In Re: John S. Stewa ( 2009 )

Opinions of the United
2009 Decisions States Court of Appeals
for the Third Circuit
4-27-2009
In Re: John S. Stewa
Precedential or Non-Precedential: Non-Precedential
Docket No. 08-2360
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NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
No. 08-2360
In re: JOHN S. STEWART, Jr.,
Debtor-Appellee
CHRISTINE C. SHUBERT, Trustee,
Appellant
On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 2-07-cv-02283)
District Judge: Honorable Paul S. Diamond
Argued April 22, 2009
Before: SCIRICA, Chief Judge, SLOVITER, and FISHER, Circuit Judges
(Filed: April 27, 2009)
____
Paul B. Maschmeyer (Argued)
Maschmeyer Karalis
Philadelphia, PA l9l03
Attorney for Trustee-Appellant
Robert N. Braverman (Argued)
Cherry Hill, NJ 08034
Attorney for Debtor-Appellee
____
OPINION
SLOVITER, Circuit Judge.
Appellant Christine C. Shubert, the trustee (“Trustee”) in appellee John S. Stewart,
Jr.’s (“Debtor”) chapter 7 bankruptcy, appeals the decision of the Bankruptcy Court,
affirmed by the District Court, that the Trustee could not sell pursuant to 11 U.S.C. §
363(h) certain real property for which the Debtor was a record owner because the Debtor
held the property in a resulting trust for the benefit of his mother. We will affirm.
I.
At issue is whether the Trustee may sell for the benefit of the Debtor’s creditors
property in Philadelphia, Pennsylvania, (“Property”) at which the Debtor’s mother,
Caroline Stewart (“Stewart”), resides. According to the Trustee, the Debtor owns a one-
half interest in that Property.
Stewart obtained title to the Property in 1951 when she purchased it jointly with
her husband, who died in 1990. On December 9, 2002, Stewart executed a deed to the
Property to the Debtor for the sum of one dollar (“First Deed”). Stewart had the First
Deed prepared in an attempt to minimize inheritance taxes on her estate. The Bankruptcy
Court credited testimony by Stewart and the Debtor that both understood that the First
Deed was conveyed for estate planning purposes and that Stewart, not the Debtor, would
remain the owner of the Property until Stewart died. Stewart v. Shubert (In re Stewart),
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368 B.R. 445, 448 & n.4 (Bankr. E.D. Pa. 2007).
Several months later, Stewart realized that she had inadvertently omitted her
daughter, Susan Harris (“Harris”), from her estate-planning effort. She therefore
requested that the Debtor transfer half of his interest to Harris, and the Debtor did so by
executing a deed on March 6, 2003, which purported to transfer the Property jointly to the
Debtor and Harris for the sum of one dollar (“Second Deed”). Notwithstanding these
conveyances, Stewart continues to reside at the Property and pay all of the bills and taxes
associated with the Property out of her own funds.
In September 2005, after the Debtor’s son had incurred substantial credit card debt
for which the Debtor was liable, the Debtor voluntarily filed for bankruptcy under chapter
7. In his bankruptcy filings, the Debtor listed his ownership interest in the Property as “½
Bare Legal Title of Caroline Stewart’s property.” App. II at 211. The Trustee
subsequently filed a motion to sell the Debtor’s interest in the Property pursuant to 11
U.S.C. § 363(h). The Debtor contested that motion and filed an adversary complaint
seeking to enjoin the Trustee from selling the Property.
After holding a trial, the Bankruptcy Court held that the Trustee could not sell the
Property. According to the Bankruptcy Court, under Pennsylvania law Stewart’s transfer
of the Property to the Debtor was subject to a resulting trust in favor of Stewart, who was
therefore the equitable owner of the Property. Accordingly, the bankruptcy estate
succeeded only to bare legal title in the Property and the Trustee’s proposed sale was not
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appropriate under § 363(h). Stewart, 368 B.R. at 457. Finally, the Trustee appealed to
the District Court, which affirmed.1
II.
Under section 363(h) of the Bankruptcy Code “the trustee may sell both the
estate’s interest . . . and the interest of any co-owner in property in which the debtor had,
at the time of the commencement of the case, an undivided interest as a tenant in
common, joint tenant, or tenant by the entirety” if certain conditions are satisfied. 11
U.S.C. § 363(h).
The Debtor argues, and the Bankruptcy and District Courts held, that the Trustee’s
proposed sale of the Property was inappropriate under § 363(h) because the Debtor held
the Property in a resulting trust for the benefit of Stewart, who thus was the equitable
owner. We agree.
A bankruptcy estate includes “all legal or equitable interests of the debtor in
1
The Bankruptcy Court had jurisdiction over this core
proceeding pursuant to 28 U.S.C. §§ 157(b)(2) and 1334. The
District Court had jurisdiction under 28 U.S.C. § 158(a)(1) and we
have jurisdiction under 28 U.S.C. § 158(d)(1). We exercise plenary
review over the District Court’s appellate review of the Bankruptcy
Court’s decision and exercise the same standard of review as the
District Court in reviewing the Bankruptcy Court’s determinations.
Fellheimer, Eichen & Braverman, P.C. v. Charter Techs., Inc., 57
F.3d 1215, 1223 (3d Cir. 1995). Thus, we review the Bankruptcy
Court’s findings for clear error and its legal conclusions de novo.
Schlumberger Res. Mgmt. Servs., Inc. v. CellNet Data Sys., Inc. (In
re CellNet Data Sys., Inc.), 327 F.3d 242, 244 (3d Cir. 2003).
