Montoya v. Garcia et al

1 Sic on the Debtor’s petition (doc 1). 	Trial exhibits
suggest the correct spelling is “Estevan”. 	The Debtor signed the
petition and schedules and his affidavit (doc 20) as “Steve”.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re:
BECKY GARCIA and
ESTAVAN 1 B. GARCIA,
Debtors. 	No. 7-05-14383 SA
PHILIP J. MONTOYA,
Plaintiff,
v.
TEODORO A. GARCIA and
ESTHER J. GARCIA,
Defendants. 	Adv. No. 06-1054 S
MEMORANDUM OPINION AFTER TRIAL ON THE MERITS
This matter came before the Court for trial on the merits of
Plaintiff’s complaint to recover preferential or fraudulent
transfer. 	The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(F) and (H); and
these are findings of fact and conclusions of law as required by
Rule 7052 F.R.B.P. 	This chapter 7 case was filed prior to the
effective date of most of the provisions of the Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005 (“BAPCPA”), Pub.
L. No. 109-08, 119 Stat. 23, and therefore the changes enacted by
that legislation are not applicable to this case.
This adversary proceeding is an attempt by the Chapter 7
Trustee for Becky Garcia and Estevan Garcia (“Debtors”) to
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2Teodoro died on September 25, 2005. 	The record is silent
as to whether there is or was a probate proceeding.
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recover a house from Estevan’s parents Teodoro A 2. and Esther J.
Garcia (“Parents”) as either a preferential transfer or a
fraudulent transfer. 	The transfer of the house took place
approximately 11 months before the bankruptcy was filed.
Debtors were married in 1995. 	At the time, Estevan owed
approximately $19,000 to his ex-wife as part of their divorce
settlement. 	Estevan’s parents agreed to place a mortgage on
their unencumbered home to help Estevan pay the debt. 	They
followed through with this plan, although the record does not
indicate when.
In February, 2000 Debtors wanted to consolidate their bills.
Estevan approached Teodoro, who stated that he no longer wanted
his name on any loans. 	Teodoro and the Debtors agreed, however,
that Parents would convey their house to the Debtors so that the
Debtors could obtain a mortgage on it in their names, with the
proviso that the Debtors immediately deed the property back to
the Parents. 	On February 23, 2000, Parents executed a warranty
deed for the house to the Debtors. 	The deed was recorded two
days later. 	The deed contained no restrictions. 	Debtors paid
and Parents received no consideration for the deed.
The Debtors then attempted to get a mortgage in their names
on the property. 	They were unable to qualify due to Estevan’s
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3Among the closing costs was a charge for County taxes on
the property in the amount of $291.82. 	These are the only taxes
Debtors ever paid on the property. 	Parents paid all other taxes.
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poor credit. 	Becky was able to qualify in her own name alone,
however. 	On April 17, 2000, Debtors executed a sole and separate
property agreement that conveyed Estevan’s interest in the house
to Becky. (Exhibit B-1). 	On April 21, 2000, Becky executed a
mortgage to Greenpoint Mortgage Funding, Inc., borrowing $35,000.
(Exhibit B-2). 	Exhibit B-3 is the closing statement which shows
a payoff of $19,060 to First Security Bank (Parent’s original
mortgage taken to help Estevan), closing costs 3, payments to
various credit card companies and a credit union, and $2,339 to
Becky. 	Becky testified that she put this in Debtors’ joint
account and used it to pay bills. 	No funds went directly to
Parents.
Debtors both testified that the property was to be deeded
back to the Parents within two weeks of the mortgage closing.
Becky believed she filled out a deed returning the house in
connection with closing, but was unable to locate it. 	She also
believed that it may never have been done.
Debtors have made all payments to Greenpoint Mortgage.
Parents made no payments to Greenpoint Mortgage.
In mid-2004, Teodoro discovered that the house had never
been deeded back per the agreement. 	He called Becky and told her
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she had to execute a deed. 	She was surprised that she still had
title, and immediately executed a Quit Claim Deed to the Parents.
This deed was recorded on July 14, 2004. 	The deed recites that
it was for “Zero dollars” consideration.
In mid-July, 2004, Debtors were having trouble paying their
bills; Estevan had suffered a stroke. 	Debtors were insolvent on
the date the deed was recorded, with debts exceeding their
assets.
Debtors filed their Chapter 7 case on May 30, 2005, within
one year of the Quitclaim deed. 	Plaintiff was appointed Trustee
and continues in that capacity.
