In re Charlton
| Decision Date | 30 May 2008 |
| Docket Number | No. 04-32400 TEC.,04-32400 TEC. |
| Citation | 389 B.R. 97 |
| Parties | In re James Paulett CHARLTON, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of California |
James Paulett Charlton, Woodside, CA, pro se.
MEMORANDUM RE TRUSTEE'S MOTION FOR SUMMARY JUDGMENT FOLLOWING REMAND FROM BANKRUPTCY APPELLATE PANEL
For the reasons stated below, I determine that the trustee's rights under her strong-arm powers are superior to the rights of Debtor's former spouse under the retroactive constructive trust and the retroactive property division imposed by a Utah state court.
This court allowed the bankruptcy estate to retain the proceeds from the post-petition sale of a Marc Chagall painting (the Painting). Debtor (hereinafter James) and his former wife (hereinafter Consuelo) stipulated that, prior to their divorce, the Painting had been held by James as his separate property. Consuelo filed a petition for divorce in Utah before James filed his bankruptcy petition, but the Utah state court made no division of property before the bankruptcy filing. Consuelo argued that under Utah law she became vested in an undivided interest in the Painting upon the filing of the divorce petition, citing In re White, 212 B.R. 979 (10th Cir. BAP 1997).
This court held that, under Utah law, Consuelo had only an inchoate interest in the Painting unless and until the state court entered an order awarding her that property. See Hamilton v. Hamilton, 562 P.2d 235, 237 (Utah 1977). The White case does not govern, because it involved a Wyoming statute providing that, upon the filing of a divorce petition, the spouse is vested with an undivided interest in all property acquired during the marriage. Because Utah had no such statute, and because the Utah state court had not entered an order dividing marital property before James' bankruptcy petition, the bankruptcy estate prevailed against Consuelo's inchoate claim under the trustee's strong-arm powers. See 11 U.S.C. § 544.
This court later approved a stipulation lifting the automatic stay to permit the Utah court to decide the issues that remained unresolved under the bifurcated decree of divorce: child custody, support, and division of property. The Utah court commenced a trial regarding these issues on November 29, 2005, issued written findings and conclusions on February 27, 2006, and entered an order on August 14, 2006.
The state court awarded the Painting to Consuelo, and imposed a constructive trust on the Painting for her benefit. The state court also made this award retroactive to the date of the bifurcated decree, which had dissolved the marriage but had reserved for later decision all issues re property division. The date of the bifurcated decree (December 18, 2003) was before the date of James' bankruptcy petition (August 24, 2004).
The state court found that none of the property held by either spouse was separate property. Although James had inherited property from his grandmother and two great aunts, he had invested that property in various business ventures, where it became co-mingled with property acquired during the marriage. See Request to Take Judicial Notice in Support of Trustee's Motion for Summary Judgment ("RJN"), Exh. 1 at pp. 12-14. Artwork acquired from the proceeds of sale of these business interests could not be traced to property James inherited, and was thus marital property, irrespective of how title was held. Id.
The state court found that James was responsible for a decline in the value of marital assets, but that his conduct did not amount to fraud. James was a software engineer at the time he married Consuelo in 1993. Id. at p. 11. During the marriage, he founded various businesses, some of which were very successful and were sold for millions of dollars. Id. at pp. 15, 26. Virtually all of this value had been lost By the time of the bifurcated decree in December 2003. Regarding this loss, the court noted:
[T]he ineluctable finding is that respondent possessed, then lost, a fortune. The court finds; however, that the steps that led inexorably to the losses were not the result of malice, and certainly not actions tailored exclusively, or even primarily, to deprive petitioner of any benefit from the assets.... In very brief summary, the losses result from mistakes of a newly-rich but unsophisticated business man, who invested badly, trusted others unwisely, and then found his mistakes compounded by the plunging stock market and technology collapse of 2000 and thereafter. As regrettable as these circumstances are, petitioner has not carried her burden of showing that most of the cumulative and devastating errors amounted to dissipation.
RJN, Exh. 1 at p. 17: ¶¶ 53, 55.
