In re Salas

• Decision Date: 24 September 2018
• Docket Number: Case No. 18-00260
• Parties: In re MAX E. SALAS, Debtor.
• Court: United States Bankruptcy Courts – District of Columbia Circuit

In re MAX E. SALAS, Debtor.

Case No. 18-00260

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF COLUMBIA

Filed: September 25, 2018
September 24, 2018

(Chapter 11)

Not for Publication in West's Bankruptcy Reporter.

MEMORANDUM DECISION AND ORDER RE OBJECTION TO HOMESTEAD EXEMPTION

The debtor, Max E. Salas, has claimed an exemption under D.C. Code § 15-501(a)(14) of the real property located at 1610 Riggs Place, NW, Washington, D.C. (the "Property") even though he is not the record owner of the Property in the District of Columbia land records. For the reasons stated below, I will overrule the pending objection to the claimed exemption of the Property.

I FACTS

On June 3, 2015, Michael Patrick McLoughlin and Nina Brekelmans, two roomers at the Property, were killed in a fire at

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the Property. The parents of McLoughlin and Brekelmans, as personal representatives of their children's estates brought actions in the Superior Court of the District of Columbia (respectively the McLoughlin plaintiffs in Case No. 2015 CA 008054 B and the Brekelmans plaintiffs in Case No. 2015 CA 008061 B), pursuing wrongful death and survivorship claims against both the debtor, Max Salas, and one of his sons, Len Salas.¹ Their actions were later consolidated as a single action and, on April 4, 2018, the McLoughlin plaintiffs and the Brekelmans plaintiffs obtained jury verdicts in the Superior Court of $7.7 million and $7.5 million, respectively, against Max and Len, jointly and severally. On April 18, 2018, Max filed a petition commencing this case under Chapter 11 of the Bankruptcy Code (11 U.S.C.) and Len filed a petition in the United States Bankruptcy Court for the Middle District of Tennessee (Case No. 3:18-bk-02662) commencing his own case under chapter 11 of the Bankruptcy Code. Max claimed an exemption on the Property and the plaintiffs timely objected to that exemption.

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A. Events Preceding the Transfer to Len of Record Title to the Property

The events relevant to the disposition of the objection to Max's exemption claim began in 1995, when Vickie L. Bruff (later Vickie Salas) purchased the Property, with Max making the $80,000 down payment. Vickie bought the Property because Max had financial and credit problems that prevented him from obtaining a mortgage to purchase the Property. Thereafter, Max and Vickie began living at the Property, with Max making the mortgage payments. Max has resided at the Property since 1995, except for when he was forced to live elsewhere temporarily after the fire pending the restoration of the Property.

Max married Vickie on March 1, 2002. In April 2007, they decided to get divorced. In contemplating a divorce agreement, Max wanted to keep the Property as his home and Vickie wanted to realize cash out of the Property. They determined that if Vickie transferred the Property to Max and Max refinanced the mortgage, he could pay Vickie her share of equity in the Property and otherwise retain the Property. This plan could not be carried out because Max's poor credit record would have impeded him from refinancing the mortgage on the Property upon the conveyance of the Property to him. However, they realized that if the Property were transferred to Max's son, Len, Len would be able to

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refinance the mortgage and pay Vickie the cash to which she was entitled under the divorce arrangement.

Vickie, Max, and Len took a series of steps to achieve that goal on April 16, 2007: Vickie conveyed the Property to Max pursuant to a deed duly recorded in the District of Columbia land records; in turn, Max conveyed the Property to Len pursuant to a deed similarly recorded in the land records;² Len then obtained a loan from SunTrust whereby any previously existing liens were eliminated and a new mortgage, a deed of trust, in favor of SunTrust, was recorded to secure repayment of the promissory note for the loan; and, finally, proceeds received by Len incident to the refinancing were then used to pay Vickie the cash to which she was entitled under the divorce agreement. Each deed recorded indicates that consideration of $10 was paid for the transfer of the Property. As a result of these transactions, title to the Property, according to the land records, was in Len's name.

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B. Residence in and Management of the Property by Max and Len After April 16, 2007, and Prior to the Signing of the Trust Documents

Len represented in the loan documents that the Property would serve as his sole residence for at least a year, and that he would maintain the Property. Nevertheless, Len and Max agreed that the Property would, in actuality, remain Max's home. In accordance with this, Len treated Max as the real owner of the Property. Indeed, Len paid Max rent when Len and his girlfriend (later his wife) lived in the house for approximately six to eight months after the transactions with Vickie closed.

