Natalie Cardiello v. Mary Claire Arbogast

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
Nos. 12-3866, 12-3867, 12-3868
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NATALIE LUTZ CARDIELLO,
Plaintiff-Appellant-Cross-Appellee
v.
THOMAS D. ARBOGAST and MARY CLAIRE ARBOGAST,
Defendants-Appellees-Cross-Appellants
____________
On Appeal from the United States District Court
for the Western District of Pennsylvania
(D.C. Civil Nos. 2:12-cv-353, 2:12-cv-401, 2:12-cv-402)
District Judge: Honorable Terrence F. McVerry
____________
Argued June 17, 2013
Before: DAVIS, WALKER, JR. and SACK, Circuit Judges. *
(Opinion Filed: August 7, 2013)
Neal H. Levin, Esq. (ARGUED)
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, IL 60606
*
Honorable Andre M. Davis, of the United States Court of Appeals for the Fourth
Circuit, Honorable John M. Walker, Jr. and Honorable Robert D. Sack, of the United
States Court of Appeals for the Second Circuit, all sitting by designation following the
recusal of the members of the Court of Appeals for the Third Circuit.
Natalie Lutz Cardiello, Esq.
107 Huron Drive
Carnegie, PA 15106
Counsel for Plaintiff-Appellant-Cross-Appellee Natalie Lutz Cardiello, Trustee for
the Bankruptcy Estate of Thomas D. Arbogast
Nicolas D. Krawec, Esq. (ARGUED)
Bernstein-Burkley, P.C.
700 Grant Street
Suite 2200 Gulf Tower
Pittsburgh, PA 15219
Counsel for Defendant-Appellee-Cross-Appellant Thomas D. Arbogast
Joseph F. McDonough, Esq.
Buchanan Ingersoll & Rooney, P.C.
301 Grant Street, 20th Floor
One Oxford Centre
Pittsburgh, PA 15219
Counsel for Defendant-Appellee-Cross-Appellant Mary Claire Arbogast
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OPINION OF THE COURT
____________
SACK, Circuit Judge:
These appeals arise from an adversary proceeding related to the Chapter 7
bankruptcy proceedings of debtor Thomas D. Arbogast ("Thomas") in the United States
Bankruptcy Court for the Western District of Pennsylvania. At issue in the adversary
proceedings were alleged fraudulent transfers made by Thomas to an account that he and
his wife, Mary Claire Arbogast ("Mary Claire"), held as tenants by the entireties (the
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"Entireties Account" or the "Account"). The Bankruptcy Court (Markovitz, J.) found that
there had been fraudulent transfers in the amount of $143,389.10. The bankruptcy court
entered judgment in that amount in favor of plaintiff Natalie Lutz Cardiello, who is the
Chapter 7 Trustee in Thomas’s bankruptcy action, and against Thomas and Mary Claire
as owners by the entireties. The Trustee appealed that judgment to the United States
District Court for the Western District of Pennsylvania, and the Arbogasts cross-
appealed; the district court (McVerry, J.) affirmed. The Trustee appeals from that
judgment, and the Arbogasts again cross-appeal. We affirm.
BACKGROUND
A. Proceedings in State Court
The bankruptcy proceedings that underlie this appeal are part of the fallout from a
landlord-tenant dispute between TrizecHahn Gateway LLC ("Trizec") -- a commercial
landlord -- and Titus & McConomy LLP ("T&M") -- a no-longer-extant Pittsburgh law
firm. In 2000, Trizec brought suit in a Pennsylvania Court of Common Pleas against
T&M and its general partners, including Thomas, in their individual capacities. The
court found in favor of Trizec, and, in 2006, entered final judgment in the amount of
$3.27 million. Thomas was among the partners upon whom the judgment imposed joint
and several liability.
In 2007, as part of its effort to recover on that judgment, Trizec brought a
fraudulent transfer action against Thomas and Mary Claire in the Court of Common
Pleas. Trizec alleged that Thomas had been depositing his salary from his new employer,
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Schnader Harrison Segal & Lewis LLP, into a bank account that he and Mary Claire held
as tenants by the entireties. Trizec contended that these deposits constituted fraudulent
transfers under the Pennsylvania Uniform Fraudulent Transfer Statute ("PUFTA"), 12 Pa.
Cons. Stat. §§ 5101-10.
