced in the Premarital Agreement is described generically as "jewelry." Further, the Engagement Ring, alleged to be encompassed by the Premarital Agreement, was stolen. Linda testified that her subsequent diamond rings, including the Big Rings, were acquired years after her Engagement Ring was stolen. And, there is nothing in the record except for Linda's testimony regarding proceeds from the sale of the Hawthorne Hills house. This Court declines to believe Linda's bare assertions of what property was encompassed by the Premarital Agreement. Therefore, this Court holds that Linda has provided no credible proof of pre-marriage separate property. See Berol, 37 Wash.2d at 381-82, 223 P.2d 1055.
Linda claims that during her marriage she inherited various furniture, jewelry, and other personal property from her mother and sister, rendering it separate property. The Court believes that Linda previously inherited property from her mother and sister as set forth in their respective wills. However, the Court does
Much proof was presented, and many arguments made, regarding Mastro's and Linda's Premarital Agreement. As discussed below, even if the Premarital Agreement had been honored and was enforceable, Linda failed to meet her burden of showing various assets were her separate property. That said, Linda and Mastro failed to implement the provisions of their Premarital Agreement, thereby rendering it abandoned and rescinded. See generally, Fox, 58 Wash.App. at 939-40, 795 P.2d 1170. Linda's testimony demonstrated that Mastro and she abandoned their Premarital Agreement, commingled all of their property, and enjoyed all of their property together.
The Premarital Agreement is a relatively short document, only eight pages exclusive of exhibits. It appears to have been entered into primarily to preserve Mastro's separate property. The recitals to the Premarital Agreement state that Mastro held substantial property "which he will continue to own after marriage as his separate property," and that he intended "to continue devoting all his time and effort ... to the management and enhancement of his separate property." In exchange, Mastro was "obligated to compensate Linda and the community for his earnings and acquisitions being his separate property ... and for her joining in, or consenting to, the transactions." Community property was to be created mainly via the Mastro Special Account ($200,000 per year) and Mike and Linda Mastro Account ($5,000 per month). In effect, under the terms of the Premarital Agreement, Mastro and Linda were to share a very limited amount of community property as compared to the extent of their combined estates.
The Premarital Agreement also endeavored to preserve Linda's separate property per the terms set forth therein. In essence, each party's pre-marriage property was to remain separate, any future enhancements to separate property were to remain separate, and community property was to be created via the Mastro Special Account and Mike and Linda Mastro Account. The Premarital Agreement further provided for what would happen in the event of the parties' separation, dissolution, or deaths. However, the majority of the Premarital Agreement (five of eight pages) is devoted to discussion of maintaining separate property and creating community property.
Even if Mastro's and Linda's Premarital Agreement had been followed and remained enforceable, Linda's claims regarding separate property fail. Linda testified repeatedly that she had authorized Mastro to sign her name on any documents he chose to execute on her behalf. As a practical matter, ceding control over all of her legal and financial affairs at a time in her life when she was perfectly capable of handling her own affairs is inconsistent with Linda's assertions of holding separate property. Mastro had Linda's unconditional blessing to control every business and financial aspect of their lives, regardless of what property may be affected.
For example, Linda testified during trial that she does not now know the location of the two Big Rings that she claims are her separate property via gift. She testified that she gave them to Mastro because she was "sick of those rings." According to Linda's attorney, Mastro refuses to tell Linda where the rings are located. Linda testified that she does not believe they have been sold, but does not know for sure. This arrangement of leaving Mastro in joint control and possession of the Big Rings is wholly inconsistent with a claim of separate property.
Linda asserted that various post-marriage gifts from Mastro, including jewelry, ornamental items, and clothing, are her separate property. The most valuable items among this property claimed to be separate are the Big Rings. Linda's trial testimony clarified that both of the Big Rings were acquired post-marriage, despite her earlier sworn statements to the contrary.
