FILED
AUG 9 2019
NOT FOR PUBLICATION
SUSAN M. SPRAUL, CLERK
U.S. BKCY. APP. PANEL
OF THE NINTH CIRCUIT
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE NINTH CIRCUIT
In re: BAP No. AZ-18-1330-LBF
DOUGLAS THORPE, Bk. No. 2:16-bk-13619-MCW
Debtor. Adv. No. 2:17-ap-00109-MCW
DOUGLAS THORPE,
Appellant,
v. MEMORANDUM*
TJ 12, LLC,
Appellee.
Argued and Submitted on July 18, 2019
at Phoenix, Arizona
Filed – August 9, 2019
Appeal from the United States Bankruptcy Court
for the District of Arizona
*
This disposition is not appropriate for publication. Although it may be cited for
whatever persuasive value it may have, see Fed. R. App. P. 32.1, it has no precedential
value, see 9th Cir. BAP Rule 8024-1.
Honorable Madeleine C. Wanslee, Bankruptcy Judge, Presiding
Appearances: Ronald J. Ellett of Ellett Law Offices, P.C., argued for
Appellant; Laura Rogal argued for Appellee.
Before: LAFFERTY, BRAND, and FARIS, Bankruptcy Judges.
INTRODUCTION
Former chapter 131 debtor Douglas Thorpe (“Doug,” as he prefers to
be called2) appeals the bankruptcy court’s grant of summary judgment
dismissing his adversary proceeding against Appellee TJ 12, LLC (“TJ 12”).
Relevant to this appeal, Doug sought to have the pre-petition transfer of his
residence from his father’s living trust to TJ 12 declared to be an equitable
mortgage. The bankruptcy court found that, because Doug never held legal
title to the residence, he lacked standing to seek such relief.
We REVERSE and REMAND.
FACTUAL BACKGROUND
In the mid-1990’s, Doug moved into residential real property on
1
Unless specified otherwise, all chapter and section references are to the
Bankruptcy Code,
11 U.S.C. §§ 101-1532, all “Rule” references are to the Federal Rules
of Bankruptcy Procedure, and all “Civil Rule” references are to the Federal Rules of
Civil Procedure.
2
Because this appeal involves other family members named Thorpe, we refer to
them by their first names.
2
North Fraser Drive in Mesa, Arizona (the “Property”), which was owned
by his father, Sherman Thorpe. Doug lived in the Property in exchange for
making the mortgage payments and maintaining the Property. In July 1999,
Sherman transferred the Property by quitclaim deed into the Sherman
William Thorpe Living Trust dated October 26, 1988 (the “Trust”). The
Trust provided that the Property would be devised to Doug upon
Sherman’s death. Doug’s brother, William Thorpe, was named successor
trustee under the Trust. Sherman passed away in December 1999.
Thereafter, Doug continued to live in the Property, but William never
transferred the Property to Doug, and title remained in the Trust.3 In
addition, the secured debt on the Property remained in Sherman’s name.
Doug fell behind on the mortgage payments on the Property, and, in
2011, the secured creditor recorded a Notice of Trustee’s Sale. Before the
sale could take place, Doug and his wife filed a joint chapter 13 bankruptcy
case. They listed the Property on Schedule A and claimed a homestead
exemption in the Property on Schedule C. That bankruptcy case was
dismissed preconfirmation in March 2013.
3
The Trust contains an “unusual circumstances” provision under which the
successor trustee is granted discretion to refrain from distributing Trust property in
certain circumstances, such as where the beneficiary is having severe financial
difficulties. The Trust also contains a spendthrift provision. TJ 12 asserted in the
bankruptcy court that William intentionally refrained from transferring the Property to
Doug pursuant to these provisions. Doug argued (and William testified in his
deposition) that the failure to transfer title was inadvertent. The bankruptcy court did
not make any finding on that issue.
3
At that point, Doug needed funds to cure the mortgage arrears to
stop the trustee’s sale. He sought financing and was put in touch with
TJ 12. TJ 12 agreed to purchase the Property. At Doug’s behest, on
August 22, 2013, William, as trustee of the Trust, executed a Residential
Resale Real Estate Purchase Contract with TJ 12 for $96,000.4 He also
executed a warranty deed transferring title to TJ 12. The next day, Doug
and TJ 12 entered into a handwritten option agreement permitting Doug to
rent the Property with an option to purchase the Property for $119,196.50 at
any time before September 1, 2014. The option agreement included an
option to extend the expiration date for one year, on condition that both the
rent and the purchase price would be increased. The agreement provided
that if rent payments were past due by more than 30 days, the option
agreement would terminate. The parties also executed a one-year
residential lease agreement under which Doug was to rent the Property for
$814 per month. According to Doug, all of the sales proceeds went to pay
closing costs and the first deed of trust on the Property.