Before the parties could litigate the fraudulent transfer action, however, the
Pennsylvania Superior Court reversed the Court of Common Pleas' judgment against
Thomas in the lease litigation, holding that he could not be held liable in his individual
capacity. TrizecHahn Gateway LLC v. Titus, 930 A.2d 524, 539, 2007 Pa. Super. 196(Pa. Super. Ct. 2007). Trizec appealed this decision to the Pennsylvania Supreme Court,
but it also discontinued the fraudulent transfer action against Thomas and Mary Claire.
In July of 2009, the Pennsylvania Supreme Court reversed the Superior Court in the lease
litigation, reinstating Thomas's individual liability. TrizecHahn Gateway LLC v. Titus,
601 Pa. 637, 646-50, 976 A.2d 474, 479-81 (2009). The Court of Common Pleas in the
fraudulent transfer action thereafter granted Trizec's motion to strike its discontinuance of
that action.
B. Proceedings in Bankruptcy Court
Thomas filed a Chapter 7 bankruptcy petition on January 15, 2010, in the United
States Bankruptcy Court for the Western District of Pennsylvania. He then removed the
fraudulent transfer action to federal court, where it was docketed as an adversary
proceeding in the bankruptcy court, see 28 U.S.C. § 1452; 28 U.S.C. § 157; Fed. R.
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Bankr. P. 7001, and assigned to Bankruptcy Judge M. Bruce McCullough. The
bankruptcy court entered an order substituting Cardiello, the Chapter 7 Trustee, for
Trizec, thus enabling the Trustee to pursue its right under 11 U.S.C. § 544(b) to "avoid
any transfer of an interest of the debtor in property . . . that is voidable under applicable
law by a creditor."
One of the fraudulent transfer theories the Trustee sought to prosecute in the
bankruptcy court, and the only one at issue here, was constructive fraud. In general, a
transfer is constructively fraudulent as to a creditor if it is "made . . . without receiving a
reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent
at that time or the debtor became insolvent as a result of the transfer." 12 Pa. Cons. Stat.
§ 5105; see also id. § 5104.
The Trustee's position as to how the law of constructive fraudulent transfer applied
to Thomas's deposits was, and continues to be, based on the premise that "under
Pennsylvania law, . . . property held as tenants by the entireties is exempt from process
by a creditor of only one spouse," In re Houck, 184 B.R. 21, 23 (Bankr. E.D. Pa. 1995).
So if a debtor spouse deposits his own funds into an entireties bank account and thus out
of reach of his creditors, and receives nothing in return for that deposit from the non-
debtor spouse, he has "transfer[red]" funds without receiving "reasonably equivalent
value" within the meaning of the PUFTA, and that transfer is therefore constructively
fraudulent. Plaintiff's Pretrial Statement, Sept. 15, 2010, at 3-4, Joint App'x at 158-59.
This rule, as the Trustee seems to have understood it, was subject to the single
qualification that such deposits into an entireties account "are not fraudulent as
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to . . . creditors to the extent th[e] funds are then used to satisfy reasonable and necessary
expenses for the maintenance of said debtor's family." See Plaintiff''s Post-Trial
Memorandum, Nov. 29, 2010, Cardiello v. Arbogast, No. 10-2092-MBM, ECF #64, at 5
(quoting In re Meinen, 232 B.R. 827, 842 (Bankr. W.D. Pa. 1999)). To make out its case,
the Trustee planned to adduce evidence of all of Thomas's deposits of his salary into the
Account as the universe of constructively fraudulent transfers, the amount of which could
be reduced only through proof of later expenditures from the Account for "reasonable and
necessary expenses."
This view of the applicable law was largely drawn from an opinion Judge
McCullough himself had previously handed down, In re Meinen, supra. But Judge
McCullough apparently did not think In re Meinen governed the Trustee’s claims in this
case. Instead, he seems to have been persuaded, or perhaps thought himself bound, by
the Pennsylvania state court’s approach in a fraudulent transfer action concerning one of
Thomas's former partners. The rule established there was that the debtor spouse's
deposits into an entireties account were constructively fraudulent against creditors only if
spent on luxury items for the exclusive benefit of the non-debtor spouse. Apparently
poised to apply this rule after trial, Judge McCullough entered a case management order
directing the Trustee to specify which expenditures of funds from the Entireties Account
it thought were spent on luxuries, undermining the Trustee’s desire to enter evidence of
Thomas’s initial deposits into the Account.
