Discussion of new developments in Asset Protection and related debtor-creditor issues, primarily from the viewpoint of planning for those who are concerned about unforeseen contingent liabilities, but also some news from the creditors' side as well. Hosted by Jay Adkisson and Chris Riser, authors of "Asset Protection: Concepts and Strategies" with supporting website at http://www.assetprotectionbook.com
The Tenth Circuit follows the rational of In re Ehmann but comes to a different result in a case involving a family limited partnership that held little more than real property and stock assets and whose commercial purpose had mostly ceased. _________________________
In re Baldwin, 2006 WL 2034217 (10th Cir.BAP (Okla.), July 11, 2006)
NOTICE: THIS IS AN UNPUBLISHED OPINION. Use FI CTA10 BAP Rule 8018-6 for rules regarding the citation of unpublished opinions.
NOTE: THIS OPINION WILL NOT BE PUBLISHED IN A PRINTED VOLUME. THE DISPOSITION WILL APPEAR IN A REPORTER TABLE.
United States Bankruptcy Appellate Panel for the Tenth Circuit.
In re Trenton J. BALDWIN, d/b /a Cross-Triangle Brangus, d/b/a Spot Light Flowers & Gifts, d/b/a With Photography On The Side, and Carolyn S. Baldwin, a/k/a Carolyn S. Bailey, d/b/a Broken Bow School of Dance, d/b/a Spot Light Flowers & Gifts, Debtors.
Gerald R. MILLER, Trustee, Plaintiff--Appellee,
v.
BILL AND CAROLYN LIMITED PARTNERSHIP, an Oklahoma limited partnership, The Maxie O. "Bill" Bailey Living Trust, and Maxie O. "Bill" Bailey, Defendant -- Appellants,
and
Trenton J. BALDWIN and Carolyn S. Baldwin, Defendants.
Appeal from the United States Bankruptcy Court for the Eastern District of Oklahoma.
Before CLARK, BROWN, and MCNIFF, Bankruptcy Judges.
ORDER AND JUDGMENT [FN*]
FN* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. 10th Cir. BAP L.R. 8018-6(a).
CLARK, Bankruptcy Judge.
Appellants seek reversal of the bankruptcy court's order, after trial, finding that debtor Carolyn Baldwin's interest in a limited family partnership is property of her estate and ordering the limited partnership dissolved pursuant to Oklahoma law. We affirm in part, reverse in part, and remand for further proceedings.
I. BACKGROUND
Debtors Trent and Carolyn Baldwin filed a petition for Chapter 7 bankruptcy relief in August, 2004. Carolyn is the sole limited partner in a limited partnership created by her parents in 1994, pursuant to the Oklahoma Uniform Limited Partnership Act, Okla. Stat. tit. 54, §§ 141-171 (2005). At the time of filing the petition, Carolyn owned a 99% interest in the partnership. The partnership's sole general partner is a trust, consisting of Carolyn's parents as the sole trustees. The partnership agreement grants exclusive management and control of the partnership and its assets to the general partner, which owns a 1% interest in the partnership. Further, the partnership agreement provides that "[t]he Limited Partner shall not take any part in or interfere in any manner with the conduct or control of the business of the Partnership or have any right or authority to act for or on behalf of the Partnership." [FN1] The partnership will dissolve 50 years after execution of the partnership agreement, otherwise, dissolution only occurs if the general partner agrees to dissolution, dies, or becomes incompetent, insolvent, or bankrupt. [FN2]
FN1. Limited Partnership Agreement of Bill and Carolyn Limited
Partnership ("Limited Partnership Agreement") ¶ 12.6, in Appellants' Appendix ("App.") Vol. II at 390.
FN2. Limited Partnership Agreement ¶ 15.1, in App. Vol. II at 393. It can only be assumed that the parties intended for dissolution to occur upon the death or mental incompetency of appellant Maxie O. "Bill" Bailey and his wife, co-trustees of the general partner, since the general partner, a trust, can neither die nor be declared mentally incompetent.
The partnership assets consist of approximately 200 acres of undeveloped land that is partly timber and partly pasture, and a house that the partnership constructed on the land, in which debtors reside. The debtors maintain the house and pay the costs associated with it, including mortgage, taxes and utilities. Debtors also use the land, in part, for the grazing of cattle. The parties apparently agree that the total value of partnership assets is approximately $400,000.
Following initiation of bankruptcy proceedings, the trustee filed an adversary proceeding against the partnership and the general partner seeking a declaration that Carolyn's interest in the partnership now belonged to the estate and, further, that continuation of the partnership was impracticable due to the general partner's refusal to recognize the estate's interest. After trial, the bankruptcy court ruled in favor of the trustee on both of these issues. The partnership and the general partner appeal.
II. APPELLATE JURISDICTION
This Court has jurisdiction to hear timely-filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8001; 10th Cir. BAP L.R. 8001-1. Neither party has elected to have this appeal heard by the United States District Court for the Eastern District of Oklahoma, and each have thereby consented to review of this case by the Bankruptcy Appellate Panel. 28 U.S.C. § 158(b) and (c); Fed. R. Bankr.P. 8001(e); 10th Cir. BAP L.R. 8001-1.
III. ISSUES ON APPEAL
1) What interest in the partnership became property of the estate upon filing of the bankruptcy petition?
2) Was the partnership properly dissolved pursuant to Oklahoma law?
IV. DISCUSSION
A. Trustee's Partnership Interest
Appellants contend that the trustee's claim to the partnership is in the nature of a judgment creditor, who must obtain a charging order pursuant to Okla. Stat. tit. 54, § 342 (2005), [FN3] and who would be treated as an assignee of Carolyn's interest in the partnership. As such, any recovery would be limited to Carolyn's interest in partnership profits and accrued distributions, of which there are none. However, although state law determines the nature of Carolyn's partnership interest, federal law determines the extent to which that partnership interest becomes a part of the estate. Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1197 (10th Cir.2002).
FN3. Applicability of this provision, which specifically applies only to judgment creditors, initially requires acceptance of appellants' unsupported assumption that a trustee in bankruptcy becomes a judgment creditor with respect to a debtor's property interests, rather than one standing in the shoes of the debtor.
At least two factually similar cases have held that a debtor's rights pursuant to a family partnership or limited liability company become property of the bankruptcy estate and may be exercised by the trustee. In Samson v. Prokopf (In re Smith), 185 B.R. 285 (Bankr.S.D.Ill.1995), the court held that a limited partner "has contractual rights arising from the partnership" that are "legal or equitable interests of the debtor within the ambit of 11 U.S.C. § 541(a)(1) [FN4] and become property of the bankruptcy estate." Id. at 290-91 (footnote omitted). Thus, "the right to obtain judicial dissolution vested in the debtor's estate upon her bankruptcy filing, and the trustee, as representative of her estate, succeeded to the debtor's right to bring this cause of action by operation of law." Id. at 292 (citations omitted).
FN4. This bankruptcy proceeding was filed prior to the October 17, 2005, enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which is expressly non-retroactive. Therefore, all references herein to Title 11 of the United States Code are as it was prior to enactment of BAPCPA.
