Gallogly v. Watson , 2013 Ohio 3778 ( 2013 )


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  • [Cite as Gallogly v. Watson, 
    2013-Ohio-3778
    .]
    IN THE COURT OF APPEALS OF OHIO
    THIRD APPELLATE DISTRICT
    UNION COUNTY
    MYRON GALLOGLY, ET AL.,
    PLAINTIFFS-APPELLEES/
    CROSS-APPELLEES,
    CASE NO. 14-12-12
    v.
    T. TODD WATSON, ET AL.,
    DEFENDANTS-APPELLANTS/
    CROSS-APPELLEES,
    -and-                                            O P IN I O N
    PAGE ENGINEERING INC.,
    DEFENDANT-APPELLEE/
    CROSS-APPELLANT.
    Appeal from Union County Common Pleas Court
    Trial Court No. 2010-CV-0309
    Judgment Affirmed
    Date of Decision: September 3, 2013
    APPEARANCES:
    Christopher R. Conrad for Appellants/Cross-Appellees
    Terrence Stolly and John D. Bodin for Appellees/Cross-Appellees,
    Myron and Priscilla Gallogly
    Dennis A. Schulze and Nichole M. Williams for Appellee/Cross-
    Appellant, Page Engineering Co.
    Case No. 14-12-12
    SHAW, J.
    {¶1} Defendant-appellant-cross appellee Timothy Todd Watson (“Todd” or
    “Todd Watson”), successor trustee of the Roger L. Watson Trust, appeals the
    March 5, 2012, judgment of the Union County Common Pleas Court imposing a
    constructive trust upon the Gallogly residence and accompanying .7 acres for the
    benefit of Plaintiff-appellee Priscilla Gallogly (“Priscilla”) following a bench trial.
    Watson and Defendant-appellant-cross appellant Page Engineering (“Page”), also
    appeal the same judgment entry designating the priority for distribution of
    proceeds from the foreclosure sale of the Gallogly residence, and the Gallogly
    property.
    {¶2} For an initial overview of the voluminous record before this court,
    Myron Gallogly (“Myron”) and Roger Watson (“Roger”), who were good friends
    and had a strong mutual trust in one another, agreed to develop property owned by
    Myron and Priscilla. The original agreement was that Myron would contribute the
    Gallogly property, excluding Priscilla Gallogly’s residence, and manage the
    development, and Roger would provide the financing for the project. The idea
    was that the value of the Gallogly property would be commensurate with the
    amount of money Roger invested. Subsequently, Roger and Myron formed a
    corporation together, Oaks Development, Inc., with each owning 50%. Priscilla
    was not party to this agreement and had no ownership of Oaks Development.
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    {¶3} As development proceeded on the Gallogly property arrangements
    were also made with Page engineering for subdivision work on this project.
    Eventually, in order to move forward with the project, Roger and Myron had to
    acquire a letter of credit for just over $1,000,000. Roger, who had been funding
    the project per the agreement, was unable to obtain the further financing that he
    originally thought he would be able to obtain.
    {¶4} After discussing the matter, Myron and Priscilla transferred the
    Gallogly property to the Roger Watson Trust so that Roger could obtain the letter
    of credit and further financing. Specifically, the bank that Roger and Myron were
    working with would not extend a letter of credit in the amount sought without
    Priscilla’s residence being transferred to the Roger Watson Trust along with the
    Gallogly property. As a result, the Gallogly residence was transferred to Roger’s
    trust along with the Gallogly property to be developed. However, at the time of
    the transfer assurances were made to Priscilla that Roger had no intention of
    taking Priscilla’s residence, that the residence still remained hers, and that the
    transfer was just for “business purposes.” Chief among those business purposes,
    aside from acquiring the letter of credit, was Roger obtaining the tax benefits from
    paying the mortgage. As Roger was already loaning money to Myron so that
    Myron could make the mortgage payments,1 the plan was for Roger to assume the
    1
    These “loans” were described as “draws” on future profits.
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    Case No. 14-12-12
    mortgages, make the mortgage payments and use the accompanying tax
    deductions, which Myron was unable to use due to his then-current lack of
    income.
    {¶5} Thus the deed recording the transfer of the Gallogly property and
    Priscilla’s residence to the Roger Watson Trust was recorded on June 4, 2007.
    Unfortunately, Roger died unexpectedly just over a month later. Todd Watson,
    Roger’s son, assumed Roger Watson’s position as trustee, and attempted to carry
    through with his father’s wishes to fund the project. However, eventually that
    became financially impractical so the funding ceased and the Gallogly property
    and Priscilla’s residence went into foreclosure leading to the filing of this action.
    {¶6} On June 17, 2010, Myron Gallogly and Priscilla Gallogly filed a
    complaint against Todd Watson individually, Todd Watson as successor Trustee
    of the Roger L. Watson Trust, Richwood Bank, Oaks Development, Inc., and
    Page. (Doc. 2). The complaint was later amended, with leave of the court, on July
    29, 2011, alleging eight counts against the same parties, including, inter alia,
    breach of fiduciary duty against Todd as trustee of the Watson Trust, imposition of
    a constructive trust, an implied vendor’s lien against the subject property, quiet
    title of the subject property and unjust enrichment of the Watson Trust. (Doc.