Even if the Premarital Agreement were found to be valid and enforceable
The Big Rings, in particular, are more like investment assets than property that might be gifted from one spouse to another. They are not mere baubles. In a declaration submitted to the Court, Linda herself asserted that she rarely wore the rings, and when she did, only in settings where their security could be assured. The Big Rings are highly valuable, highly portable, difficult-to-trace assets. The Court, therefore, finds that the Big Rings are not Linda's separate property, but were community property as of the date of petition and are property of the bankruptcy estate.
Linda asserted that the wine collection was her separate property because the wine had been given to her as hostess gifts over the years. The Court does not believe that the wine was gifted to Linda, bottle-by-bottle, as separate property from various guests visiting Mastro's and Linda's home. Outside of clear and convincing evidence, property acquired during marriage is presumed to be community property. If the wine was indeed gifted, the Court concludes that it was gifted to the community of Mastro and Linda.
Similarly, Linda asserted that a Chihuly chandelier valued at approximately $100,000 was a gift to her from the artist. The Court does not believe her. However, even if the chandelier was a gift, the Court finds it incredible that Chihuly would have expressly gifted the chandelier to Linda in her separate capacity. This Court declines to accept Linda's bare assertions that the Chihuly chandelier was a separate property gift. Outside of clear and convincing evidence, property acquired during marriage is presumed to be community property.
In summary, this Court finds that Linda has failed to establish that she holds any property in a separate capacity.
Section 542 provides that an entity in "possession, custody or control, during the case, of property that the trustee may use, sell, or lease ... or that the debtor may exempt ... shall deliver to the trustee, and account for, such property or the value of such property." 11 U.S.C. § 542. "Although courts disagree, most of the appellate courts that have addressed the issue have concluded that entry of a turnover order is appropriate if a debtor came into possession of funds of the estate after the filing of the petition, even if the debtor was no longer in possession of such funds at the time of a bankruptcy trustee's turnover motion." See In re Rynda, 2011 WL 2161905 at *1, 2011 Bankr.LEXIS 2110 at *2-3 (Bankr.N.D.Cal.2011). To read Section 542(a) "otherwise would enable possessors of property of the estate to escape trustees' demands simply by transferring the property to someone else." Beaman v. Vandeventer Black, LLP (In re Shearin), 224 F.3d 353, 357 (4th Cir.2000) (internal
Having concluded that Linda has no separate property, the furniture, furnishings, jewelry, Chihuly chandelier, wine collection, and other personal property itemized in the Murphy Appraisal are community property of the debtor as of the date of petition and, therefore, property of the estate. See 11 U.S.C. § 541.
Linda must turn over all of the furniture, furnishings, jewelry, Chihuly chandelier, wine collection, and other personal property itemized in the Murphy Appraisal—with one exception. See 11 U.S.C. § 542. The audio equipment that was designated in the Murphy Appraisal as built-in to the Medina house shall be excluded. The Trustee has not demonstrated that this equipment is in the control of Linda and Mastro and/or was not sold with the Medina Residence.
The Trustee is entitled to a judgment ordering Linda to turn over the furniture, furnishings, jewelry, Chihuly chandelier, wine collection, and other personal property itemized in the Murphy Appraisal that is still in her possession or control, and if she fails to do same, the Trustee is entitled to a judgment for the value of these items.
The Gold Bars were purchased by Mastro for $99,300 shortly before bankruptcy. The Court does not believe Linda's assertion that she was unaware of the purchase of the Gold Bars and was not involved in the transaction. The Court concludes that the Gold Bars were community property as of the date of petition and, therefore, property of the estate. See 11 U.S.C. § 541. The Trustee is entitled to a judgment ordering Linda to turn over any of the Gold Bars that are in her possession or control and if she fails to turn over same, the Trustee is entitled to a judgment for the value of the Gold Bars to be determined at a later hearing. See 11 U.S.C. § 542.