More specifically, the state court found that James was responsible for the loss of marital assets after the parties' separation in March 1999. The court found that James had expended marital assets on a lavish lifestyle and that in doing so he breached his fiduciary duty to preserve marital assets for the use of the marital estate, but that this breach of duty did not amount to fraud.
Respondent breached the promise, not for the most part by dissipation as that term is usually defined, and not by fraud, but respondent allowed himself to get into a position where he could not keep his promises and meet his obligations in the marital relationship.
Although the state-court order awards Consuelo the Painting, its findings and conclusions do not support the award of that particular property. Rather, they indicate that the court intended to award Consuelo an interest only in those art-works in her possession on the date of trial, and that the constructive trust was intended to protect art in Consuelo's possession but to which James held title.
This court specifically focused on art work in the possession of petitioner at the date of trial.... Regarding the foregoing property, the court concludes that respondent held the entire equity of the Woodside house, any art titled in his name, and half of the Pare Royal judgment in constructive trust for the benefit of petitioner.... The art work and personal property that is not at this time controlled by the Bankruptcy Trustee, but is in the possession of petitioner, represents her equitable share of the marital estate. In fact, it represents a value that is likely much lower than her equitable share, but for respondent's mismanagement, but it is essentially the only property remaining outside the Bankruptcy estate that may be awarded to her pursuant to this court's equitable powers. If any of the art work is titled in respondent's name, a constructive trust is imposed on that art for petitioner's benefit.
Id., Exh. 1 at pp. 30-31: ¶¶ 31, 32, 35 (emphasis added). The state court was aware that the trustee had sold the Painting in November 2004 and had possession of the proceeds on the date the state-court trial commenced (November 26, 2005). Id. at p. 3.
While the state-court action was proceeding, Consuelo appealed from this court's order upholding the bankruptcy estate's claim to the Painting. That appeal went to the Ninth Circuit Bankruptcy Appellate Panel (BAP). The Utah state court issued its decision before the BAP heard Consuelo's appeal. Because the respective rights of Consuelo and the bankruptcy estate might be affected by the state-court order, and because this court had not had an opportunity to consider the effect of that order, the BAP remanded the matter to allow this court to consider the effect of the state-court order.
Does the post-petition imposition of a constructive trust on the Painting, or the post-petition division of property awarding the Painting to Consuelo, made via an order purporting to be retroactive to a date before the filing of the bankruptcy petition, remove the Painting from the bankruptcy estate or otherwise defeat the trustee's interest in the Painting under her strong-arm powers?
We must first examine Consuelo's property rights under Utah law. Utah is not a community property state. Under Utah law, property traceable to assets owned by one spouse before the marriage or to assets inherited by a spouse during the marriage, are separate property. Bradford v. Bradford, 993 P.2d 887, 892-93 (Utah App.1999) (citing Utah Code Ann. § 30-2-3). Property acquired during marriage that is not traceable to separate property is marital property. Id. Upon divorce, the state court is authorized to divide the marital property equitably between the spouses. Utah Code Ann. § 30-3-5. In appropriate circumstances, the court may award the separate property of one spouse to the other spouse. E.g., Elman v. Elman, 45 P.3d 176, 180-82 (Utah App.2002); Thomas v. Thomas, 987 P.2d 603, 610-11 (Utah App.1999).
Although which spouse holds title does not determine whether property is marital property, how title to marital property is held is important in dealings with third parties. A spouse who is not on title does not have a present, vested interest in marital property until the court awards such property to that spouse. Hamilton, supra, 562 P.2d at 236-37. Thus, after the filing of a petition for divorce but before the state court enters an order dividing marital property, the title-holding spouse may convey marital property to a third party free of the inchoate marital property interest of the non-title-holding spouse. Id.
Utah courts are permitted to enter, upon notice and a finding of good cause, nunc pro tunc orders in matters "relating to marriage, divorce, legal separation or annulment of marriage". Utah Code Ann. § 30-4a-1. But this court has found no published Utah decision suggesting that a nunc pro tunc division of marital property overrides Hamilton and is effective against a bona fide purchaser or against a judgment lien creditor of the title-holding spouse.1
We must next examine the effect of constructive trust...
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