In re Carriage House, Inc.

• Decision Date: 28 September 1990
• Docket Number: Bankruptcy No. 88-152,Adv. No. 89-22A.,88-175 and 88-174
• Citation: 120 BR 754
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re The CARRIAGE HOUSE, INC., James J. Gabelhart and Ruth S. Gabelhart, Mark F. Gabelhart and Martha E. Gabelhart, Debtors. H. Arthur and Nancy S. LOUX, Plaintiffs, v. James J. GABELHART, Ruth S. Gabelhart, James J. Gabelhart, as Trustee of C & H Associates, First National Bank of Vermont, General Electric Capital Corporation, and The Carriage House, Inc., Defendants.

120 B.R. 754 (1990)

In re The CARRIAGE HOUSE, INC., James J. Gabelhart and Ruth S. Gabelhart, Mark F. Gabelhart and Martha E. Gabelhart, Debtors H. Arthur and Nancy S. LOUX, Plaintiffs, v. James J. GABELHART, Ruth S. Gabelhart, James J. Gabelhart, as Trustee of C & H Associates, First National Bank of Vermont, General Electric Capital Corporation, and The Carriage House, Inc., Defendants.

Bankruptcy Nos. 88-152, 88-175 and 88-174, Adv. No. 89-22A.

United States Bankruptcy Court, D. Vermont.

September 28, 1990.

J. Canney, III, Hull, Webber, Reis & Canney, Rutland, Vt., trustee pro se for James Gabelhart and Ruth Gabelhart Chapter 7 Bankruptcy Estate.

R. Gerety, Jr., Plante, Hanley & Gerety, P.C., White River Junction, Vt., for H. Arthur Loux and Nancy S. Loux.

J. Meyers, Jerome I. Meyers, P.C., White River Junction, Vt., for James J. Gabelhart, Ruth S. Gabelhart, and The Carriage House.

E. Zuccaro and J. Salamandra Corso, Zuccaro, Willis & Bent, St. Johnsbury, Vt., for First Nat. Bank of Vermont.

MEMORANDUM OF DECISION ON PROPERTY OF ESTATE

FRANCIS G. CONRAD, Bankruptcy Judge.

Trustee and Gabelharts seek a determination¹ that a Declaration of Trust executed by James Gabelhart, trustee, is invalid and its property declared part of Gabelharts' personal bankruptcy estate. Trustee and Gabelharts also seek to enforce a discharge of a mortgage on the property by extending a discharge of an assignment of that mortgage to include the mortgage itself. They also seek to prevent Bank's post-petition attempt to correct this alleged defect through the application of a bona fide purchaser for value status. Bank and Loux oppose. We hold the Declaration of Trust created a valid and nonvoidable Vermont Common Law business trust, or, in the alternative, a private trust. In either case, only Gabelharts' beneficial interest becomes property of their bankruptcy estate. Because we resolve the trust issue in favor of Loux and Bank, it is not necessary to determine the mortgage discharge issue. Upon request of Trustee, we will set an evidentiary hearing for the valuation of Gabelharts' bankruptcy estate's beneficial interest in the trust.

BACKGROUND

Loux initiated this adversary proceeding for a determination of the validity and priority of a mortgage upon certain real estate located in Windsor, Vermont. Following the filings of pleadings and cross-pleadings, Loux moved for partial summary judgment and sought: 1) a declaration on the validity and priority of its lien on the real estate; and 2) a determination that the real estate was not part of Gabelharts' personal bankruptcy estate. Bank filed a memorandum in support of Loux's motion for partial summary judgment. Gabelharts and Carriage House filed a cross motion for partial summary judgment against Loux and a joint motion for summary judgment against Bank. The cross motion sought: 1) a declaration that the mortgage was discharged and unenforceable; and 2) a declaration the real estate was part of the Gabelharts' personal bankruptcy estate. The cross motion against Bank also sought damages for violation of the automatic stay.² On March 12, 1990, we filed our Memorandum of Decision on Motions For Partial and Summary Judgment and denied all pre-trial motions for partial and summary judgment because we found material and disputed facts required a trial. Trial on the merits was held and this matter was taken under advisement upon the conclusion of a post-trial briefing schedule.

FACTS

On May 1, 1987, James Gabelhart entered into a Declaration of Trust of C & H Associates (Declaration of Trust), a so called Real Estate Investment Trust under the Internal Revenue Code (REIT).³ James Gabelhart was named trustee for the Declaration of Trust.

The material terms of the Declaration of Trust include:

RECITALS

. . . . .

1. The Trustees desire to form a trust for the principal purpose of purchasing commercial and other real property and raising capital therefore to be secured on the real property, and all acts associated therewith.