Mastro and Linda transferred ownership of the following jewelry to the LCY Trust through LCY, LLC—Series Jewelry: (a) one platinum ring with 27.80 carat pear shape diamond; (b) one 14 karat white gold ring with 15.93 carat round diamond; (c) one 18 karat yellow gold diamond solitaire ring with one 14.17 carat round diamond; (d) one 18 karat yellow gold ring with one 9.68 carat diamond; (e) one 18 karat yellow gold ring with two rows of seven diamonds, two rows of five diamonds and two rows of three diamonds; (f) two 2.5 carat earrings; and (g) one ring with one 10.25 carat diamond—collectively, the LCY LLC Jewelry. Although Linda asserted that except for the two Big Rings (rings (a) and (b) above) the LCY LLC Jewelry did not exist and was not actually transferred into the LCY Trust, the Court does not believe her. It is illogical that Mastro would so specifically itemize jewelry that did not exist, and then purportedly transfer that jewelry into the LCY Trust— which was itself expressly designed to protect Mastro's and Linda's assets. The
Having concluded that Linda has no separate property, the LCY LLC Jewelry, including the two Big Rings, was community property as of the date of petition and, therefore, property of the estate. See 11 U.S.C. § 541. The Trustee is entitled to a judgment ordering Linda to turn over the LCY LLC Jewelry, including the two Big Rings. See 11 U.S.C. § 542. If Linda fails to turn over same, the Trustee is entitled to a judgment for the value of the LCY LLC Jewelry, including the two Big Rings, to be determined at a later hearing.
As of January 2009, Linda's admitted signature demonstrates that she was aware of the existence of the LCY Trust. Linda was a signator on the LCY Account and wrote numerous checks thereon. As of the petition date, although undisclosed, the LCY Account was property of the estate. The Trustee is entitled to a judgment for $379,039, the amount of funds on deposit in the LCY Account on the date of the petition.
The Rolls Royce was community property. Linda transferred the Rolls Royce into the LCY Trust in October 2008. Although the exact value of the Rolls Royce on the date of transfer is difficult to determine, the Court finds that the $300,000 sale price of the Rolls Royce to the Bellevue Dealership in February 2009 is an appropriate valuation. As set forth above, the Bellevue Dealership purchased the Rolls Royce from Mastro and Linda for $300,000, and then sold it back to them. As part of the sale-back transaction, the Rolls Royce was encumbered by a lien in favor of the Bellevue Dealership. Thus, as of the date of petition, the Rolls Royce was encumbered. On July 28, 2010 Mastro and Linda sold the Rolls Royce to a third party buyer for $272,000, without obtaining requisite permission from the Court.
The Rolls Royce was property of the estate on the date of petition, but encumbered by the Bellevue Dealership's lien. Although Mastro and Linda improperly disposed of the Rolls Royce post-petition, rendering them liable pursuant to Sections 549 and 550, the proceeds of the sale of the Rolls Royce to the third party buyer were less than the amount of the encumbrance thereon. Thus, damages for purposes of turnover net to zero.
Linda has no liability for funds allegedly received from Hazelrigg III in the amount of $158,000 and from Centurion Financial Group in the amount of $28,645. Although the Trustee claims these funds were advanced by Hazelrigg III to offset amounts owed to Mastro, there is no proof of any setoff actually being claimed or effectuated. Moreover, there is no proof that these transactions diminished the value of the estate. The Gold Coins acquired by Mastro and Linda in December 2009 and January 2010,
A bankruptcy trustee may avoid any transfer of an interest of the debtor in property, or any obligation incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
11 U.S.C. § 548(a)(1) (emphasis added). Except to the extent a transfer or obligation under § 548 is voidable under §§ 544, 545, or 547, "a transferee or obligee of such a transfer or obligation that takes for value and in good faith has a lien on or may retain any interest transferred or may enforce any obligation incurred ... to the extent that such transferee or obligee gave value to the debtor in exchange for such transfer or obligation." 11 U.S.C. § 548(c). In addition, a trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if such transfer was made to a self-settled trust or similar device. 11 U.S.C. § 548(e).
Similarly, under Washington law, "[a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) [w]ith actual intent to hinder, delay, or defraud any creditor of the debtor" or "(2) [w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (i) [w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) [i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due." RCW 19.40.041(a)(1)-(2) (emphases added). In addition, Washington law provides that "all deeds of gift, all conveyances, and all transfers or assignments, verbal or written, of goods, chattels or things in action, made in trust for the use of the person making the same, shall be void as against the existing or subsequent creditors of such person." RCW 19.36.020.
