In re Garcia, Bankruptcy No. 7-05-14383 SA.

• Decision Date: 11 April 2007
• Docket Number: Adversary No. 06-1054 S.,Bankruptcy No. 7-05-14383 SA.
• Citation: In re Garcia, 367 B.R. 778 (Bankr. N.M. 2007)
• Parties: In re Becky GARCIA and Estavan<SMALL><SUP>1</SUP></SMALL> B. Garcia, Debtors. Philip J. Montoya, Plaintiff, v. Teodoro A. Garcia and Esther J. Garcia, Defendants.
• Court: U.S. Bankruptcy Court — District of New Mexico

367 B.R. 778

In re Becky GARCIA and Estavan¹ B. Garcia, Debtors Philip J. Montoya, Plaintiff, v. Teodoro A. Garcia and Esther J. Garcia, Defendants.

Bankruptcy No. 7-05-14383 SA.

Adversary No. 06-1054 S.

United States Bankruptcy Court, D. New Mexico.

April 11, 2007.

Ronald E. Holmes, Albuquerque, NM, for Debtor.

MEMORANDUM OPINION AFTER TRIAL ON THE MERITS

JAMES S. STARZYNSKI, Bankruptcy Judge.

This matter came before the Court for trial on the merits of Plaintiff's complaint to recover preferential or fraudulent transfer. The Court has subject matter and personal jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b); this is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(F) and (H); and these are findings of fact and conclusions of law as required by Rule 7052 F.R.B.P. This chapter 7 case was filed prior to the effective date of most of the provisions of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), Pub.L. No. 109-08, 119 Stat. 23, and therefore the changes enacted by that legislation are not applicable to this case.

This adversary proceeding is an attempt by the Chapter 7 Trustee for Becky Garcia and Estevan Garcia ("Debtors") to recover a house from Estevan's parents Teodoro A². and Esther J. Garcia ("Parents") as either a preferential transfer or a fraudulent transfer. The transfer of the house took place approximately 11 months before the bankruptcy was filed.

Debtors were married in 1995. At the time, Estevan owed approximately $19,000 to his ex-wife as part of their divorce settlement. Estevan's parents agreed to place a mortgage on their unencumbered home to help Estevan pay the debt. They followed through with this plan, although the record does not indicate when.

In February, 2000 Debtors wanted to consolidate their bills. Estevan approached Teodoro, who stated that he no longer wanted his name on any loans. Teodoro and the Debtors agreed, however, that Parents would convey their house to the Debtors so that the Debtors could obtain a mortgage on it in their names, with the proviso that the Debtors immediately deed the property back to the Parents. On February 23, 2000, Parents executed a warranty deed for the house to the Debtors. The deed was recorded two days later. The deed contained no restrictions. Debtors paid and Parents received no consideration for the deed.

The Debtors then attempted to get a mortgage in their names on the property. They were unable to qualify due to Estevan's poor credit. Becky was able to qualify in her own name alone, however. On April 17, 2000, Debtors executed a sole and separate property agreement that conveyed Estevan's interest in the house to Becky. (Exhibit B-1). On April 21, 2000, Becky executed a mortgage to Greenpoint Mortgage Funding, Inc., borrowing $35,000. (Exhibit B-2). Exhibit B-3 is the closing statement which shows a payoff of $19,060 to First Security Bank (Parent's original mortgage taken to help Estevan), closing costs³, payments to various credit card companies and a credit union, and $2,339 to Becky. Becky testified that she put this in Debtors' joint account and used it to pay bills. No funds went directly to Parents.

Debtors both testified that the property was to be deeded back to the Parents within two weeks of the mortgage closing. Becky believed she filled out a deed returning the house in connection with closing, but was unable to locate it. She also believed that it may never have been done.

Debtors have made all payments to Greenpoint Mortgage. Parents made no payments to Greenpoint Mortgage.

In mid-2004, Teodoro discovered that the house had never been deeded back per the agreement. He called Becky and told her she had to execute a deed. She was surprised that she still had title, and immediately executed a Quit Claim Deed to the Parents. This deed was recorded on July 14, 2004. The deed recites that it was for "Zero dollars" consideration.

In mid-July, 2004, Debtors were having trouble paying their bills; Estevan had suffered a stroke. Debtors were insolvent on the date the deed was recorded, with debts exceeding their assets.

Debtors filed their Chapter 7 case on May 30, 2005, within one year of the Quitclaim deed. Plaintiff was appointed Trustee and continues in that capacity.

At trial both Debtors testified, as did Esther Garcia. The Court found all witnesses to be truthful, forthcoming and credible. There were no inconsistencies between any of the testimony or between the testimony and the documents admitted into evidence.