Similarly, in Movitz v. Fiesta Invs. (In re Ehmann), 319 B.R. 200, 204 (Bankr.D.Ariz.2005), the court considered the estate's interest in a limited liability company that was set up by the debtor's parents in order "to remove assets from the parents' estates for estate tax purposes, and to accumulate investments for the benefit of their children after their deaths." The court concluded that the "[t]rustee has all of the rights and powers with respect to [the company] that the [d]ebtor held as of the commencement of the case [,]" including the right to seek dissolution. Id. at 206. [FN5]
FN5. Both Smith and Ehmann discussed whether limited partnership agreements were "executory contracts" governed by 11 U .S.C. § 365, and concluded that unless the debtor owed such a material obligation to the partnership that failure to perform it would relieve the partnership of its obligations to debtor, the debtor's limited partnership interest was a "property interest" governed by § 541, rather than by § 365. To the extent that appellants contend that the Limited Partnership Agreement constitutes an executory contract, we reject that contention, and find that § 541 controls.
We conclude that the bankruptcy court was correct in finding that Carolyn's partnership interests became property of her estate at the time of filing the petition. Likewise, the bankruptcy court correctly determined that the trustee in bankruptcy steps into the shoes of the debtor with respect to partnership interests and may assert whatever rights the debtor has as a partner under the partnership agreement and state law, including the right to seek dissolution. We therefore affirm these conclusions.
B. Dissolution
The next issue is whether the bankruptcy court correctly determined Carolyn's rights as a limited partner under the partnership agreement and under Oklahoma law. Appellants correctly point out that Carolyn's rights under the partnership agreement are extremely limited. In fact, the partnership agreement grants Carolyn no right to manage the partnership, to sell or demand distribution of partnership property, or to dissolve the partnership. [FN6] The partnership agreement provides limited circumstances under which the partnership may be dissolved, none of which are applicable to the present situation. [FN7] Therefore, dissolution pursuant to the partnership agreement would be improper.
FN6. We note, however, that Carolyn apparently does have a right to "withdraw" from the partnership pursuant to ¶ 16 of the Limited Partnership Agreement, which right the trustee does not here attempt to exercise, and instead seeks only to dissolve the partnership and liquidate its assets. Limited Partnership Agreement at ¶ 16, in App. Vol. II at 395.
FN7. See Limited Partnership Agreement ¶ 15.1, in App. Vol. II at 395.
However, in ordering dissolution of the partnership, the bankruptcy court relied on Oklahoma law, rather than on the partnership agreement. Oklahoma specifically allows limited partners to seek dissolution of a partnership "whenever it is not reasonably practicable to carry on the business [of the partnership] in conformity with the partnership agreement." Okla. Stat. tit. 54, § 346 (2005). [FN8] As previously noted, the bankruptcy court correctly held that the trustee had whatever rights Carolyn had to seek dissolution of the partnership under this provision. Whether the partnership was properly dissolved pursuant to this statute is a mixed question of fact and law. We review the bankruptcy court's findings regarding the fundamental facts of the partnership's business under a clearly erroneous standard and its application of the statute to those facts de novo. Sender v. The Bronze Group, Ltd. (In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1297-98 (10th Cir.2004). A factual finding is "clearly erroneous" when "it is without factual support in the record, or if the appellate court, after reviewing all the evidence, is left with the definite and firm conviction that a mistake has been made." Las Vegas Ice & Cold Storage Co. v. Far W. Bank, 893 F.2d 1182, 1185 (10th Cir.1990) (citation omitted).
FN8. Virtually identical statutory language was considered in the Smith case. However, because that matter was before the court on a motion for summary judgment, issues of fact precluded a finding that carrying on the partnership business was not practicable. 185 B .R. at 294-95.
From the evidence at trial, the bankruptcy court found that the general partner "does not recognize the [trustee's] interest in the Partnership as trustee of the bankruptcy estate. Furthermore, the Partnership no longer serves any estate planning purpose. [The general partner] even stated at trial that he considered the future development of the property into residential lots as a possibility." From these findings, the bankruptcy court determined that it was no longer "reasonably practicable" to carry on the partnership's business. [FN9]
FN9. November 15, 2005, Order ("Order") at 6, in App. Vol. I at 270.
The partnership agreement defines its business purpose as follows:
The purpose of this Partnership shall be to engage in general business activities including but not limited to the purchasing, holding, construction, owning, operation, improving, managing, mortgaging, leasing and selling of and dealing in and with real property. In addition to the foregoing, the Partnership may engage in any business activity in which any limited partnership may engage under the laws of the State of Oklahoma. [FN10]
FN10. Limited Partnership Agreement at ¶ 4, in App. Vol. II at 381.
At trial, Mr. Bailey, Carolyn's father, testified that the partnership was set up in 1994 as a part of his effort to remove assets from his estate for tax purposes. [FN11] Mr. Bailey characterized the primary and continuing purpose of the partnership as estate planning, with the intent that he would retain full management and control of the partnership assets during his lifetime . [FN12] He further testified that the partnership had at one time invested in mutual funds for a small profit, [FN13] that lumber from the property had been sold at a profit to his lumber company, [FN14] and that he expected the property to appreciate in value, at which point, the partnership might sell lots out of the 200 acres and/or develop a subdivision for profit. [FN15] All of the partnership profits were put back into the partnership property. [FN16] Mr. Bailey also testified that it was his opinion that the trustee should not get the partnership property, and that Carolyn should be his partner. [FN17] Finally, Mr. Bailey testified that the partnership was an ongoing part of his estate planning. [FN18]
FN11. October 6, 2005, Trial Transcript ("Tr.") at 47-50, in App. Vol. I at 321-24.
FN12. Id. at 66-67, in App. Vol. I at 340-41.
FN13. Id. at 59-60, in App. Vol. I at 332-33.
FN14. Id. at 63-64, in App. Vol. I at 336-37.
FN15. Id. at 68, in App. Vol. I at 342.
FN16. Id. at 60-61, in App. Vol. I at 334-35.
FN17. Id. at 72-73, in App. Vol. I at 346-47.
FN18. Id.
After reviewing the record, this court is left with the definite and firm conviction that the bankruptcy court was mistaken in finding that the partnership no longer serves an estate planning purpose. As was the limited liability company in Ehmann, the limited partnership was set up to allow Mr. Bailey to retain complete control of the partnership assets during his lifetime, while at the same time removing them from his estate for tax purposes. This purpose is still being served and will continue to be served even if the partnership were to become totally inactive. In addition, at various times the general partner has made, or attempted to make, profits for the partnership that were then reinvested in the property. Such profit-seeking efforts, such as the possible sale or subdivision of the real property, are expected to continue as circumstances allow, and serve the partnership purpose of preserving and maintaining assets for the benefit of Mr. Bailey's heirs. [FN19] Given that the partnership was set up, among other things, to hold, improve, and sell real property, along with any other valid business purpose, we can only conclude that the partnership is still operated within the parameters of its stated purposes.
FN19. In fact, absent its for profit" business purposes, the limited partnership might not be a lawful partnership under Oklahoma law. See Okla. Stat. tit. 54, § 1-101(6) and § 144 (2005); Roby v. Day, 635 P.2d 611, 613 (Okla.1981).