A transfer being deemed "void" under state law does not preclude the
Similarly, in Menotte v. Champalanne (In re Champalanne), 425 B.R. 707, 713 (Bankr.S.D.Fla.2010) the debtors alleged that a transfer to their family trust "was not fraudulent because under California law, the California Property remained subject to the claims of creditors after the transfer." The court held that "[e]ven if that is a correct statement of California law, the transfer may nevertheless be avoidable if the [d]ebtor acted with actual intent to hinder, delay, or defraud creditors." Id.; see also In re Potter, 2008 WL 5157877, 2008 Bankr.LEXIS 3351 (Bankr. D.N.M.2009) (finding a transfer invalid under California self-settled trust law, but holding the same transfer to be a fraudulent transfer pursuant to § 548(e)).
To the extent a transfer is avoided as a fraudulent transfer under 11 U.S.C. §§ 544, 548, and state law, the Trustee may recover the property transferred or the value of such property pursuant to 11 U.S.C. § 550(a)(1) from the initial transferee of such property or from the entity for whose benefit the transfer was made, or pursuant to § 550(a)(2) from any immediate or mediate transferee.
The Irrevocable Trust is a self-settled trust. Thus, the transfers of assets into the Irrevocable Trust were void as transfers made into a self-settled trust, and avoidable as fraudulent transfers. See RCW 19.36.020; 11 U.S.C. § 548(e). As set forth above in greater detail, Mastro transferred the unencumbered Clyde Hill House, Highlands House, and Medina Residence (collectively valued in the Irrevocable Trust documents at $23.7 million) into the Irrevocable Trust with intent to hinder, delay or defraud his creditors. No consideration was paid for the transfers and the properties were transferred when Mastro was insolvent. Thus, the transfers of the Clyde Hill House, Highlands House, and Medina Residence into the Mastro Irrevocable Trust were fraudulent transfers.
The LCY Trust is a self-settled trust. Thus, the transfers of assets into the LCY Trust by placing ownership of the assets in the LCY LLC Entities are void as transfers
Under Section 550(a)(2), a "[t]rustee can . . . recover from any `immediate or mediate transferee' of the initial transferee who does not take in good faith, for value, and without knowledge." In re Bullion Reserve of North America, 922 F.2d 544, 548 (9th Cir.1991). Specifically, Section 550(a)(2) provides that to the extent a transfer is avoided under Section 548, a trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property from "any immediate or mediate transferee."
Although the term transferee is not defined by the Bankruptcy Code, the Ninth Circuit has adopted the "dominion test" to determine whether someone is a transferee, providing that "a transferee is one who has dominion over the money or other asset, the right to put the money to one's own purposes." Universal Serv. Admin. Co. v. Post-Confirmation Comm. (In re Incomnet), 463 F.3d 1064, 1070 (9th Cir.2006) (internal marks omitted) (citing Abele v. Mod. Fin. Plans Servs. (In re Cohen) 300 F.3d 1097, 1102 (9th Cir. 2002)).
Id. at 1073-74. Restrictions on the use of funds over which an entity exercises control will not necessarily preclude a finding
Linda is a subsequent transferee for the entire net $995,106 transfer out of the LCY Account because she at all times had dominion over the LCY Account. As set forth above, Mastro and Linda fraudulently transferred net funds of approximately $1,000,000 into the LCY Account, and transferred net funds of approximately $995,106 out of the account. The Court does not believe Linda's assertions that she was not aware of and did not actively participate in concealing and spending funds from the LCY Account. To the contrary, Linda actively participated in the transfers. She was a signator on the LCY Account, and wrote numerous checks thereon. She also received the benefit of both Mastro's and her own expenditures using LCY Account funds. They used the $995,106 to pay for luxury automobiles, fine dining, designer clothing, trips to ski resorts, travel to Europe and Palm Springs, gold and lawyers. At least $70,000 of expenditures from the LCY Account are directly traceable to goods and services benefiting Linda alone. Thus, Linda is individually liable for the net $995,106 transfer out of the LCY Account.
