Titus v. Shearer

• Decision Date: 30 September 2013
• Docket Number: Civil Nos. 12–1559,Adversary No. 10–2338.,Bankruptcy No. 10–23668.,12–1560.
• Citation: 498 B.R. 508
• Court: U.S. District Court — Western District of Pennsylvania
• Parties: Paul H. TITUS & Bonnie Titus, Appellants Cross–Appellees v. Robert SHEARER, Trustee for the Chapter 7 Bankruptcy Estate of Paul Titus, Appellees Cross–Appellants.

498 B.R. 508

Paul H. TITUS & Bonnie Titus, Appellants Cross–Appellees

v.Robert SHEARER, Trustee for the Chapter 7 Bankruptcy Estate of Paul Titus, Appellees Cross–Appellants.

Civil Nos. 12–1559, 12–1560.

Bankruptcy No. 10–23668.

Adversary No. 10–2338.

United States District Court, W.D. Pennsylvania.

Sept. 30, 2013.

Douglas A. Campbell, Campbell & Levine, Pittsburgh, PA, for Appellant.

John P. Vetica, Jr., Moon Township, PA, for Appellee.

MEMORANDUM OPINION

CONTI, Chief Judge.

Pending before the court are two appeals from the February 29, 2012, order issued by the United States Bankruptcy Court for the Western District of Pennsylvania in adversary proceeding No. 10–2338. Bohm v. Titus (In re Titus), 467 B.R. 592 (Bankr.W.D.Pa.2012). In the memorandum opinion accompanying the order, the bankruptcy court found Paul Titus and his wife, Bonnie Titus (collectively, the “Tituses”), liable for $281,006.18 of constructively fraudulent transfers stemming from wages directly deposited into the Tituses' checking account held as tenants by the entireties. Id. at 601. The Tituses appealed from this judgment (No. 12–1559), and Trustee Robert Shearer (the “Trustee”) cross appealed (No. 12–1560). For the reasons set forth below, the bankruptcy court's opinion is affirmed in part, vacated in part, and remanded for further proceedings.

I. Background

The parties do not contest the factual background set out in the bankruptcy court's opinion. The bankruptcy proceedings arose out of the dissolution in 1999 of the Pittsburgh law firm of Titus & McConomy,¹ in which Mr. Titus had been a partner. Titus & McConomy rented office space from Trizechahn Gateway LLC (“Trizec”) under a long-term lease agreement. In July 2000, Trizec filed a breach of contract suit against Titus & McConomy's former partners in state court for unpaid rent due under the lease. 467 B.R. at 601. In 2006, the state trial court found Mr. Titus and other Titus & McConomy partners jointly and severally liable in the amount of $2.7 million, which, due to interest and costs, subsequently increased to more than $3 million. Id.

After the dissolution of Titus & McConomy, Mr. Titus worked for the law firm of Schnader Harrison Segal & Lewis (“Schnader Harrison”). Beginning in July 2002, Mr. Titus had Schnader Harrison directly deposit his wages into a checking account he owned with his wife as tenants by the entireties. On April 23, 2007, Trizec filed a fraudulent transfer action against the Tituses in state court in an effort to collect on the judgment. Id. The fraudulent transfer action contained three claims under Pennsylvania's Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa. Cons.Stat. §§ 5101–5110. The first claim is for actual fraudulent transfer under 12 Pa. Cons.Stat. § 5104(a)(1), ² and the second and third claims are for constructive fraudulent transfer under 12 Pa. Cons.Stat. §§ 5104(a)(2)(ii)³ and 5105.⁴Titus, 467 B.R. at 602. In the constructive fraudulent claims it is alleged that the direct deposits by Schnader Harrison into Mr. and Mrs. Titus' checking account constituted constructive fraudulent transfers.

On May 20, 2010, TRZ Holdings, Trizec's parent and successor in interest, ⁵ filed an involuntary chapter 7 bankruptcy petition against Mr. Titus, who removed the fraudulent transfer action to the bankruptcy court. Id. The bankruptcy court entered an order substituting the Trustee for Trizec as plaintiff in the fraudulent transfer action. Id. The Trustee prosecuted the claims under the authority and derivative standing granted by 11 U.S.C. § 544(b)(1). Id. at 602.

The bankruptcy court tried the case on May 25, 2011, and entered its opinion and order on February 29, 2012. The bankruptcy court found in favor of the Tituses on the actual fraudulent transfer claim, id. at 618,⁶ and it entered judgment against the Tituses on the constructive fraudulent transfer claims in the amount of $281,006.18. Id. at 627. The Tituses filed a motion to reconsider, which was denied, and they appealed from the adverse judgment against them on September 14, 2012 (Notice of Appeal, No. 12–1559 ECF No. 1). The Trustee and TRZ Holdings cross appealed on September 20, 2012, raising several issues with respect to the bankruptcy court's findings about the constructive fraudulent transfer claims. (Joint Notice of Cross–Appeal, No. 12–1560 ECF No. 1). A hearing was held by this court on September 25, 2013. The appeals are now ripe to be decided.

