Pergament v. Yerushalmi (In re Yerushalmi)

• Decision Date: 19 November 2012
• Docket Number: Bankruptcy No. 807–72816–reg.,Adversary No. 809–8003–reg.
• Citation: 487 B.R. 98
• Parties: In re Joseph YERUSHALMI, Debtor. Marc A. Pergament, Chapter 7 Trustee of Trustee of the Estate of Joseph Yerushalmi, Plaintiff, v. Malka Yerushalmi, Joseph Yerushalmi and Malka Yerushalmi as Trustees for September 7, 1995 Qualified Personal Residence Trust, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

487 B.R. 98

In re Joseph YERUSHALMI, Debtor.

Marc A. Pergament, Chapter 7 Trustee of Trustee of the Estate of Joseph Yerushalmi, Plaintiff,

v.Malka Yerushalmi, Joseph Yerushalmi and Malka Yerushalmi as Trustees for September 7, 1995 Qualified Personal Residence Trust, Defendants.

Bankruptcy No. 807–72816–reg.

Adversary No. 809–8003–reg.

United States Bankruptcy Court,

E.D. New York.

Nov. 19, 2012.

Marc A. Pergament, Weinberg Gross & Pergament LLP, Garden City, NY, for Plaintiff.

Rachel P. Corcoran, Salvatore LaMonica, Shannon Anne Scott, LaMonica Herbst & Maniscalco LLP, Wantagh, NY, Gary M. Kushner, Goetz Fitzpatrick LLP, New York, NY, Thomas J. McGowan, Meltzer Lippe Goldstein & Breitstone, Mineola, NY, for Defendants.

MEMORANDUM DECISION

(Re: Defendants' Motions for Summary Judgment)

ROBERT E. GROSSMAN, Bankruptcy Judge.

Before the Court are the Defendants' motions for summary judgment pursuant to Fed.R.Civ.P. 56(c), and Fed. R. Bankr.P. 7056. The chapter 7 trustee has filed this adversary proceeding seeking a declaratory judgment under sections 541 and 542 of the Bankruptcy Code. He claims that a qualified personal residence trust established by the Debtor to hold real property is by law the alter ego of the Debtor and consequently the property held by the trust is property of the estate which must be turned over for the benefit of all creditors of the estate. The Defendants argue, in part, that judgment should be entered in their favor in that the chapter 7 trustee lacks standing to bring the alter ego claim because as a matter of law that claim belongs to creditors not to the Debtor and its estate.

The material facts are not in dispute and this case is ripe for summary judgment. As a threshold matter the Court finds that as a matter of law a chapter 7 trustee is the only person with standing to pursue alter ego claims on behalf of a bankruptcy estate pursuant to section 541 of the Bankruptcy Code, as long as the claim could have been asserted by the debtor pre-petition and the claim involves a generalized injury which is not particular to one creditor. In this case, the Court finds that the Debtor could have asserted the alter ego claim pre-petition against the trust, and the claim, if asserted by a creditor, did not involve an injury which was specific to any particular creditor. The Court also finds that because this claim is asserted under section 541 of the Code and as such is an action to recover property of the estate, it is not subject to the statute of limitations applicable to fraud actions. However, on the merits, the Court finds that the Trustee has failed to satisfy his burden to prove that the Debtor exercised the requisite dominion and control over the trust necessary to sustain an alter ego finding; nor has he proven the fraud or wrongdoing necessary to support the piercing claim.

For this reason and for the reasons more fully set forth in this Memorandum Decision, the Defendants' motions are granted, and judgment will enter in favor of the Defendants on the sole remaining cause of action of the amended complaint.

Facts

The Great Neck Residence

The Debtor, Joseph Yerushalmi, and the Defendant, Malka Yerushalmi, were married in 1971. In 1983, they purchased a single family home located on West Shore Road in Great Neck, New York (“Great Neck Residence”), which served as their marital residence.¹ The Great Neck Residence was purchased for $410,000, of which the Yerushalmis paid $210,000 in cash and the balance was financed by a private mortgage of $200,000.² The $210,000 cash payment came from the proceeds of the sale of the Yerushalmis' former marital residence which was purchased in 1977.

In 1989, the Yerushalmis borrowed over $1 million from Citibank secured by a first and second mortgage in order to renovate the Great Neck Residence to fit the needs of their family, including their youngest son who had special needs. In January of 2003, the Yerushalmis caused a consolidation of all mortgages encumbering the Great Neck Residence-which then totaled $515,600–at a more favorable interest rate. The parties do not dispute that the Yerushalmis did not take any equity out of the property at the re-finance. As of the date of the bankruptcy filing there was approximately $4.8 million of equity in the Great Neck Residence.