In addition, Okla. Stat. tit. 54, § 346 (2005), the statute upon which the bankruptcy court relied in dissolving the partnership, requires a finding that it is no longer "reasonably practicable to carry on the business [of the partnership] in conformity with the partnership agreement." The bankruptcy court found this provision applicable because the general partner "does not recognize" the trustee's interest in the partnership. [FN20] However, the precise purpose of the adversary proceeding and this appeal is to let Mr. Bailey know just what interest the trustee holds. Mr. Bailey testified that he did not believe that the trustee should be given Carolyn's partnership interest, and that he did not want the trustee to be his partner. [FN21] Significantly, however, Mr. Bailey did not testify that he could or would not continue to carry out his duties as general partner in the event the trustee was found to have an interest in the partnership, nor did he testify that he would refuse to recognize the court's determination of the trustee's interest. In any event, the partnership agreement does not require Mr. Bailey either to deal with or to "recognize" the limited partner as he carries out his duties as general partner.
FN20. Order at 6, in App. Vol. I at 270.
FN21. Tr. at 72-73, in App. Vol. I at 72-73.
Since the trustee holds Carolyn's rights with respect to the partnership, and since Carolyn has neither management power under the partnership agreement, nor any present right to dissolve or liquidate the partnership, then the trustee doesn't either. Carolyn, and therefore the trustee, does have a right under state law to require the general partner to exercise his partnership duties as a fiduciary. Okla. Stat. tit. 54, § 1-404 (2005). In addition, the trustee has succeeded to any rights Carolyn could exercise under the Limited Partnership Agreement, including without limitation, the rights set forth in ¶¶ 14 and 16 of that agreement. However, since the partnership is operating as allowed under the partnership agreement and Oklahoma law, we are constrained to say that the trustee has no present right to force either dissolution of the partnership or liquidation of its assets.
V. CONCLUSION
We therefore reverse the bankruptcy court's conclusion that the partnership is subject to dissolution pursuant to Okla. Stat. tit. 54, § 346 (2005), and remand for further proceedings in accordance with this decision.
Good article by Rachel Silverman of the Wall Street Journal on Asset Protection, entitled:
"A Fortress for Your Money -- How to Guard Against LawsuitsAnd Other Claims on Assets;The 'Equity Strip' Maneuver", By RACHEL EMMA SILVERMANJuly 15, 2006; Page B1
Here is an older case that deals with the Crime-Fraud Exception to Attorney-Client Privilege in the Fraudulent Transfer context. In re Andrews, 186 B.R. 219 (E.D.Va. 1995)
United States Bankruptcy Court, E.D. Virginia,
Alexandria Division.
In re John A. ANDREWS, Debtor.
RIGGS NATIONAL BANK, American Security Bank, Plaintiffs,
v.
John A. ANDREWS, Defendant.
Bankruptcy No. 92-14879-AT.
Adv. No. 93-1012.
July 25, 1995.
*220 Wayne G. Travell, Washington, DC, for debtor.
Brian F. Kenney, Fairfax, VA, for NationsBank.
William Trencher, Washington, DC, for Riggs National Bank of Washington, D.C.
MEMORANDUM OPINION
DOUGLAS O. TICE, Jr., Bankruptcy Judge.
Hearing was held May 17, 1995, on the motion of nonparty Stefan F. Tucker, Esq., for a protective order precluding the taking of Tucker's deposition in connection with an adversary proceeding filed against Debtor John A. Andrews. Tucker alleged that any relevant information that he might possess was protected by the attorney-client privilege. Plaintiffs argued that the information sought falls within the crime/fraud exception to the attorney-client privilege and is, therefore, discoverable. The court took the matter under advisement. For the reasons stated in this memorandum opinion, the court will enter an order denying the motion for a protective order for any communications concerning a continuing or contemplated fraud. To the extent plaintiffs seek to elicit information from communications regarding legal advice *221 on past fraud, the court will enter a protective order.
Findings of Fact [FN1]
FN1. The Findings of Fact are made solely for the disposition of the motion for a protective order and are not binding on the parties in the underlying adversary proceeding.
On May 10, 1991, First American Bank of Virginia obtained a confessed judgment in state court against Debtor John A. Andrews in the amount of $1,275,000.00. First American again obtained a confessed judgment against debtor on September 13, 1991, in the amount of $500,000.00. On September 19, 1991, First American obtained a confessed judgment against debtor in the additional amount of $137,333.00.
Tucker, Flyer represented debtor in these actions and filed motions to set aside the confessed judgments. On March 26, 1992, the state court denied the motions and granted plaintiffs $100,000.00 in fees on May 29, 1992.
Debtor John A. Andrews filed a chapter 7 bankruptcy petition on October 14, 1992.
Plaintiffs Riggs National Bank and American Security Bank filed an adversary proceeding against debtor objecting to debtor's discharge under 11 U.S.C. § 727(a)(2), alleging that debtor transferred property within the year preceding his bankruptcy case with the intent to hinder, delay, or defraud his creditors.
On April 17, 1995, plaintiffs served a subpoena on Tucker, seeking to compel his attendance at a discovery deposition in this matter. Tucker is a founder, a senior attorney, and a principal in Tucker, Flyer and Lewis. Tucker has represented debtor on numerous prepetition matters. Mr. Wayne Travell, a member of Tucker, Flyer is debtor's bankruptcy counsel.
Although there are many transfers at issue in the underlying adversary proceeding objecting to debtor's discharge, the specific facts surrounding the transfers of which plaintiffs desire further discovery are as follows:
1. Windward Passage, L.P. Windward Passage, L.P., is a Virginia limited partnership. Debtor owned his 49.5% limited partnership interest individually. Windward Passage owns an unimproved lot known as Lot 5C, Peter Bay Subdivision, United States Virgin Islands. On April 1, 1992, debtor executed a Distribution and Nominee Agreement drafted by Tucker, Flyer. By the term of the agreement, Windward Passage distributed all of its beneficial interest in the property to the partners, debtor and Scott Meese. Debtor and Meese then contributed all of their beneficial interest in the property to Catherineberg Fund Limited Partnership. Debtor owns his 49.5% limited partnership interest in Catherineberg Fund as tenants by the entireties with his wife. Under this agreement Windward Passage would continue to hold the property as "nominee, agent and straw party for Catherineberg." No evidence of consideration has been presented for the transfer of debtor's interest in the property to Catherineberg Fund. The transfer is not listed in debtor's schedules or statement of affairs. After the filing of this adversary proceeding, Windward Passage and Catherineberg Fund entered into a termination agreement which purports to the terminate the distribution and nominee agreement.
2. 1986 Ferrari Automobile. Debtor initially owned a 1986 Ferrari individually. Debtor paid $128,000.00 for the automobile in 1986. On October 23, 1991, debtor filed an application for a certificate of title to add his wife to the title. The certificate of title was issued on October 23, 1991, naming debtor and Helen Andrews as joint title holders. Debtor sold the car to a dealership in Massachusetts. The current whereabouts of the vehicle is unknown. A Fax cover sheet from debtor to Tucker concerning the retitling is dated "10/92," a year after the alleged fraudulent transfer of title occurred.
3. $50,000 Escrow Account at Tucker, Flyer: During the year preceding his bankruptcy case, debtor set up an escrow account at Tucker, Flyer to which he transferred an amount in excess of $50,000.00. The escrow account was used to pay some of debtor's creditors. Debtor *222 admitted that he established the account to avoid garnishment of the funds.
Debtor discussed each transfer with Tucker before conveying the subject property.
Position of Parties
Plaintiffs argue that Tucker should appear at a deposition and testify about his conversations with debtor regarding the questioned transfers. Plaintiffs claim that the communications are excepted from the attorney-client privilege because the discussions involved a continuing fraud.