Max and Len also agreed that Max would make the mortgage payments even though only Len was an obligor on the note secured by the deed of trust. There is no writing evidencing an agreement to that effect, but the existence of that agreement is demonstrated by that fact that over the years Max alone made all monthly mortgage payments. Len made none of the payments, even though he on occasion did receive communications from SunTrust whenever a payment was missed.³ Similarly, Max has paid for all other expenses associated with the Property, including amounts incurred for utilities, real property taxes, insurance, maintenance, and general upkeep. Accounts associated with the

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Property have been established in Max's name, including all electric and water utility accounts, cable and internet accounts, and a Deluxe-Home insurance policy for the Property with Encompass Insurance Company of America ("Encompass").⁴ None of the leases entered into with roomers at the Property ever listed Len as the lessor, and Len never executed any of the leases. The roomers viewed Max as the landlord. Max and Len never told them that Len was the owner of the Property.

C. Conflict between Max and Len Regarding Len's Obligations under the SunTrust Loan

Max and Len contemplated that within a few years after Len's execution of the promissory note in favor of SunTrust on April 16, 2007, Max would have an improved financial status enabling him to take steps to eliminate Len's financial obligations in relation to the Property. The existence of the SunTrust debt in Len's name was an impediment to Len's ability to obtain financing to purchase real property for his own use. Over the years, Len contacted Max to urge Max to take steps to eliminate his responsibility for the debt owed SunTrust secured by the Property. Max told Len that he was working with SunTrust to

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replace Len as the obligor on the debt, but such efforts did not succeed. Len's wife, Karen, nagged Len continually regarding eliminating Len's obligations under the SunTrust debt. Len hoped his father would sell or refinance the Property and thereby eliminate Len's obligations regarding the Property. The issue was increasingly a sore point for Len.

D. Creation of the 1610 Riggs Property Trust and Attempted Transfer of Ownership

Because of Max's income tax liabilities, Max's credit was shot and he could not get refinancing for the Property to remove Len as the obligor. Max thought, based on discussions with Sylvia Jones, an acquaintance who was active in real estate transactions, that transferring the Property to a trust in his favor might make refinancing the Property easier than placing title to the Property in his own name: a business entity with no credit record would have a better chance of success in obtaining financing than would Max, an individual with a bad credit record. Max also may have been concerned that transferring title to the Property directly to himself would create a risk of the outstanding income tax liens against him being enforced against the Property. In 2010, Max, Len, and Karen spent the July 4th holiday in Colorado with Ron Salas, Max's eldest son. Ron had recently graduated from law school and had begun practicing law

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in Colorado. On July 6, 2010, Max, Len, Karen, and Ron met at Ron's office. Using Colorado legal forms, Ron prepared (or had already prepared) an Irrevocable Trust Agreement and a Quitclaim Deed.

At the July 6, 2010 meeting, Len executed the Irrevocable Trust Agreement as "Len Salas, Grantor," and Max executed it as "Max Salas, Trustee." Karen and Ron witnessed the execution of the document and Lori King, a notary public, certified that Max and Len executed the document before her. The Irrevocable Trust Agreement purports to create a trust named the 1610 Riggs Property Trust ("the Trust"), and recites that the Grantor (Len) "desiring to create a trust for the benefit of his father and for other good and valuable consideration, irrevocably assignees [sic] to the Trustee the [Property], in trust, for the purposes and on the conditions hereinafter stated." The Irrevocable Trust Agreement names Max as the sole trustee and the sole beneficiary of the Trust and makes clear Len's intent to grant Max complete authority regarding management of the Property and the sole right to enjoy income generated by the Property, with, for example, the right to sell or encumber the Property.

At the same meeting, Len and Max (as Trustee of the Trust) executed the Quitclaim Deed, which Lori King notarized as executed before her. The Quitclaim Deed recites:

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THIS QUITCLAIM DEED, Executed this 6^th day of July, 2010, by first Len Salas whose post office address is 1859 Newton St. Unit B, Washington, DC 20010 to second party, 1611 Riggs Property Trust whose post office address is 155 E Boardwalk, Suite 300, Fort Collins, CO 80525.

WITNESSETH, That the said first party, for good consideration and for the sum of $100.00 paid by the said second party, the receipt whereof is hereby acknowledged, does hereby remise, release and quitclaim unto the said second

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