Murphy v. Felice (In re Felice)

• Decision Date: 12 June 2013
• Docket Number: Adversary No. 08–1355.,Bankruptcy No. 07–17589–FJB.
• Citation: 494 B.R. 160
• Parties: In re Ernest J. FELICE and Michelle Felice, Debtors. Harold B. Murphy, Plaintiff v. Ernest J. Felice, Michelle Felice, Danielle J. Felice and Ernest O. Felice, individually and in his capacity as Trustee of the Ernest O. Felice Family Trust, Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

494 B.R. 160

In re Ernest J. FELICE and Michelle Felice, Debtors.Harold B. Murphy, Plaintiff

v.Ernest J. Felice, Michelle Felice, Danielle J. Felice and Ernest O. Felice, individually and in his capacity as Trustee of the Ernest O. Felice Family Trust, Defendants.

Bankruptcy No. 07–17589–FJB.

Adversary No. 08–1355.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

June 12, 2013.

Kathleen R. Cruickshank, Murphy & King P.C., Boston, MA, for Plaintiff.

Jordan L. Shapiro, Shapiro & Hender, Malden, MA, Kevin J. Kiely, Kiely & Ferrante, LLC, Gloucester, MA, for Defendants.

MEMORANDUM OF DECISION ON DEBTOR'S MOTION FOR DETERMINATION THAT HIS BENEFICIAL INTEREST IN A TRUST IS NOT PROPERTY OF THE ESTATE AND ON PLAINTIFF'S CROSS–MOTION FOR SUMMARY JUDGMENT

FRANK J. BAILEY, Bankruptcy Judge.

I. INTRODUCTION

By his complaint in this adversary proceeding, the chapter 7 trustee, Harold Murphy (“Murphy”), seeks among other things a determination that the spendthrift clause that ostensibly protects the beneficial interest of debtor Ernest J. Felice (hereinafter, “Ernest”) in a family trust is ineffective; hence that beneficial interest is property of his bankruptcy estate. According to Murphy, the family trust owns the Felice family home, the real property located at 20 Mandalay Drive, Peabody, Massachusetts (“Mandalay Drive”), subject only to a life estate in favor of Ernest's father; it is the value in the real estate that Murphy seeks by this adversary proceeding to recover for the estate. The adversary proceeding is before the court on two motions: Ernest's motion, essentially in the nature of one for summary judgment, for a determination that by virtue of the spendthrift clause, his beneficial interest in the trust is excluded from the estate; and Murphy's cross-motion for summary judgment on that issue and related counts. For the reasons set forth below, I conclude that there is no genuine issue of material fact and that, on the uncontroverted facts, the spendthrift clause is effective and the beneficial interest therefore excluded from the estate.

II. PROCEDURAL HISTORY

On November 28, 2007, Ernest and his wife, Michelle Felice (“Michelle”), filed a joint petition for relief under chapter 7 of the Bankruptcy Code.¹ Murphy was appointed chapter 7 trustee in the case.

On November 21, 2008, Murphy commenced the present adversary proceeding. The defendants are Ernest, Michelle, Danielle J. Felice (“Danielle”), who is Ernest's sister, and Ernest O. Felice (“Ernest Senior”), who is Ernest's father. Ernest Senior is a defendant both individually and in his capacity as trustee of the Ernest O. Felice Family Trust (“the Family Trust”). By his amended complaint in the adversary proceeding (the “Complaint”), Murphy seeks the following relief: (i) in Count I, a declaration, especially as against Danielle, that when Ernest and Michelle filed their bankruptcy petition, Ernest held all, and Danielle held none, of the beneficial interest in the Family Trust; (ii) also in Count I, a declaration that, notwithstanding the spendthrift clause in the Family Trust, the beneficial interest that Ernest held in that trust at the time of the bankruptcy filing is property of his bankruptcy estate under 11 U.S.C. § 541; (iii) in Count II, reformation of a deed executed by Ernest Senior by which he intended to transfer Mandalay Drive into a trust, referred to herein as the 2001 Realty Trust, which in turn transferred it to the Family Trust; (iv) in Counts III and VII, avoidance and recovery for the benefit of the estate of Ernest's post-petition transfer of one-half of his beneficial interest in the Family Trust to Danielle; (v) in Count VIII, a declaration that Ernest and Michelle have no right to claim Ernest's beneficial interest in the Family Trust as exempt; and (vi) in Count IX, denial of discharge against both Ernest and Michelle under 11 U.S.C. §§ 727(a)(2)(B), 727(a)(3), and 727(a)(4)(A).² The defendants oppose the Complaint at every turn.

