Montoya v. HRW of Las Cruces, Inc. et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
HARRY CARLTON WILEY and
VIRGINIA RUTH WILEY,
Debtors. 	No. 7-07-13053 SL
PHILIPS J. MONTOYA,
Plaintiff,
v. 	Adv. No. 08-1120 S
HRW OF LAS CRUCES, INC.,
VIRGINIA OXFORD,
OXFORD INVESTMENTS, LLC.
FIRST STATE BANK,
ROBERT WILEY,
HRW FAMILY, LLC.,
HARRY CARLTON WILEY,
VIRGINIA RUTH WILEY,
HARRY CARLTON WILEY,
as TRUSTEE OF THE WILEY FAMILY TRUST,
FIRST NEW MEXICO BANK, LAS CRUCES,
and
HARRY CARLTON WILEY,
as TRUSTEE OF THE CHARLES HAYDEN WILEY
AND ELNORA WILLIAMS WILEY REVOCABLE TRUST,
Defendants.
MEMORANDUM OPINION ON VIRGINIA OXFORD
AND ROBERT WILEY’S OPPOSED RULE 12(b)(6)
MOTION TO DISMISS COUNT 6
This matter is before the Court on Defendants’ Virginia
Oxford and Robert Wiley (“Movants”) Motion to Dismiss Count 6 of
Plaintiff’s First Amended Complaint (doc 20)(“Motion”) for
failure to state a claim upon which relief can be granted.
Plaintiff did not file a response. 	Movants appear through their
attorney Thuma & Walker, P.C. (David T. Thuma). 	This is a core
proceeding. 	28 U.S.C. § 157(b)(2)(A).
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Judge Robert Jacobvitz of this Court recently set forth the
standards to use when considering a motion to dismiss:
A motion to dismiss for failure to state a claim is
governed by Rule 12(b)(6), Fed.R.Civ.P., made
applicable to adversary proceedings by Rule 7012,
Fed.R.Bankr.P. In considering a motion to dismiss under
Rule 12(b)(6), the Court accepts as true all well
pleaded facts and evaluates those facts in the light
most favorable to the plaintiff. 	Moore v. Guthrie, 438
F.3d 1036, 1039 (10th Cir. 2006). 	The time-tried
standard of proof established by Conley v. Gibson, 355
U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957),
whereby a complaint should not be dismissed “unless it
appears beyond doubt that the plaintiff can prove no
set of facts in support of his claim which would
entitle him to relief” has now been replaced by the
standard enunciated in Bell Atl. Corp. v. Twombly, 550
U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
Under Twombly, in order to survive a motion to dismiss
under Rule 12(b)(6), Fed.R.Civ.P., the complaint must
contain enough facts to state a cause of action that is
“plausible on its face.” 	550 U.S. at 570. 	In other
words, the plaintiff must “nudge [his] claims across
the line from conceivable to plausible.” 	Id. 	In
applying this new standard, the Tenth Circuit has
directed the trial court to “look to the specific
allegations in the complaint to determine whether they
plausibly support a legal claim for relief.” 	Alvarado
v. KOB-TV, L.L.C., 493 F.3d 1210, 1215, n. 2 (10th Cir.
2007) (citation omitted). 	The plaintiff must
sufficiently allege all facts necessary to support the
required elements under the legal theory proposed.
Lane v. Simon, 495 F.3d 1182, 1186 (10th Cir. 2007)
(citation omitted).
Wright v. Vanderbilt Mortgage and Finance, Inc. (In re Wright),
2009 WL 3633811 (Bankr. D. N.M. 2009).
In addition, “the tenet that a court must accept as true all
of the allegations contained in a complaint is inapplicable to
legal conclusions. 	Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not
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suffice.” 	Bixler v. Foster, 596 F.3d 751, 756 (10 th Cir.
2010)(citing Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009)).
COUNT 6
Count 6 of the 1 st Amended Complaint seeks a declaration
that the “Wiley Trust” is property of the estate and an order
directing the trustee of that trust to yield possession of the
trust assets to Plaintiff. 	Relevant factual allegations follow:
1. 	Plaintiff is the trustee for this chapter 7 case.
2. 	The Charles Hayden Wiley and Elnora Williams Wiley Revocable
Trust (“Wiley Trust”) is a trust created by instrument in 1988.