Linda is a subsequent transferee of the proceeds of the Avatar loan in the amount of $200,000. As set forth above, Mastro and Linda received the proceeds of a $3,360,000 loan from Avatar, secured by a deed of trust on the Clyde Hill House and Highlands House which were fraudulently transferred into the Irrevocable Trust. The proceeds of the Avatar Loan included a $200,000 check payable specifically to Linda, which was later deposited into the LCY Account. Despite her assertion that the check was never delivered to or endorsed by her, she participated in receipt and disposition of the $200,000, had dominion over the funds in the LCY Account, and derived benefit from the $200,000 issued in her name. Thus, Linda is individually liable for the $200,000 received as proceeds of the Avatar Loan. Given the later deposit of the $200,000 check into the LCY Account, the Court reiterates that it is not permitting double-recovery, but is articulating alternate bases for liability.
Finally, Linda is a subsequent transferee of the proceeds from the Rolls Royce sale and buy-back transaction. As set forth above, the Rolls Royce was fraudulently transferred into the LCY Trust. Subsequently, Linda participated in the Bellevue Dealership sale and buy-back transaction, and was the recipient of $300,000 in sale proceeds from the sale of the Rolls Royce to the Bellevue Dealership.
Although a subsequent transferee may avoid liability by taking a transfer in good faith, for value, and without knowledge, the Court finds that as to the subsequent transfers to Linda, she had knowledge of
Second, Mastro, Linda, and LCY LLC-Series Home had no intention of encumbering the Medina Residence. It would be illogical for Mastro and Linda to go to the trouble of transferring the Medina Residence into the LCY Trust, itself designed to protect assets, only to turn around and gratuitously encumber the property. It is undisputed that no new money was advanced in connection with the February Note transaction. Moreover, Mastro was a sophisticated real estate developer, with sophisticated legal counsel. Had Mastro's and Linda's intent been to encumber the Medina Residence to secure loans previously made by various Friends and Family, they were familiar with the procedures necessary to accomplish same. As set forth above, the entire transaction surrounding the February Note and Medina Deed of Trust reeks of an attempt to hinder, delay, or defraud Mastro's creditors by attempting to give the appearance that the Medina Residence was encumbered although it really was not.
Section 550(a)(1) provides that to the extent a transfer is avoided under Section 548, a trustee may recover the property or the value of the property from "the entity for whose benefit such transfer was made." See 11 U.S.C. § 550(a)(1). "The phrase `or the entity for whose benefit such transfer was made' refers to those who receive a benefit as a result of the initial transfer from the debtor—not as the result of a subsequent transfer." Bullion Reserve, 922 F.2d at 547. "[A]n entity need not actually benefit, so long as the transfer was made for his benefit." Id. (emphasis in original). The bankruptcy trustee's power to recover from the entity "for whose benefit such transfer was made" is absolute. Id.
Ninth Circuit case law suggests that the beneficiary of a trust may be considered a person for whose benefit a transfer into a trust is made, and may be held strictly liable under § 550(a)(1). See Kosmala v. Imhof (In re Hessco), 295 B.R. 372, 377-78 (9th Cir. BAP 2003) (finding that "[a]lthough . . . not the sole beneficiaries, the bankruptcy court did not err in finding the deposits to the Trust's account were made for their benefit"); Kupetz v. United States (In re California Trade Technical Schools, Inc.), 923 F.2d 641 (9th Cir.1991) (finding that the Department of Education's status as beneficiary of a trust is what rendered it the entity for whose benefit the transfer was made); see also Brown v. Phillips, 379 B.R. 765 (Bankr. N.D.Ill.2007) (holding the beneficiary of a trust liable pursuant to § 550(a)(1)); Terry v. Paschall, 403 B.R. 366 (Bankr.E.D.Va. 2009) (same).
