Mashburn v. Arzate (In re Arzate)
| Decision Date | 15 June 2020 |
| Docket Number | Adv. No. 18-01125-JDL,Case No. 16-14260-JDL |
| Citation | 618 B.R. 535 |
| Parties | IN RE: Santiago Junior ARZATE, Debtor. John D. Mashburn, U.S. Bankruptcy Trustee of the Estate of Santiago Junior Arzate, Plaintiff, v. Santiago Junior Arzate; Santiago Arzate Y EL Amigo Inc., a suspended Oklahoma corporation; Santiago Arzate ; Fortunata C. Arzate; and First Fidelity Bank, N.A., an Oklahoma domestic bank, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Oklahoma |
L. David McBride, McBride & Associates PC, Edmond, OK, for Debtor.
This adversary proceeding is before the Court for decision after a trial conducted on March 3, 2020. Plaintiff, the Chapter 7 Trustee ("Trustee"), seeks to avoid a post-petition transfer of title to real property from the Debtor to his father's corporation. As of the commencement of the case the property was titled in the names of both the debtor and his father, as Tenants in Common. Debtor doesn't dispute the post-petition transfer; however, Debtor asserts that he held only bare legal title to the property as a matter of convenience, and that at the time of the filing of the bankruptcy the property was impressed with a resulting trust for the corporation or father's benefit. Trustee asserts that he holds the status of a bona fide purchaser who takes the property free of any alleged resulting trust.
After hearing the arguments of counsel, considering all the documentary and testimonial evidence and weighing the credibility of the witnesses, the Court makes the following Findings of Fact and Conclusions of Law pursuant to Rule 52 of Federal Rules of Civil Procedure, made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure.1
This Court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157 (a) and the Order of Reference of the United States District Court for the Western District of Oklahoma as Local Rule LCvR 81.4(a). Furthermore, pursuant to Rules 7008 and 7012(b), the Trustee, Debtor and all the other Defendants have consented to entry of final orders or judgment by the bankruptcy court. This is an adversary brought pursuant Rule 7001(1) () and is a "core proceeding" under 28 U.S.C. § 157(b)(2)(E) ().
The Defendants are identified as follows: (1) Santiago Junior Arzate is the Debtor ("Debtor"); (2) Santiago Arzate Y EL Amigo, Inc. is a suspended Oklahoma corporation ("SAYEA"); (3) Santiago Arzate is the father of the Debtor and was/is the President of SAYEA ("Father"); (4) Fortunata C. Arzate is the wife of Father ("F. Arzate") (Debtor, Father, SAYEA and F. Arzate are sometimes referred to collectively as the "Arzate Defendants") and (5) First Fidelity Bank, NA, is an Oklahoma domestic bank ("Fidelity").
1. On February 19, 1997, by Warranty Deed recorded with the Oklahoma County Clerk in Book 7026 at Page 709, SAYEA obtained title to the following described commercial real property in Oklahoma County, Oklahoma, to wit:
Lots Thirty-One (31) and Thirty-Two (32), in Block Thirteeen (13), in Capitol Hill Addition to Oklahoma City, Oklahoma County, Oklahoma, according to the recorded plat thereof. Street address: 217/219 SW. 25th, Oklahoma City, OK 73109.
(the "Property").
2. By Quitclaim Deed executed on March 12, 2015, and recorded with the Oklahoma County Clerk on March 13, 2015, at Book 12771, Page 252, SAYEA transferred ownership of the Property to SAYEA and the Debtor.
3. On March 24, 2015, by Quitclaim Deed recorded with the Oklahoma County Clerk at Book 12779, Page 735, SAYEA purported to transfer ownership of the Property to Father.3 Debtor was not a party to said March 24, 2015 Quitclaim Deed.
4. On March 24, 2015, a Mortgage on the Property in favor of Fidelity executed by Father and F. Arzate was recorded with the Oklahoma County Clerk at Book 12779, Page 746. Debtor was not a party to said March 24, 2015 mortgage.
5. On March 3, 2016, Debtor executed a Promissory Note in favor of Fidelity in the original amount of $61,474.20. The Promissory Note made reference that the same was given to secure the March 24, 2015 Mortgage in favor of Fidelity. The Promissory Note was not filed of record.
6. On October 21, 2016, Debtor filed a petition for relief under Chapter 13 of the United States Bankruptcy Code. On September 21, 2018, the case was converted from a proceeding under Chapter 13 to a proceeding under Chapter 7 of the Bankruptcy Code.