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After discovery, Judge McCullough held a trial at which the parties litigated, as
relevant here, four categories of alleged disbursements from the Entireties Account,
totaling about $900,000.00: (1) checks drawn and deposited into an account owned solely
by Mary Claire; (2) payments related to the Arbogasts' purchase and maintenance of a
house in Florida; (3) membership fees for three different country clubs; and (4) premium
payments towards various life insurance policies.
Before he could render a final decision, Judge McCullough died. The case was
reassigned to Western District Bankruptcy Judge Bernard Markovitz. Judge Markovitz
decided, pursuant to Fed. R. Civ. P. 63, to retry the case, and the retrial again focused on
the four categories of expenditures listed above. On February 7, 2012, Judge Markovitz
issued a Memorandum Opinion and Judgment resolving the Trustee's claims. Cardiello
v. Arbogast, 466 B.R. 287 (Bankr. W.D. Pa. 2012). Adopting, by and large, In re
Meinen's and the Trustee's understanding of the law governing the case, but applying it to
the evidence as limited by Judge McCullough's case management order, Judge Markovitz
determined that there were $143,389.10 in constructively fraudulent transfers, based on
disbursements related to the Florida residence and the country club memberships. Id. at
296, 302-04, 320. Both parties appealed to the district court, that court affirmed, and the
parties now renew their appeals here.
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DISCUSSION
In bankruptcy cases, we "exercise the same standard of review as the District
Court when it reviewed the original appeal from the Bankruptcy Court." In re Handel,
570 F.3d 140, 141 (3d Cir. 2009). "Thus, we review the Bankruptcy Court's findings of
fact for clear error and exercise plenary review over the Bankruptcy Court's legal
determinations." Id.I. The Trustee's Appeal
A. Exclusion of Evidence of Deposits into the Entireties Account
We address at the threshold the principal theme of the Trustee's counsel's
presentation at oral argument before us: that the bankruptcy court's judgment is
fundamentally flawed because the Trustee was precluded from introducing evidence of
Thomas's deposits into the Entireties Account, and instead limited to proof of
disbursements from the Account. This limitation of the Trustee's proofs, counsel
maintained, is so at odds with the law Judge Markovitz ultimately applied to resolve the
fraudulent transfer claims that we must vacate the judgment and remand for retrial.
We have no reason to doubt the accuracy of the Trustee's understanding of the
law. But we decline to reach the merits of this argument because we conclude that it was
waived. "An issue is waived unless a party raises it in its opening brief, and for those
purposes 'a passing reference to an issue . . . will not suffice to bring that issue before this
court.'" Laborers' Int'l Union of North Am., AFL-CIO v. Foster Wheeler Energy Corp.,
26 F.3d 375, 398 (3d Cir. 1994) (quoting Simmons v. City of Philadelphia, 947 F.2d
1042, 1066 (3d Cir. 1991) (opinion of Becker, J., announcing the judgment)); Fed. R.
8
App. P. 28; 3d Cir. R. 28. Despite its centrality at oral argument, and although it is
referenced elliptically in the Trustee's briefs, the issue of the evidentiary limitations the
bankruptcy court allegedly imposed upon the Trustee does not appear as a ground for
appeal in the "Statement of Issues" or "Argument" sections of the Trustee's brief; nor
does the Trustee's brief mention the argument in its conclusion, which seeks only a
"remand for a recalculation [of fraudulent transfer amounts]," not a new trial. Appellant's
Br. at 28. We therefore conclude that this argument is not properly before us.
B. Recovery Period
The first argument properly raised in the Trustee's briefing is that the bankruptcy
court erred by limiting its recovery to transfers made between April 23, 2003, and April
23, 2007. The basis upon which the bankruptcy court did so is the PUFTA's four-year
statute of repose, 12 Pa. Cons. Stat. § 5109. The bankruptcy court interpreted this
provision to limit the Trustee’s potential recovery to transfers during a four-year "look-
back period" stretching backwards from April 23, 2007, the date Trizec first filed the
fraudulent transfer action in Pennsylvania state court. See Arbogast, 466 B.R. 287, 300-
02. The Trustee argues that the court erred insofar as it interpreted the PUFTA's statute
of repose to preclude it from seeking relief for allegedly fraudulent transfers that took
place after Trizec's April 23, 2007, filing.