Doug filed a chapter 13 case in November 2016; the case was
dismissed in March 2019. During the pendency of the chapter 13 case, he
filed an adversary complaint against TJ 12, LLC. The Second Amended
4
Doug asserts that the value of the Property at that time was $218,000 based on a
Zillow estimate attached to his adversary complaint. The bankruptcy court made no
valuation finding.
4
Complaint (“SAC”) sets forth three counts, only the last of which is at issue
in this appeal: Count One sought declaratory relief that certain IRS liens
recorded against Doug in 2007 and 2008 attached to the Property; Count
Two sought avoidance of the sale to TJ 12 as a fraudulent transfer under
Arizona Revised Statutes § 44-1004(A)(2); and, alternatively, Count Three
sought an equitable mortgage and forfeiture of all interest pursuant to
Arizona Revised Statutes § 44-1202.
The parties filed cross-motions for summary judgment. TJ 12 moved
for summary judgment on all claims. It argued that Doug lacked standing
to prosecute any of the claims because he had never held title to the
Property, and it was the Trust, not Doug, that had transferred the Property
to TJ 12.
Doug moved for partial summary judgment, seeking a determination
that he owned the beneficial interest in the Property at the time it was
transferred to TJ 12.
After a hearing, the bankruptcy court granted TJ 12’s motion for
summary judgment and denied Doug’s motion. The bankruptcy court
found that, with the exception of Doug’s leasehold interest, the Property
was not property of the bankruptcy estate because, to the extent Doug held
a beneficial interest when legal title to the property was owned by the
Trust, that interest ceased when the Property was transferred out of the
Trust by warranty deed to TJ 12.
5
The bankruptcy court agreed with TJ 12 that Doug lacked standing to
prosecute any of the claims. With respect to the equitable mortgage claim,
the court ruled that it should be dismissed because he had never held title
to the Property and thus lacked standing, and because he had not shown
how he could establish fraud or wrongdoing on the part of the purchaser.
Accordingly, the court found that all three claims should be dismissed with
prejudice.5
The court then denied Doug’s motion for partial summary judgment
because it found that the request for a determination that Doug held a
beneficial interest in the Property before the sale to TJ 12 was irrelevant,
given that any such interest ceased when the Property was transferred out
of the Trust.6
The court also commented that
there is an in pari delicto concept at play here, and this concept
is where both parties are furthering a wrongful act like
potentially defrauding Debtor’s current or future creditors by
selling the real property for substantially less than its
equivalent value, that the Court will not enforce the scheme or
5
As noted, only the court’s ruling on the equitable mortgage claim is at issue in
this appeal. Doug did not assign error to the court's ruling regarding the IRS liens. At
oral argument, his counsel conceded that, because the bankruptcy case had been
dismissed, Doug no longer had any debtor-in-possession avoiding powers with which
to prosecute the fraudulent transfer claim.
6
At the hearing on the motion, TJ 12’s counsel agreed that Doug held a beneficial
interest in the Property while it was titled in the name of the Trust.
6
give relief to coconspirators in the scheme.
The bankruptcy court thereafter entered a judgment dismissing all
claims against TJ 12 and denying Doug’s motion for summary judgment.
Doug timely appealed.7
JURISDICTION
The bankruptcy court had jurisdiction under
28 U.S.C. §§ 1334 and
157(b)(2)(H) and (O). We have jurisdiction under
28 U.S.C. § 158.
ISSUE
Did the bankruptcy court err in granting summary judgment to TJ 12
on Count Three for an equitable mortgage on the ground that Doug lacked
standing?
STANDARD OF REVIEW
We review de novo the bankruptcy court’s grant of summary
judgment. Plyam v. Precision Dev., LLC (In re Plyam),
530 B.R. 456, 461 (9th
Cir. BAP 2015). “When we conduct a de novo review, we look at the matter
anew, the same as if it had not been heard before, and as if no decision
previously had been rendered, giving no deference to the bankruptcy
court’s determinations.” Barnes v. Belice (In re Belice),
461 B.R. 564, 572–73
7
During the pendency of this appeal, the bankruptcy court dismissed the chapter
13 case. However, the dismissal of Doug’s case did not moot this appeal. See Spacek v.
Thomen (In re Universal Farming Indus.),
873 F.2d 1334, 1335-36 (9th Cir. 1989) (holding
that controversy about priority of a trust deed was not so closely linked to the
underlying bankruptcy that dismissal of the underlying chapter 11 case rendered the
appeal moot).