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property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). However,
“[p]roperty in which the debtor holds . . . only legal title and not an equitable interest . . .
becomes property of the estate under [§ 541(a)(1)] . . . only to the extent of the debtor’s
legal title to such property, but not to the extent of any equitable interest in such property
that the debtor does not hold.” Id. Therefore, the “bankrupt estate . . . obtains no greater
ownership right . . . than [the debtor] . . . would have . . . prior to the bankruptcy filing.”
Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 372 (3d Cir.
1992). We look to the applicable state law, here Pennsylvania law, to determine what
interests a debtor possesses. Id. at 369.
Under Pennsylvania law, “[a] resulting trust arises where a person makes or causes
to be made a disposition of property under circumstances which raise an inference that he
does not intend that the person taking or holding the property should have the beneficial
interest therein.” Galford v. Burkhouse, 478 A.2d 1328, 1334 (Pa. Super. Ct. 1984)
(quotations omitted). As recognized by the Bankruptcy Court, Galford is
indistinguishable from the instant case. In Galford, the transferor wanted to ensure that
certain real estate would be available to support his wife in the event that he died and
therefore deeded the property to his son to avoid possible attachment of the property by
certain creditors. Id. at 1330. Subsequently, the transferor decided that he wanted to
convey the property to one of his daughters, but the son refused to do so. Id. The
transferor brought an action to compel his son to convey the property to him or to the
daughter. Id. at 1331.
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The Pennsylvania Superior Court held that the transferor could not impose an oral
trust on his transfer of the property to his son in light of the Statute of Frauds, but
concluded that “[w]here an express trust fails, a resulting trust may be imposed by
operation of law.” Id. at 1333. Further, because “[t]he Statute of Frauds specifically
exempts such trusts . . . from its operation,” parol evidence is “admissible to show the
circumstances under which [the] resulting trust arose” as long as such evidence is “clear,
explicit and unequivocal.” Id. (quotations and citations omitted). In Galford, “[t]he
testimony of all parties . . . was in agreement that [the transferor] intended to transfer only
bare legal title to [the son] at the time he executed the deed,” and thus the “evidence was
clearly sufficient to establish a resulting trust.” Id. at 1334 (emphasis in original).
Similarly, in this case the Bankruptcy Court concluded that the Debtor held the
Property in a resulting trust for Stewart because “Stewart intended to transfer the Property
to the Debtor in trust” but “her intentions were ineffective due to the wording of the
instrument [i.e., the First Deed] used to effect the transfer.” Stewart, 368 B.R. at 457.
This conclusion is amply supported by the record. The Bankruptcy Court credited the
testimony of Stewart and the Debtor that the First Deed “was motivated wholly by the
estate planning advice [Stewart] received from friends” and that both understood that
Stewart would own the Property until she died. Id. at 454 & n.18. Further, after the
execution of the First Deed, there was “no material change in the conduct of either Mrs.
Stewart o[r] the Debtor.” Id. at 454. Stewart continued to live at the Property and pay all
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costs associated with it. The transaction culminating in the Second Deed also supports
the conclusion that Stewart retained beneficial ownership of the Property because the
Debtor executed the Second Deed on the instructions of Stewart in order to further her
estate planning goals, “again suggesting that both parties considered the Property to be
hers to control.” Id. at 455.
The Trustee raises three arguments against the conclusion that Stewart was the
equitable owner of the Property. None is convincing. First, the Trustee argues that we
should not look beyond the four corners of the First Deed because it unambiguously
conveyed Stewart’s entire interest in the Property to the Debtor by “grant[ing]” the
Property to the Debtor “in Fee.” App. II at 150. However, as noted above, the
Pennsylvania Statute of Frauds exempts resulting trusts from its strictures so that parol
evidence is “admissible to show the circumstances under which a resulting trust arose.”
Galford, 478 A.2d at 1333 (citing Geyer v. Thomas, 72 A.2d 89, 90 (Pa. 1950); Potoczny
v. Dydek, 162 A.2d 70, 76 (Pa. Super. Ct. 1960)); see also 33 Pa. Stat. Ann. § 2
(providing that trusts that “result by implication . . . of law” are exempted from the Statute
of Frauds). Further, the parol evidence here is “clear, explicit and unequivocal” that
Stewart did not intend to convey to the Debtor her equitable ownership in the Property.
Galford, 478 A.2d at 1333 (citation omitted).
The Trustee next argues that Stewart must have intended to grant the Debtor her
entire interest in the Property because, if Stewart retained an equitable interest in the
7
Property, it would have been subject to inheritance taxes upon her death, in contradiction
of her avowed estate planning purposes. See 72 Pa. Stat. Ann. § 9107(c)(5). At most,
this argument shows that Stewart, who was an unsophisticated party with a high school
education and no legal training, may have failed to minimize her estate taxes through the
conveyances at issue. As the Bankruptcy Court concluded: “While there may have been a
better way to achieve her estate planning goals, [Stewart] signed the First Deed, not for
the purpose of transferring her beneficial interest in the property, but only to transfer a
future interest in the Property–which is precisely why a resulting trust arises in this case.”
Stewart, 368 B.R. at 457.
Finally, the Trustee contends that, even if the Debtor held the Property in a
resulting trust in favor of Stewart, she may avoid Stewart’s equitable interest in the
Property pursuant to her strong-arm powers under 11 U.S.C. § 544(a)(3). However,
under Pennsylvania law, Stewart’s clear and open possession of the Property put the
Trustee on constructive notice of Stewart’s equitable interest therein, and therefore the
Trustee may not avoid that interest under § 544(a)(3). See McCannon v. Marston, 679
F.2d 13, 16-17 (3d Cir. 1982).
III.
For the above-stated reasons, we will affirm the judgment of the District Court
affirming the judgment of the Bankruptcy Court.
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