The Qualified Personal Residence Trust

In or around 1989, the Debtor began implementing estate planning strategies. On July 26, 1989, the Debtor executed a trust document called the July 31, 1989 Yerushalmi Family Trust. The beneficiaries of the Yerushalmi Family Trust are the Yerushalmis' children, and the trustee, a family friend. In addition, in 1995, an irrevocable qualified personal residence trust (“QPRT”) was created in order to facilitate the ultimate transfer of the Great Neck Residence into the Yerushalmi Family Trust with a reduced gift and estate tax consequence to the Yerushalmis' children.³ Malka and the Debtor are co-trustees of the QPRT, but neither is a beneficiary.

It is this Court's understanding that an individual—a grantor—might transfer real property to a QPRT in order to reduce the size of their taxable estate. (Decl. of Gary M. Kushner (“Kushner Decl.”), Exh. 43 [Dkt. # 83–46] ). If structured properly, the QPRT will freeze the value of the grantor's residence at the time he or she creates the trust and result in estate tax savings if the property increases in value. During the term of the QPRT, the grantor retains the exclusive rent-free use, possession and enjoyment of the residence and pays all ordinary and recurring expenses such as real estate taxes, insurance and minor repairs. At the expiration of the trust term the grantor must relinquish possession of the residence or pay rent to the trust.

In order to realize the tax benefits of the QPRT, the grantor must outlive the term of the trust. If the grantor dies before the trust term expires, the value of the property at the date of death will be included in the grantor's estate and be subject to estate taxes. If the grantor outlives the term of the trust, the property passes to the beneficiary, in this case the Yerushalmi Family Trust, at the end of the term. At that point, the grantor may lease the residence back from the beneficiary at fair market rent, thereby allowing the grantor to continue living in the house.

In this case the term of the QPRT is 23 years. It does not expire until 2018.

According to the Debtor, in furtherance of the plan to transfer the Great Neck Residence to the QPRT, the Debtor transferred his 50% ownership interest in the Great Neck Residence to Malka by deed dated March 28, 1996.⁴

On May 9, 1996, Malka, as grantor, transferred her 100% interest in the Great Neck Residence to the QPRT. The QPRT holds no assets other than the Great Neck Residence, and it continues to hold legal title to the property.

The Accounting Action

The Debtor is an attorney. Beginning in June 1987, he practiced law with Mr. Amnon Shiboleth at the law firm Yerushalmi, Shiboleth, Yisraeli and Roberts, LLP (“YSYR”). The partnership dissolved sometime in 1995, and in April 1997 the Debtor started practicing law under the name Yerushalmi & Associates, LLP (“Y & A”). Shiboleth practiced law under the name Shiboleth, Yisraeli, Roberts and Zisman, LLP.

In January 1998, Shiboleth commenced a partnership accounting action against Y & A and the Debtor individually (“Accounting Action”). In March 2007, a judgment of $3.45 million was entered in favor of YSYR and Shiboleth, against Y & A and the Debtor. Both Y & A and the Debtor appealed the judgment, and the appeal was pending as of the bankruptcy petition date.⁵ On January 6, 2009, subsequent to the bankruptcy filing, the Appellate Division vacated the damages awarded in favor of Shiboleth and YSYR and remanded back to a special referee to recalculate the allocation of certain contingency fees among the parties. On November 17, 2011, the state trial court issued an opinion pursuant to which the allocation of fees among the parties resulted in a net judgment in favor of the Debtor and Y & A in the approximate amount of $600,000. (Debtor's Reply, Exh. A [Dkt. # 102–2] ).

The Divorce Action

In April 2002, Malka commenced a divorce action. Despite their estrangement, the Debtor and Malka continued to reside at the Great Neck Residence. In the course of the divorce proceedings, in November 2003, the state court directed the Debtor to pay all of the carrying charges on the Great Neck Residence, “including, but not limited to, mortgage, taxes, utilities, insurance, landscaping and all maintenance expenses....” (Kushner Decl., Exh. 39 [Dkt. # 83–42] ).

The Bankruptcy Filing and Procedural History

On July 25, 2007, the Debtor filed separate chapter 11 bankruptcy petitions for himself and his law firm, Y & A [Case No. 07–72817–dte]. Both his individual case and the Y & A case were converted to chapter 7 on October 2, 2007. Marc A. Pergament, the Plaintiff herein, was appointed chapter 7 trustee (“Trustee”) of the Debtor's individual case. According to the Trustee, on the date of the petition the Great Neck Residence was worth approximately $5.2 million and the outstanding balance on the Citibank mortgage was $407,000.

On January 5, 2009, the Trustee filed the instant adversary proceeding against Malka Yerushalmi, individually, and Joseph Yerushalmi and Malka Yerushalmi in their capacities as trustees of the QPRT. In the complaint as originally filed, the Trustee sought to avoid the Debtor's transfer of his interest in the Great Neck Residence to Malka in March of 1996, and Malka's subsequent transfer of her 100% interest in the Great Neck Residence to the QPRT in May of 1996, as fraudulent conveyances (the “Property Transfers”). He also sought to recover from Malka and the Debtor as Trustees of the QPRT, the real property expenses that were paid by the Debtor from 1996 until the bankruptcy petition date (the “Expense Transfers”).

On March 6, 2009, the Debtor...