3. 	Wiley Trust is an insider of the Debtors in this case.
4. 	Wiley Trust owns real estate and personal property.
5. 	In or around October 2005 Debtor used about $75,000 of
personal funds to construct a barn on trust real estate.
6. 	Funds from the Wiley Trust paid a portion of Debtor’s 2005
federal income taxes.
7. 	Debtor Harry Wiley authorized loans from the Wiley Trust to
another family trust and to his daughter Virginia Oxford.
8. 	Debtor Harry Wiley is both a trustee and beneficiary of the
Wiley Trust and has had and continues to have unregulated
dominion and control over the corpus of the Wiley Trust.
9. 	Wiley Trust is the equivalent of a grantor trust.
The Court will not consider the content of footnote 1 on
page 3 of the Motion. 	It seeks to introduce matters outside the
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1The complaint is silent as to who the beneficiaries of the
Wiley Trust are.
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pleadings which are not properly considered in a motion to
dismiss. 	See Pace v. Swerdlow, 519 F.3d 1067, 1072 (10 th Cir.
2008)(Discussing items that trial court can consider in ruling on
a motion to dismiss without converting it to a motion for summary
judgment). 	See also Delhomme v. Caremark Rx, Inc., 232 F.R.D.
573, 577 (N.D. Tex. 2005)(same).
The Court will also not consider item 9 above to be true;
whether the Wiley Trust is equivalent to a grantor trust is a
legal question. 	No facts were alleged that describe why it is
like a grantor trust. 	Similarly, the Court will not assume that
the Trust is an insider. 	See Bixler, 596 F.3d at 756.
ARGUMENT
Movants argue that the complaint does nothing more than
state that Debtor Harry Wiley has mishandled the Wiley Trust
and/or breached his fiduciary duties to Movants 1 . 	They argue
that even if the allegations were true, Plaintiff lacks standing
to seek any relief; but, even if he did, the relief requested is
not one authorized by law. 	Specifically, they state that the
exclusive remedy is found under § 46A-10-1001, NMSA 1978 (2007
Repl.). This statute would require Harry Wiley to make the Wiley
Trust and/or the Movants whole. 	Finally, they argue that there
is no legal support for the proposition that a trustee who
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breached his duties, or that breaching trustee’s bankruptcy
estate, could end up with the trust property as a remedy for the
breach.
The Court disagrees and will deny the motion to dismiss.
DISCUSSION
For bankruptcy purposes, “property interests are created and
defined by state law.” 	Butner v. United States, 440 U.S. 48, 55
(1979). 	“[B]ut once it is determined that such an interest
exists, it becomes part of the debtor's estate by operation of
law under s 541 of the new Bankruptcy Code.” 	Regan v. Ross, 691
F.2d 81, 84 (2 nd Cir. 1982). 	See also Marrs-Winn Co., Inc. v.
Giberson Electric, Inc. (In re Marrs-Winn Co., Inc.), 103 F.3d
584, 591 (7 th Cir. 1996)(“The question of whether a debtor's
interest in property is ‘property of the estate’ is a federal
question to be decided by federal law, yet courts must look to
the applicable state law to determine the extent (if any) of the
Debtor's legal or equitable interest in the property.”)(citing In
re Yonikus, 996 F.2d 866 (7th Cir. 1993)).
Bankruptcy Code section 541(a) states that, except as
otherwise provided, all legal or equitable interests of the
debtor in property as of the commencement of a bankruptcy case
are “property of the estate”. 	Section 541(a) has a very broad
reach. 	United States v. Whiting Pools, Inc., 462 U.S. 198, 205
n. 9 (1983). 	Section 541(b), on the other hand, specifically
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2This section provides:
Property in which the debtor holds, as of the
commencement of the case, only legal title and not an
equitable interest, such as a mortgage secured by real
property, or an interest in such a mortgage, sold by
the debtor but as to which the debtor retains legal
title to service or supervise the servicing of such
mortgage or interest, becomes property of the estate
under subsection (a)(1) or (2) of this section 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.
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excludes some property from that reach. 	Section 541(c)(2)
recognizes that a restriction on transfer of a debtor’s interest
in a valid spendthrift trust is enforceable in a bankruptcy case.
And, section 541(d) 2 limits a bankruptcy estate’s interest in
property for which debtor holds bare legal title to that bare
legal title.