Neither Debtor was contemplating bankruptcy in mid-July, 2004. Neither Debtor has ever claimed an ownership interest in the house, they never charged rent for its use, and they never paid for repairs, insurance or taxes (except as noted above). Debtors did not have the taxes assessed in their names, they did not receive the tax assessment notices and they did not receive the tax bills. Teodoro also never gave Debtors copies of the tax bills to pay.

Parents have continuously lived in the house for over 40 years.

Debtors did take a mortgage interest deduction On' their 2004 tax return for interest paid to Greenpoint. (Exhibit 7). They did not take a real estate tax deduction for the house, however.

Esther Garcia testified that she was 84 or 85 years old, had never been to school and does not read, write or speak English. She has lived in the property for over 40 years. She testified that she signed Exhibit A-3 (the 2000 Warranty deed to Debtors), but she could not read it and did not know what she was signing. Teodoro also did not explain it to her. Teodoro handled all the financial matters for the household. She had no idea she was deeding her home to the Debtors. She received no money for the deed. If she had known what she was signing, she would have refused. She and Teodoro had discussed their testamentary desires that the house should be distributed among their four living children upon the last of Parents to die; she never would have agreed to give it to just one child. She understood that Estevan had financial problems ever since his divorce, and understood that her husband helped him with money, but she did not understand that the house was ever involved.

Plaintiff argues that he has made out a prima facie case of either a fraudulent or preferential transfer. Defendant argues that there was not a transfer of an interest of the Debtors in property because Debtors held only bare legal title to the house. Alternately, Defendant argues that the original Warranty deed in 2000 was ineffective to pass title because there was no intent to transfer an interest in the House. Plaintiff responds that it is improper to impose either resulting trusts or constructive trusts on a bankruptcy estate, and that neither trust theory is applicable in this case in any event. In response to the deed argument, Plaintiff claims that Debtors have failed to prove the deed was fraudulently obtained. In addition to their closing arguments, each side submitted thoughtful briefs (does 18, 30, 31, 32 and 33), which the Court has considered.

CONCLUSIONS OF LAW

First, the Court notes that this is not a case where a creditor is trying to impose a constructive or resulting trust on property in a bankruptcy estate. Rather, the position is that of a defendant in an avoidance action demonstrating that, had no bankruptcy been filed, the defendant would have been entitled to an equitable remedy in state court to have the property ordered returned. The asset is not in the estate and was never in the estate. The question, then, is would Parents have been entitled to a return of the property if Becky refused to deed it back. The Court finds that they would.

Decisions in bankruptcy cases concerning the doctrines of constructive or resulting trusts in bankruptcy cases are determined by reference to state law. See Taylor v. Rupp (In re Taylor), 133 F.3d 1336, 1341 (10th Cir.), cert. denied, Rupp v. Taylor, 525 U.S. 873, 119 S.Ct. 172, 142 L.Ed.2d 140 (1998) (Utah law governed whether resulting or constructive trust should be imposed); United States Department of Energy v. Seneca Oil Company (In re Seneca Oil Company), 906 F.2d 1445, 1450 (10th Cir.1990) (Oklahoma law governed conditions for imposing a constructive trust). Three New Mexico cases are particularly on point.

In the first, Garcia v. Marquez, 101 N.M. 427, 684 P.2d 513 (1984), the New Mexico Supreme Court dealt with the imposition of a constructive trust. In 1940 Garcia and his former wife purchased two lots and a residence in Ruidoso, New Mexico. Id. at 428, 684 P.2d at 514. In 1974 he and his spouse deeded the property to his daughter Marquez, the defendant. Id. Garcia, his spouse and Marquez continued to reside in the family home until July 1979 when the parents divorced. Id. In 1980 Garcia filed an action to establish a constructive trust over his interest in the property. Id. The District Court concluded that Marquez's title be encumbered with a constructive trust for herself and her brothers and sisters to the extent of Garcia's one-half interest in the property. Id. On appeal, Marquez argued that there was no evidence of fraud, duress, overreaching or similar unconscionable conduct on her part that would require the imposition of a constructive trust. Id. The Supreme Court ruled that such conduct was not essential for imposition of a constructive trust. Id. (citing Velasquez v. Mascarenas, 71 N.M. 133, 140-41, 376 P.2d 311, 316 (1962)). "Other grounds commonly supporting the imposition of constructive trusts are abuse of a confidential relation and unjust enrichment." Id. (citing Flanagan v. Benvie, 58 N.M. 525, 273 P.2d 381 (1954); Restatement (Second) of Trusts §§ 2 comment b, 44, 45 (1959); G. Bogert, The Law of Trusts and Trustees §§ 482, 496 (1978)). The Court noted that proof of a constructive trust requires clear and convincing evidence.⁴ Id. at 428-29, 684 P.2d at 514-45. It then reviewed the conflicting...