Tucker alleges any relevant information that he might possess about the transactions is protected by the attorney-client privilege. Tucker claims that there are legitimate, legal explanations for the transfers, and that, therefore, he has rebutted the prima facie case of fraud. Tucker also alleges that plaintiff's discovery request is a trial tactic to force debtor to obtain new counsel.
Discussion and Conclusions of Law
The crime/fraud exception to the attorney-client privilege has been recognized in this country for many years. See Clark v. United States, 289 U.S. 1, 53 S.Ct. 465, 77 L.Ed. 993 (1933); In re Grand Jury Proceedings, 727 F.2d 1352, 1355 (4th Cir.1984). As the Supreme Court held, "[a] client who consults an attorney for advice that will serve him in commission of a fraud will have no help from the law. He must let the truth be told." Clark, 289 U.S. at 14, 53 S.Ct. at 469.
In essence, a client's communication with his attorney is not privileged if it involves a continuing or contemplated crime or fraud. See In re Grand Jury Subpoena, 884 F.2d 124, 127 (4th Cir.1989). Furthermore, an attorney's knowledge of the client's wrongful intent is irrelevant. Clark, 289 U.S. at 15, 53 S.Ct. at 469-70; see also United States v. Ballard, 779 F.2d 287, 292-93 (5th Cir.), cert. denied, 475 U.S. 1109, 106 S.Ct. 1518, 89 L.Ed.2d 916 (1986).
The crime/fraud exception applies to fraudulent transfers in the bankruptcy context. See Ballard, 779 F.2d 287; In re Hunt, 153 B.R. 445 (Bankr.N.D.Tex.1992); In re Cumberland Inv. Corp., 120 B.R. 627 (Bankr.D.R.I.1990).
In order to invoke the crime/fraud exception, the movant must make a prima facie showing that the communications were either made for an unlawful purpose or that the communications reflect ongoing or future unlawful activity. X Corp. v. Doe, 805 F.Supp. 1298, 1306 (E.D.Va.1992). The movant does not have to conclusively prove the elements of the purported crime or fraud, X Corp., 805 F.Supp. at 1307, but the movant must show that the client possessed the requisite intent. Industrial Clearinghouse, Inc. v. Browning Mfg. Div. of Emerson Elec. Co., 953 F.2d 1004, 1008 (5th Cir.1992).
Pursuant to § 727(a)(2)(A), plaintiffs object to debtor's discharge. Under this section a debtor is not entitled to a discharge if he transferred, within one year before the date of the bankruptcy filing, property with the intent to hinder, delay, or defraud creditors. "Because proof of actual intent [of fraudulent transfers to hinder, delay or defraud creditors] is often unavailable through direct evidence, courts have traditionally relied upon certain well-defined badges or indicia of fraud to presume fraudulent intent." In re Warner, 87 B.R. 199, 202 (Bankr.M.D.Fla.1988). The indicia include: (1) A relationship between the debtor and the transferee; (2) Lack of consideration for the conveyance; (3) Debtor's insolvency or indebtedness; (4) Transfer of debtor's entire estate; (5) Reservation of benefits, control, or dominion by the debtor; (6) Secrecy or concealment of the transaction; and (7) Pendency or threat of litigation at the time of transfer. See In re Warner, 87 B.R. at 202; In re Porter, 37 B.R. 56, 60-61 (Bankr.E.D.Va.1984).
As the Fifth Circuit held,
'A fraud upon creditors consists in the intention by the debtor to prevent his creditors from recovering their just debts by withdrawing his property from the reach of his creditors.' ... This intention can be found by the existence of certain indicia or badges of fraud. These involve the following considerations: (1) lack of consideration for the transfer; (2) close *223 family relationship between the transferor and the transferee; (3) pending or threatened litigation against the transferor; and (4) insolvency or substantial indebtedness of the transferor. '[W]hile a badge of fraud standing alone may amount to little more than a suspicious circumstance, insufficient in itself to constitute a fraud per se, several of them when considered together may afford a basis from which its existence is properly inferable.'
United States v. Fernon, 640 F.2d 609, 613 (5th Cir.1981) (citations omitted).
In the case of the transfer of the interest in real property in the Virgin Islands, debtor concedes that he consulted with Tucker, Flyer prior to the Windward Passage transfer. Debtor executed an agreement drafted by Tucker, Flyer. By the terms of the agreement, Windward Passage distributed all of its beneficial interest in the property to the partners, debtor and Scott Meese. (Debtor individually owns the interest in Windward Passage.) Debtor and Meese then contributed all of their beneficial interest in the property to Catherineberg Fund Limited Partnership. (Debtor owns his 49.5% limited partnership interest in Catherineberg Fund as tenants by the entireties with his wife.) There is no evidence that Catherineberg Fund gave any consideration for the transfer. Under this agreement Windward Passage would continue to hold the property as "nominee, agent and straw party for Catherineberg." Furthermore, there is no evidence that the transfer was recorded in land records, and debtor did not list the transfer in his schedules. Finally, the transfer occurred a few days after a state court declined to set aside large judgments that had been entered against debtor.
Debtor claims that he transferred the property interest for legitimate business purposes and that he has, therefore, rebutted movant's prima facie case. Contrary to debtor's assertion, he has not rebutted the prima facie case. Debtor fails to explain why no consideration was exchanged, why Windward Passage was to hold the property as a straw party for Catherineberg Fund, why he neglected to record the transfer, and why he did not list the transfer in his schedules.
Based on the unrefuted indicia of fraudulent intent, debtor's communications with counsel regarding the transfer are excepted from the attorney-client privilege. Debtor's argument that the transfer was subsequently reversed is irrelevant. Even assuming that the termination agreement reverses the distribution and nominee agreement, the indicia of fraud to presume debtor's fraudulent intent are unaffected. Furthermore, debtor did not attempt to reverse the transaction until after this adversary proceeding was commenced and after the trustee had filed an adversary proceeding to avoid the transfer.
In the case of the 1986 Ferrari, debtor initially owned the automobile individually. Approximately one month after the large judgments in excess of 1.9 million dollars were confessed against debtor, he filed an application for a certificate of title to add his wife to the title. The certificate of title was issued on October 23, 1991, naming debtor and Helen Andrews as joint title holders. Debtor stated in a state court deposition that he conferred with Tucker before he added his wife to the title. Debtor now argues that the original title of the car was supposed to be in the name of him and Mrs. Andrews and that the retitling merely corrected the error.
The court finds that the indicia of fraud outweigh the alleged explanation. However, the court limits discovery on this issue to events prior to the retitling. Communications occurring after the car was retitled are protected. [FN2] See United States v. Zolin, 491 U.S. 554, 562-63, 109 S.Ct. 2619, 2625-26, 105 L.Ed.2d 469 (1989) (holding "communications seeking legal advice regarding past crimes or frauds are ... privileged").
FN2. The Fax cover sheet from debtor to Tucker concerning the retitling is dated "10/92," a year after the alleged fraudulent transfer of title occurred.
In the case of the $50,000 escrow account at Tucker, Flyer, debtor established the account at Tucker, Flyer with an excess of $50,000.00 during the year preceding the filing of his bankruptcy case and within close proximity to the entry of plaintiffs' judgment debts. It is undisputed that debtor paid *224 creditors with funds from the account. In fact, debtor admitted that he established the account to avoid garnishment of the funds but argued that it is not illegal to pay certain creditors ahead of others.