Once again, the Trustee's argument may have theoretical merit. But also once
again, we ultimately do not reach it. In a pre-trial conference held before Judge
McCullough in this case, the court asked counsel for all parties, "While we're talking
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about time frames, does anybody disagree that we've got four years we're dealing with
here?" Tr. of Hr'g, Oct. 14, 2010, at 42, Joint App'x at 194. Counsel for the Trustee
responded, "No, sir. We don't." Id."The chief purposes of the pre-trial conferences are to define and simplify the
issues, to lessen surprise at trial and the risk of judicial error, to conclude stipulations on
matters of evidence, and to promote settlements." Price v. Inland Oil Co., 646 F.2d 90,
96 (3d Cir. 1981) (internal quotation marks omitted). To these ends, "this court
has . . . been willing to hold the parties bound by pre-trial representations." Id. at 95. We
conclude here, as did the district court on appeal from the bankruptcy court's order, that
the Trustee is bound by counsel’s unambiguous statement before Judge McCullough. We
therefore reject this ground for appeal.
C. Burden of Proof
Finally, the Trustee contends that the bankruptcy court erred in its allocation of the
burden of proof with respect to whether the Arbogasts' expenditures from the Entireties
Account were for "reasonable and necessary expenses for the maintenance of [the]
debtor's family," Meinen, 232 B.R. at 842. The bankruptcy court concluded that the
burden of persuasion on this issue remained at all times with the Trustee, but did assign
to the Arbogasts "the burden of producing at least some useful evidence regarding what
the funds deposited into an entireties account are ultimately spent on." Arbogast, 466
B.R. at 308. The Trustee argues that the law's exemption for constructive fraud purposes
of funds later used for "reasonable and necessary expenses" constitutes an affirmative
defense, and that the burden of persuasion should therefore have rested with the
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Arbogasts.
Pennsylvania law appears to us to be silent as to whether the demonstration that
funds were used for "reasonable and necessary expenses" is an affirmative defense or
instead, a negation of the plaintiff's prima facie case. See, e.g., Watters v. DeMilio, 16
Pa. D. & C.2d 747, 752-53 (Ct. Com. Pl. 1957) (recognizing the rule, but offering no hint
as to its nature). Cases from other jurisdictions arising in similar legal contexts, however,
have treated the subsequent use of transferred funds as going to the question of
"reasonably equivalent value," that is, as negating that element of a plaintiff's prima facie
case. See United States v. Goforth, 465 F.3d 730, 736 (6th Cir. 2006) (collecting cases).
And, as the bankruptcy court recognized, Arbogast, 466 B.R. at 307-08, Committee Note
6 of section 5102 of the PUFTA specifically rejects the notion that the burden of proof
with respect to whether "the transferor received reasonably equivalent value" should ever
shift to the defendant. 12 Pa. Cons. Stat. § 5102 cmt.6. *
In any event, because the Arbogasts did indeed produce evidence at trial as to the
uses to which funds from the Entireties Account were put, it seems to us highly unlikely
that the bankruptcy court's allocation of the burden of persuasion made any difference in
this case. Cf. Ridley School Dist. v. M.R., 680 F.3d 260, 271 (3d Cir. 2012) ("In a non-
*
The Pennsylvania Supreme Court has instructed that "[o]fficial comments are to
be given weight in the construction of statutes," Lessner v. Rubinson, 527 Pa. 393, 398
n.4, 592 A.2d 678, 680 n.4 (1991), a principle that is derived from Pennsylvania statutory
law, 1 Pa. Cons. Stat. § 1939. See also McGowan v. University of Scranton, 759 F.2d
287, 298 & n.14 (3d Cir. 1985) (recognizing and applying the principle contained in 1 Pa.
Cons. Stat. § 1939).
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criminal case, an error regarding the placement of the burden of persuasion will
frequently be harmless."). We therefore reject this ground for the appeal.
II. The Arbogasts' Cross-Appeal
A. Scope of "Reasonable and Necessary Expenses"
We read the Arbogasts' first ground for their cross-appeal to be that the bankruptcy
court adopted an unduly narrow conception of what sorts of expenses are "reasonable and
necessary . . . for the maintenance of [the] debtor's family." Meinen, 232 B.R. at 842.
They argue that this category of expenses should be understood to embrace expenses for
anything other than luxuries. So understood, the Arbogasts posit, the category of
"reasonable and necessary expenses" should embrace the expenditures on the Florida
residence and the country club memberships, and hence exempt them from the
constructive fraudulent transfer calculation.