The starting point is to determine what state law interests
the Debtor had when this bankruptcy case was filed. 	The
complaint alleges that Debtor is both a beneficiary and a trustee
of the Wiley Trust. 	It also alleges that Debtor used some
$75,000 to make physical improvements on land owned by the Wiley
Trust. 	It also states that Debtor has had and continues to have
unregulated dominion and control over the corpus of the Wiley
Trust.
1. 	Debtor Wiley’s Interest as Beneficiary may be property of
the estate.
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New Mexico recognizes spendthrift trusts. 	Section 46A-5-
502, NMSA 1978 (2007 Repl.) 	They are valid, however, “only if”
they restrain both voluntary and involuntary transfer of a
beneficiary’s interest. 	Id. § A. 	The record does not contain a
copy of the Wiley Trust documents. 	Therefore, the Court cannot
rule as a matter of law that his interest as beneficiary is not
property of the estate.
2. 	Debtor Wiley’s Contributions to the Wiley Trust may be
property of the estate.
Restatement (Third) of Trusts § 58 (2003), Spendthrift
Trusts: Validity And General Effect, provides:
(1) Except as stated in Subsection (2), and subject to
the rules in Comment b (ownership equivalence) and §
59, if the terms of a trust provide that a beneficial
interest shall not be transferable by the beneficiary
or subject to claims of the beneficiary's creditors,
the restraint on voluntary and involuntary alienation
of the interest is valid.
(2) A restraint on the voluntary and involuntary
alienation of a beneficial interest retained by the
settlor of a trust is invalid.
Comment f addresses the situation of when a beneficiary transfers
part of the property to fund the spendthrift trust:
If a beneficiary transfers part of the property or
supplies part of the consideration to fund a trust, the
beneficiary is ordinarily settlor to the extent of a
fractional portion appropriate to reflect his or her
proportionate share of the funding.
Id., cmt. f.
Under this rule, Debtor Wiley’s contribution of $75,000, or
its fractional proportion of the entire Wiley Trust may be deemed
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to be a self-settled trust. 	Self-settled spendthrift trusts are
not valid in New Mexico. 	Reardon v. Brackett (In re Brackett),
54 B.R. 57, 58 (Bankr. D. N.M. 1985). 	Therefore, the Court
cannot rule as a matter of law that Debtor’s contributions to the
Wiley Trust are not property of the estate. 	Accord Shurley v.
Texas Commerce Bank-Austin, N.A. (In re Shirley), 115 F.3d 333,
338 (5 th Cir. 1997)(Under Texas law a partially self-settled
spendthrift trust is partially subject to creditor’s claims.);
Humphrey v. Buckley (In re Swanson), 873 F.2d 1121, 1124 (8 th
Cir. 1989)(“The fact that the contributions to the Fund are made,
at least in part, by the debtors compels a conclusion that the
Fund would not be a valid spendthrift trust under Minnesota
law.”)
3. 	The trust assets may otherwise be estate property.
In general, assets held by a trustee are not subject to the
trustee’s creditors. 	Section 46A-5-507 NMSA 1978 (2007 Repl.)
And they are generally not property of a bankruptcy estate. 	11
U.S.C. § 541(d). 	See Begier v. Internal Revenue Service, 496
U.S. 53, 59 (1990)(“Because the debtor does not own an equitable
interest in property he holds in trust for another, that interest
is not ‘property of the estate.’”). 	See also Whiting Pools, 462
U.S. at 205 n. 10:
We do not now decide the outer boundaries of the
bankruptcy estate. 	We note only that Congress plainly
excluded property of others held by the debtor in trust
at the time of the filing of the petition. 	See §
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541(b); H.R.Rep. No. 95-595, p. 368 (1977); S.Rep. No.
95-989, p. 82 (1978). 	Although it may well be that
funds that the IRS can demonstrate were withheld for
its benefit pursuant to 26 U.S.C. § 7501 (employee
withholding taxes), are excludable from the estate, see
124 Cong.Rec. 32417 (1978) (remarks of Rep. Edwards)
(Service may exclude funds it can trace), the IRS did
not attempt to trace the withheld taxes in this case.
See Tr. of Oral Arg. 18, 28-29.
