Bird v. McCauley (In re McCauley)

• Decision Date: 31 March 2016
• Docket Number: Adversary Proceeding No. 12–2313,Bankruptcy Number: 10–30907
• Citation: 549 B.R. 400
• Parties: In re: Eugene V. McCauley, Jr., Debtor. J. Kevin Bird, Trustee, Plaintiff, v. Michael McCauley, an individual; Susan Knorr, an individual; Nancy Gallegos, an individual; Elizabeth McCauley, an individual; and RE McCauley LLC, a dissolved Utah Limited Liability Company, Defendants.
• Court: U.S. Bankruptcy Court — District of Utah

549 B.R. 400

In re: Eugene V. McCauley, Jr., Debtor.J. Kevin Bird, Trustee, Plaintiff,

v.Michael McCauley, an individual; Susan Knorr, an individual; Nancy Gallegos, an individual; Elizabeth McCauley, an individual; and RE McCauley LLC, a dissolved Utah Limited Liability Company, Defendants.

Bankruptcy Number: 10–30907

Adversary Proceeding No. 12–2313

United States Bankruptcy Court, D. Utah.

Signed March 31, 2016

Adam S. Affleck, Prince Yeates & Geldzahler, Salt Lake City, UT, for Plaintiff.

Randy B. Birch, Heber City, UT, for Defendants.

FINDINGS OF FACT AND CONCLUSIONS OF LAW ON REMAND

R. KIMBALL MOSIER

, U.S. Bankruptcy Judge

This matter is before this Court on the United States District Court's order remanding the case for further proceedings (Remand Order) consistent with the District Court's memorandum decision and order of September 18, 2015.

I. PROCEDURAL BACKGROUND

The Trustee's complaint asserted claims based on alter ego, resulting trust, and constructive trust and sought damages and turnover for violation of the automatic stay and avoidance and recovery of the unauthorized post-petition transfer of certain real property referred to as the "Ballard Property."¹ On September 30, 2014, after trial, this Court entered its written Findings of Fact and Conclusions of Law determining that J. Kevin Bird (Trustee) had failed to carry his burden of proof on his claims for resulting trust, constructive trust, and alter ego and entered judgment against the Trustee on those claims. Because the Trustee's claims for violation of the automatic stay and unauthorized post-petition transfer were dependent on the Court finding that the Ballard Property was property of the bankruptcy estate, this Court dismissed those claims.

The Trustee appealed this Court's judgment to the United States District Court for the District of Utah. The District Court disagreed with this Court's conclusion that the Trustee had failed to prove the requisite elements for imposition of a constructive trust and ruled that "a constructive trust should be imposed to reflect Eugene McCauley's interest in REM and REM's assets, including the Ballard Property and the REM bank account." After making that determination, the District Court ordered that "the September 30, 2014 decision of the United States Bankruptcy Court for the District of Utah in Adversary Proceeding No. 12–2313, Bankruptcy Case No. 10–30907, is REVERSED and REMANDED for a determination of whether the post-petition transfer of the Ballard property was an avoidable transfer." On remand, the parties were given an opportunity to submit additional briefing and present oral argument.

It is clear from the District Court's Remand Order that this Court's decision on the Trustee's constructive trust claim was reversed. It does not appear that the District Court intended to reverse this Court's decision with respect to the Trustee's resulting trust and alter ego claims.² But because the District Court's Remand Order reversed "the September 30, 2014 decision of the United States Bankruptcy Court for the District of Utah," there is potential for confusion with respect to the status of the Trustee's resulting trust and alter ego claims. In order to ensure a complete and final adjudication of all claims consistent with the District Court's Remand Order, this decision will address all of the Trustee's claims.

II. JURISDICTION

The Trustee commenced this adversary proceeding seeking a judicial determination under theories of constructive trust, resulting trust, and alter ego that RE McCauley, LLC (REM) and its remaining assets, including real property in Uinta County, Utah (Ballard Property), belonged to Eugene V. McCauley, Jr. (Debtor) on the date that the Debtor filed his bankruptcy petition. To the extent that the Trustee seeks a determination that REM and its remaining assets are property of the Debtor's bankruptcy estate, the Trustee's complaint is a "core" proceeding, and this Court has jurisdiction under 28 U.S.C. § 157(b)(2)(A), (E) & (O )

and 28 U.S.C. § 1334. The Trustee's claim under 11 U.S.C. § 549 is a "core" proceeding, and this Court has jurisdiction under 28 U.S.C. § 157(b)(2)(A) & (O ) and 28 U.S.C. § 1334.