    -4-
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    102). Page Engineering and Todd each filed counterclaims against the appellees
    and crossclaims against each other.2 (Docs. 103, 104).
    {¶7} On December 20-21, 2011, the case proceeded to a bench trial. Just
    prior to the beginning of the trial, it was agreed by the parties that Page’s claims
    for engineering work done on the project would be settled for the amount of
    $220,000, and that Page waived any defenses and crossclaims other than priority.
    {¶8} The trial then commenced, at which Priscilla, Myron, and Mike
    Karcher of Richwood Banking Company testified in Myron and Priscilla’s case-
    in-chief. At the conclusion of Myron and Priscilla’s case, the claims against Todd
    Watson individually were dismissed. Then Todd presented his case as successor
    trustee, taking the stand himself, and also calling Justin Moeller, an accountant.
    Thereafter the case was submitted to the trial court for decision.
    {¶9} On March 5, 2012, the trial court filed a 33-page judgment entry on
    the matter summarizing the extensive record, and making findings of fact and
    conclusions of law. (Doc. 153). In its entry, the trial court held, inter alia, that a
    constructive trust would be imposed upon Priscilla’s residence and accompanying
    .7 acres for Priscilla, and that Priscilla was entitled to 21% of the proceeds from
    the foreclosure sale of the Gallogly property and Priscilla’s residence as a result of
    2
    Page claimed breach of contract against ODI and the Watson Trust, and that the Watson Trust was
    unjustly enriched. The Watson Trust claimed a breach of contract by Myron and unjust enrichment.
    Various filings were made by the remaining parties, but as they do not pertain to the case, they will not be
    addressed.
    -5-
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    the constructive trust for her residence. (Id.) The basis of the trial court’s holding
    was the court’s finding that the parties never intended Priscilla’s residence to be
    included in the project; rather, Priscilla’s residence was transferred purely for the
    sake of obtaining financing.
    {¶10} In its entry, the court also determined that the proceeds of the
    foreclosure sale of the Gallogly property and Priscilla’s residence would be
    distributed first to the balance due to the Richwood Banking Company for the
    mortgages, then Priscilla’s 21% representing the constructive trust for her
    residence, then Page’s agreed upon $220,000, then the next $1,003,729.00 to Todd
    Watson, Trustee of the Roger Watson Living Trust representing the amount the
    Roger Watson Trust invested over Myron in the project, and any remaining
    balance paid to the Watson Trust and Myron Gallogly in a 50/50 ratio per their
    original agreement as investors in the Oaks. (Doc. 153).
    {¶11} It is from this judgment that Todd Watson3 and Page appeal,
    asserting the following assignments of error for our review.
    TODD WATSON’S FIRST ASSIGNMENT OF ERROR
    THE TRIAL COURT ERRED BY IMPOSING A
    CONSTRUCTIVE TRUST IN PRISCILLA’S FAVOR,
    ESSENTIALLY RESCINDING THE DEED AS TO THE
    HOUSE, IN DIRECT CONFLICT WITH THE DEED’S
    UNAMBIGUOUS CONSIDERATION CLAUSE AND THE
    UNDISPUTED EVIDENCE IN THE RECORD.
    3
    Herein where “Todd” or “Todd Watson” is referenced, it is in his capacity as successor trustee of the
    Roger Watson Trust.
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    TODD WATSON’S SECOND ASSIGNMENT OF ERROR
    THE TRIAL COURT ERRED BY IMPOSING A
    CONSTRUCTIVE TRUST IN PRISCILLA’S FAVOR
    BECAUSE THE REAL ESTATE MARKET CRASH, NOT
    INEQUITABLE CONDUCT, CAUSED HER HARM.
    TODD WATSON’S THIRD ASSIGNMENT OF ERROR
    THE TRIAL COURT ERRED BY GIVING PRISCILLA’S
    AND PAGE’S INTERESTS PRIORITY WHEN THE TRUST
    HAS THE ONLY SECURED INTEREST AMONG THEM.
    TODD WATSON’S FOURTH ASSIGNMENT OF ERROR
    IF A CONSTRUCTIVE TRUST WAS AN APPROPRIATE
    REMEDY, THE TRIAL COURT ERRED IN HOW IT
    IMPLEMENTED THAT REMEDY.
    PAGE’S ASSIGNMENT OF ERROR
    THE TRIAL COURT ERRED IN CONCLUDING THAT
    PRISCILLA GALLOGLY’S 21% INTEREST IN THE
    SUBJECT PROPERTY IS SUPERIOR TO THE INTEREST
    OF PAGE ENGINEERING, INC.
    {¶12} For the sake of clarity, we elect to address some of the assignments
    of error together, and out of the order in which they were raised.
    Watson’s First and Second Assignments of Error
    {¶13} In Todd’s first and second assignments of error, Todd makes various
    arguments that the trial court’s imposition of a constructive trust in Priscilla’s
    favor was improper.      Specifically, Todd argues that the deed to Priscilla’s
    residence contained language that was unambiguous in stating that the property
    had been transferred for consideration making a constructive trust inappropriate,
    that there was no fraud or unjust enrichment on behalf of the Watson Trust, and
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    that Priscilla knowingly, intelligently, and voluntarily transferred her residence
    making a constructive trust inappropriate.
