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May 19, 2009

3rd Circuit Rules that Mother Transferred Only Bare Legal Title to Debtor Son

Brief by University of West Los Angeles law student, Roksana Moradi (now studying for the California Bar exam)

In re John S. Stewart, Jr., 2009 WL 1111540 (3rd Cir. 2009)(unpublished)

Issue:  How does a court determine when the title owner of real property holds only “bare legal title”?

Holding:  Intent of the parties.  A failed transfer in trust creates a resulting trust under Pennsylvania law and the title owner therefore holds only bare legal title.  

Circuit Judge Sloviter,

Debtor’s mother obtained title to the Property in 1951 when she purchased it jointly with her husband.  In 2002, she transferred the Property to the Debtor for one dollar (“First Deed”) in an attempt to minimize inheritance taxes on her estate.  The Bankruptcy Court found that the Debtor and his mother both understood that the First Deed was conveyed for estate planning purposes and that his mother, not the Debtor, would remain the owner of the Property until she died.  Later, Debtor’s mother realized that she had inadvertently omitted her daughter from her estate-planning effort and requested that the Debtor transfer half of his interest to his sister, which he did.  Notwithstanding these conveyances, Debtor’s mother continued to reside at the Property and pay all of the bills and taxes associated with the Property out of her own funds.

In 2005, the Debtor filed chapter 7.  In his bankruptcy filings, the Debtor listed his ownership interest in the Property as “ 1/2 Bare Legal Title of Caroline Stewart's property.”  The Trustee subsequently filed a motion to sell the Debtor's interest in the Property pursuant to 11 U.S.C. § 363(h).  The Debtor filed an adversary complaint seeking to enjoin the Trustee from selling the Property.
At trial the Bankruptcy Court held that, under Pennsylvania law, the Debtor’s mother’s transfer of the Property to the Debtor was subject to a resulting trust in favor of herself, who was therefore the equitable owner of the Property.  As a result, the bankruptcy estate succeeded only to bare legal title in the Property.  The Trustee appealed to the District Court, which affirmed.
The Court of Appeal also affirmed. 

A bankruptcy estate includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).  However, “[p]roperty in which the debtor holds ... only legal title and not an equitable interest ... becomes property of the estate under [§ 541(a)(1) ] ... 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.”  Therefore, the “bankrupt estate ... obtains no greater ownership right ... than [the debtor] ... would have ... prior to the bankruptcy filing.” Universal Bonding Ins. Co. v. Gittens & Sprinkle Enters., Inc., 960 F.2d 366, 372 (3d Cir.1992).

The court then looked to the applicable state law in Pennsylvania to determine what interests the debtor possessed.  “[A] resulting trust arises where a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest therein.” Galford v. Burkhouse, 478 A.2d 1328, 1334 (Pa.Super.Ct.1984).

The court found Galford to be persuasive.  The Pennsylvania Superior Court there held that “[w]here an express trust fails, a resulting trust may be imposed by operation of law.”  Further, because “[t]he Statute of Frauds specifically exempts such trusts ... from its operation,” parol evidence is “admissible to show the circumstances under which [the] resulting trust arose” as long as such evidence is “clear, explicit and unequivocal.”  Also, “that the testimony of all parties ... was in agreement that [the transferor] intended to transfer only bare legal title to [the son] at the time he executed the deed,” and thus the “evidence was clearly sufficient to establish a resulting trust.”
 Similarly, here the Bankruptcy Court concluded that the Debtor held the Property in a resulting trust for his mother because she “intended to transfer the Property to the Debtor in trust” but “her intentions were ineffective due to the wording of the instrument [i.e., the First Deed] used to effect the transfer.”  The Bankruptcy Court found that that the First Deed “was motivated wholly by the estate planning advice [Stewart] received from friends” and that both understood that she would own the Property until she died.  Further, that she continued to live at the Property and pay all costs associated with it.  The transaction culminating in the Second Deed also supports the conclusion that she retained beneficial ownership of the Property because the Debtor executed the Second Deed on the instructions of his mother in order to further her estate planning goals, “again suggesting that both parties considered the Property to be hers to control.”

The Trustee raised three arguments;  First, the Trustee argued that the court should not look beyond the four corners of the First Deed because it unambiguously conveyed Stewart's entire interest in the Property to the Debtor by “grant[ing]” the Property to the Debtor “in Fee.”  However, as noted above, the Pennsylvania Statute of Frauds exempts resulting trusts from its strictures so that parol evidence is “admissible to show the circumstances under which a resulting trust arose.” Further, the parol evidence here is “clear, explicit and unequivocal” that Stewart did not intend to convey to the Debtor her equitable ownership in the Property.
The Trustee next argued that Stewart must have intended to grant the Debtor her entire interest in the Property because, if Stewart retained an equitable interest in the Property, it would have been subject to inheritance taxes upon her death, in contradiction of her avowed estate planning purposes.  The court found that at most this argument showed that Debtor’s mother, who was an unsophisticated party with a high school education and no legal training, may have failed to minimize her estate taxes through the conveyances at issue.
Finally, the Trustee contended that, even if the Debtor held the Property in a resulting trust in favor of Stewart, she may avoid Stewart's equitable interest in the Property pursuant to her strong-arm powers under 11 U.S.C. § 544(a)(3). However, under Pennsylvania law, Stewart's clear and open possession of the Property put the Trustee on constructive notice of Stewart's equitable interest therein, and therefore the Trustee may not avoid that interest under § 544(a)(3). 

May 19, 2009 in Other Circuit Briefs | Permalink


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