Baumgart v. Laurie et al

UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re: ) Case No. 10-12952
)
CHARLES R. LAURIE, ) Chapter 7
)
Debtor. )
) Judge Pat E. Morgenstern-Clarren
___________________________________ )
)
RICHARD A. BAUMGART, TRUSTEE, ) Adversary Proceeding No. 11-1023
)
Plaintiff, )
)
v. )
) MEMORANDUM OF OPINION1
LAVERNE LAURIE, et al., ) AND ORDER
)
Defendants. )
The plaintiff chapter 7 trustee filed this adversary proceeding seeking a determination of
rights as to real property and authority to sell both the estate’s and defendant LaVerne Laurie’s
interest in the property. The trustee moves for summary judgment against defendant-debtor
Charles Laurie and defendant LaVerne Laurie, and the defendants oppose the motion. For the2
reasons stated below, the trustee’s motion is denied.
JURISDICTION
Jurisdiction exists under 28 U.S.C. § 1334 and General Order No. 84 entered in this
district by the United States District Court for the Northern District of Ohio. This is a core
proceeding under 28 U.S.C. §§ 157(b)(2)(A), (K), and (N) and the parties have consented to
This opinion is not intended for commercial publication, either print or electronic.1
Docket 23, 30, 32.2
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entry of a final order by this court. This decision is within the court’s constitutional authority as3
analyzed by the United States Supreme Court in Stern v. Marshall, 131 S.Ct. 2594 (2011); no
party disputes that.
DISCUSSION
I. Summary Judgment
Summary judgment should be rendered if the pleadings, the discovery and disclosure
materials on file, and any affidavits show “that there is no genuine dispute as to any material fact
and [that] the movant is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a) (made
applicable by FED. R. BANKR. P. 7056); see also Celotex Corp. v. Catrett, 477 U.S. 317 (1986);
Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Matsushita Elec. Indus. Co. v. Zenith
Radio Corp., 475 U.S. 574 (1986). The moving party generally bears the initial burden of
showing that no genuine issue of material fact exists. Gen. Motors Corp. v. Lanard Toys, Inc.
468 F.3d 405, 412 (6th Cir. 2006). “[T]hat burden ‘may be discharged by 'showing–that is,
pointing out to the . . . court–that there is an absence of evidence to support the nonmoving
party's case.’” Id. (quoting Bennett v. City of Eastpointe, 410 F.3d 810, 817 (6th Cir. 2005)).
“Once the moving party has satisfied its burden, the nonmoving party may not rest upon its mere
allegations or denials of the opposing party’s pleadings, but rather it must set forth specific facts
showing that there is a genuine issue for trial.” Havensure, L.L.C. v. Prudential Ins. Co. of Am.,
595 F.3d 312, 315 (6th Cir. 2010). “In determining whether a genuine issue of material fact
exists, [the] court draws all inferences in the light most favorable to the nonmoving party.” Id.
See Joint Pretrial Statement, docket 19.3
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The issue at this stage is whether there is evidence on which a trier of fact could reasonably find
for the nonmoving party. Street v. J.C. Bradford & Co., 886 F.2d 1472, 1477 (6th Cir. 1989).
II. The Facts
These facts are undisputed based on the evidence offered in connection with the motion
for summary judgment, the pleadings, and the parties’ joint pretrial statement and stipulations:
Defendant-debtor Charles Laurie (debtor) filed a chapter 7 case on April 2, 2010.
Defendant LaVerne Laurie is the debtor’s mother. At present, the debtor’s chapter 7 estate and
Ms. Laurie each hold an undivided one-half interest in real property located at 7454 Hillbrook
Oval, Brecksville, Ohio (the property), which is a private single-family residence. The estate
obtained its interest by a default judgment which this court entered in favor of the trustee and
against Ms. Laurie in a related adversary proceeding (the fraudulent transfer proceeding). The
judgment avoids the debtor’s prepetition transfer of his undivided one-half interest in the
property to Ms. Laurie as a fraudulent transfer and states that:
[O]n motion of the Plaintiff, Richard A. Baumgart, Trustee,
judgment is hereby entered against Defendant, LaVerne Laurie, in
favor of the Plaintiff, and the transfer of the Debtor’s undivided
one-half interest in the real estate . . . to the Defendant LaVerne
Laurie on or about June 23, 2009 . . . is hereby avoided and
preserved for the benefit of the within bankruptcy estate[.]4
The debtor was not named as a party in the fraudulent transfer proceeding.
The property was purchased in 2006 for $280,000.00 and in 2010 the county auditor
valued it at $274,400.00. The real estate taxes are current and there are no mortgages, liens, or
other claims to the property other than a statutory lien for accruing real estate taxes. The trustee
Baumgart, Trustee v. LaVerne Laurie (In re Charles Laurie), Adv. No. 10-1321, docket4
13.