Debtor's statement in the abstract may be correct; however, fraudulent transfers and preferential transfers are subject to avoidance actions in bankruptcy. The court does not nor am I required to determine whether debtor intended to defraud his creditors in this motion for a protective order; the badges of fraud are enough to establish a prima facie case of fraud which excepts the communications from the attorney-client privilege.
Although it is abundantly clear to the court that counsel for both parties are skeptical of opposing counsel, debtor's counsel has presented no evidence of any improper motive of plaintiff's counsel. Given the substantial indicia of fraud surrounding the transfers, the logical conclusion is that counsel seeks to discover further information about debtor's intent to hinder and delay creditors.
Although plaintiffs have not yet proven debtor's intent in regard to the questioned transactions, plaintiffs have raised through the indicia of fraud the inference that the transfers may have been fraudulent. This prima facie showing of fraud is sufficient to warrant applying the crime/fraud exception to the attorney-client privilege. [FN3] See In re Warner, 87 B.R. at 203. At trial, the court is committed to hearing admissible evidence relating to the transfers, and then I will make an objective determination of the issues on the merits.
FN3. The court does not infer any ill motive on the part of counsel nor does the court have to make such a finding. See Clark, 289 U.S. at
15, 53 S.Ct. at 469-70; Ballard, 779 F.2d at 292-93.
ACCORDINGLY, the court will enter a separate order denying Tucker, Flyer's motion for a protective order for any communications concerning a continuing or contemplated fraud. To the extent plaintiffs seek to elicit information from communications regarding legal advice on past fraud, the court will enter a protective order.
Ever wonder whether the crime-fraud exception to attorney-client privilege applies in the fraudulent transfer context? Read this case for an excellent discussion of the subject.
In re Galaxy Computer Services, Inc., 2004 WL 3661433 (E.D.Va. 2004)
Lawrence Philip Block, Stinson Morrison Hecker LLP, Washington, DC, for Appellee.
MEMORANDUM OPINION
BRINKEMA, J.
Before the Court is an appeal from an Order of the United States Bankruptcy Court compelling production of documents that appellants had withheld under a claim of attorney-client privilege. For the reasons discussed below, the Order of the bankruptcy court will be affirmed.
I. Background
This matter arises from an adversary proceeding brought by Galaxy Computer Services, Inc. ("Galaxy"), a bankrupt company whose parent is Dolfin.com, Inc. ("Dolfin"), to recover Galaxy assets that were transferred to another company, Pinnacle Financial Strategies, Inc. ("Pinnacle"), through a foreclosure sale that Galaxy claims was fraudulent.
Because Galaxy handled classified computer security projects for the Department of Defense and Dolfin had Canadian ownership, the parent and subsidiary maintained an arm's length relationship, with a four-member proxy board representing Dolfin's interest in the company. Lara Baker and Gary Sullivan were officers of Galaxy and had stakes in the company. Baker and Sullivan sat on the proxy board, with the other two proxy board members independent of the day-to-day management of Galaxy.
In early 2003, Pinnacle sought to acquire Galaxy from Dolfin, but after due diligence an agreement was not reached. Subsequently, in March 2003, the holder of Galaxy's secured debt, Los Alamos National Bank ("LANB"), called Galaxy's debt and demanded payment. When LANB called the debt, Baker waived Galaxy's rights to notice and cure and informed LANB that Galaxy could not pay. LANB then foreclosed on the debt and seized Galaxy's assets (including its rights under the government contracts), which LANB then sold in a private sale to Galaxy CSI LLC ("CSI"), a Pinnacle subsidiary. Baker and Sullivan resigned from Galaxy and went to work for CSI, and most Galaxy employees joined CSI, continuing to work on the same contracts after the insolvent Galaxy terminated them.
In the adversary proceeding, Galaxy alleged that Pinnacle, Baker, and Sullivan had colluded to defraud Galaxy and its parent Dolfin of the government contracts and other assets. Specifically, Galaxy alleged that Baker and Sullivan had breached their fiduciary duties as proxy board members by misrepresenting the state of Galaxy to LANB, causing the debt to be called, and failing to inform Dolfin that the debt had been called so that Dolfin would have a chance to pay it. Rather, Baker and Sullivan hid this information from the independent proxy board members and Dolfin, because they were conspiring with Pinnacle to purchase the assets in foreclosure.
In discovery, Galaxy subpoenaed documents relating to communications among Baker, Sullivan, and Pinnacle about the foreclosure and asset purchase. Andrews & Kurth, the law firm which had advised the parties on the transactions, withheld certain documents as privileged. Galaxy moved to compel, arguing that the documents fell within the crime/fraud exception to privilege. After hearing argument and testimony, reviewing deposition testimony, and conducting an in camera review of 39 documents, the bankruptcy court upheld the claims of privilege for some documents and held that others were not privileged, either because they fell within the crime/fraud exception or were not communications for the purpose of obtaining legal advice. Specifically, the bankruptcy court found that documents 2, 7, 9, 10, 12, 13, 16, 17, 20, 24, 25, 26, 31, 35, 36, 37, and 39 were not covered by the attorney-client privilege and documents 3, 4, 5, 6, 11, 14, 15, 19, 21, 27, and 28-29 fell within the crime/fraud exception. On December 15, 2003, the bankruptcy court ordered the production of those documents.
*2 Pinnacle and CSI now appeal this Order, arguing that the bankruptcy court erred in applying the crime-fraud exception and treating other documents as non-privileged. On December 22, 2003, this Court stayed the bankruptcy court Order requiring production pending this appeal. Galaxy Computer Inc. v. Galaxy CSI, LLC, et al., Misc. No. 03-59 (E.D.Va. Dec. 22, 2003).
II. Discussion
The ruling of the bankruptcy court presents mixed questions of law and fact. Legal conclusions of the bankruptcy court are reviewed de novo. In re Morris Communications NC, Inc., 914 F.2d 458, 467 (4th Cir.1990). We review "factual findings underlying an attorney-client privilege ruling" for clear error. In re Grand Jury Subpoena, 341 F.3d 331, 334 (4th Cir.2003). The determination of whether a prima facie showing of crime or fraud has been made is reviewed for abuse of discretion. In re Grand Jury Proceedings, 102 F.3d 748, 751 (4th Cir.1996).
Appellants argue that the bankruptcy court relied on an incorrect legal analysis in finding that certain documents fell within the crime/fraud exception to the attorney-client privilege. Appellants claim that the crime/fraud exception applies only to criminal conduct and common-law fraud, neither of which is pled in this case, and that a fraudulent transfer, breach of fiduciary duty, or other inequitable conduct is not sufficient to breach the privilege. See In re Spalding Sports Worldwide, Inc., 203 F.3d 800, 807 (Fed.Cir.2000); Laser Industries, Ltd. v. Reliant Technologies, Inc., 167 F.R.D. 417, 424 (N.D.Cal.1996). Appellees counter that courts in this circuit have held that fraudulent transfer and fraudulent conveyance claims under the Bankruptcy Code fall within the crime/fraud exception. See In re Andrews, 186 B.R. 219 (Bankr.E.D.Va.1995); In re Vereen, 1999 WL 33485642 (Bankr.D.S.C.1999).