7. On January 23, 2017, Debtor and Father, as President of SAYEA, executed a Quitclaim Deed by which Debtor and SAYEA quit claimed their interest in the Property to SAYEA.4 On February 6, 2017, the Quitclaim Deed was recorded with the Oklahoma County Clerk in Book 13353 at Page 1069.
8. In Schedule A of his Schedules filed on October 21, 2016, Debtor listed his interest in the Property describing the nature of his ownership as "Tenancy in Common." Schedule H listed the Father as a co-debtor together with the Debtor on the obligation to Fidelity. .
9. The Property was purchased by Father in 1997 using his funds. Father has occupied the Property, both as a business and a residence, from 1997 to the present time. Debtor resided there for three or four months during his divorce. Father, not the Debtor, at all times exercised control or dominion over the Property.
10. Father has paid all insurance and utilities on the Property.
11. SAYEA conveyed the Property to itself and the Debtor as co-tenants in 2015 because Debtor and Father, who was unemployed at the time, believed that Father would not have qualified for a loan on his credit alone. Debtor executed a promissory note in favor of Fidelity because Father's financial circumstances, after an on-the-job injury, would not support the loan. The loan was made for the stated purpose of paying for a new roof on the Property. The loan would not have been made except for the fact that the Property needed a new roof. The mortgage executed a year before the 2016 loan on the Property in favor of Fidelity was only signed by Father and F. Arzate.
12. Although executing a promissory note in favor of Fidelity in 2016, Debtor has never made a payment on the note; Father making all such payments. The Fidelity representative in charge of the loan testified at trial that although Debtor had signed the 2016 promissory note all contact regarding the loan performance was with Father.
The Trustee's Adversary Complaint contained two Counts. Count I sought a determination pursuant to the Warranty Deed of record as of the date of the Debtor's filing for bankruptcy that the bankruptcy estate held a one-half interest in the Property free and clear of any right, title or interest of the Arzate Defendants, and that the Debtor's attempt to convey that one-half interest by a Quitclaim Deed after the bankruptcy was an unauthorized post-petition transfer of property voidable pursuant to 11 U.S.C. § 549.5 Count II maintains that title to the Property is clouded based upon the Warranty Deed's language naming Debtor and Defendant SAYEA as having co-ownership of the Property and the Arzate Defendants disputing the estate's ownership interest. Count II sought the Court to quiet title to the Property by determining that the Debtor's estate holds an undivided one-half interest in the Property free and clear of any interest claimed by the Arzate Defendants.
The Debtor and the Arzate Defendants argue that as of the date of filing of bankruptcy the Debtor held only bare legal title subject to a resulting trust for Defendants Father/SAYEA. Debtor and his Father assert that since its purchase by Father with solely his funds in 1997, the Property was at all times Father's place of business doing so under the name of SAYEA; the Debtor made no contribution to the purchase or maintenance of the Property, never insured the Property, never used the Property, and made no payments on the mortgage secured by the Property. Arzate Defendants contend that the only reason the Debtor's name appeared on the title to the Property was for the Debtor to use his credit to allow his father to obtain a loan from Fidelity to put a new roof on the Property in 2015. Debtor and the Arzate Defendants thus contend that as of the commencement of the bankruptcy case the Debtor held only bare legal title and not any equitable interest (the resulting trust in favor of his Father/SAYEA) such that any interest in the Property was not property of the bankruptcy estate under § 541(d).
The Trustee counters that even if the Court would find the existence of a resulting trust, that fact would have no bearing on the Trustee's entitlement to the relief sought. Specifically, the Trustee argues that pursuant to § 544(a)(3), the Trustee has the rights and powers of a bona fide purchaser of real property, and under Oklahoma law, a bona fide purchaser without notice would take priority over an unrecorded equitable interest such as the resulting trust alleged by the Debtor and the Arzate Defendants. Further, the Trustee argues that the Debtor is judicially estopped from asserting the existence of a resulting trust or that the property is not property of the bankruptcy estate because his Schedules indicate that the property was held by him in co-tenancy.
The Court will first determine whether the evidence demonstrates that the Property, although titled in the name of the Debtor, was subject to a resulting trust in favor of Father. If the Court finds that a resulting trust exists and that the Property is not property of the bankruptcy estate, it then must decide whether the Trustee qualifies as a bona fide purchaser whose rights trump those of the father/beneficiary and can bring the Property back into the bankruptcy estate.
Section 541 broadly defines property of the estate...
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