At trial both Debtors testified, as did Esther Garcia. 	The
Court found all witnesses to be truthful, forthcoming and
credible. 	There were no inconsistencies between any of the
testimony or between the testimony and the documents admitted
into evidence.
Neither Debtor was contemplating bankruptcy in mid-July,
2004. 	Neither Debtor has ever claimed an ownership interest in
the house, they never charged rent for its use, and they never
paid for repairs, insurance or taxes (except as noted above).
Debtors did not have the taxes assessed in their names, they did
not receive the tax assessment notices and they did not receive
the tax bills. 	Teodoro also never gave Debtors copies of the tax
bills to pay.
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Parents have continuously lived in the house for over 40
years.
Debtors did take a mortgage interest deduction on their 2004
tax return for interest paid to Greenpoint. 	(Exhibit P-7). 	They
did not take a real estate tax deduction for the house, however.
Esther Garcia testified that she was 84 or 85 years old, had
never been to school and does not read, write or speak English.
She has lived in the property for over 40 years. 	She testified
that she signed Exhibit A-3 (the 2000 Warranty deed to Debtors),
but she could not read it and did not know what she was signing.
Teodoro also did not explain it to her. 	Teodoro handled all the
financial matters for the household. 	She had no idea she was
deeding her home to the Debtors. 	She received no money for the
deed. 	If she had known what she was signing, she would have
refused. 	She and Teodoro had discussed their testamentary
desires that the house should be distributed among their four
living children upon the last of Parents to die; she never would
have agreed to give it to just one child. 	She understood that
Estevan had financial problems ever since his divorce, and
understood that her husband helped him with money, but she did
not understand that the house was ever involved.
Plaintiff argues that he has made out a prima facie case of
either a fraudulent or preferential transfer. 	Defendant argues
that there was not a transfer of an interest of the Debtors in
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property because Debtors held only bare legal title to the house.
Alternately, Defendant argues that the original Warranty deed in
2000 was ineffective to pass title because their was no intent to
transfer an interest in the House. 	Plaintiff responds that it is
improper to impose either resulting trusts or constructive trusts
on a bankruptcy estate, and that neither trust theory is
applicable in this case in any event. 	In response to the deed
argument, Plaintiff claims that Debtors have failed to prove the
deed was fraudulently obtained. 	In addition to their closing
arguments, each side submitted thoughtful briefs (docs 18, 30,
31, 32 and 33), which the Court has considered.
CONCLUSIONS OF LAW
First, the Court notes that this is not a case where a
creditor is trying to impose a constructive or resulting trust on
property in a bankruptcy estate. 	Rather, the position is that of
a defendant in an avoidance action demonstrating that, had no
bankruptcy been filed, the defendant would have been entitled to
an equitable remedy in state court to have the property ordered
returned. 	The asset is not in the estate and was never in the
estate. 	The question, then, is would Parents have been entitled
to a return of the property if Becky refused to deed it back.
The Court finds that they would.
Decisions in bankruptcy cases concerning the doctrines of
constructive or resulting trusts in bankruptcy cases are
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determined by reference to state law. 	See Taylor v. Rupp (In re
Taylor), 133 F.3d 1336, 1341 (10 th Cir.), cert. denied, Rupp v.
Taylor, 525 U.S. 873 (1998)(Utah law governed whether resulting
or constructive trust should be imposed; United States Department
of Energy v. Seneca Oil Company (In re Seneca Oil Company), 906
F.2d 1445, 1450 (10 th Cir. 1990) (Oklahoma law governed
conditions for imposing a constructive trust). 	Three New Mexico
cases are particularly on point.
In the first, Garcia v. Marquez, 101 N.M. 427, 684 P.2d 513
(1984), the New Mexico Supreme Court dealt with the imposition of
a constructive trust. 	In 1940 Garcia and his former wife
purchased two lots and a residence in Ruidoso, New Mexico. 	Id.
at 428, 684 P.2d at 514. 	In 1974 he and his spouse deeded the
property to his daughter Marquez, the defendant. 	Id. 	Garcia,
his spouse and Marquez continued to reside in the family home
until July 1979 when the parents divorced. 	Id. 	In 1980 Garcia
filed an action to establish a constructive trust over his
interest in the property. 	Id. 	The District Court concluded that
Marquez’s title be encumbered with a constructive trust for
herself and her brothers and sisters to the extent of Garcia’s
one-half interest in the property. 	Id. 	On appeal, Marquez
argued that there was no evidence of fraud, duress, overreaching
or similar unconscionable conduct on her part that would require
the imposition of a constructive trust. 	Id. 	The Supreme Court
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4In Homes by Marilyn v. Robinson (Estate of McKim), 111 N.M.