    {¶14} In its judgment entry, the trial court set forth the following factual
    findings, which were stipulated to by the parties at trial, and which provide a more
    detailed summary of the evidence relied upon by the court in reaching its decision
    to impose the constructive trust in this case.4
    1. The real estate at issue consists of land totaling
    approximately 64.4 acres, and is more particularly described in
    the Quit Claim Deed dated June 12, 2006. Joint Trial Exhibit J-
    1-A.
    2. The aforementioned real estate was owned in fee simple by
    the Gallogly Qualified Personal Residence Trust dated January
    1, 2001, Priscilla Gallogly, Trustee, and is referred to as the
    “Gallogly Property”.
    3. In 2005, Myron Gallogly (Priscilla’s husband, “Myron”)
    and Mr. Roger L. Watson of Bellefontaine, Ohio (“Roger” or
    “Roger Watson”) had general discussions concerning the
    development of the Gallogly Property as a single-family
    residential development.
    4. On January 10, 2006, Myron Gallogly and Roger Watson
    executed an agreement which outlined the general terms of the
    project (the “Agreement”), the general terms of which included
    the following:
    A. single-family home lots would be developed and sold in
    phases, except that the Galloglys’ residence and an
    approximate 0.7 acre lot upon which it sat would be retained
    by Priscilla Gallogly remain [sic] with the Priscilla Gallogly
    Residential Trust, Priscilla Gallogly Trustee;
    4
    These stipulations were read into the record at trial, and were submitted to the court as “Agreed
    Stipulation of Facts” via a document the court accepted as an exhibit of the court. (Tr. at 9-15).
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    B. income expenses of the development would be shared equally
    by Myron Gallogly and Roger Watson, and should they
    decide to form a legal entity for the development, the two
    men would each own 50% of such entity;
    C. Galloglys would contribute the land and management
    services, while Roger Watson would facilitate financing for
    the project; and
    D. The then-existing mortgages to Defendant Richwood Banking
    Co. on the Gallogly Property would remain the liability of
    Myron Gallogly.
    5. On or about May 16, 2006, Myron Gallogly and Roger
    Watson filed Articles of Incorporation to form Defendant The
    Oaks Development, Inc.         (“ODI”), an Ohio for-profit
    corporation, with Myron and Roger each owning 50% of that
    corporation.
    6. Myron and Roger Watson, through ODI, began the
    development process for The Oaks subdivision, including
    seeking subdivision approval from the City of Marysville, Ohio
    and retaining various professional services, including among
    others, the engineering services of Defendant Page Engineering,
    Inc.
    7. On May 16, 2007, Defendant Richwood Banking Co.
    obtained an appraisal for the Gallogly Property, as developed,
    based upon 43.981 acres of development land, 20 developed lots,
    and existing Gallogly residence and lot, at an estimated value of
    $2.6 million ($2,600,000).
    8. With this information, Roger and Myron reached a more
    detailed, revised agreement for the project, which included, at
    least, the following terms:
    A. Myron Gallogly and Roger Watson agreed that $1.3 million
    would be the value of the land contributed to the Project; and
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    B. The existing first and second mortgage payments to
    Richwood Banking Co. would be booked as loans to Myron
    Gallogly; and [sic]
    9. On May 26, 2007, a closing to transfer the Gallogly
    Property was held at Defendant Richwood Banking Co.’s
    Offices.
    10. On May 23, 2007, Roger Watson executed a mortgage
    Assumption Agreement whereby he agreed, individually and as
    Trustee of the Watson Trust, to assume with Myron Gallogly,
    the debt payments on the existing first and second mortgages on
    the Gallogly Property which had a then combined balance of
    $455,566.62.
    11. Priscilla Gallogly executed a warranty deed to transfer title
    of the Gallogly Property to the Watson Trust.
    12. This deed was recorded on June 4, 2007.
    13. By June 1, 2007, phase 1 of The Oaks subdivision P.U.D.
    and plat was approved by the City of Marysville, consisting of 21
    lots, and the Declaration of Covenants, Easements, Restrictions,
    Assessments, and Assessment Liens for the Oaks subdivision was
    recorded against the Gallogly Property in the office of the Union
    County Recorder.
    14. An initial loan of $200,000 was obtained on August 3, 2005
    from Richwood Bank prior to the January 2006 agreement
    between Myron and Watson.
    15. A second loan of $100,000 was obtained in January 2006
    from Richwood Bank.
    16. In early 2007, Roger Watson obtained two personal loans
    for the principle purpose of funding the Oaks Project, using
    Roger Watson’s personal assets as collateral.
    17. Roger Watson’s first personal loan was obtained on May 3,
    2007 from the People Savings Bank in the amount of $615,200.
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    18. Roger Watson’s second personal loan was obtained on June
    29, 2007 with Citizens Federal Savings & Loan in the amount of
    $1,000,000.
    19 On July 14, 2007, soon after returning from his out-of state
    trip, Roger L. Watson died unexpectedly.
    20. Defendant Timothy Todd Watson was thereafter appointed
    Successor trustee of the Roger Watson Trust.
    21. On January 6, 2009, Todd Watson cancelled a listing
    agreement which Myron Gallogly had signed, as the Property’s
    alleged owner, with Coldwell Banker to sell the lots.