7
(9th Cir. BAP 2011) (citations omitted). We must apply the same legal
standards that all federal courts are required to apply in considering the
propriety of summary judgment. Marciano v. Fahs (In re Marciano),
459 B.R.
27, 35 (9th Cir. BAP 2011), aff’d,
708 F.3d 1123 (9th Cir. 2013).
Summary judgment is appropriate “if the movant shows that there is
no genuine issue as to any material fact and the movant is entitled to
judgment as a matter of law.” Wank v. Gordon (In re Wank),
505 B.R. 878, 886
(9th Cir. BAP 2014) (citing Civil Rule 56(a), applicable in adversary
proceedings by Rule 7056). An issue is genuine if there is enough evidence
for a reasonable trier of fact to make a finding in favor of the non-moving
party, and an issue is material if it might legally affect the outcome of the
case. Far Out Prods., Inc. v. Oskar,
247 F.3d 986, 992 (9th Cir. 2001) (citing
Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 248-49 (1986)).
When the party moving for summary judgment would bear the
burden of proof at trial, it must come forward with evidence which would
entitle it to a directed verdict if the evidence went uncontroverted at trial.
In such a case, the moving party has the initial burden of establishing the
absence of a genuine issue of fact on each issue material to its case. Once
the moving party comes forward with sufficient evidence, the burden then
shifts to the opposing party, who must present significant probative
evidence tending to support its claim or defense. A motion for summary
judgment may not be defeated, however, by evidence that is merely
8
colorable or is not significantly probative. C.A.R. Transp. Brokerage Co. v.
Darden Rests., Inc.,
213 F.3d 474, 480 (9th Cir. 2000) (citations and internal
quotations omitted).
DISCUSSION
Doug contends that the bankruptcy court erred in dismissing his
equitable mortgage claim. He argues that, as the (former) owner of a
beneficial interest, he has standing to assert an equitable mortgage. He also
contends that, under Arizona law, there is no requirement to show fraud or
wrongdoing to prevail on an equitable mortgage claim.
Arizona courts recognize the common law doctrine of equitable
mortgage. This doctrine
is a device used to prevent an avaricious lender from taking
advantage of a distressed borrower. Even without avarice and
distress, lenders have a natural dislike for taking a mortgage as
security, because of the time and expense of a foreclosure upon
default, and the tying up of the property during the redemption
period. Other lenders don’t like the ceiling on interest imposed
by the usury laws. Were it not for the doctrine of equitable
mortgage, they would always take an absolute deed, with an
option to the borrower to repurchase at a much higher figure.
Shelton v. Cunningham,
508 P.2d 55, 58 (Ariz. 1973) (en banc). The party
asserting an equitable mortgage must establish by clear and convincing
evidence that a loan was intended rather than an outright conveyance.
Id.
Ordinarily, when deciding whether an ostensible sale transaction
should be recharacterized as an equitable mortgage, the trial court engages
9
in a fact-intensive inquiry to determine the parties’ intent.8 Factors to be
considered include
(1) the prior negotiations of the parties; (2) the distress of the
“grantor”; (3) the fact that the amount advanced was about the
amount that the grantor needed to pay an existing
indebtedness; (4) the amount of the consideration paid in
comparison to the actual value of the property in question; (5) a
contemporaneous agreement to repurchase; and (6) the
subsequent acts of the parties, as a means of discerning the
interpretation they themselves gave to the transaction.
Merryweather v. Pendleton,
372 P.2d 335, 340–41 (Ariz. 1962) (en banc)
(footnotes omitted). Here, the bankruptcy court never reached this analysis
because it dismissed the claim for lack of standing.
To establish standing to pursue a claim, a plaintiff must show injury
in fact, causation, and redressability (constitutional standing), and he must
assert his own legal rights and not those of others (prudential standing).
8
Arizona law permits a party to present evidence that a property transfer is
actually a mortgage. Arizona Revised Statutes § 33-702 provides, in relevant part:
§ 33-702 Mortgage defined; admissibility of proof that transfer is a
mortgage
A. Every transfer of an interest in real property, other than in trust, or a
trust deed subject to the provisions of chapter 6.1 of this title, made only
as a security for the performance of another act, is a mortgage. The fact
that a transfer was made subject to defeasance on a condition may, for the
purpose of showing that the transfer is a mortgage, be proved except
against a subsequent purchaser or encumbrancer for value and without
notice, notwithstanding that the fact does not appear by the terms of the
instrument. (Footnote omitted).
10
Veal v. Am. Home Mortg. Serv’g, Inc. (In re Veal),
450 B.R. 897, 906-07 (9th Cir.
BAP 2011). Although the bankruptcy court did not explicitly address these
requirements, it implicitly found that Doug was not asserting his own
rights because Doug never held legal title to the Property.
But it is undisputed that Doug held a beneficial interest in the
Property at the time of the subject transaction. The evidence in the record
showed that he and his family regarded Doug as the owner of the Property:
William testified in his deposition that his failure to transfer legal title to
Doug after Sherman’s death was not intentional but was due to oversight.