517, 519, 807 P.2d 215, 217 (1991) the Supreme Court adhered to
the “clear and convincing standard” but “confess[es] to some
misgivings about the necessity for and appropriateness of this
heightened standard of proof in cases such as this, where the
basis for the imposition of a constructive trust does not involve
fraud, duress, undue influence, or other form of wrongful
conduct, but solely the prevention of unjust enrichment.”
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ruled that such conduct was not essential for imposition of a
constructive trust. 	Id. (citing Velasquez v. Mascarenas, 71 N.M.
133, 140-41, 376 P.2d 311, 316 (1962)). 	“Other grounds commonly
supporting the imposition of constructive trusts are abuse of a
confidential relation and unjust enrichment.” 	Id. (citing
Flanagan v. Benvie, 58 N.M. 525, 273 P.2d 381 (1954); Restatement
(Second) of Trusts §§ 2 comment b, 44, 45 (1959); G. Bogert, The
Law of Trusts and Trustees §§ 482, 496 (1978)). 	The Court noted
that proof of a constructive trust requires clear and convincing
evidence. 4 	Id. at 428-29, 684 P.2d at 514-15. 	It then reviewed
the conflicting evidence that had been given at trial and found
that it met the clear and convincing standard. 	Id.
From the evidence it is clear a parent-child
relationship existed with surrounding circumstances
indicating the presence of a relationship of trust and
confidence between the parties. 	There was clear and
convincing evidence outlining the terms of defendant’s
ownership and the conditions upon which it was to be
transferred to her siblings. 	Viewing the evidence in a
light most favorable to the trial court’s findings and
conclusions, and in keeping with the tendency of courts
to liberally construe confidential relationships, see
Restatement (Second) of Trusts, supra, at § 44 comment
a; G. Bogert, supra, at § 496, we conclude there was a
sufficient basis for the imposition of a constructive
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trust over plaintiff’s one-half interest in the real
property.
Id. (Some citations omitted.)
The second case is Estate of McKim, in which the Supreme
Court again upheld a constructive trust between a husband and
wife. 	The trial court found that Mr. McKim paid off the loan of
Ms. McKim’s corporation secured by a parcel of Ms. McKim’s real
property. 	The court also found that, in order to pay off
foreclosing creditors on another of Ms. McKim’s parcels of real
property, Mr. McKim borrowed a substantial sum of money. 	The
lenders required, as a condition to making the loans, that Ms.
McKim transfer the two parcels of real property to Mr. McKim.
111 N.M. at 518, 807 P.2d at 216. 	Mr. McKim died before
transferring the properties back to Mrs. McKim. 	Id. at 519, 807
P.2d at 217. 	Mr. McKim’s personal representative (Robinson) and
Mrs. McKim disagreed on whether the deeds were intended as a
permanent transfer of title or merely as security for repayment
to Mr. McKim. 	Id. at 518, 807 P.2d at 216. 	The trial court
found that the McKims intended that Mr. McKim would hold title to
the properties for the benefit of Mrs. McKim and her corporation,
and imposed a constructive trust on each property. 	Id. at 519,
807 P.2d at 217. 	The court also required that Mrs. McKim’s
corporation reimburse the estate for the amounts advanced by Mr.
McKim to protect Mrs. McKim’s interests in the properties but not
yet repaid to him or his estate. 	Id. 	Robinson appealed,
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claiming that nothing justified the imposition of a constructive
trust, which he claimed required fraud or “abuse of a
confidential relationship and unjust enrichment.” 	Id. at 521,
807 P.2d at 219. 	He argued that there was no finding of any
abuse of a confidential relationship and that there was no unjust
enrichment. 	Id. 	The Supreme Court disagreed:
It is true that there was no finding of an abuse
of a confidential relationship in this case. 	However,
the court did determine, in a finding undisputed on
this appeal, that a fiduciary relationship existed
between the McKims during their marriage. 	Both
fiduciary and confidential relationships give rise to
duties of trust and confidence and are therefore
synonymous for the purpose of determining entitlement
to a constructive trust. 	See Garcia v. Presbyterian
Hosp. Center, 92 N.M. 652, 654, 593 P.2d 487, 489 (Ct.
App. 1979) (fiduciary and confidential relationships
part of same concept). 	The existence of the fiduciary
relationship was all that was necessary to establish
constructive trusts over the properties held by Mr.