    22. After the Watson Trust stopped making payments to
    Richwood Bank, Myron Gallogly paid the real estate taxes for
    the house and lot and the mortgage payments for the Gallogly
    Property to Richwood Banking Co., the total amount of which is
    in dispute.
    23. Roger Watson and the Watson Trust contributed a total of
    $2,032,612 to the project. This does not include a loan from
    Grand Rental Station.
    24. Priscilla Gallogly is not a shareholder in the Oaks
    Development, Inc.
    25. Priscilla Gallogly was not a beneficiary of the Roger
    Watson Trust.
    26. The parties have reached agreement to settle Page’s claims
    in the amount of $220,000. * * * Court determines priority.
    Defendant waives any defenses and cross claims other than
    priority.5
    5
    The preceding 25 stipulations were all submitted via a typed sheet for the court and acknowledged by the
    parties in open court after the stipulations were read into the record. The final stipulation/agreement was
    not part of the document with the other stipulations, but both parties did agree to this stipulation in open
    court.
    -11-
    Case No. 14-12-12
    {¶15} In Estate of Cowling v. Estate of Cowling, 
    109 Ohio St.3d 276
    , 280-
    81, 
    2006-Ohio-2418
    , the Ohio Supreme Court defined a constructive trust as a
    trust by operation of law which arises contrary to intention and
    in invitum, against one who, by fraud, actual or constructive, by
    duress or abuse of confidence, by commission of wrong, or by
    any form of unconscionable conduct, artifice, concealment, or
    questionable means, or who in any way against equity and good
    conscience, either has obtained or holds the legal right to
    property which he ought not, in equity and good conscience,
    hold and enjoy. It is raised by equity to satisfy the demands of
    justice.
    Cowling at ¶ 18, citing Ferguson v. Owens, 
    9 Ohio St.3d 223
    , 225, (1984), quoting
    76 American Jurisprudence 2d (1975) 446, Trusts, Section 221. A constructive
    trust is considered a trust because “‘[w]hen property has been acquired in such
    circumstances that the holder of the legal title may not in good conscience retain
    the beneficial interest, equity converts him into a trustee.’” Cowling, 2006-Ohio-
    2418, at ¶ 18, citing Ferguson, 9 Ohio St.3d at 225, quoting Beatty v. Guggenheim
    Exploration Co., 
    122 N.E. 378
     (1919). “In applying the theories of constructive
    trusts, courts also apply the well-known equitable maxim, ‘equity regards [as]
    done that which ought to be done.’” Ferguson, 9 Ohio St.3d at 226.
    {¶16} The party seeking to have a constructive trust imposed bears the
    burden of proof by clear and convincing evidence. Cowling, supra, at ¶ 20, citing
    Univ. Hosps. of Cleveland, Inc. v. Lynch, 
    96 Ohio St.3d 118
    , 
    2002-Ohio-3748
    ,
    paragraph three of the syllabus. The standard of “clear and convincing evidence”
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    is defined as “that measure or degree of proof which is more than a mere
    ‘preponderance of the evidence,’ but not to the extent of such certainty as is
    required ‘beyond a reasonable doubt’ in criminal cases, and which will produce in
    the mind of the trier of facts a firm belief or conviction as to the facts sought to be
    established.” Cross v. Ledford, 
    161 Ohio St. 469
     (1954), paragraph three of the
    syllabus. Where the proof required must be clear and convincing, a reviewing
    court will examine the record to determine whether the trier of facts had sufficient
    evidence before it to satisfy the requisite degree of proof. Ford v. Osborne, 
    45 Ohio St. 1
     (1887) paragraph two of the syllabus.
    {¶17} In this case, the trial court held the following with regard to the
    imposition of the constructive trust for Priscilla Gallogly’s benefit:
    The Court finds under the circumstances of the instant matter
    that an equitable remedy is appropriate to place the parties in
    the position for which they bargained for in their agreement
    regarding the Project. All parties substantially performed under
    the agreement until the Watson Trust reasonably ceased funding
    the fledgling Project. The Court finds that the original parties to
    the agreement, Roger Watson and Myron Gallogly, intended for
    the ownership of the Gallogly residence and .7 acre lot to be
    vested in Priscilla Gallogly. In the efforts to obtain financing
    and funding for the Project, the subject property in its entirety
    was transferred to the Watson Trust as this was the only way
    that the parties found to obtain such financing. Despite the
    transfer, the Court finds that the intent for the ownership of the
    Gallogly residence and .7 acre lot to be vested in Priscilla
    Gallogly did not change. The Court finds that it would be against
    the principles of equity to allow the entire property to be retained
    by the Watson Trust and therefore that a constructive trust be
    imposed for the benefit of Priscilla Gallogly.
    -13-
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    (Emphasis Added.) (Doc. 153).
    {¶18} The trial court thus found that although Priscilla’s residence was
    transferred to the Roger Watson Trust, the parties never intended the residence to
    be part of the project. It is clear, and undisputed, that Myron and Roger had this
    understanding at the inception of their agreement. On January 10, 2006, Myron
    and Roger executed an agreement which outlined the general terms of the project,
    which stated that:
    Myron Gallogly and Roger L. Watson wish to become partners
    in a project hereafter referred to as “The Oaks”.
    The Oaks Project is defined as the development and sale of 64
    acres more or less at 14180 State Route 38, Marysville, Ohio
    43040, less the house and a lot of approximately .7 acre.