On May 3, 2010, Ernest filed the first of the two motions under consideration: a motion in the adversary proceeding for a determination that, by virtue of the spendthrift clause, his beneficial Interest in the Family Trust is not property of the bankruptcyestate. Though Ernest neither calls his motion one for summary judgment nor expressly invokes Fed.R.Civ.P. 56, the motion is in substance one for partial summary judgment. He identifies certain material facts, contends that they are not in dispute, and argues that on the basis of those facts, he is entitled to the requested declaration as a matter of law. Murphy agrees that the identified facts are not in dispute and has responded to the motion as one for summary judgment. In addition, Murphy himself has filed a cross-motion for partial summary judgment, seeking judgment as to all counts except only Counts VIII (for declaration that beneficial interest cannot be claimed as exempt) and IX (objection to discharge); the defendants have filed a joint opposition to the cross motion. As the parties agree, there are no genuine issues of material fact.

As a preliminary matter, I earlier determined the extent to which the various counts are “core proceedings” within the meaning of 28 U.S.C. § 157(b) and, in light of Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), within the authority of the bankruptcy court to enter final judgment. See Murphy v. Felice (In re Felice), 480 B.R. 401 (Bankr.D.Mass.2012). I determined that the count that is the subject of Ernest's present motion—Murphy's request in Count I for a determination that notwithstanding the spendthrift clause, Ernest's beneficial interest in the Family Trust is property of his estate—is both a core proceeding and within my authority to enter final judgment. Because I resolve that count in favor of Ernest and that resolution renders moot each of the other counts put in issue by Murphy's motion for summary judgment, I may enter final judgment as to each count that the present motions place in controversy.

III. FACTSa. The 1981 Trust

In 1981, just prior to formation of the Felice Realty Trust (the “1981 Trust”), Ernest's parents, Ernest Senior and Phyllis Felice (“Phyllis”), owned Mandalay Drive as tenants by the entirety. On September 21, 1981, Ernest Senior, by execution of a declaration of trust, settled the 1981 Trust, and Ernest Senior and Phyllis deeded Mandalay Drive to Ernest Senior as trustee of the 1981 Trust. Phyllis was the initial beneficiary and Ernest Senior the trustee of the 1981 Trust. As trustee, Ernest Senior had broad powers. He could exercise all rights of ownership in Mandalay Drive, including to sell and borrow against the property. The declaration of trust permitted Ernest Senior to amend the terms of the 1981 Trust at any time. The declaration of trust also stated that the 1981 Trust “shall terminate in twenty (20) years from the date hereof or at the death of the beneficiary.” Once either of these termination events occurred, Mandalay Drive would revert to the “Donor,” and “it shall be the duty of the Trustee, then acting to convey the property to said Donor.” On January 10, 2001, Ernest Senior executed an amendment to the 1981 Trust (the “January Amendment”) naming himself as the new beneficiary with a 100% beneficial interest. At some point thereafter, Phyllis died; the date of death is not in evidence.

b. The 2001 Deed

On September 27, 2001, Ernest Senior and his children, Ernest and Danielle, executed a series of documents relating to the disposition of Mandalay Drive. In her deposition, Maureen E. Lane, the attorney who prepared these documents for Ernest Senior, described Ernest Senior's intentions: ³

Ernest Senior wanted to have extensive control over the terms of how the property would be held for a very extensive time period. So [the trust] was a mechanism which would give him the ability to control the property beyond his death. And lastly, it was to avoid probate.

...

Q. And your client testified previously that he wanted to leave 20 Mandalay Road (sic) to his children after he died and just asked you to prepare the necessary documents to make that happen. Is that correct?

A. It's correct, except for the fact that it went further than that. He wanted to ensure that the property was going to be left any which way possible for those children to live in.

There is nothing in the record to indicate the precise order in which Ernest Senior, Ernest, and Danielle executed the documents. They are discussed below in a sequence that best clarifies the purported mechanics of the disposition as a whole.

First, Ernest Senior executed a quitclaim deed which reads as follows:

I, Ernest O. Felice, as Trustee of the Ernest O. Felice Family Trust, under declaration of Trust recorded with Essex South Registry of Deeds, recorded in book 6872, page 637, of 20 Mandalay Drive, Peabody, Essex South County, Massachusetts

for consideration of: One Hundred Dollars ($100.00)

grant to: A Life Estate unto myself, Ernest O. Felice, and a remainder interest to Danielle J. Felice, and Ernest J. Felice, as Co–Trustees of the Felice Realty Trust U/D/T dated September 27, 2001 and recorded in Essex County Land Registration Office herewith....

At the February 26 hearing, both the Trustee and the Defendants stipulated to a scrivener's error in the granting language.⁴ Instead of reading “Ernest O. Felice, as Trustee of the Ernest O. Felice Family Trust,” the deed should have identified the grantor as “Ernest O. Felice, as Trustee of the Felice Realty Trust,” that is, the 1981 Trust. The deed was recorded in the Essex South Registry of Deeds on January 11, 2002.

c. The 2001 Realty Trust

The 2001 Deed purported to transfer Mandalay Drive into the “Felice Realty Trust U/D/T dated September 27, 2001.” This is understood by all concerned to refer to the Ernest O. Felice Realty Trust, settled on September 27, 2001 (the “2001 Realty Trust”) by a declaration of...