Moorhous, In re, 95-2552

• Decision Date: 05 March 1997
• Docket Number: No. 95-2552,95-2552
• Citation: 108 F.3d 51
• Parties: Bankr. L. Rep. P 77,292 In re Dudley M. MOORHOUS, Jr., Debtor. Earl DORFMAN; Sharon Dorfman, Plaintiffs-Appellants, v. Dudley M. MOORHOUS, Jr.; Dorothy Moorhous, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 51

108 F.3d 51

Bankr. L. Rep. P 77,292

In re Dudley M. MOORHOUS, Jr., Debtor Earl DORFMAN; Sharon Dorfman, Plaintiffs-Appellants, v. Dudley M. MOORHOUS, Jr.; Dorothy Moorhous, Defendants-Appellees.

No. 95-2552.

United States Court of Appeals Fourth Circuit.

Argued Feb. 2, 1996.

Decided March 5, 1997.

ARGUED: Joel S. Luber, Caplan & Luber, Paoli, PA, for Defendants-Appellants. Alan Miles Winterhalter, Alan M. Winterhalter & Associates, P.C., McLean, VA, for Plaintiffs-Appellees.

Before WIDENER, WILKINS, and MICHAEL, Circuit Judges.

Affirmed by published opinion. Judge WIDENER wrote the opinion, in which Judge WILKINS and Judge MICHAEL concur.

OPINION

WIDENER, Circuit Judge:

Plaintiffs Earl and Sharon Dorfman, husband and wife, appeal from an order of the district court affirming the memorandum and order of the bankruptcy court published as In re Moorhous, 180 B.R. 138 (Bankr.E.D.Va.1995). Defendants are Dudley M. Moorhous, the debtor and a retired Air Force colonel, and Dorothy Moorhous, his wife. ¹ The bankruptcy court held that a series of agreements purporting to assign a number of installments of Col. Moorhous's military retirement pay in exchange for lump sum advances from the Dorfmans were "not effective to vest ownership of such pay in the Dorfmans." 180 B.R. at 150. As a result, the court also held that no basis had been shown to impose a constructive trust on Col. Moorhous' retired pay, denied injunctive relief, and held that Col. Moorhous did not become liable for conversion when he ceased to remit his retired pay to the Dorfmans. 180 B.R. at 151-52. In an earlier order granting summary judgment in favor of the Moorhouses on plaintiffs' claim for breach of contract, the bankruptcy court held that any contractual liability under the agreement had been discharged in bankruptcy, 180 B.R. at 152.

We affirm.

The parties accept, as do we, the statement of facts set forth in the bankruptcy court's published opinion.

The facts show that Col. Moorhous sought money for investment purposes and consequently placed an ad in the November 17, 1989 edition of a national newspaper that read as follows:

WILL PAY 17% ANNUALLY!

For $190,000 for 15 years, paying $3,250/mo from government retirement.

The Dorfmans, who reside in Pennsylvania, responded to the ad, and after a period of negotiations with Col. Moorhous in Virginia, obtained the services of an attorney. Col. Moorhous did not engage counsel.

The transaction, as Col. Moorhous proposed it, involved the "exchange of his right to the proceeds of his vested pension" for a specified period of months in return for a lump sum cash payment. 180 B.R. at 145 n. 4. The attorney doubted whether an assignment of the right to military retired pay could be enforced and made written inquiry to the Headquarters Air Force Accounting and Finance Center (AFAFC) in March 1990. His letter described the proposed transaction as the "advance [of] a certain sum of money to [Col. Moorhous] in exchange for his irrevocable assignment of a certain fixed number of future pension payments," and asked the following questions about the nature of the right to retired pay and the legality of the proposed arrangement:

3. Whether there is any law, regulation, ruling, or other authority which would prohibit Mr. Moorhous from entering into the type of transaction described above. (A proposed form of agreement incorporating the deal is enclosed).

4. Whether you will honor a direction by Mr. Moorhous to make direct deposits of his pension into a bank account designated by our client (not in the name of Mr. Moorhous). Please forward the appropriate forms to accomplish same (Form # 1199A?).

5. Will you accept an irrevocable designation of direct deposit for a stated period of time, or one revocable only upon signed co-authorization by our client.

....

7. Under what circumstances, if any, could Mr. Moorhous' retirement pay be terminated, suspended, reduced in amount, or otherwise impacted by his acts alone, or by actions outside his control. For example--divorce, judgment creditors, bankruptcy, Act of Congress.

Letter from Luber to AFAFC of March 8, 1990. Before a written reply was received, the attorney learned by telephone from personnel at AFAFC that "the Air Force would only disburse retired pay to the retired member or by direct deposit to an account in the retired member's name." 180 B.R. at 142.