And it is undisputed that Doug lived in the Property for many years,
maintained it, and generally paid the associated expenses. If the secured
creditor on the Property had foreclosed, he would have lost that beneficial
interest. He sought funds from TJ 12 to protect that interest, and if he is
unable to prove that the parties intended the transaction to be a mortgage
rather than an outright conveyance, he may lose that interest permanently.
As such, he has standing to assert the equitable mortgage claim.
That Doug did not hold legal title is not dispositive. “Equity regards
the substance rather than the form of the transaction and will go behind the
form to impose liability or defeat an unlawful claim.” Merryweather,
372
P.2d at 340-41 (citations omitted). And although we have found no Arizona
cases specifically addressing the standing of a holder of a beneficial
interest, authority exists to support the proposition that such a holder may
11
assert a claim for an equitable mortgage. E.g., Lindsay v. Matthews,
17 Fla.
575, 576 (1880) (a conveyance by the trustee holding the legal title for the
owner of an equitable interest gives that owner the same standing in equity
as though the conveyance or mortgage were made by him); Stoddard v.
Whiting,
46 N.Y. 627, 632 (1871) (“When the owner of the equitable title
directs his trustee of the legal title to convey such title to a third person as
security for a debt of the former to the latter, or as security for any other
person, it is obvious that the latter holds such title as mortgagee of the
former.”).
Nor does it matter that there is no documentary evidence of a debt
owed by Doug to TJ 12, even though a debtor-creditor relationship is
required for an absolute transfer to be deemed a mortgage. See Downs v.
Ziegler,
477 P.2d 261, 264 (Ariz. App. 1970) (“Of primary importance in
Arizona in determining whether a transaction was intended to be a security
device, i.e., a mortgage, or an absolute conveyance is the presence of a
subsisting obligation.”); Charter Gas Engine Co. v. Entrekin,
246 P. 1038, 1040
(Ariz. 1926) (finding no equitable mortgage where there was no obligation
or subsisting indebtedness created or continued by the parties’ agreement).
Nevertheless, it is the intent of the parties that is determinative, not
whether there is “express evidence” of a debt. Merryweather,
372 P.2d at
339-40.
Doug also argues that the bankruptcy court erred to the extent it
12
granted TJ 12’s summary judgment motion on the ground that there was
no evidence of any fraud or wrongdoing by TJ 12. He argues–correctly–that
the factors to be considered in determining whether the parties intended a
mortgage rather than an absolute conveyance do not include a requirement
that fraud or wrongdoing be shown.9 Thus, it was error for the bankruptcy
court to base its ruling on this ground.
Finally, Doug complains that the bankruptcy court erred in basing its
ruling on the doctrine of in pari delicto (“equally at fault”) because there
was no evidence of wrongdoing on his part. But the bankruptcy court’s
comments regarding the doctrine appeared to be dicta, as they were
unnecessary to its ruling; accordingly, they do not constitute a separate
ground for reversal.10
9
That said, equitable relief is generally used to remedy a “wrong” where there is
no adequate remedy at law. See 27A Am. Jur. 2d Equity § 6 (“It is an established maxim
that equity will not suffer a wrong to be without a remedy[.]” (footnote and citations
omitted)). In an equitable mortgage case, the “wrong” is the inconsistency between the
terms of the transaction and its economic substance, where the form of the transaction
permits the grantee/mortgagee to circumvent the protections of a foreclosure
proceeding.
10
Doug submitted with his excerpts of record the deposition transcript of Troy
McNaughton dated May 22, 2018, in which Mr. McNaughton admitted to sending texts
to Doug stating that TJ 12 needed to be “paid off.” TJ 12 objected to the inclusion of that
transcript because it was not presented to the bankruptcy court. We agree that the
transcript is not properly part of the record on appeal. See Edwards v. Wells Fargo Bank,
N.A. (In re Edwards),
454 B.R. 100, 104 (9th Cir. BAP 2011). In any event, this evidence
has no bearing on Doug’s standing, and we have not relied on it in reviewing the
bankruptcy court’s ruling.
13
CONCLUSION
For these reasons, we REVERSE the bankruptcy court’s grant of
summary judgment to TJ 12 on Count Three of Doug’s complaint and
REMAND for further proceedings in accordance with this disposition.11
11
We express no opinion on whether the bankruptcy court should adjudicate the
equitable mortgage claim on the merits, given that the underlying chapter 13 case has
been dismissed. See Carraher v. Morgan Elecs., Inc. (In re Carraher),
971 F.2d 327, 328 (9th
Cir. 1992) (bankruptcy court has discretion to retain jurisdiction over related state law
claims despite dismissal of underlying bankruptcy).
14