Federal courts have long recognized a "probate exception" to otherwise proper federal jurisdiction. "[T]he probate exception reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate; it also precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court."³ The "probate exception" does not bar federal courts, however, "from adjudicating matters outside those confines and otherwise within federal jurisdiction."⁴ Accordingly, this Court is not deciding, and will not decide, whether Susan Knorr properly performed her duties as the trustee of the Ruth E. McCauley Revocable Trust (Trust) or executor of Ruth E. McCauley's probate estate. This Court is not deciding what assets poured into or should have poured into the Trust. This Court is not deciding what assets or distributions the Debtor was entitled to receive as a beneficiary of the Ruth E. McCauley estate, nor is this Court attempting to equally re-distribute assets of the Ruth E. McCauley estate. Even if Eugene "should" have received more from Ruth's estate, and the Trustee had proved the amount Eugene should have received, this Court cannot order a re-distribution of assets.⁵ These determinations fall within the "probate exception" and should be determined by a state court.

The decision of this Court is limited to the narrow issue of whether the Debtor had a legal or equitable interest in REM and its remaining assets, including the Ballard Property, under one of three doctrines: (a) constructive trust, (b) resulting trust, or (c) alter ego, and whether there was an avoidable post-petition transfer of property of the estate.

III. FINDINGS OF FACT

There is no inconsistency between this Court's factual findings and the District Court's factual findings. This Court's prior factual findings are restated here and are augmented by the District Court's additional express factual findings, which are italicized.

The Court did not find any of the Defendants' testimony particularly credible. They all failed to remember facts and events of significance, except in those instances where their testimony supported facts or events that may be helpful to their case. Notwithstanding the lack of witness credibility, the following facts are clearly established by the record.

Ruth E. McCauley had four children: Eugene V. McCauley, Jr., Michael G. McCauley, Susan K. Knorr, and Nancy L. Gallegos. On June 1, 2000, the Debtor was incarcerated. At the time of his incarceration, the Debtor was married to Elizabeth McCauley.

Four days after Eugene was incarcerated, Ruth created the Trust. Ruth was the sole beneficiary under the Trust and she appointed herself and Susan as co-trustees. The Trust directed that upon Ruth's death, after paying certain Trust obligations, the "Trust Estate shall then be distributed ... with the children of Ruth E. McCauley, to wit, Eugene V. McCauley, Jr., Michael G. McCauley, Susan K. Knorr and Nancy L. Gallegos, each receiving equal shares."⁶ On the same day Ruth created the Trust she also executed a separate will bequeathing all of her property to the Trust. Sometime after the formation of the Trust, Ruth quitclaimed property she owned in Lehi, Utah to the Trust.

In December 2003, the Trust sold its interest in the Lehi property to Wentworth Development LLC. As part of the transaction, Ruth received a quitclaim deed to some of the real property the Trust had sold to Wentworth. The quitclaim deed conveyed proposed lots 1 and 2 of the Bull River Ridge subdivision to Ruth. In connection with the sale of the Lehi property, the Trust also entered into a 1031 tax exchange with Everet and Janet West whereby the Trust was to receive the Ballard Property.

On January 23, 2004, Ruth formed REM with herself as the sole member and manager. The Trust's 1031 exchange for the Ballard Property was completed in March 2004. In June 2004 the Trust conveyed the Ballard Property to REM. Susan testified that Ruth transferred the Ballard Property to REM to avoid liability for any potential personal injury claims. REM never engaged in any business activities, maintained any business records, or filed any tax returns. REM did maintain a bank account at Mountain America Credit Union (REM Account.)⁷ In May 2005, Ruth updated REM's records filed with the Division of Corporations and Commercial Code of the Utah Department of Commerce (Utah Department of Commerce) to add Susan as a member. Susan held her REM membership interest in her capacity as Ruth's personal representative and trustee of the Trust.⁸

In February 2004 Susan formed EMSN, LLC. Susan was EMSN's only member and manager but Susan testified that EMSN was formed at Ruth's request. In April of that same year, Ruth conveyed lots 1 and 2 of the Bull River Ridge subdivision to EMSN. There was a home on lot 2, but lot 1 was raw land. Susan testified that lot 2 was transferred to EMSN to hold for Nancy but she didn't know what was going to happen to lot 1. There were also water shares associated with the Lehi property that were transferred to EMSN.

Ruth died on July 22, 2006, and Susan became the sole trustee of the Trust. In addition, the Trust became irrevocable. Under the terms of the separate will, all of Ruth's non-Trust assets were to "pour over" and become assets of the Trust upon her death. So when Ruth McCauley died, the Trust became the owner of Ruth McCauley's membership interest in REM. Susan also served as executor of Ruth's will. Susan failed to maintain any accounting, informal or otherwise, with respect to Ruth's assets or the Trust assets. The evidence before the Court is, at the time of Ruth's death, the Trust had bank accounts at Mountain America Credit Union, a home in Roosevelt, Utah, and a...