The crime/fraud exception has been applied to reach both fraudulent transfers in the bankruptcy context and breaches of fiduciary duty. Andrews, 186 B.R. at 222; Fausek v. White, 965 F.2d 126, 133 (6th Cir.1992). The cases requiring a showing of common-law fraud that appellants cite were both patent cases, in which the courts distinguished common-law fraud from failure to disclose prior art to the PTO, and found that the latter did not justify invading the attorney-client privilege. However, in the instant case, the allegations in the complaint are not just of isolated misrepresentations, but of an extensively planned course of dealing to collude with a competitor and clandestinely transfer assets from the parent company, through transactions structured with the advice of counsel. Such allegations of fraudulent transfer and fraud by the subsidiary's directors on the parent corporation are sufficient allegations of fraud in a bankruptcy case to invoke the crime-fraud exception. See Hon. Barry Russell, Bankruptcy Evidence Manual § 501.11 (2004). Therefore, we do not find that the bankruptcy court used an incorrect legal analysis.
*3 Appellants next argue that Galaxy failed to establish a prima facie case of fraud. For the crime/fraud exception to apply, the movant must make a prima facie showing of fraudulent conduct. United States v. Ruhbayan, 201 F.Supp.2d 682, 685 (E.D.Va.2002). This prima facie showing has two prongs: "1) that defendant was engaged in or planning a criminal or fraudulent scheme and used his counsel to further the scheme, and 2) that the privileged information bears a close relationship to the criminal or fraudulent scheme." Id. at 685-86. To make this prima facie case, Galaxy submitted documents and deposition testimony that showed collusion among Pinnacle, Baker, and Sullivan. Having reviewed this information, the bankruptcy court found on the record that there was a strategy to
"keep everything secret from Dolfin. This was not a case of mere failure to inform. There were affirmative efforts to make sure that Dolfin did not find out. As I stated, Andrews & Kurth ... handled the transactional work, that is, assisted Pinnacle in making the bid, but also preparing other documents, the resignation of Mr. Sullivan and Dr. Baker from their positions at Galaxy which did not occur until after. That was carefully orchestrated again ... There are a lot of objective facts here that do point to a fraudulent scheme, the fraud being to wrest the assets away from Dolfin and the key to making that work was to keep Dolfin in the dark because if Dolfin knew about it one reading of the evidence is that they could frustrate it by the simple exped[ient] of paying the note."
Transcript, Dec. 3, 2003, p. 39-40, 43. Our own in camera review of the documents at issue supports this finding of the Bankruptcy court.
Appellants do not dispute that the bankruptcy court made this finding, but argue that the bankruptcy court also found that evidence supported the view that Dolfin had unclean hands. Specifically they argue that Dolfin's failure to keep Galaxy solvent authorized Galaxy directors Baker and Sullivan under Delaware law to act as fiduciaries to Galaxy's creditors, with fiduciary obligations to shareholder Dolfin taking a secondary role. In arguing that Baker and Sullivan were complying with their fiduciary duties to Galaxy's creditors, appellants rely on Odyssey Partners, L.P. v. Fleming Companies, 735 A.2d 386, 417-21 (Del.Ch.1999). Odyssey held that directors did not breach their fiduciary duties when they enabled a secured creditor to foreclose on corporate assets, eliminating shareholder equity. Under Delaware law, when a corporation is insolvent, the fiduciary duties of officers and directors shift, so that a duty to creditors trumps the duty to shareholders. Geyer v. Ingersoll Publications Co., 621 A.2d 784, 787 (Del.Ch.1992). Appellants point to evidence that Dolfin's failure to adequately capitalize Galaxy, secure its debts, or compensate Baker and Sullivan "swindled" the Galaxy assets from Baker and Sullivan. In light of this history, appellants argue, Baker and Sullivan were simply conducting a sensible business transaction by seeking buyers for Galaxy's assets to preserve their interests as personal guarantors of Galaxy's debt.
*4 Appellees distinguish Odyssey, and the bankruptcy court agreed with the distinction, because in Odyssey the board was acting as a whole, and did not withhold information from shareholders or other board members, as Baker and Sullivan did here. The problem with the appellants' argument is that it does not explain the efforts made to hide the loan foreclosure from Dolfin. If the true concern was that Dolfin would refuse to pay the notes when the bank called them, there would be no harm in presenting Dolfin with the opportunity to pay, and proceeding accordingly if Dolfin failed to do so. Instead, as the bankruptcy court found, Baker, Sullivan, and Pinnacle took steps to hide the foreclosure from the two independent proxy board members, depriving Dolfin of any opportunity to pay the notes and cure the default. Based on the evidence in this record of self-dealing and deliberate concealment of information, documents that show willful misrepresentation of the consent of the independent proxy board members are plainly relevant to the claim of fraudulent transfer of Galaxy's assets. Therefore, the bankruptcy court's finding that Baker and Sullivan were not acting in accordance with their fiduciary responsibilities as defined in Odyssey is not error.
Appellants' other objection is to the bankruptcy court's finding that some documents were not protected by the attorney-client privilege at all, because they did not seek legal advice. Appellant argues that the underlying documents have already been provided in discovery, but that the fax transmittal sheets that show when and to whom the documents were sent are privileged, because they necessarily reveal the types of communications that occurred between the attorney and client. Appellants rely on two California cases, Mitchell v. Superior Court, 37 Cal.3d 591, 600, 208 Cal.Rptr. 886, 691 P.2d 642 (Cal.1985) and Solin v. O'Melveny & Myers, LLP, 107 Cal.4th 451, 457 (Cal.App.2001) for their argument that the mere fact of transmittal can be privileged.
Appellees respond with cases in which routine transmittal letters are not privileged or work product. See P. & B. Marina, LP v. Lougrande, 136 F.R.D. 50, 54 (E.D.N.Y.1991); Stout v. Ill. Farmers Ins. Co., 150 F.R.D. 594 (S.D.Ind.1993). On the facts of this case, the bankruptcy court did not find the fact of transmittal of the documents to be confidential such that it implicated the attorney-client privilege, and our own in camera review of the documents at issue supports that finding. Accordingly, we find no error in the ruling of the bankruptcy court on this issue.
III. Conclusion
For the reasons discussed above, the appeal from the United States Bankruptcy Court is DENIED, and the Order of the bankruptcy court AFFIRMED. An appropriate Order shall issue.
Because we find that appellants cannot establish a likelihood of success on the merits on further appeal and that the public interest will not be served by further delay in this case, we will not stay our Order pending appeal. Long v. Robinson, 432 F.2d 977, 979 (4th Cir.1970). However, to give appellants an opportunity to seek a stay from the United States Court of Appeals for the Fourth Circuit, we will not require production of documents for ten (10) days from the issuance of this Opinion and the accompanying Order.
Here is a Utah case where the self-settled spendthrift trust provisions were upheld under the new Utah DAPT law. The result is predictable as the involved assets were in Utah. The concerns that remain for such trusts is how they will be treated by non-DAPT states and under the new 10-year clawback provisions for self-settled trusts under the 2005 amendments to the bankruptcy code. Lakeside Lumber Products, Inc v. Renee Evans, Dan R. Evans, et al.,
2005 UT App 87 (Utah App. 02/25/2005) COURT OF APPEALS OF UTAH 2005 UT App 87;2005 Utah App. LEXIS 71 Case No. 20010334-CA
Appeal from Second District, Farmington Department. The Honorable Jon M. Memmott.
Affirmed.
COUNSEL: Clinton J. Bullock, J. Jay Bullock, and Karen Bullock Kreeck, Salt Lake City, for Appellant.