II. Jurisdiction and Standard of Review

Federal district courts have appellate jurisdiction over the final judgments, orders, and decrees of the bankruptcy court. 28 U.S.C. § 158(a)(1). Rule 8013 of the Federal Rules of Bankruptcy Procedure provides:

On an appeal the district court or bankruptcy appellate panel may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings. Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the Bankruptcy Court to judge the credibility of the witnesses.Fed. R. Bankr.P. 8013. When a district court examines a bankruptcy court's decision, “legal determinations are reviewed de novo, factual findings are reviewed for clear error, and discretion is reversed for abuse.” Official Comm. of Unsecured Creditors of J. Allan Steel Co. v. Nucor–Yamato Steel Co. (In re J. Allan Steel Co.), 336 B.R. 226, 228–29 (W.D.Pa.2005) (citing In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.1989)). Mixed questions of fact and law must be broken down and reviewed under the applicable standard. First Jersey Nat'l Bank v. Brown (In re Brown), 951 F.2d 564, 567 (3d Cir.1991).

The bankruptcy court's decisions regarding discovery management and the scope of discovery are reviewed for abuse of discretion. Kimmelman v. Port Auth. (In re Kiwi Int'l Air Lines, Inc.), 344 F.3d 311, 323 (3d Cir.2003). “An abuse of discretion occurs ‘if a discovery ruling is seen to be a gross abuse of discretion resulting in fundamental unfairness in the trial of the case.’ ” In re W.R. Grace & Co., 316 Fed.Appx. 134, 137 (3d Cir.2009) (quoting Pub. Loan Co. v. Fed. Deposit Ins. Corp., 803 F.2d 82, 86 (3d Cir.1986)).

III. Discussion

There are multiple issues in the two appeals before the court. Because many of the issues overlap, the court will consider the two appeals together.

A. The Trustee's Appeal (No. 12–1560)

The Trustee asserts two issues. First, whether the bankruptcy court erred by not permitting the Trustee to recover any constructive fraudulent transfers made after the complaint was filed on April 23, 2007; and second, whether the bankruptcy court erred by requiring the Trustee to prove that the transferred funds were not spent on necessities as a part of his prima facie case.

1. Applicable Recovery Period

The Trustee argued before the bankruptcy court that he could seek to recover fraudulent transfers made during the period of April 23, 2003–June 30, 2010.⁷ The bankruptcy court determined that the look-back period for the fraudulent transfer action was the four years between April 23, 2003, and April 23, 2007, and ruled that the Trustee could not seek recovery of transfers made after the complaint was filed. Titus, 467 B.R. at 607. The bankruptcy court reached this conclusion because a transfer cannot be made under the PUFTA “until the debtor has acquired rights in the asset transferred,” 12 Pa. Cons.Stat. § 5106(4), and at the time the complaint was filed, Mr. Titus had not yet acquired any right to future wages. Titus, 467 B.R. at 607. The Trustee appeals this ruling. The proper length of the period during which fraudulent transfers can be recovered is a question of statutory interpretation and is reviewed de novo. In re Goody's Family Clothing, Inc., 610 F.3d 812, 816 (3d Cir.2010).

The Trustee argues that, while the PUFTA statute of repose, 12 Pa. Cons.Stat. § 5109, extinguishes any claims prior to April 23, 2003, it does not limit the ability to seek recovery for transfers made after the filing of the complaint. (Trustee's Br. 8, No. 12–1560 ECF No. 5.) The Trustee points out that there is no Pennsylvania case law limiting the period of recovery to four years. ( Id. at 9.) In Gross v. Laver, 96 Del. 419 (Pa.Ct.Com.Pl.2009), the state trial court allowed for recovery of “a continuing fraudulent transfer” during a five-year period, albeit with no direct analysis of section 5109. The PUFTA contemplates ongoing transfers as it specifically permits a creditor to seek and obtain “an injunction against further disposition by the debtor or a transferee, or both, of the asset transferred or of other property.” 12 Pa. Cons.Stat. § 5107(a)(3)(i). The second amended complaint, filed by Trizec, sought such an injunction. (Second Am. Compl. ¶¶ 24, 40, No. 12–1560 ECF No. 1–6.)

The bankruptcy court in In re Arbogast, a case arising out of the same lease and similar fraudulent transfer litigation, concluded that the look-back period was limited to the period April 23, 2003–April 23, 2007. Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287, 300 (Bankr.W.D.Pa.2012). On appeal, the trustee argued that complaint alleged a continuing violation and that the trustee is able to recover all fraudulent transactions until the trial, a seven-year period. Cardiello v. Arbogast, 479 B.R. 661, 665 (W.D.Pa.2012). The district court, however, found that counsel for the trustee had limited her claims to the 2003–2007 time period.⁸Id. The Court of Appeals for the Third Circuit affirmed on the same grounds. Cardiello v. Arbogast, ––– Fed.Appx. ––––, ––––, 12–3868, 2013 WL 4007772, at *4 (3d Cir.2013) (“[T]he Trustee's argument may have theoretical merit. But ... [w]e conclude here, as did the district court on appeal from the bankruptcy court's order, that the Trustee is bound by counsel's unambiguous statement before [the bankruptcy judge].”). The Trustee in this case did not...