The Arbogasts cite no authority, nor have we found any ourselves, that suggests
that "reasonable and necessary expenses" in this context means "expenses for anything
other than luxuries." Whatever the category's outermost perimeters, moreover, we can
find no case extending it so far as to cover such non-essential expenses as vacation
residences or country club memberships -- even if either is used from time to time for
business purposes. Cf. Watters, 16 Pa. D. & C.2d at 752 (referencing "food, clothing,
medical expenses, taxes on . . . real estate . . . and interest paid on [a] mortgage" as
reasonable and necessary); Goforth, 465 F.3d at 736 (approving use of funds on "food,
clothing, utilities, gasoline, property taxes, and travel expenses" as reasonable and
necessary). And we see no reason that the law of fraudulent transfer should permit an
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insolvent debtor to transfer his own funds out of the reach of his creditors -- frustrating or
delaying attempts to recover a debt -- while still directing the use of those funds towards
amenities of his choice. We therefore affirm the bankruptcy court's decision that the
payments towards the Florida residence and the country club memberships were not
"reasonable and necessary expenses" within the meaning of Pennsylvania law.
B. Reasonably Equivalent Value Through Satisfaction of Thomas's Debts
The Arbogasts next argue that those funds deposited into the Entireties Account that were
later used for membership fees at Thomas’s country clubs should not be treated as
fraudulent transfers inasmuch as such payments were put towards satisfaction of
Thomas’s debts to the clubs. Payment in satisfaction of "antecedent debts," they point
out, is included in section 5103 of the PUFTA’s definition of "value." 12 Pa. Cons. Stat.
§ 5103. And the question of "reasonably equivalent value," they continue, is generally
one to be considered under the "totality of the circumstances." In re R.M.L., Inc., 92 F.3d
139, 153 (3d Cir. 1996). The Arbogasts maintain that in circumstances in which
transferred funds are initially deposited into an entireties account, but eventually used
towards satisfaction of a debt owed by the debtor that is of similar value to the funds
transferred, the debtor receives "reasonably equivalent value" from the initial transfer,
and such transfer would therefore not constitute constructive fraud.
The problem with this argument as applied to the facts of this case -- an initial
transfer to an entireties account, followed by a transfer from that account towards
satisfaction of a debt -- is that it treats the initial transfer to the entireties account as
legally irrelevant. It is not, inasmuch as that initial transfer places the funds out of all
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creditors’ reach, and therefore, at the least, hinders or delays creditors seeking
satisfaction of debts owed them. Cf. Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717,
720 (7th Cir. 2002) (addressing a similar argument in a related context, and explaining
panel’s view that "the inquiry should stop at the first stage of the analysis, that is, should
stop after it is determined that the [initial] transfer was not supported by consideration").
It is true, of course, that the uses to which the funds are later put may also be relevant --
for example, through the exemption for funds spent on "reasonable and necessary
expenses" addressed supra. Similarly, insofar as a later received benefit, either direct or
indirect, can be seen as being "as a result of" the initial transfer, it may confer
"reasonably equivalent value." Mellon Bank, N.A. v. Metro Commc'ns, Inc., 945 F.2d
635, 647 (3d Cir. 1991). But we are aware of no authority suggesting that any later
expenditure from a transferee that happens to confer some value upon the transferor
sanitizes, for constructive fraud purposes, a transfer that was fraudulent when made. We
therefore reject this argument.
C. Additional Post-Trial Hearing
Finally, the Arbogasts argue that the bankruptcy court erred by not holding an
additional hearing after the trial at which they would have had an opportunity to
demonstrate that funds from the Entireties Account that were used for expenses the court
found not to be "reasonable and necessary" came from Mary Claire, and not Thomas, and
therefore could not be counted as constructively fraudulent transfers. They argue that the
parties stipulated to such a hearing before Judge McCullough, and that Judge Markovitz
was bound by this stipulation.
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Even if the parties did agree on such a hearing before Judge McCullough, we find
nothing in the record to establish that the Arbogasts brought this to Judge Markovitz’s
attention. We conclude, considering the circumstances, that it was incumbent upon them
to do so before they can assert that such a hearing was wrongly withheld. We therefore
reject this ground for appeal also.
CONCLUSION
For the foregoing reasons, the judgment of the district court is AFFIRMED.
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