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and defendant Cuyahoga County Treasurer entered into an agreed partial judgment. To date, the5
trustee has collected assets totaling $6,500.00 and creditors have filed claims in an amount
exceeding $2,000,000.00.
III. Discussion
A. The Positions of the Parties
The defendants argue that summary judgment is not appropriate because the debtor’s
interest in the property which he transferred to Ms. Laurie prepetition was held in constructive
trust for Ms. Laurie. As a result, they contend, any interest which the trustee recovered in the
related proceeding is an interest held for Ms. Laurie’s benefit. Both defendants submitted
affidavits to support this characterization of the debtor’s interest in the property. Additionally,
the defendants argue that the trustee has not established that a sale of Ms. Laurie’s interest in the
property is appropriate under Bankruptcy Code § 363(h).
The trustee argues that the recovered undivided one-half interest in the property is an
asset of the estate which is subject to sale and that LaVerne Laurie is precluded from arguing
otherwise based on the res judicata effect of the previous judgment. He argues further that sale
of Ms. Laurie’s interest in the property is appropriate.
B. Res Judicata
The defendants attempt to argue that the trustee’s recovered interest in the property is an
interest held for the benefit of Ms. Laurie. However, the trustee already holds a judgment
avoiding the transfer to Ms. Laurie and the issue here is whether the defendants can raise that
argument at this point. The trustee argues that they cannot under the doctrine of res judicata,
Docket 14.5
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which is also referred to as claim preclusion. Under that doctrine “a final judgment forecloses
successive litigation of the very same claim, whether or not relitigation of the claim raises the
same issues as the earlier suit.” Taylor v. Sturgell, 553 U.S. 880, 892 (2008) (internal quotation
marks and citation omitted).
As explained by the Sixth Circuit:
Res judicata, or claim preclusion as it is more helpfully termed, is
the doctrine, simply stated, by which a final judgment on the merits
in an action precludes a party from bringing a subsequent lawsuit
on the same claim or cause of action or raising a new defense to
defeat a prior judgment. . . . It precludes not only relitigating a
claim or cause of action previously adjudicated, it also precludes
litigating a claim or defense that should have been raised, but was
not, in a claim or cause of action previously adjudicated.
Gargallo v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 918 F.2d 658, 660-61 (6th Cir. 1990)
(internal citation omitted). The doctrine is applied “to promote the finality of judgments, which
in turn increases certainty, discourages multiple litigation and conserves judicial resources.”
Sanders Confectionery Prods., Inc. v. Heller Fin., Inc., 973 F.2d 474, 480 (6th Cir. 1992).
This four-part test is used to determine whether a claim or defense is barred by claim
preclusion: (1) a final decision on the merits by a court of competent jurisdiction; (2) a later
action between the same parties or their privies; (3) an issue in the later action which was
litigated or which should have been litigated in the prior action; and (4) an identity of the causes
of action. Rawe v. Liberty Mut. Fire Ins. Co., 462 F.3d 521, 528 (6th Cir. 2006). That test is
met here.
Res judicata does not require that a matter actually be litigated. See Morris v. Jones, 329
U.S. 545-550-51 (1947) (“A judgment of a court having jurisdiction of the parties and of the
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subject matter operates as res judicata, in the absence of fraud or collusion, even if obtained upon
a default.” ) (quotation marks and citation omitted). The default judgment entered in the
fraudulent transfer proceeding is a final decision on the merits by this court avoiding the transfer
to Ms. Laurie and preserving it for the benefit of the chapter 7 estate. The previous litigation
involved Ms. Laurie and the trustee, both of whom are parties to this adversary proceeding. And
finally, as discussed below, the issue of whether the transferred interest was the debtor’s property
was directly raised in the fraudulent transfer proceeding and the constructive trust defense is one
which Ms. Laurie should have raised in that proceeding.
A debtor does not own an equitable interest in property which he holds in trust for
another and such property is not property of the estate. See 11 U.S.C. § 541(d). As a result, such
an interest is not treated as an interest of the debtor in property for purposes of fraudulent transfer
avoidance. See for example, Golden v. The Guardian (In re Lenox Healthcare, Inc.), 343 B.R.
96, 101 (Bankr. D. Del. 2006) (“Because property a debtor holds in trust for another is not
property of the estate, transfers of such property cannot be avoided.”). Absent a constructive
trust, the debtor had an interest in the property which he transferred to Ms. Laurie. The claim or
defense that the debtor held the interest transferred in constructive trust for Ms. Laurie is one
which she should have raised in the fraudulent transfer proceeding. See, for example, Gilbert v.6
Under Ohio law, a constructive trust is not an actual trust but is an equitable remedy6
imposed by operation of law against one who holds legal title to property and who in equity
should not be entitled to keep the beneficial interest. Estate of Cowling v. Estate of Cowling, 847
N.E.2d 405, 411 (Ohio 2006); Colley v. Colley, – N.E.2d – , 2009 WL 4936382 at *15 (Ohio Ct.