Linda and Mastro were both individually beneficiaries of the Irrevocable Trust and the LCY Trust. In addition, the structure of the transactions and the supporting facts and circumstances all indicate that each of the transfers into the Irrevocable Trust and into the LCY Trust was made to benefit Linda. For this reason, the Court concludes that Linda is individually and separately liable under 11 U.S.C. § 550(a)(1) for each of the transfers set forth above for which she has been
Section 550(a)(1) provides that to the extent a transfer is avoided under Section 548, a trustee may recover property or the value of the property from the initial transferee of such transfer. See 11 U.S.C. § 551(a)(1). "Section 550(a) does not define the phrase `initial transferee.'" Incomnet, 463 F.3d at 1069. However, as set forth above, the Ninth Circuit has adopted the "dominion test" to determine whether someone is a transferee, providing that "a transferee is one who has dominion over the money or other asset, the right to put the money to one's own purposes." Id. at 1070 (internal marks omitted).
The dominion test "strongly correlates with legal title," as in the "vast majority of cases, possessing legal title to funds will equate to having dominion over them." Id. at 1073. Under Washington law, "legal and equitable ownership of . . . trust property is divided between two parties; the trustee has bare legal title and the beneficiary has the equitable or beneficial ownership." O'Steen v. Estate of Wineberg, 30 Wn.App. 923, 932, 640 P.2d 28 (Wash.Ct.App.1982); see also In re Marriage of McKean, 110 Wn.App. 191, 195, 38 P.3d 1053 (Wash.Ct.App.2002).
Given (1) the dominion test's strong emphasis on legal title, (2) Washington law indicating that a trustee holds legal title to trust property, (3) the Ninth Circuit's express rejection of the less stringent "control test" espoused in other circuits,
The Ninth Circuit has not yet decided in what capacity the trustee of a trust may be liable as an initial transferee under § 550(a)(1). The Trustee relies on In re Newman Companies, Inc., 140 B.R. 495 (Bankr.E.D.Wis.1992) and Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir. 2010), as authority for holding a trustee personally liable as an "initial transferee" under Section 550. Although Newman held a trustee personally liable as an "initial transferee," the Court finds the case to be limited to its own facts, and not persuasive. Newman, 140 B.R. at 499.
In Paloian, the Seventh Circuit held LaSalle Bank, as trustee for a pool of investors, liable as an "initial transferee" under Section 550. However, LaSalle Bank was "a litigant only in a trustee's capacity." Paloian, 619 F.3d at 690 (emphasis added). The Court reasoned,
Id. at 691-92 (emphasis added).
The Restatement (Second) of Trusts provides that "[w]here liability to third persons is imposed upon [a trustee] . . . because he is the holder of the title to property, a trustee as holder of the title to the trust property is subject to personal liability, but only to the extent to which the trust estate is sufficient to indemnify him." Restatement (Second) of Trusts § 265 (1959). However, Comment A to the Restatement clarifies that "[t]he modern trend has been to hold the trustee as holder of the title to the trust property liable to third persons only as trustee, that is only to the extent to which the trust estate is sufficient to indemnify him."
This Court finds the logic of Paloian compelling, and concludes that, generally, a trustee should not be personally liable as an "initial transferee" under Section 550(a)(1). Rather, a trustee should be liable only in its capacity as trustee, and should draw from the corpus of the trust to satisfy its liability. Were the law applied otherwise, it would be an unduly broad and inequitable expansion of transferee liability.
As co-trustee, Michael K held legal title to the Irrevocable Trust property—the Clyde Hill House, Highlands House, and Medina Residence. He admitted to being Co-Trustee of the Irrevocable Trust on multiple occasions leading up to trial.
American Title Insurance Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir.1988).
Further, despite Michael K's claims that he did not sign various operative documents and his submission of signature comparisons to allegedly illustrate same, this Court finds it more likely than not that Michael K signed the documents. The Court is admittedly not a handwriting expert. However, Michael K submitted no conclusive evidence or expert testimony establishing that he did not sign the documents as he originally testified.