Loren D. Martin, Salt Lake City, for Appellee. JUDGES: Before Judges Billings, Bench, and Thorne.
OPINION: BENCH, Associate Presiding Judge:
Lakeside Lumber Products, Inc. (Lakeside) appeals the district court's grant of summary judgment in favor of Dan R. and Renee Evans. We affirm.
BACKGROUND
In 1996, Dan Evans, in his capacity as manager of a limited liability company, E.S. Systems, executed a personal guarantee agreement in favor of Lakeside. Lakeside delivered goods to E.S. Systems, but E.S. Systems and Dan Evans failed to pay for the goods. In 1998, E.S. Systems filed for bankruptcy. Later that same year, Lakeside obtained a judgment against Dan Evans in Arizona. Dan Evans filed a petition for bankruptcy in 1999.
Lakeside brought the present action against Dan and Renee Evans in 1998, seeking to satisfy the Arizona judgment by obtaining an interest in the couple's primary residence. Dan and Renee Evans had transferred the home to an intervivos trust several years earlier. In 1989, Dan and Renee Evans executed the DaRe Family Trust Agreement, which created three separate trusts: the DaRe Trust, the Daymond Trust, and the Revans Trust. The Evanses conveyed the home to the Revans Trust. Article II of the DaRe Family Trust Agreement, which outlines the terms of the Revans Trust, states that: "Property held as 'The Revans Trust' is the exclusive property of Renee Poulsen Evans and Daniel Raymond Evans hereby expressly waives all interests . . . therein." Dan and Renee Evans were joint trustees under the DaRe Family Trust Agreement.
The DaRe Family Trust Agreement was amended in 1997. As part of the amendment process, Dan and Renee Evans executed a separate trust agreement for the Revans Trust, naming Renee Evans as the sole trustee. In addition, the couple filed a quitclaim deed as trustees, purporting to reconvey the home to the Revans Trust. The stated purpose of the quitclaim deed was "to reflect that Daniel R. Evans . . . no longer serves as a trustee."
Lakeside's complaint alleged that either the initial transfer to the trust or the subsequent amendment constituted a fraudulent transfer. Alternatively, Lakeside asked the district court to create a constructive trust in Lakeside's favor because, in Lakeside's view, Dan Evans continues to hold an interest in the home as a beneficiary and still has power to revoke the transfer under the Revans Trust.
After suit was filed, Dan and Renee Evans moved for summary judgment and Lakeside filed a cross-motion for summary judgment. In granting summary judgment in favor of Dan and Renee Evans, the district court concluded that the undisputed facts did not demonstrate that Dan Evans transferred the home to the trust with the intent to defraud his creditors. Further, the district court determined that the 1997 amendment to the trust agreement was not a transfer, but merely an addition to the trust agreement. With regard to the constructive trust claim, the district court held that the trust agreement did not give Dan Evans the power to revoke the transfer of the home. The district court stated that Dan Evans was a beneficiary of the Revans Trust, but refused to create a constructive trust in Lakeside's favor. Lakeside appeals.
ISSUES AND STANDARDS OF REVIEW
Lakeside argues that the district court erred in rejecting its claims for fraudulent transfer and constructive trust, and in granting the Evanses' motion for summary judgment.
"In reviewing a grant of summary judgment, we view the facts and all reasonable inferences drawn therefrom in the light most favorable to the nonmoving party." Higgins v. Salt Lake County, 855 P.2d 231, 233 (Utah 1993). Summary judgment is proper when "there is no genuine issue as to any material fact" and "the moving party is entitled to a judgment as a matter of law." Utah R. Civ. P. 56(c). Moreover, a district court's interpretation of a "trust instrument is a question of law," which we review for correctness. Jeffs v. Stubbs, 970 P.2d 1234, 1251 (Utah 1998).
ANALYSIS
I. Fraudulent Transfer
A. The 1989 Conveyance
Lakeside argues that the district court erred in concluding that the 1989 conveyance of the home to the trust was not fraudulent as a matter of law. Under the Uniform Fraudulent Transfer Act (the Act), the transfer of an asset "is fraudulent . . . if the debtor made the transfer . . . with actual intent to hinder, delay, or defraud any creditor." Utah Code Ann. § 25-6-5(1) (1998). The existence of "fraudulent intent is ordinarily considered a question of fact, and may be inferred from the existence of certain indicia of fraud" enumerated in the Act. Territorial Sav. & Loan Ass'n v. Baird, 781 P.2d 452, 462 (Utah Ct. App. 1989) (citations and quotations omitted). Indicia of fraud "are facts having a tendency to show the existence of fraud, although their value as evidence is relative not absolute." Id. (citations and quotations omitted). Under the Act, indicia of fraudulent intent include: "transfer . . . to an insider," and "the debtor retaining possession or control of the property." Utah Code Ann. § 25-6-5(2)(a), (b). Moreover, the Act provides that the enumerated indicia of fraud are to be considered "among other factors" in determining actual intent. Id. § 25-6-5(2).
With regard to the 1989 conveyance, Lakeside argues that two indicia of fraud are present: (1) Dan Evans transferred the home to an "insider"; and (2) Dan Evans has continued to reside in the home, effectively retaining control of the property. Assuming, without deciding, that Lakeside's contentions are true, we conclude that these indicia of fraud, considered in conjunction with "other factors," fail to create a triable issue of fact in this case. Crucial to our determination is the temporal remoteness of the 1989 conveyance to both the 1996 guarantee agreement and Dan Evans's 1999 petition for bankruptcy. Lakeside has pointed to no facts suggesting that in 1989, or shortly thereafter, Dan Evans was insolvent or experiencing other financial difficulties. Likewise, there are no facts in the record that would suggest that the 1989 transfer was part of a larger scheme to defraud future creditors such as Lakeside. Based merely on the indicia of fraud cited by Lakeside--transfer to an insider and retaining control of the transferred property--a jury could not rationally conclude that Dan Evans transferred the property with an intent to defraud creditors. Thus, the district court did not err in granting summary judgment on this issue.
B. The 1997 Trust Amendment
Lakeside contests the district court's conclusion that the 1997 amendment to the trust was not a transfer, but simply a modification of the trust agreement. Under the Act, a transfer is defined as "every mode . . . of disposing of or parting with an asset or an interest in an asset." Utah Code Ann. § 25-6-2(12) (1998). At the time of their creation, the DaRe Trust, the Daymond Trust, and the Revans Trust were governed by a single trust agreement, entitled "the DaRe Family Trust." Under the 1989 trust agreement, Dan and Renee Evans were both trustees of the Revans Trust. In 1997, the trust agreement was amended and a separate agreement for the Revans Trust was created. At that time, Dan and Renee Evans, as trustees, executed a quitclaim deed to the Revans Trust and named Renee Evans as the sole trustee.
We conclude that these actions did not effectuate a transfer within the meaning of section 25-6-2(12). Dan Evans did not part with an asset or an interest in an asset by signing the quitclaim deed as a trustee. The purpose of the amendment and the quitclaim deed was to reflect Dan Evans's resignation as trustee. The district court did not err in determining that the 1997 amendment was not a transfer. Thus, the district court properly granted summary judgment in favor of Dan and Renee Evans on Lakeside's fraudulent transfer claim.