But courts recognize exceptions to the distinction between
spendthrift trust assets and personal assets in at least two
situations. 	First, even if the required spendthrift boilerplate
language is included in a trust instrument, a court may look at
the actual conduct of the parties and the parties abilities and
potential future conduct to determine if the trust is in fact a
spendthrift trust. 	Richardson v. McCullough (In re McCullough),
259 B.R. 509, 517-18 (Bankr. D. R.I. 2001). 	Here, Plaintiff
alleges that Debtor Wiley has sole and absolute discretion over
the trust.
Second, in cases where the debtor-trustee has sufficiently
commingled trust and personal assets, Courts admit the existence
of the trust but shift the burden onto the beneficiaries to
specifically identify and trace trust assets in order to reclaim
them. 	See McMakin v. Pine Bush Equip. Co., Inc. (In re Nevins
Bros. Auction Co., Inc.), 242 B.R. 271, 280 (D. N.J. 1999):
For example, “[i]t is well established that where a
debtor holds property impressed with a valid trust, the
estate will generally hold that property subject to the
interest of the beneficiary.” 	In re Felton's Foodway,
Inc., 49 B.R. 106, 108 (citing Pearlman v. Reliance
Ins. Co., 371 U.S. 132, 83 S.Ct. 232, 9 L.Ed.2d 190
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(1962)). 	Nevertheless, it is equally well established
that the claimant has the burden to identify the trust
fund and to trace the fund where it has been commingled
with funds of the debtor. 	See id.; see also In re
Columbia Gas Sys., Inc., 997 F.2d 1039, 1063 (3d Cir.
1993); cf. In re Lehigh and New England Railway Co.,
657 F.2d 570, 579 (3d Cir. 1981)(applying tracing
principles to secured creditors when the trust funds
have been dissipated). 	In Sonnenschein v. Reliance
Ins. Co., 353 F.2d 935 (2d Cir. 1965), the Second
Circuit clearly stated the applicable rule:
[T]o sustain a claim to trust property or to an
equitable lien thereon, the claimant must depend
upon his ability to identify the property in its
original or substituted form in the hands of the
[debtor].... The basic idea of the trust doctrine
as applied in bankruptcy is a fair and reasonable
identification of the property or fund so as not
to harm other creditors. 	It is not enough,
therefore, to show merely that the funds of
property came into the bankrupt's hands ... the
claimant must assume the burden of ascertaining
and tracing the trust property, and where it is
alleged that such property has been converted into
other property in the hands of the bankrupt, the
claimant has the burden of tracing the trust
property thereon.
Id. at 936-37 (quoting 4 Collier on Bankruptcy ¶
70.25[2] at 1215-17, 1218 (14th ed.1964)).
See also Dayton Title Agency, Inc. v. The White Families
Companies, Inc. (In re Dayton Title Agency, Inc.), 292 B.R. 857,
871 (Bankr. S.D. Ohio 2003)(The commingling of trust funds with
non-trust funds does not change the characteristic of either set
of funds to the extent that they remain traceable.); and Bank of
Alex Brown v. Goldberg (In re Goldberg), 158 B.R. 188, 196
(Bankr. E.D. Cal. 1993):
Commingling trust funds with personal funds generally
renders the trust unenforceable against the commingled
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funds or property acquired from the commingled funds.
Rendering trusts unenforceable where funds are
commingled ensures fairness to competing creditors who
would otherwise be prejudiced by one creditor receiving
preferential payment from commingled funds, or their
product, where the debtor's personal funds and trust
funds cannot be distinguished.
Movants’ argument that § 46A-10-1001 is the exclusive remedy
is not inconsistent with a bankruptcy court declaring that trust
assets have become estate property. 	That declaration does not
affect the liability that the trustee has to the trust or its
beneficiaries, and fiduciary defalcations are generally
nondischargeable under the code. 	See 11 U.S.C. § 523(a)(4).
Therefore, the Court cannot rule as a matter of law that all
assets of the Wiley Trust are not property of the estate. 	The
Motion to Dismiss Count 6 will be denied.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	October 14, 2010
Copies to:
Bonnie Bassan Gandarilla
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
George M Moore
Moore, Berkson & Gandarilla, P.C.
PO Box 7459
Albuquerque, NM 87194
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David T Thuma
500 Marquette Ave NW Ste 650
Albuquerque, NM 87102-5309
Michael K Daniels
PO Box 1640
Albuquerque, NM 87103-1640
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