McKim.
It is well established that a breach of a
confidential relationship is not required to establish
a constructive trust based on an oral agreement to hold
a deed in trust; the mere existence of a fiduciary or
confidential relationship is sufficient in certain
circumstances to justify imposition of a constructive
trust. 	See Restatement (Second) of Trusts § 44(1)(b)
(1957); Restatement of Restitution § 182(b)(1936); 4 G.
Palmer, The Law of Restitution § 19.3(c)(1978). 	This
is significant in that it permits the imposition of a
constructive trust against the estate of a grantee
where, as in this case, the grantee dies before the
trust is carried out and there is no indication that he
intended to breach the confidential relationship by not
performing the trust. 	See Henry v. Goodwin, 266 Ark.
95, 583 S.W.2d 29 (1979); Steinberger v. Steinberger,
60 Cal.App.2d 116, 140 P.2d 31 (1943); Silver v.
Silver, 421 Pa. 533, 219 A.2d 659 (1966). As stated in
the Restatement:
If the transferee at the time of the transfer
was in a confidential relation to the
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5Plaintiff’s argues that Sholer v. Carmichael (In re PKR,
P.C.), 220 B.R. 114, 118 (10 th Cir. BAP 1998) requires
“sufficient wrongdoing by the bankrupt in acquiring the property
or a fiduciary relationship between the party and the bankrupt.”
The Bankruptcy Appellate Panel was quoting United States Dep’t of
Energy v. Seneca Oil Co. (In re Seneca Oil Co.), 906 F.2d 1445,
1449 (10 th Cir. 1990). 	That may have been the state of the law
in 1990, but Estate of McKim was decided in 1991 and is binding
on this Court. 	Also, the context of PKR, P.C. was different. 	In
PKR, P.C. a creditor was attempting to establish a constructive
trust over estate assets. 	In our case, we are looking to what a
state court would have done if Ms. Garcia had refused to return
the property to Parents.
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transferor, a constructive trust will be
imposed even though the transferee was not
guilty of an abuse of the confidential
relation in retaining the land. Thus, if the
transferee dies intestate without having
repudiated his promise but intending always
to perform it, his heir will be compelled to
hold the property upon a constructive trust
for the transferor. A court of equity will
not permit the unjust enrichment of the heir.
Restatement of Restitution § 182 comment c; see also
Restatement (Second) of Trusts § 44 comment c,
illustration 3.
Id. at 522, 807 P.2d at 220 (Footnotes and emphasis omitted.)
The Supreme Court affirmed the trial court, finding that the
imposition of a constructive trust was proper, and agreeing that
the estate would be unjustly enriched if allowed to retain the
properties. 	Id. at 523, 807 P.2d at 221. 	Of note is the fact
that the Supreme Court went from “abuse of a confidential
relationship and unjust enrichment” in Garcia, to the simple
existence of a confidential relationship with unjust enrichment
in McKim. 5
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Another lesson from Estate of McKim is that it was the
parties’ intention at the time of the transfer that was the
relevant inquiry. 	Id. at 520, 807 P.2d at 218. 	However, “the
parties’ actions following the transfer are often revealing of
the intent at the time of the transfer.” 	Id. (Emphasis in
original.)
The subsequent conduct of the parties is often
persuasive of what they intended to accomplish by the
transaction. Among the circumstances held to be
evidence that they intended to convey title * * * are
the following: That the grantor relinquished
possession; that he allowed a long period of time to
elapse without asserting a claim to the land or
exercising any act of ownership over it; that he paid
no taxes or incumbrances; that grantee took possession
and exercised dominion over the land as owner; that he
paid taxes; that he put valuable improvements on the
land; that he contracted to sell and convey the land as
owner. 	Likewise, and most relevant to our inquiry, the
absence of these or similar factors would tend to show
that the parties did not intend to convey beneficial
title, but rather to pass conditional ownership or
“dry” legal title, leaving beneficial ownership in the
hands of the grantor.
Id. (Citation omitted.)
The third instructive case is Aragon v. Rio Costilla
Cooperative Livestock Ass’n, 112 N.M. 152, 812 P.2d 1300 (1991).
In this case the Supreme Court set out New Mexico law on
resulting trusts:
A resulting trust differs from an express trust in the
manner of its creation. 	It arises when a person makes
a disposition of property under circumstances which
raise an inference that such person does not intend
that the party taking or holding the property should
also have the beneficial interest therein, and where
the inference is not rebutted and the beneficial
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6The Court makes the following additional findings as proven
by clear and convincing, uncontroverted, evidence.