    The house and lot remain with the residential trust (Pricilla
    Gallogly, trustee) and the current 1st and 2nd mortgage of
    approximately $500,000.00 remains the liability of Myron
    Gallogly.
    It is intended that all income and expenses of The Oaks be
    equally shared by Myron Gallogly and Roger Watson. Should
    the partners decide to form a legal entity, the documents would
    reflect 50% Myron Gallogly and 50% Roger Watson.
    Myron Gallogly provides the land and management and Roger
    Watson will facilitate the financing.
    It is intended to phase the project to minimize exposure and
    utilize proceeds to accomplish future phases.
    ***
    -14-
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    (Emphasis Added.) (Joint Ex. 10).6
    {¶19} Following the agreement, the parties proceeded with development of
    the Gallogly property under the continued understanding that Priscilla’s residence
    was not part of the project, and that Roger Watson was to provide financing for the
    project. (Dec. 20, 2011, Tr. at 81); (Dec. 20, 2011, Tr. at 60). As part of that
    financing, Roger loaned Myron money against future profits so that Myron could
    pay the mortgages on the Gallogly property and Priscilla’s residence.
    {¶20} During development of the Gallogly property, a letter of credit in
    excess of $1,000,000 was required to continue, and Roger was unable to secure
    further financing as he originally thought he would, so Myron and Roger
    negotiated an agreement whereby the Gallogly property would be transferred to
    Roger so that Roger could obtain the requisite letter of credit and financing in
    exchange for a $1.3 million note. The bank informed Myron and Roger that it
    would not issue a letter of credit unless Priscilla’s residence was involved as well,
    so Myron and Roger spoke with Priscilla about transferring the residence to the
    Roger Watson Trust along with the land. However, according to Myron, when
    Myron discussed the matter with Roger, it was not intended to place the equity in
    6
    It is not disputed that that at the time of originally making this deal title to the residence and the
    accompanying land to be developed was held by the Gallogly Qualified Personal Residence Trust, with
    Priscilla Gallogly as trustee. Subsequently, the land and residence were transferred to Priscilla Gallogly on
    June 12, 2006. See (Joint Ex. 1).
    -15-
    Case No. 14-12-12
    the residence in the project, Myron testified that he would not have signed the
    deed if it was supposed to be collateral for the project. (Dec. 20, 2011, Tr. at 85).
    {¶21} Priscilla testified that Myron and Roger first approached her and
    asked her to transfer the residence approximately a week or two before the
    ultimate transfer. (Dec. 20, 2011, Tr. at 192). According to Priscilla, when Roger
    and Myron spoke to her about transferring her residence to the Roger Watson
    Trust, she had reservations as she did not want to lose her home. (Dec. 20, 2011,
    Tr. at 193). However, Priscilla testified that Myron and Roger told her that Roger
    needed the residence for financing and tax deductions. (Dec. 20, 2011, Tr. at 193).
    Priscilla and Myron testified at trial that Roger made assurances to Priscilla that
    the transfer was only so Roger and Myron could obtain further financing, and so
    that Roger could take the tax deductions for paying the mortgages he was
    effectively already paying by loaning Myron the money (against future profits) to
    pay them. According to Priscilla, at closing, Roger said directly to her that he
    wanted her to understand he was not taking her house, and that the transfer was
    just for business reasons. (Dec. 20, 2011, Tr. at 195).
    {¶22} Priscilla testified that Roger also informed Priscilla he would give
    her the previously discussed $1.3 million note for the Gallogly property upon his
    return from his pending vacation.7 With these assurances, and because Priscilla
    7
    This note appears as though it was prepared but never signed by Roger Watson prior to his death.
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    and Myron trusted Roger, with Priscilla testifying that she specifically trusted
    Roger “to do what was right,” Priscilla transferred the deed for her residence over
    to the Roger Watson Trust and that deed was recorded on June 4, 2007. (Dec. 20,
    2011, Tr. at 222).
    {¶23} Subsequently, on June 25, 2007, Roger prepared a letter for Myron
    just prior to Roger going on vacation to summarize where the two were at in their
    development deal, which stated, in part, as follows:
    ***
    I have developed some summary sheets right after we closed on
    the 26th. Please go over these. If there is something you don’t
    understand we will discuss it.
    The first sheet shows $1,300,000 for the farm, payments to you
    so far and the assumption of debt on the house, the additional
    loan and the $10,000 I loaned you earlier. As you know the house
    I consider yours and anything over and above the payoff you get
    will be yours and add back to your note due The Oaks.
    ***
    (Emphasis Added.) (Joint Ex. 11). Roger then took a vacation, and unfortunately
    died unexpectedly upon return, on July 14, 2007.
    {¶24} The trial court relied on the foregoing evidence to establish that
    throughout the development, from the beginning until Roger’s death, Priscilla’s
    residence was never intended to actually be part of the project. Roger’s letter,
    written shortly before he died, seems to make clear that even after the deed to
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    Priscilla’s residence had been transferred to the Roger Watson Trust, Roger
    considered the Gallogly property and Priscilla’s residence separately.         Roger
    specifically stated in the letter that he considered the house Priscilla’s, and
    addressed the house separately from the $1.3 million that would be “for the farm.”