Despite the verbal refusal of the Air Force to recognize a right of payment in anyone but Col. Moorhous, Luber drafted an agreement circumventing the bank account restrictions and purporting to transfer the right without waiting for a written reply to his inquiry. The parties executed the agreement on April 18, 1990. The Air Force replied in writing on April 24, 1990, confirming that the right to retired pay could not be transferred:

c. Question 3. Retired pay is not a vested pension. It is a statutory right governed by law enacted by congressional legislation. Retired pay can be disbursed only to the Air Force retiree. The disbursement of funds after receipt by the retiree is at his discretion.

d. Question 4 and 5. Direct deposits to a financial institution can be made in Colonel Moorhous' name only and must be at his request. He and the financial institution must complete a Standard Form 1199A and send it to AFAFC.

....

f. Question 7. Retired pay terminates upon the retiree's death. However, it may be waived in full or partially in lieu of Department of Veterans Affairs (VA) compensation or civil service retirement. It may be reduced partially or in full by dual compensation or pay cap offsets if he should be employed by the Federal Government. An act of Congress may also stop or change retired pay, and the retiree's pay may be garnished for debts owed to the U.S. government or by court order for various reasons.

Letter from AFAFC to Luber of 4/24/90.

Under the agreement drafted by the attorney and executed April 18, 1990, the Dorfmans paid $125,000 in exchange for an irrevocable assignment of 112 1/2 consecutive monthly payments of Col. Moorhous's retired pay. We are told by the Dorfmans at oral argument that the first money was paid to Col. Moorhous on April 18-20, 1990. The agreement circumvented the Air Force's direct deposit restrictions by requiring Col. Moorhous to establish an account at a Pennsylvania bank, issue orders purporting to be irrevocable to the Air Force to deposit his retired pay into that account, and give irrevocable authorization to the bank to transfer the payment into an account in the Dorfmans' name each month. The Dorfmans required as security a first mortgage on two lots in St. John's County, Florida; a third deed of trust on the Moorhous's home in Springfield, Virginia; a collateral assignment of a $250,000 life insurance policy on Col. Moorhous's life; and a pledge of the corporate stock Col. Moorhous purchased with the proceeds of the Dorfmans' advance. The decision of the bankruptcy court did not disturb this security, and it is not an issue on appeal.

Subsequent loans by the Dorfmans and a bill from the attorney resulted in amendments to the agreement that increased the number of installments of retired pay assigned by Moorhous.

The arrangement functioned for some months, from May 1990 through October 1993, during which time the bankruptcy court estimated that the Dorfmans received in excess of $137,981. In October 1993, Col. Moorhous, experiencing financial difficulties, submitted a new direct deposit form to the Air Force, directing that his retired pay be deposited in a Virginia Bank. The Dorfmans filed suit in the United States District Court for the Eastern District of Pennsylvania the following month. In January, 1994, Col. Moorhous filed a chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Virginia, which stayed the Dorfmans' suit in Pennsylvania. Col. Moorhous received a discharge on April 22, 1994. The Dorfmans obtained a confessed judgment against Mrs. Moorhous who then filed her own chapter 7 petition in October, 1994 and received a discharge on January 31, 1995.

The Dorfmans filed this action as an adversary proceeding on April 12, 1994, seeking a declaratory judgment that Col. Moorhous breached the agreement; an injunction to require him to repay the installments of retired pay missed since November, 1993 and reinstate the direct deposit to the Pennsylvania bank; damages for breach of contract and conversion; and the imposition of a constructive trust upon the retired pay received by the Moorhouses after October 31, 1993. The bankruptcy court granted summary judgment for the Moorhouses on the breach of contract claim on the grounds that any liability for breach had been discharged in bankruptcy. Following a two day trial, the court entered judgment for the Moorhouses on all remaining counts.

The principal question presented in this appeal is whether the agreement constituted a valid assignment of an interest in property that could be enforced, post-petition, against the Moorhouses. In its opinion, the bankruptcy court accepted the parties' characterization of the transaction at the time the agreement was entered into as an annuity rather than a loan, which bankruptcy would clearly discharge, on the grounds that Col. Moorhous knew that the Dorfmans, following the attorney's advice would not have entered into a transaction structured as a loan. The court reasoned, however, that if retired pay was compensation for the retiree's current--though reduced--military service, the assignment would not survive the filing of the bankruptcy petition. The court was reluctant to base its holding on this rationale in light of the principle, announced by the Supreme Court in Barker v. Kansas, 503 U.S. 594, 112 S.Ct. 1619, 118 L.Ed.2d 243 (1992), that for state tax purposes under a federal statute that waives intergovernmental tax immunity, military retirement benefits are considered deferred pay...