In re Palmer, Bankruptcy No. SA 91-36731JB

• Decision Date: 24 April 1992
• Docket Number: Adv. No. SA 91-03837JB.,Bankruptcy No. SA 91-36731JB
• Citation: 140 BR 765
• Court: U.S. Bankruptcy Court — Central District of California
• Parties: In re Joan Schueman PALMER, Debtor. Richard A. MARSHACK, Trustee, Plaintiff, v. Fred SAUER and Marcia Plahm-Sauer, Defendants.

140 B.R. 765 (1992)

In re Joan Schueman PALMER, DebtorRichard A. MARSHACK, Trustee, Plaintiff, v.Fred SAUER and Marcia Plahm-Sauer, Defendants.

Bankruptcy No. SA 91-36731JB, Adv. No. SA 91-03837JB.

United States Bankruptcy Court, C.D. California.

April 24, 1992.

COPYRIGHT MATERIAL OMITTED

Robert P. Goe, Burd & Marshack, Santa Ana, Cal., for trustee.

Ross L. Edgell, Jr., Edgell and Edgell, Orange, Cal., for defendants.

AMENDED MEMORANDUM OF DECISION

JAMES N. BARR, Bankruptcy Judge.

PROCEDURAL BACKGROUND

The Chapter 7 Bankruptcy Trustee(the "Trustee") commenced this adversary proceeding seeking an adjudication of the rights of the parties with respect to real property located in New Mexico (the "Property").The Trustee then filed a motion for summary judgment against Fred and Marcia Plahm-Sauer(the "Sauers") on the sole basis that, as a bona fide purchaser under 11 U.S.C. § 544(a)(3)¹, he may defeat the Sauers' claim that Joan Schueman Palmer(the "Debtor") was holding the Property in trust for them.Based on the following findings of fact and conclusions of law, I will deny the Trustee's motion for summary judgment and, sua sponte, grant summary judgment to the Sauers.

FACTS

In September, 1989, the Sauers attempted to purchase the Property from Wayne and Jean Miller(the "Millers").Because of their bad credit history, the Sauers were unable to consummate the sale.Thus, the Debtor, Marcia Plahm-Sauer's mother, agreed to purchase the Property on their behalf.On January 12, 1990, the Millers transferred legal title to the Property to the Debtor pursuant to a warranty deed that was recorded in Bernalillo County, New Mexico.Fred Sauer testified that he and his wife paid the down payment and all mortgage payments, insurance premiums and property taxes on the Property.The Trustee has not disputed this testimony.

The Sauers and the Debtor then entered into an agreement, dated March 9, 1990(the "Agreement"), pursuant to which they agreed, among other things, that: (i) the Debtor obtained a mortgage and took legal title to the Property because the Sauers' bad credit history prevented them from doing so; (ii) the Sauers "owned" the Property; and (iii) when "practical," the Debtor would transfer any "right, title and interest" in the Property to the Sauers.

In May, 1990(i.e., more than a year before this bankruptcy case was commenced), the Debtor signed and delivered a warranty deed to the Sauers that apparently transferred her interest in the Property to them.Fred Sauer testified that he did not record that warranty deed because he was concerned that the Debtor's mortgagee would consider the transfer to be a default under the loan agreement.However, notwithstanding that transaction, the Debtor, the Sauers and the Trustee have all agreed, for purposes of this motion, that the Debtor had legal title to the Property at the time she filed the Chapter 7 petition.

On June 13, 1991, the Sauers entered into a written lease agreement with Susannah Specht("Specht") for a one year period.Specht has paid all of the lease payments to the Sauers.The Debtor filed a Chapter 7 petition on July 15, 1991, at which time Specht was occupying the Property.The Trustee was appointed on August 6, 1991.

JURISDICTION

This court has jurisdiction over this case pursuant to § 1334(a)(the district courts shall have original and exclusive jurisdiction of all cases under Title 11), 28 U.S.C. § 157(a)(authorizing the district courts to refer all Title 11cases and proceedings to the bankruptcy judges for the district) and General OrderNo. 266, dated October 9, 1984(referring all Title 11cases and proceedings to the bankruptcy judges for the Central District of California).This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O).

ISSUES

The following issues are presented by the Trustee's motion: (i) is the Property held in trust for the Sauers; and (ii) may the Trustee avoid the Sauers' interest in the Property pursuant to § 544(a)(3)?

ANALYSIS

Summary Judgment Basics

The Trustee has the initial burden of identifying the portion of the record which demonstrates the lack of genuine issues of material fact.If that burden is met, the burden of going forward with evidence to establish the existence of such issues shifts to the Sauers.Celotex Corp. v. Catrett,477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265(1986).