2. The Trustees desire that such trust qualify as a `real estate investment trust\' under the REIT Provisions of Internal Revenue Code.

. . . . .

4. The beneficial interest in the trust assets shall be divided into transferable shares of beneficial interest, evidenced by certificates therefor, as hereinafter provided.

DECLARATION

Now therefore, the Trustees hereby declare that they will hold all property of every type and description that they may acquire as such trustees, together with the proceeds thereof, in trust, to manage and dispose of them for the benefit of the holders of record of the certificates for shares being issued and to be issued hereunder and in the manner and subject to the provisions as follows:

. . . . .

THE TRUST

1.3 Nature of trust. The trust is a real estate investment trust (also known as a business trust, for real estate purposes) organized under the laws of the State of Vermont. The trust is not a general partnership, limited partnership, joint venture, corporation, or joint stock company. The shareholders shall be beneficiaries, and their relationship to the trustees shall be solely in that capacity in accordance with the rights conferred on them hereunder. The trust is intended to have the status of a `real estate investment trust\' as that term is defined in the REIT provisions of the Internal Revenue Code, and this declaration of trust and all actions of the trustees hereunder shall be construed in accordance with such intent.

POWERS OF TRUSTEES

2.1 General. The trustees, subject only to the specific limitations contained in this declaration of trust, and such limitations as may be imposed by law, shall have, without other or further authorization, and free from any power or control on the part of the shareholders, full, exclusive, and absolute power, control and authority over the trust property and over the business of the trust to the same extent as if the trustees were the sole and absolute owners of the trust property and business in their own right. . . .

. . . . .

2.4 Legal title. Legal title to all the trust property shall be vested in the trustees as joint tenants and held by and transferred to the trustees, except that the trustees shall have power to cause legal title to any trust property to be held by or in the name of one or more of the trustees with suitable reference to his or their trustee status, or in the name of the trust, or in the name of any other person as nominee, on such terms, in such manner, and with such powers as the trustees may determine.

. . . . .

INVESTMENTS

. . . . .

4.2 Limitation of liability if trust fails to qualify under the REIT provisions of the Internal Revenue Code. The general purpose of the trust is to seek real estate investment trust income as defined in the REIT provisions of the Internal Revenue Code. The trustees intend to make investments in such a manner as to comply with the requirements of the REIT . . . no trustee . . . shall be liable for any act or omission resulting in the loss of tax benefits under the Internal Revenue Code, except for that arising from bad faith, willful misconduct, or reckless disregard of duties or for failure to act in good faith in the reasonable belief that the action was in the best interests of the trust.

SHARES

6.1 Description of shares. The interest of the shareholders hereunder shall be divided into shares, all of one class and having a par value of ten dollars ($10.00) per share. The number of shares authorized hereunder is unlimited. Ownership of shares shall be evidenced by certificates. All shares shall have noncumulative voting, distribution, liquidation, and other rights, and shall be fully paid and nonassessable, and shall have no preference, conversion, exchange, preemptive, or redemption rights.

6.2 Certificates. Every shareholder shall be entitled to receive a certificate. . . . Certificates shall be treated as negotiable, and title thereto and to the shares represented thereby shall be transferred by delivery thereof to the same extent in all respects as a stock certificate. . . .

. . . . .

CHARACTERISTICS OF SHARES

8.1. General. The ownership of the trust property of every description and the right to conduct any business hereinbefore described are vested exclusively in the trustees, and the shareholders shall have no interest therein other than the beneficial interests conferred by their shares, and they shall have no right to call for any partition or division of any property, profits, rights, or interests of the trust nor can they be called on to share or assume any losses of the trust or suffer an assessment of any kind by virtue of their ownership shares. . . . Notwithstanding any other provisions hereof, all real estate at any time forming part of the trust property shall be held in trust subject to sale and conversion into personal estate at such time or times and in such manner and on such terms as the trustee shall approve, but the trustees shall have power, until the termination of this trust, to postpone such conversion so long as they shall think fit, and for the purpose of determining the nature of the interest of the shareholders therein, all such real estate shall at all times be considered as personal estate; and the real estate and personal property comprised in the trust estate shall constitute a single fund.

. . . . .

8.4. Trustees as shareholders. Any trustee in his individual capacity may purchase and otherwise acquire or sell and otherwise dispose of shares or other securities issued by the trust, and in so doing shall be subject to the same limitations as director of a business corporation organized under the laws of the State of Vermont.

. . . . .

TRUSTEES

10.1 Number and qualifications. There shall be one (1) trustee until such time as the number of trustees has been changed pursuant to the provisions of this paragraph 10.1. The number of trustees may be increased or decreased by a written

...