Review of the Irrevocable Trust Agreement indicates that Michael K, as co-trustee, shared authority with Mastro to administer and manage the Irrevocable Trust's affairs. By jointly holding legal title and jointly managing the Irrevocable Trust's affairs, Michael K exercised dominion sufficient to render him liable as an "initial transferee" under Section 550(a)(1). Although this Court believes that as a practical matter Michael K operated entirely at his father's direction and whim, and did not receive any personal benefit from participating in the Irrevocable Trust's transactions, that does not change the legal conclusion that Michael K exercised dominion.
Therefore, Michael K is liable for $23,700,000 as an initial transferee of the property fraudulently transferred to the Irrevocable Trust, less the net amount of $750,000 recovered by the Trustee from the sale of the Clyde Hill House, and less the net amount of $8,358,990 recovered by the Trustee from the sale of the Medina
The equities of the situation support the Court's conclusion. Michael K's motivation for participating as co-trustee of the Irrevocable Trust appears to have derived solely from his personal relationship with his father. His participation was not undertaken to benefit, and in no way benefited, his marital community or himself personally.
Compass Trust Corp. and Compass S.A. appeared in this matter through counsel and filed answers to the Trustee's complaint, but failed to cooperate in discovery. The Court entered the Discovery Order compelling the entities to cooperate, and later issued the Sanctions Order finding the entities in contempt, and awarding discovery sanctions of $1,000 per day commencing May 25, 2010. Compass Trust Corp. and Compass S.A. did not participate at trial, and are in default.
Compass Trust Corp. and Compass S.A. are jointly and severally liable for discovery sanctions pursuant to the Sanctions Order. As of July 1, 2011, the accrued discovery sanctions totaled $402,000, and continue at $1,000 per day through the date of judgment.
Compass Trust Corp. is liable pursuant to 11 U.S.C. § 550(a)(1) as an "initial transferee" of property fraudulently transferred to the LCY Trust—but only in its capacity as trustee of the LCY Trust. Compass Trust Corp. has no personal liability for the transfers.
Dorssers is owed nothing pursuant to the February Note, and the Medina Deed of Trust is not valid or enforceable for a plethora of reasons.
First, the February Note transaction was not consummated. Dorssers may have initially believed that he was getting a valid deed of trust as part of the February Note transaction. However, because that the February Note was for the amount of $12,000,000—far beyond Dorssers' lending capacity—it is unlikely that Dorssers actually believed the February Note transaction was legitimate. On their face, the documents memorializing the February Note transaction are blatantly inconsistent with the transaction that Dorssers asserts occurred and do not evidence a transaction by which Mastro intended to be bound.
The February Note provided that the maker promised to pay the sum of $12,000,000, "or so much thereof as may be disbursed, to or for the benefit of the Maker in accordance with this Note." (emphasis added). Although the terms of the February Note indicated that it encompassed up to $12,000,000 of funds to be loaned in the future, it is undisputed that neither Dorssers (nor any other party) advanced new funds in connection with the February Note. Although Dorssers had advanced approximately $1,200,000 to Mastro pursuant to the November Note,
A further inconsistency suggesting that the November Note and February Note were not intended to be related is that the notes were made between different parties. The November Note was between Mastro and Mastandrea as makers, and Hendrik Dorssers as Lender. The February Note was between Mastro, Linda, and LCY LLC-Series Home as makers and Concept Dorssers as lender. It would make little sense for Dorssers to sign a note with LCY LLC Series—Home, an entity to whom he has never loaned money.
The Escrow Instructions for the February Note Transaction were also objectively inconsistent with the purported transaction. Although the Escrow Instructions noted that $1,200,000 had been advanced outside of escrow, they also provided that another $10,800,000 was to be advanced outside of escrow. Dorssers has never claimed that he intended, or would have been able, to advance funds in any amount even close to $10,800,000.
The Memorandum of Understanding that Dorssers signed, in which he allegedly agreed to enforce the February Note and Medina Deed of Trust on behalf of other parties also purportedly secured by the Medina Deed of Trust, is a blatant after-the-fact attempt to try to make the February Note transaction appear legitimate. Dorssers admitted the document was back-dated to December 11, 2008, and that the first time he ever saw the Memorandum of Understanding was when it was faxed to him in the middle of the night on September 11, 2009.
