In re Levitsky, Case No.: 04-16203-JS (Bankr.Md. 9/30/2008), Case No.: 04-16203-JS.

CourtU.S. Bankruptcy Court — District of Maryland
Writing for the CourtJames F. Schneider
PartiesIn re: LEON R. LEVITSKY, Chapter 7 Debtor. LORI S. SIMPSON, CHAPTER 7 TRUSTEE, Plaintiff, v. LEON R. LEVITSKY and JANE LAMBERT Defendants. MANUFACTURERS AND TRADERS TRUST COMPANY, Plaintiff, v. LEON R. LEVITSKY, Et al., Defendants.
Docket NumberAdv. Proc. No. 05-1254, (Consolidated into 05-1254).,Case No.: 04-16203-JS.,Adv. Proc. No. 04-2024.
Decision Date30 September 2008

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In re: LEON R. LEVITSKY, Chapter 7 Debtor.
LORI S. SIMPSON, CHAPTER 7 TRUSTEE, Plaintiff,
v.
LEON R. LEVITSKY and JANE LAMBERT Defendants.
MANUFACTURERS AND TRADERS TRUST COMPANY, Plaintiff,
v.
LEON R. LEVITSKY, Et al., Defendants.
Case No.: 04-16203-JS.
Adv. Proc. No. 04-2024.
Adv. Proc. No. 05-1254, (Consolidated into 05-1254).
United States Bankruptcy Court, D. Maryland.
September 30, 2008.

Leon R. Levitsky, Annapolis, Maryland, Debtor.

Cynthia L. Leppert, Esquire, Jennifer J. Karangelen, Esquire, Neuberger, Quinn, Gielen, Rubin & Gibber, Baltimore, Maryland, Counsel to the Chapter 7 Trustee.

Lori S. Simpson, Esquire Bishop, Daneman & Simpson, LLC, Baltimore, Maryland, Chapter 7 Trustee.

Harvey A. Levin, Esquire, Thompson Coburn LLP, Washington, D.C., Counsel to CIT Group Consumer Finance Inc.

Michael Scott Cohen, Esquire, Cumberland, Maryland, Counsel to Manufacturers and Traders Trust Company.

Ms. Jane Lambert, Park City, Utah.

Dashiell C. Shapiro, Esquire, Department of Justice, Tax Division Washington, DC.

United States of America (IRS) c/o Jennifer L. Vozne U.S. Department, of Justice, Washington, D.C.

Office of the United States Trustee, Baltimore, Maryland.

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MEMORANDUM OPINION GRANTING CHAPTER 7 TRUSTEE'S COMPLAINT FOR TURNOVER OF PROPERTY OF THE ESTATE, UPHOLDING LIEN OF CIT GROUP CONSUMER FINANCE, INC., AND AVOIDING LIEN OF MANUFACTURERS AND TRADERS TRUST COMPANY AS TO THE SAID PROPERTY

JAMES F. SCHNEIDER, Bankruptcy Judge.


Before the Court are two adversary proceedings that relate to the debtor's residence ("the Property"). The first, Adversary Proceeding No. 04-2024, brought by Lori S. Simpson, the Chapter 7 Trustee, asks the Court to declare that the Property is includable as property of the debtor's estate, even though it is titled in the name of a corporation, and to grant other relief. The second, Adversary Proceeding No. 05-1254, brought by Manufacturers and Traders Trust Company ("M&T"), seeks a declaratory judgment against CIT Group Consumer Finance, Inc. ("CIT") as to the priority of recorded liens on the Property. In that proceeding, the parties have filed cross-claims and counterclaims.1 The Court having issued an order setting the order of proof, trial was held on the Trustee's complaint, at the conclusion of which this Court held that the debtor's residence was property of the estate. The Trustee then

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presented her case in the second adversary proceeding to establish the invalidity of the liens of both CIT and M&T. At the close of the Trustee's case, CIT and M&T filed the instant motions for judgment. Counsel for CIT informed the Court that were its motion to be denied, it would put forward its own case, while counsel for M&T stated that it had no further case to put forward. For the reasons set forth, the motion for judgment filed by CIT will be granted, that of M&T will be denied, and the lien of M&T will be avoided.

THE PARTIES

1. Leon R. Levitsky ("Levitsky," or "the debtor") is a resident of the State of Maryland.

2. Jane A. Lambert ("Jane") is the debtor's wife.

3. Lori S. Simpson ("Trustee") is the debtor's Chapter 7 Trustee.

4. Contemporary Magic Kingdom, Inc., t/a CMK Company ("Contemporary"), is a corporation organized under the laws of the State of Maryland by Levitsky, and holds record title to the Property.

5. Associated Enterprises Ltd. is a defunct corporation organized by Levitsky under the laws of Great Britain on the Isle of Man. When a subpoena was sent to Associated in this action, it was returned two months later with a sticker that stated simply, "Gone Away."

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6. JP Morgan Chase Bank, N.A. ("JP Morgan") is a corporation organized under the laws of the United States and was a holder of a deed of trust on the Property.

7. Manufacturers and Traders Trust Company ("M&T"), is a commercial bank chartered under the laws of the State of New York, registered and qualified to do business in the State of Maryland, and claims to hold a first lien on the Property.