    Although Todd Watson suggests on appeal that this letter could be read to have a
    different meaning, certainly the trial court could validly read this as consistent
    with Priscilla’s residence never being intended to be in the project.
    {¶25} Thus the record contains a consistent trail of evidence that the trial
    court could rely upon establishing that Priscilla’s residence was never intended to
    be part of the project from its inception to after the transfer. It is undisputed that
    Priscilla’s residence was not intended to be part of the project at the inception of
    the project, and there is clear and convincing evidence to support the finding that
    Priscilla’s residence was not intended to be part of the project when she signed the
    deed over to the Roger Watson Trust, especially when considering Roger’s letter
    weeks prior to his death.
    {¶26} To argue against the imposition of the constructive trust by the trial
    court based on these facts, Todd first claims that a general warranty deed was
    transferred and that the deed stated it was transferred for valuable consideration.
    Todd claims the deed constituted a novation to the original understanding and that
    therefore the deed should control. However, the trial court weighed all of the
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    evidence and determined by clear and convincing evidence that a constructive
    trust was appropriate in this case.8 Notably, the deed is the only evidence in the
    record to indicate that the parties ever had an intention other than Priscilla’s
    residence remaining hers, and that indication is specifically rebutted in Roger’s
    letter.
    {¶27} Next, in arguing against the imposition of the constructive trust,
    Todd claims that the trial court did not explicitly find any unjust enrichment in its
    judgment entry. Todd correctly argues that for a constructive trust to be imposed
    unjust enrichment or fraud has to be found. Cowling, supra, at ¶ 19. Todd
    contends no fraud was alleged in the complaint and that unjust enrichment was
    specifically rejected by the trial court in its judgment entry. Unjust enrichment
    was discussed at an earlier point in the trial court’s judgment entry, prior to the
    trial court’s discussion of the constructive trust, and rejected; however, this portion
    of the trial court’s judgment entry pertained only to the Gallogly’s breach of
    contract claim.
    {¶28} In the trial court’s judgment entry where the court discusses its
    imposition of a constructive trust, the court outlines the standards for finding a
    constructive trust. As part of that analysis, the court stated, “[t]he constructive
    trust is an equitable remedy that protects not only against fraud, but also unjust
    8
    Appellees also contend that valuable consideration was actually not transferred as Roger never signed the
    promissory note.
    -19-
    Case No. 14-12-12
    enrichment, ‘where it is against the principles of equity that the property to be
    retained by a certain person even though the property was acquired without fraud.’
    (Emphasis Added.) (Doc. 153) quoting Cowling, supra, at ¶ 19, quoting Ferguson,
    supra, at 226. The trial court thus cited recognized standards of the Ohio Supreme
    Court in Cowling and Ferguson to impose a constructive trust, standards which
    clearly contain the concept of unjust enrichment.
    {¶29} Following the trial court’s analysis of the standards it had laid out for
    imposing a constructive trust, the court then specifically stated, “[t]he court finds
    that it would be against the principles of equity to allow the entire property to be
    retained by the Watson Trust and therefore that a constructive trust be imposed for
    the benefit of Priscilla Gallogly.” (Emphasis Added.) (Doc. 153). A comparison
    of the trial court’s language used in its findings to the standards and requirements
    of the Ohio Supreme Court for imposing a constructive trust clearly shows that the
    trial court utilized the Ohio Supreme Court’s language from Cowling, and
    Ferguson in making its decision.
    {¶30} In sum, while the exact phrase “unjust enrichment” was not used in
    the trial court’s official “finding,” the language the trial court did use precisely
    mirrors the required findings for a constructive trust. Therefore, we cannot find
    that the court’s failure to use the phrase “unjust enrichment” in its finding warrants
    reversal.
    -20-
    Case No. 14-12-12
    {¶31} Based upon all the evidence, we find that there was competent
    credible evidence to support the trial court’s imposition of a constructive trust for
    the benefit of Priscilla Gallogly.
    {¶32} Accordingly, Todd Watson’s first and second assignments of error
    are overruled.
    Watson’s Fourth Assignment of Error
    {¶33} In Todd’s fourth assignment of error, he argues that if the
    constructive trust was an appropriate remedy, the trial court erred in how it
    implemented the constructive trust. Specifically, Todd argues that constructive
    trusts attach to assets, not values, and that the trial court should have factored in
    the mortgage debt when determining Priscilla’s residence’s value.
    {¶34} In the trial court’s judgment entry, the trial court conducted the
    following analysis, and made the subsequent findings, when determining
    Priscilla’s interest to be covered by the constructive trust.
    The Galloglys request that the constructive trust be for 21% of
    the current fair market value, if not for the $350,000.00
    valuation at the time of transfer. By the property values
    Priscilla Gallogly is entitled to 21% of the subject property,
    determined by adding the value of the Gallogly residence and .7
    acre lot ($350,000.00) to the value of the residue ($1,300,000.00),
    then dividing the value of the Gallogly residence and .7 acre lot
    ($350,000.00) by that sum ($1,650,000.00). * * * The Court
    finds that inherent in the transfer of the subject property is some
    risk of loss despite the intent of Roger Watson and Myron
    Gallogly and as such Priscilla Gallogly should share partially in
    the loss as a result of the failure of the Project.