Fed.R.Civ.Proc. 56(e), as made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056, provides that the non-moving party may not rest on mere allegations or denials of its pleading, but must set forth specific facts demonstrating a genuine issue of material fact.A dispute about a material fact is "genuine" if the evidence offered would enable a reasonable jury to return a verdict for the non-moving party; a fact is "material" if it affects the outcome of the lawsuit.Anderson v. Liberty Lobby, Inc.,477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202(1986).Thus, I must grant the Trustee's motion for summary judgment if the record shows that there is no genuine issue of material fact and the uncontroverted facts support judgment for the Trustee.Alternatively, I may grant summary judgment to the Sauers, sua sponte, if there is no genuine issue of material fact and the uncontroverted facts support such a ruling.In re Marvin Properties, Inc.,76 B.R. 150, 152(Bankr. 9th Cir.1987), aff'd on other grounds,854 F.2d 1183(9th Cir.1988), citingPortsmouth Square v. Shareholders' Protective Comm.,770 F.2d 866, 869(9th Cir.1985).

Is the Property Presently Held in Trust for the Sauers?

The Sauers contend that they are the beneficiaries of a resulting trust and the Trustee has not argued otherwise.To determine whether a valid resulting trust exists, I must apply New Mexico law because the Property is located in that state.In re Torrez,63 B.R. 751, 754(Bankr. 9th Cir.1986), aff'd on other grounds,827 F.2d 1299(9th Cir.1987)(the validity of a trust must be determined under the laws of the state in which the real property is located).

In Aragon v. Rio Costilla Coop. Livestock Assn.,112 N.M. 152, 812 P.2d 1300(1991), the New Mexico Supreme Court held that a resulting trust arises when a person transfers property under circumstances which raise an inference that he intended the transferee to have only legal title and not a beneficial interest in the property, the inference is not rebutted, and the beneficial interest in the property is not disposed of.A resulting trust may arise when: (i) an express trust partially or totally fails; (ii) a trust is fully performed without exhausting the trust res; or (iii) one person pays the purchase price for real property and requests that it be conveyed to another person.Aragon,112 N.M. at 155, 812 P.2d 1300.

In contrast, an express trust is created by the direct and positive acts of the parties: a writing, a deed, a will, or by words which expressly or impliedly demonstrate a desire to create a trust.While an express trust does not have to be in writing, there must be some memorandum to prove that it exists.Aragon,112 N.M. at 155, 812 P.2d 1300.Unlike a resulting trust which is implied by the nature of the transaction, an express trust is established by the actions of the parties.

In the present case, Fred Sauer and the Debtor both testified that, at the time the Property was transferred to the Debtor, they intended that the Debtor would hold legal title to the Property for the benefit of the Sauers.Approximately three months later, the Debtor and the Sauers memorialized their intentions in the Agreement.The testimony of the Debtor and Fred Sauer(which is uncontroverted by the Trustee) and the Agreement clearly demonstrate that the parties intended to place title to the Property in an express trust for the benefit of the Sauers and that intent was memorialized in a subsequent writing.Thus, I find, as a matter of law, that the Debtor held the Property in an express trust for the benefit of the Sauers at the time this bankruptcy case was commenced.

May the Trustee avoid the Sauers' interest in the Property pursuant to § 544(a)(3)?

The Trustee relies solely on the court of appeals' holding in In re Tleel,876 F.2d 769(9th Cir.1989) to support his argument that he may, as a bona fide purchaser under § 544(a)(3), avoid the Sauers' interest in the Property.The Sauers argue that under the Bankruptcy Appellate Panel's (the "BAP")holding in Torrez, the Trustee cannot avoid their interest in the Property.

In Tleel, the debtors, Joseph Chbat("Chbat") and two other parties acquired certain real property in August, 1978.After buying out the interests of the co-owners, the debtors sold the property to a third party(the "Purchaser") pursuant to a land sale contract.Under that contract, the debtors retained legal title to the property and the Purchaser agreed to make installment payments to the debtors totalling $400,000.

In 1980, Chbat brought a state court action alleging that the debtors breached an oral partnership agreement and requested that the court impose a constructive trust on half the proceeds of the land sale contract in his favor.In December, 1984, the debtors filed a Chapter 11 petition.After the Purchaser defaulted on the land sale contract, the debtors apparently instituted nonjudicial foreclosure proceedings.The bankruptcy court approved the debtors' motion to sell the property free and clear of any liens.Chbat then commenced an adversary proceeding seeking a constructive trust on the proceeds from the sale of the property.The trustee brought a motion for summary judgment arguing that he could avoid Chbat's alleged constructive trust claim under § 544(a)(3).The bankruptcy court granted the trustee's motion for summary judgment action and the BAP affirmed.

Upon appeal, the circuit court of appeals first considered whether the trustee was a bona fide purchaser for purposes of § 544(a)(...