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interest is not otherwise disposed of. 	Restatement §
404; accord Bassett v. Bassett, 110 N.M. 559, 566, 798
P.2d 160, 167 (1990). 	Since the person who holds title
to the property is not entitled to the beneficial
interest, the property “springs back or results,” to
the person who made the original disposition or to that
person's estate. 	Watson Truck & Supply Co. v. Males,
111 N.M. 57, 59, 801 P.2d 639, 641 (1990). 	In the case
of a resulting trust it is not necessary to show that
the settlor manifested any intention to create a trust.
It is necessary to show the absence of any intention to
give the beneficial interest to the transferee. 	In
that case the settlor presumably intends to retain the
beneficial interest, or it may be inferred that the
settlor would have formed such an intention had the
settlor foreseen certain future events. 	See
Restatement Ch. 12, Topic 4, Introductory Note at 392.
Id. at 155, 812 P.2d at 1303. 	One reason for imposition of a
resulting trust is the failure of an express oral trust of land
due to the statute of frauds. 	Id.
Turning now to the facts of our case, the Court finds 6 that
Debtors and Parents were in a confidential relationship. 	See
Restatement (Second) of Trusts § 2 comment b (1959). 	Debtors
paid nothing to Parents for the deed to the house. 	The parents
did not intend that Debtors take the beneficial interest to the
house; rather, they intended that Debtors take bare legal title
for a short period of time to allow them to use the house as
collateral. 	Had Debtors failed or refused to return the house,
Debtors would have been unjustly enriched. 	A state court would
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have imposed a constructive trust in this case and ordered a
return of the property to the Parents.
A similar result is obtained by examining the McKim factors.
Parents never relinquished possession. 	Teodoro immediately
demanded a return of the Property in 2004 when he discovered it
had not already been returned; he was not guilty of allowing a
long period of time to elapse without asserting his ownership
rights. 	Parents paid the property taxes and insurance during the
time title was in Becky. 	These factors demonstrate that the
parties did not intend to convey beneficial title, but rather
only to pass conditional ownership or “dry” legal title, leaving
beneficial ownership in the hands of the Parents.
Similarly, an application of Aragon to the facts of this
case mandates the same result. 	The warranty deed to Debtors was
executed under circumstances which raise an inference that
Parents did not intend that the Debtors taking or holding the
property should also have the beneficial interest therein. 	The
facts demonstrate that Parents were “loaning” bare legal title to
Debtors for a very limited period of time for a very limited
purpose, with the expectation that the property would be promptly
deeded back.
Parent’s interest in the property is also not subject to
attack under Section 544. 	They continuously lived on the
property, which gave constructive notice of their claim. 	See
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7That subsection 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.
11 U.S.C. § 541(d).
8Section 547(b) states, in part: “the trustee may avoid any
transfer of an interest of the debtor in property...” (Emphasis
added.)
9Section 548(a)(1) states, in part: “The trustee may avoid
any transfer ... of an interest of the debtor in property...”
(Emphasis added.)
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Crowder v. Crowder (In re Crowder), 225 B.R. 794, 797 (Bankr. D.
N.M. 1998); Conway v. San Miguel County Board of Education, 59
N.M. 242, 249, 282 P.2d 719, 724 (1955); Nelms v. Miller, 56 N.M.
132, 156, 241 P.2d 333, 349 (1952). 	See also In re Keenan, ___
B.R. ___, 2007 WL 901885 *6 (Bankr. D. N.M. 2007)(Section
544(a)(3) cannot be used to avoid interest of one in actual
possession of a property.)
In conclusion, the Court finds that Debtors did not have an
equitable interest in the property. 	Under Bankruptcy Code
Section 541(d) 7, had the property not been returned, Debtors
would have had bare legal title only. 	Both Sections 547 8 and
548 9 require a transfer of a debtor’s property. 	In this case,
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Debtors did not transfer an equitable interest in property, only
bare legal title. 	Because the Court finds for the Defendants on
the basis of constructive or resulting trust, the Court need not
address the arguments relating to the validity of the warranty
deed. 	Judgment will be entered for the Defendants.
Honorable James S. Starzynski
United States Bankruptcy Judge
copies to:
Thomas G Rice
500 4th St NW Ste 230
Albuquerque, NM 87102-2106
Bonnie Bassan Gandarilla
Moore, Berkson & Gandarilla, P.C.
PO Box 216
Albuquerque, NM 87103-0216
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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