II. Constructive Trust
Lakeside argues that the undisputed material facts justified the creation of a constructive trust in Lakeside's favor. "A constructive trust is an equitable remedy which arises by operation of law to prevent unjust enrichment." Ashton v. Ashton, 733 P.2d 147, 150 (Utah 1987). "The plaintiff in bringing a suit to enforce a constructive trust seeks to recover specific property." Restatement of Restitution § 160 cmt. a (1937). Because Lakeside is seeking to recover specific property, Lakeside must show a nexus between the alleged wrongful conduct and the property that is the target of the constructive trust action. See Baltimore & Ohio R.R. Co. v. Equitable Bank, 77 Md. App. 320, 550 A.2d 407, 412 (Md. Ct. Spec. App. 1988) ("In order to impose a constructive trust as a matter of law specific funds must be ascertained as traceable to fraudulent or wrongful conduct."); Restatement of Restitution § 160 cmt. b ("A constructive trust is imposed [*9] because the person holding title would profit by a wrong or would be unjustly enriched if he were allowed to keep the property."); 76 Am. Jur. 2d Trusts § 207 (1992) (noting that imposition of a constructive trust requires that "specific identifiable property" be held by the defendant).
Lakeside contends that a constructive trust is an appropriate remedy because Dan Evans is either a beneficiary of the Revans Trust or has power to revoke the transfer of the home. However, even assuming these facts, a constructive trust can only be imposed if Lakeside can demonstrate a connection between wrongful conduct and the property. See Baltimore & Ohio R.R. Co., 550 A.2d at 412.
Lakeside argues that it can prevail on its constructive trust claim without a showing of wrongful conduct. Lakeside points to section 156 of the Restatement of Trusts, which provides that "where a person creates for his own benefit a trust[,] . . . creditors can reach his interest." Restatement (Second) of Trusts § 156 (1959). The Restatement further provides that the creditor can reach the assets of a self-settled trust without showing fraudulent intent. See id., comment a. However, section 156 cannot be read to allow a creditor to reach assets of a self-settled trust under any theory of recovery, even where, as here, the theory urged by the creditor requires a showing of fraudulent or wrongful conduct. Section 156 merely states a general rule: A debtor's interest in a self-settled trust is reachable to the same extent as the debtor's non trust assets. Moreover, comment (a) of section 156 simply recognizes it is possible for a creditor to successfully reach self-settled trust assets without showing fraudulent intent, if the creditor pleads a proper theory of recovery. See Leach v. Anderson, 535 P.2d 1241, 1243 (Utah 1975) (citing the general rule that self-settled trusts are void against creditors and allowing a creditor to reach the assets of a self-settled trust under a statute that did not require a showing of fraudulent intent). Comment (a) does not suggest that a creditor's obligation to prove all required elements of an established cause of action is altered when the creditor seeks to reach the assets of a self-settled trust. Thus, Lakeside cannot avoid its obligation to prove each element of its constructive trust claim simply by citing the Restatement of Trusts. If Lakeside desired to recover without having to prove fraudulent or wrongful conduct, it was incumbent upon Lakeside to plead such a theory.
Lakeside also cites Butler v. Wilkinson, 740 P.2d 1244 (Utah 1987), for the proposition that a judgment creditor can reach a debtor's property via a constructive trust action. However, Butler is easily distinguished from the present case. In Butler, the Utah Supreme Court held that a constructive trust was necessary to permit judgment creditors to reach the proceeds resulting from a debtor's fraudulent transfer where the judgment creditors had no other remedy. See id. at 1262.
In contrast to Butler, the present case does not involve a fraudulent transfer or other wrongful conduct. The debtor's fraudulent transfer in Butler gave rise to the constructive trust; without the fraudulent transfer, a constructive trust would have been inappropriate. See id. Here, even if Dan Evans holds an interest in the Revans Trust, as Lakeside asserts, this fact alone does not give rise to a constructive trust in Lakeside's favor absent a showing of fraud or other wrongdoing. While it is true that Dan Evans has failed to pay his debt to Lakeside, it does not follow that Lakeside can collect on the debt by imposing a constructive trust on the home. Thus, we affirm the district court's conclusion that, as a matter of law, Lakeside cannot prevail on its constructive trust claim.
CONCLUSION
Accordingly, we affirm the district court's order granting summary judgment in favor of Dan and Renee Evans and denying Lakeside's cross-motion for summary judgment.
In re Dep, Inc., 1997 WL 1507390 (Bankr.E.D.Va. 2006)
A "friendly lien" is a lien placed on property to attempt to deny its value to creditors and which is also known as "equity stripping". Sometimes it works; sometimes it doesn't. Here we have the classic friendly lien case gone astray. Note how important the credibility of witnesses was in this case.
United States Bankruptcy Court, E.D. Virginia.
In re DEP, INC. Debtor.
-------------
C.F. Trust, Inc., Plaintiff,
v.
DEP, Inc., et al., Defendants.
Nos. 95-14438-SSM, 97-1017 Oct. 31, 1997
Harvey A. Levin, Birch, Horton, Bittner and Cherot, Washington, DC, for plaintiff. Robert Rae Gordon, Gordon & Pesner, L.C., McLean, VA, for defendant J.P. Development, Inc. Thomas P. Gorman, Tyler, Bartl, Burke & Albert, P.L.C., Alexandria, VA, for Gordon Peyton, Chapter 7 Trustee. James R. Schroll, Bean, Kinney & Korman, P.C., Arlington, VA, for Atlantic Funding Corporation. Paul D. Pearlstein, Pearlstein & Jacques, Washington, DC, for defendant Brent Jacques, Substitute Trustee.
MEMORANDUM OPINION
STEPHEN S. MITCHELL, Bankruptcy Judge. *1 A hearing was held in open court on September 10, 1997, on the plaintiff's motion for summary judgment in this action to determine the priority and extent of liens against certain real property owned by the debtor. At the conclusion of the hearing the court took the motion under advisement in order to review the evidence and the applicable law. [FN1] Having done so, the court concludes that a challenged first-lien deed of trust has not been extinguished but that a challenged judgment lien has.
FN1. Subsequent to the hearing, J.P. Development filed on September 24, 1997, in opposition to the summary judgment motion, an affidavit of Barrie M. Peterson. On October 8, 1997, C.F. Trust filed a motion to strike the affidavit. At a hearing held on October 28, 1997, the court granted the motion to strike the affidavit.
Background This is an action to determine the priority and extent of a judgment lien, purchased by J.P. Development, Inc. ("J.P.Development") vis-a-vis a deed of trust purchased by C.F. Trust, Inc. ("C.F.Trust"). Both liens are claimed to encumber twenty-two office condominium units, owned by the debtor, known as the Dominion Professional Center. The debtor, DEP, Inc. ("DEP" or "the debtor"), is a Virginia corporation, the stock of which is now entirely owned by Barrie M. Peterson. At all times during the events giving rise to the present controversy, however, the president of DEP was Scott Peterson, his son, who is also the president and sole shareholder of J.P. Development. DEP, Inc. filed a voluntary petition under chapter 11 of the Bankruptcy Code in this court on October 10, 1995, and operated for some 17 months as a debtor in possession. On its original schedules, DEP did not list the judgment lien now at issue, nor did it recognize or provide for the judgment lien in the first proposed chapter 11 plan it filed. Pltf. Exh. 26 and 27. On March 11, 1997, the debtor's case was converted to a case under chapter 7, and Gordon P. Peyton