App. 2009). As the imposition of a constructive trust is considered a claim to an equitable
remedy rather than an actual trust, it seems likely that the claim or defense would have failed had
it been raised. See Emerson v. Maples (In re Mark Benskin & Co.),59 F.3d 170 at *8 (6th Cir. )
(unpublished opinion).
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Palmer Mfg. and Supply, Inc. (In re Winkle), 128 B.R. 529, 535-36 (Bankr. S.D. Ohio 1991)
(holding that a debtor’s transfer of property to a creditor which was subject to a state court decree
imposing a constructive trust in favor of the creditor was not a transfer of the debtor’s property
and was not subject to avoidance as a fraudulent transfer). Ms. Laurie did not raise it, and res
judicata precludes her from doing so now.
Although the debtor was not a party to the fraudulent transfer litigation, his assertion of a
constructive trust raises the issue of prudential standing which “encompasses ‘the general
prohibition on a litigant’s raising another person’s legal rights[.]’” Elk Grove Unified Sch. Dist.
v. Newdow, 542 U.S. 1, 12 (2004) (quoting Allen v. Wright, 468 U.S. 751 (1984)). The
imposition of a constructive trust is a legal remedy which was potentially available to Ms. Laurie,
and the debtor lacks standing to assert it here. See Cassirer v. Sterling Nat’l Bank & Trust Co. of
N.Y. (In re Schick), 246 B.R. 41, 45-46 (Bankr. S.D.N.Y. 2000) (stating that a constructive trust
is a personal remedy which may not be asserted either offensively or defensively by someone
other than the beneficiary).
C. 11 U.S.C. § 363
Bankruptcy Code § 363 provides that the trustee may sell property of the estate, 11 U.S.C.
§ 363(b), free and clear of another party’s interest in the property, 11 U.S.C. § 363(f). Under
§ 363(h), a trustee may sell both the estate’s and a co-owner’s interest in property –
(h) Notwithstanding subsection (f) of this section, the trustee may
sell both the estate’s interest, under subsection (b) or (c) of this
section, and the interest of any co-owner in the property in which
the debtor had, at the time of the commencement of the case, an
undivided interest as a tenant in common, joint tenant, or tenant by
the entirety, only if –
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(1) partition in kind of such property among the
estate and such co-owners is impracticable;
(2) sale of the estate's undivided interest in such
property would realize significantly less for the
estate than sale of such property free of the interests
of such co-owners;
(3) the benefit to the estate of a sale of such property
free of the interests of co-owners outweighs the
detriment, if any, to such co-owners; and
(4) such property is not used in the production,
transmission, or distribution, for sale, of electric
energy or of natural or synthetic gas for heat, light,
or power.
11U.S.C. § 363(h). A trustee seeking to sell a co-owner’s interest in real property must
demonstrate that these conditions are met. Official Comm. of Unsecured Creditors v. Anderson
Senior Living Prop., LLC (In re Nashville Senior Living, LLC), 620 F.3d 584, 595 (6th Cir.
2010).
To support his request to sell the property including Ms. Laurie’s remaining undivided
one-half interest, the trustee submitted an affidavit in which he states that: partition of the
property is impracticable because it is a residence and cannot be divided; sale of the estate’s
undivided one-half interest would yield significantly less for the estate than a sale free of Ms.
Laurie’s interest; the estate’s interest alone may not be saleable as a practical matter; the benefit
of a sale free of Ms. Laurie’s interest outweighs any detriment which the sale would cause to Ms.
Laurie; and the property is not used in the production, transmission, or distribution, for sale, of
electric energy or of natural or synthetic gas for heat, light, or power. The defendants submitted
affidavits which state that Ms. Laurie resides at the property and that the detriment which a sale
would cause to her outweighs any benefit to the estate.
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Based on the trustee’s evidence and the fact that the property is a private single family
residence, partition is impracticable. See Mostoller v. Kelley (In re Kelley), 304 B.R. 331, 338
(Bankr. E.D. Tenn. 2003). It is also clear that the property is not used in the production,
transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat,
light, or power. And it appears that a sale of the estate's undivided one-half interest in the
property would realize significantly less for the estate than a sale of the property free of Ms.
Laurie’s interest because the number of buyers for an undivided one-half interest in a house is no
doubt limited. The remaining issue is whether the benefit of the sale outweighs the harm which
the sale would cause Ms. Laurie. Viewing the parties’ evidence in the light most favorable to the
defendants, as the court is required to do on summary judgment, there is a genuine issue of fact
regarding that issue. Consequently, the court cannot grant summary judgment for the trustee.
CONCLUSION
For the reasons stated, the plaintiff trustee’s motion for summary judgment is denied.
The trial will go forward only on the unresolved issue of whether the benefit of the sale to the
estate outweighs the harm to Ms. Laurie.
IT IS SO ORDERED.
_________________________________
Pat E. Morgenstern-Clarren
United States Bankruptcy Judge
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