    -21-
    Case No. 14-12-12
    It is therefore ORDERED, ADJUDGED AND DECREED that a
    constructive trust be imposed upon the subject property for the
    benefit of Priscilla Gallogly in the amount of 21% of the net
    proceeds of the foreclosure sale after payment of court costs and
    the amount due and owing to the Richwood Banking Company.
    (Emphasis Added.) (Doc. 153).
    {¶35} Todd’s first argument that the trial court’s computation was improper
    is that constructive trusts attach to assets rather than values. The Ohio Supreme
    Court held in Estate of Cowling v. Estate of Cowling, supra, 
    109 Ohio St.3d 276
    ,
    
    2006-Ohio-2418
    , that
    [a] claimant seeking the imposition of a constructive trust must
    specify the particular property over which the constructive trust
    is to be placed. If the form or possessor of the property over
    which the constructive trust should be placed changes during a
    lawsuit, the claimant should be given an opportunity to conduct
    discovery, if necessary, and present evidence of the new location
    or form of the property over which the trust should be placed.
    Cowling, at ¶ 24. Here Priscilla’s residence, along with the Gallogly property, was
    in the process of going through foreclosure at the time of the trial, and the trial
    court traced the property back to Priscilla Gallogly and imposed the constructive
    trust over her financial interest in her residence relative to the accompanying land
    as a whole. In this case, the “assets” are the identifiable proceeds derived from the
    pending foreclosure sale of Priscilla’s residence, over which the constructive trust
    was imposed. Consequently, there is clear and convincing evidence to support the
    -22-
    Case No. 14-12-12
    trial court’s tracing. Accordingly, we do not find that the trial court erred in this
    aspect of its implementation of the constructive trust.
    {¶36} In Todd’s second argument under this assignment of error, Todd
    argues that the trial court erred in its computation of the value of Priscilla’s
    interest covered by the constructive trust. Todd claims that the trial court did not
    appropriately factor in the mortgages as they pertained to Priscilla’s residence, and
    that therefore her interest should have been lower.
    {¶37} As is made clear by the trial court’s holding above, the mortgages on
    the entire property are to be paid out of proceeds from the foreclosure sale, as well
    as the court costs, before Priscilla receives her 21%. Thus Priscilla will effectively
    be “paying” her share of the mortgage relative to the property as a whole, as she is
    only getting 21% of the net proceeds of the foreclosure after the mortgages are
    paid off, not 21% of the property value before the mortgages are paid off. This
    computation establishes that the trial court did, in fact, consider the mortgages and
    Priscilla’s obligation to pay her share. Accordingly, we find that there is clear and
    convincing evidence to support the decision made by the trial court. Therefore,
    Todd’s fourth assignment of error is overruled.
    Watson’s Third Assignment of Error and
    Page’s Assignment of Error
    {¶38} In Todd’s third assignment of error, and Page’s assignment of error,
    Todd and Page contest the trial court’s determination of priority distribution of
    -23-
    Case No. 14-12-12
    funds from the foreclosure sale. Specifically, Todd argues that the Watson Trust
    should have priority over all but the bank’s mortgages on the Gallogly property
    and Priscilla’s residence. On the other hand, Page argues that it should have
    priority over all but the bank’s mortgages on the Gallogly property and Priscilla’s
    residence.
    {¶39} Regarding priority, the trial court held the following:
    It is therefore ORDERED, ADJUDGED AND DECREED that
    after payment of court costs, taxes, and the balance due to the
    Richwood Banking Company, the remaining net proceeds of the
    foreclosure sale shall be distributed as follows:
    a. The first 21% to Priscilla Gallogly;
    b. The next $220,000 to Page Engineering
    c. The next $1,003,729.00 to Todd Watson, Trustee of the Roger
    Watson Living Trust; and
    d. Any remaining balance paid to the Watson Trust and Myron
    Gallogly in a 50/50 ratio.
    (Doc. 153).
    {¶40} At the outset, we would note that the constructive trust imposed
    would not have any practical effect in protecting Priscilla’s interest if she was not
    given priority over Todd.      We have already found that there was clear and
    convincing evidence to support the trial court’s finding that a constructive trust
    should be imposed for Priscilla’s benefit. Moreover, we see nothing in the record
    illustrating that Todd’s interest was somehow secured or should be superior in any
    other way to Priscilla’s interest in her residence.
    -24-
    Case No. 14-12-12
    {¶41} As to Page’s priority, the trial court found that “Page Engineering
    does not have an interest in the Gallogly residence and .7 acre lot portion of the
    subject property; therefore, its interest is only in the remaining portion of the
    subject property.” (Id.) The record supports the trial court’s determination. In
    this case, Page engineering did work on the Gallogly property that was part of the
    project, and Page expected to be compensated for it. Nowhere in the record is
    there any indication that Page ever had any interest in Priscilla’s residence, or that
    Page did any work on Priscilla’s residence. Thus Page would have no claim on
    Priscilla’s residence, as the trial court found, and we do not find that the trial court
    erred in determining that Page’s interest was subordinate to Priscilla’s in the
    proceeds of the foreclosure sale.
    {¶42} It remains for us to determine whether the trial court correctly
    determined that Page’s interest in the foreclosure proceeds was superior to Todd’s.