8. CIT Group Consumer Finance, Inc. ("CIT") was assigned the deed of trust from JP Morgan and claims to hold a lien on the Property.

9. The Internal Revenue Service ("IRS") asserts a secured claim against the debtor in the amount of $462,190.85, a priority claim in the amount of $10,252.78, and an unsecured claim in the amount of $347,890.76, for a total claim in the amount of $820,334.39. Claim No. 50.

FINDINGS OF FACT

1. The debtor has been in continuous possession of the Property from September 1983 to the present. It is his personal residence, a waterfront property identified as Lots E and F in the subdivision known as "Arundel on the Bay," located at 1315 Magnolia Avenue, Annapolis, Maryland 21403. In a 2001 financial statement, the debtor valued the Property and its contents at $1 million. Trustee's Exhibit 4. The Trustee's investigation disclosed that the Property is titled in the name of CMK Company, Inc., a purported trade name of Contemporary. The debtor's

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ownership of Contemporary was not disclosed in either his Schedule A or B (listing, respectively, real and personal property). However, CMK, Inc. was listed as an unsecured non-priority creditor in Schedule F, and as a party to an executory contract with the debtor in Schedule G. Bankruptcy Schedules, Trustee's Exhibit No. 20.

2. On March 2, 1982, Levitsky separated from his first wife, Carol Leigh Levitsky ("Carol"), left their marital home and moved into an apartment with Jane.2

3. In April 1982, one month after he separated from Carol, Levitsky purchased the Property and titled it in the trade name of Contemporary, the corporation he created in order to put the house that he purchased for himself and Jane beyond the reach of creditors, particularly Carol.3

4. Evidence of Levitsky's motivation to shield the home from Carol manifested itself in the following actions taken by the debtor.4

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A. The timing of the purchase of the Property in 1983 occurred shortly after the separation from Carol.

B. His relationship with Jane created the potential for a financially unfavorable divorce.

C. A handwritten notation in a letter written by James K. Stitcher, the debtor's accountant (now deceased), with additional notations made by the debtor in his own handwriting, indicated that Levitsky set up Contemporary "[i]n order to get [the home] out of his wives (sic) grasp." Memo from James Stitcher, Trustee's Exhibit No. 61.5

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D. Levitsky had no explanation for his decision to place the ownership of his residence in a corporate name.

E. The Property was the sole asset of Contemporary.

5. Levitsky has resided in the Property for nearly 25 years but paid no rent to the corporation, except for the one payment of approximately $36,000, that he paid shortly before the petition date, which he denominated as "arrears."6 Despite being so far in arrears, Contemporary never sought to evict Levitsky. Trial Transcript ("Tr.") at 193.

6. A $3,610 figure recorded as "rent" on the books of the corporation was actually money lent to Contemporary by Maryland National Bank ("MNB").

7. The only written leases on the Property between Levitsky and Contemporary that were entered into evidence, purportedly executed in 1983, were crude forgeries that contained a telltale 2006 facsimile date with the debtor's signature written in ink. Facsimile copy of lease, Trustee's Exhibit No. 147.

8. For many years, the corporation had only $5 in its bank account.

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9. Levitsky paid all expenses accruing from the ownership of the Property from his personal checking account or from the operating accounts of his personal secretaries. These payments included real estate taxes and homeowner's insurance, as well as corporate expenses, such as SDAT filing fees and accounting expenses. Travelers invoices and checks, Trustee's Exhibit No. 27; 2003 tax bill for Property, and checks paying taxes, Trustee's Exhibit No. 28; and checks paying water bills for Property, Trustee's Exhibit No. 29.7

10. Levitsky obtained homeowner's insurance, listing himself as the beneficiary and personally received payment of claims for damage to the Property. Hartford Homeowner's Policy, Trustee's Exhibit No. 17; Travelers Homeowners Insurance Policy, Trustee's Exhibit No. 18; Correspondence/documentation regarding flood damage to Property, Trustee's Exhibit No. 19; and Chubb Homeowner's Insurance Policy, Trustee's Exhibit No. 21.

11. On Schedule B (Personal Property) filed with his bankruptcy petition, Levitsky scheduled a $140,000 insurance claim for storm damage to the Property resulting from Hurricane Isabel.

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12. On his personal income tax returns, Levitsky deducted interest payments paid on the mortgage on the Property.

13. Levitsky stopped filing tax returns for Contemporary after his divorce from Carol became final.

14. Despite the fact that the Property was titled in the name of the corporation, Levitsky claimed the Property as tax exempt when he filed for a state homestead property tax exemption that was available only to individual homeowners. Trustee's Exhibit No. 12.

15. During an audit by the IRS, Levitsky defended his non-payment of capital gains taxes resulting from the sale of different piece of real property, on the ground that he had used monies from that sale to purchase the Property, even though the defense was available only to an individual purchaser. Trustee's Exhibit No. 64.

16. In his Last Will and Testament, Levitsky devised to Jane "any interest which I may possess at the time of my death in [the Property]," thereby treating it as his own. Article V. B., Last Will and Testament dated October, 1994, Trustee's Exhibit No. 3.

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17. Levitsky was the sole shareholder8 and sole director of Contemporary. Although he originally disputed at depositions that he was also president of the corporation, Levitsky suddenly remembered at trial that he was. Tr. at 130:5.

18. There are no other current...

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