All of these factors indicate that the February Note transaction was not grounded in reality.
Dorssers asserted that his receipt of five payments of $3,000 per month, consistent with the Loan Fee Agreement, indicated Mastro's and Linda's intent to be bound by the February Note and Medina Deed of Trust. This Court finds that the payments of $3,000 per month are a neutral fact. Although the payment amounts are consistent with the Loan Fee Agreement, the February Note transaction was a sham. The payments would be equally consistent with Mastro's fraudulent intent for Dorssers to believe he had a valid note and deed of trust.
Third, the February Note was not delivered as required by applicable law. Dorssers is neither a holder nor a holder in due course. Although Dorssers was generally a truthful witness, the Court does not believe Dorssers' self-serving testimony that while staying at a property owned by or rented to Hazelrigg III, he briefly held a stack of papers containing the original February Note and Medina Deed of Trust, thereby effectuating delivery.
Dorssers asserted, alternatively, that his receipt of interest-only payments supported "constructive delivery" of the February Note. However, the interest-only payments related to the November Note transaction, not the February Note transaction. The November Note indicated that payments to Dorssers were to begin on December 5, 2008. Consistent with the November Note, from December 2008 to July or August of 2009, Dorssers received at least seven interest-only payments in the amount of $9,876.13 each. This payment
The Medina Deed of Trust is avoidable by the Trustee as a fraudulent transfer pursuant to § 548 as the entire February Note transaction was sham. To the extent Dorssers would seek to invoke the good faith defense provided in § 548(c), his efforts fail. The burden of proof is on Dorssers to establish good faith. See e.g., In re Agric. Research and Tech. Group, Inc., 916 F.2d 528, 535 (9th Cir.1990). Good faith is based on an objective standard. Id. at 535-36. As one court explained,
Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1357 (8th Cir.1995) (citations omitted).
Dorssers has not met his burden of establishing a good faith defense. At best, he appears to have been too trusting of Mastro and Hazelrigg III. At worst, Dorssers was fully aware the transaction was a sham, but played along to further his own interests. Either way, the Court concludes that Dorssers was on notice that the circumstances surrounding the February Note and Medina Deed of Trust transaction were amiss and that he should have further inquired. In sum: the February Note and Medina Deed of Trust were facially inconsistent with Dorssers' purported understanding of the transaction; Dorssers did not provide anything new of value in exchange for the February Note and Medina Deed of Trust; Dorssers had never loaned money to LCY LLC—Series Home; the February Note and Medina Deed of Trust were approximately ten times greater than the amount Hendrik Dorssers claimed he was owed pursuant to the November Note transaction; Dorssers did not receive delivery of the February Note; Dorssers signed escrow instructions that were facially inaccurate; and Dorssers received and signed a midnight-faxed Memorandum of Understanding that was backdated.
The February Note and Medina Deed of Trust are not enforceable and do not create any valid lien against the Medina Residence or any other property of the bankruptcy estate. The Medina Deed of Trust was a sham, recorded while Mastro was insolvent, with an intent to hinder, delay, or defraud his creditors by giving the appearance that the Medina Residence was encumbered while it really was not. Nothing is owing on the February Note because no advances were made after its execution and because the February Note transaction was a sham. The execution of the February Note and Medina Deed of Trust are avoidable by the Trustee as fraudulent transfers pursuant to 11 U.S.C. §§ 544, 548(a)(1)(A)-(B), (e) and RCW 19.40.041(a)(1)-(2). Dorssers, therefore, is entitled to no judgment against Linda.
The Trustee is entitled to prejudgment interest at the federal prejudgment interest rate on all liquidated amounts awarded above. See e.g., Banks v. Gill Distrib. Ctrs., Inc. (In re Banks), 263 F.3d 862, 871 (9th Cir.2001).
The Trustee shall present separate judgments consistent with the findings and conclusions set forth in this Memorandum