    In making its determination, the trial court reasoned that, “whether or not Page
    Engineering is a creditor or an investor Page Engineering’s interest in the subject
    property is superior to the other investors of the Project, those being Roger
    Watson/the Watson Trust and Myron Gallogly as shareholders in ODI.” (Doc.
    153).
    {¶43} On appeal, both Todd and Page argue each should be ahead in
    priority over the other. Todd claims that he was somehow a “secured” creditor
    -25-
    Case No. 14-12-12
    and Page claims priority over Todd as a creditor over an investor. The trial court
    weighed the evidence and found that Todd was not a creditor and his interests
    were subordinate to Page’s regardless of whether Page was an investor or a
    creditor.9
    {¶44} We would further note that the record would support a determination
    that Page was a creditor, as the parties agreed and stipulated that Page was owed
    $220,000.00 for the work it performed on the Gallogly property, certainly taking
    Page out of the realm of an investor. As a creditor, Page would certainly take over
    Todd as an investor and thus the trial court’s decision would be correct. However,
    even if Page and Todd were both construed as investors, the trial court’s
    discretionary decision is supported by the record and we will not simply substitute
    our judgment for the trial court’s judgment on this point.
    {¶45} Accordingly, Watson’s third assignment of error and Page’s
    assignment of error are overruled.
    {¶46} For the foregoing reasons Watson’s and Page’s assignments of error
    9
    The argument that Page was an investor rather than a creditor stems from Page’s original agreement in the
    project. Evidence indicated that Page originally agreed to forgo receipt of payment for its work on the
    project for a period of years in exchange for double its regular fee. Even if this made Page an investor, that
    characterization would be altered when the parties later agreed that Page was owed a flat-fee of $220,000
    for its work on the project.
    -26-
    Case No. 14-12-12
    are overruled and the judgment of the Union County Common Pleas Court is
    affirmed.
    Judgment Affirmed
    WILLAMOWSKI, J., concurs in Judgment Only.
    ROGERS, J., DISSENTS.
    {¶47} I must dissent from the opinion of the majority. Once again this
    court has chosen to ignore the finality and sanctity of formally executed
    documents; in this case a warranty deed. See Neville v. Neville, 3d Dist. Marion
    No. 9-08-37, 
    2009-Ohio-3817
    , ¶ 36 (Rogers, J., concurring in part and dissenting
    in part) (“I find it troubling the lack of importance placed upon the formally
    executed deed of the parties.”). The Galloglys (yes, both husband and wife) made
    a business decision to formally transfer their property to the Watson Trust. That
    transfer enabled Roger to obtain a loan that was necessary for the Oaks
    Development to proceed. Personal assurances aside, the property development
    could not continue without the letter of credit Watson needed to obtain a loan,
    which was intended to benefit both Watson and the Galloglys’ business venture.
    At that point in time, Roger was also making the mortgage payments on the
    Gallogly property. It is unfortunate that Roger died shortly after the loan was
    -27-
    Case No. 14-12-12
    executed. However, his death may or may not have contributed to the failure of
    the development.
    {¶48} But more importantly, all that is immaterial to the issues in this case.
    A properly executed deed may only be set aside upon a showing of lack of
    capacity, fraud, or undue influence, and the burden of proof is by clear and
    convincing evidence.    Household Fin. Corp. v. Altenberg, 
    5 Ohio St.2d 190
    (1966), syllabus. None of these circumstances have been alleged, let alone proven
    by any evidentiary standard. Priscilla contributed her property to her husband’s
    business venture and must be allowed to suffer the consequences. She might have
    tried to protect herself through additional written agreements, although such a
    collateral agreement may not have been acceptable to the loaning institution, and
    the development might have stopped there. The choice was made to indenture the
    property without recourse.
    {¶49} As to the issue of a constructive trust, this court cannot rationally
    find unjust enrichment of the Watson Trust when the Galloglys benefited from the
    business venture proceeding due to the loan obtained by Watson.            Priscilla
    effectively made herself a silent partner in the Oaks Development by her transfer
    of the real estate and has no rights except those properly executed in writing, and
    obviously there are none. Therefore, I would find that Priscilla has no interest in
    -28-
    Case No. 14-12-12
    the subject property and the trial court erred in both imposing a constructive trust
    and giving Priscilla priority over Todd Watson and Page Engineering.
    {¶50} As to Page Engineering, it is an unsecured creditor of Oaks
    Development, and has no rights except as to Oaks Development. Consequently,
    the trial court erred in giving priority to Page Engineering over Todd Watson.
    Nevertheless, Page Engineering should have been given priority over Priscilla,
    who, as stated above, did not have any interest in the subject property.
    {¶51} Accordingly, I would sustain Todd Watson’s first, second, and third
    assignments of error, as well as Page’s assignment of error. Moreover, I would
    find that the resolution of Todd Watson’s first and second assignments of error
    rendered his fourth assignment of error moot.
    {¶52} Since the majority today has failed to uphold the permanence of
    warranty deeds, it has failed to properly determine the priorities of the parties
    involved in this matter. As such, I respectfully dissent.
    /jlr
    -29-
    

Document Info

Docket Number: 14-12-12

Citation Numbers: 2013 Ohio 3778

Judges: Shaw

Filed Date: 9/3/2013

Precedential Status: Precedential

Modified Date: 10/30/2014