Wise v. Wise (In re Wise)
| Decision Date | 28 September 2018 |
| Docket Number | Adv. Pro. No. 17-4534, Adv. Pro. No. 17-4535,Case No. 17-45621 |
| Citation | 590 B.R. 401 |
| Parties | IN RE: Olivia WISE, Debtor. Norman Wise, Plaintiff, v. Olivia Wise, Defendant. Daniel M. McDermott, United States Trustee, Plaintiff, v. Olivia Wise, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
William C. Blasses, James E. DeLine, Kerr, Russell and Weber, PLC, Detroit, MI, for Plaintiff Norman Wise
Thomas R. Morris, Silverman & Morris, P.L.L.C., Farmington Hills, MI, for Defendant Olivia Wise
Sean M. Cowley, Jill M. Gies, Office of the United States Trustee, Detroit, MI, for Plaintiff Daniel M. McDermott, United States Trustee
TRIAL OPINION
The Defendant in these two adversary proceedings, Olivia Wise, filed a Chapter 7 bankruptcy case on April 14, 2017. In Adversary Proceeding Number 17-4535, the Plaintiff Daniel M. McDermott, United States Trustee, seeks a judgment denying Defendant's discharge, based on 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(4)(A) (Counts I and III of Plaintiff McDermott's Complaint).1 In Adversary Proceeding Number 17-4534, creditor Norman Wise, who is the Debtor's father, also seeks a judgment denying Defendant Debtor's discharge, based on the same § 727(a) grounds as the United States Trustee, and also based on 11 U.S.C. §§ 727(a)(3), 727(a)(5), and 727(a)(6) (). Norman Wise also seeks a determination that the Debtor's debt to him is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6) ().2
The Court held a joint bench trial on May 22, 2018, June 5, 2018, June 19, 2018, and July 10, 2018. These adversary proceedings are now ready for decision.
The Court has considered all of the evidence and arguments presented by the parties. This includes the testimony of all the witnesses — namely, Norman Wise; Bert Whitehead, IV; Olivia Wise; and Chelsea M. Rebeck. And this includes all of the exhibits, or parts of exhibits, that were admitted into evidence.3 This Opinion states the Court's findings of fact and conclusions of law.
For the reasons stated below, the Court finds for the Plaintiffs in each adversary proceeding, on Counts I and III of the United States Trustee's complaint and on Counts IV and VI of Norman Wise's complaint. The Court will enter a judgment denying the Defendant's discharge, based on 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(4)(A). The Court will dismiss all other counts of Norman Wise's complaint, as moot.
This Court has subject matter jurisdiction over each of these adversary proceedings under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a)(E.D. Mich.). Every claim in each adversary proceeding is a core proceeding under 28 U.S.C. §§ 157(b)(2)(I) and 157(b)(2)(J).
These adversary proceedings arise out of a pre-petition agreement (the "Agreement") entered into between the Plaintiff Norman Wise ("Norman") and the Defendant Debtor Olivia Wise ("Olivia"), Norman's daughter, regarding property located at 137 South Wilson Avenue, Royal Oak, Michigan 48067 (the "South Wilson Avenue Property"), and property located at 30515 Fairfax, Southfield, MI 48076 (the "Fairfax Street Property"). The Agreement was fully memorialized (according to Norman) or partially memorialized (according to Olivia) in an e-mail exchange between the parties on February 19, 2016.4 On that day, Olivia sent the following e-mail to Norman:
Later that day, Norman responded:
The transactions outlined in the February 19, 2016 e-mail exchange purportedly would benefit both parties. The idea in entering into the Agreement was to eliminate the tax liability Norman otherwise would incur from a gain on the sale of the South Wilson Avenue Property, while providing Olivia with financial support, health insurance, and a means to purchase the Fairfax Street Property.
Norman hoped to avoid tax liability on the sale of the South Wilson Avenue Property by transferring the property to Olivia before selling it. As a result, Norman would avoid any tax liability, and Olivia would be able to avoid any tax liability by taking advantage of a homeowner's exclusion on the gain of up to $250,000, contained in § 121 of the Internal Revenue Code ("IRC"), 26 U.S.C. § 121. The general rule under that statute, subject to certain qualifications and limited to $250,000 for a single individual,7 is that:
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.
When the parties entered into the Agreement, Olivia and her two children were already living at the Fairfax Street Property. Norman had purchased that property primarily so that Olivia and her family could live in the Birmingham School District, a school district that Olivia and Norman believed would best serve the educational needs of Olivia's children.8
Olivia previously had lived at the South Wilson Avenue Property with her domestic partner and Olivia's children. Norman had purchased the South Wilson Avenue Property on or about September 9, 2011, for Olivia and her family to live in when they moved from California to Michigan. Norman purchased that property primarily because it was in the Royal Oak School District; a school district that Olivia wanted her children to attend at that time.9 Olivia made no contribution to the purchase of the South Wilson Avenue Property, and lived in that property rent-free. Norman "paid all [of] the property taxes and homeowners insurance premiums for the [South Wilson Avenue Property]" and "also paid for approximately $50,000 in improvements to the property."10 Norman also paid health insurance premiums for Olivia and the children and some of Olivia's living expenses.11
On October 14, 2013, Olivia and her domestic partner separated and Olivia moved out of the South Wilson Avenue Property with her children. After Norman evicted Olivia's domestic partner from the South Wilson Avenue Property, Olivia and her children moved back into that property and lived there until June 2015, when they left permanently and moved into the Fairfax Street Property.12
In the spring of 2016, after making some renovations to the South Wilson Avenue Property, Norman listed it for sale.13 Norman had purchased the Property for approximately $250,000.14 After Norman received an offer for over $400,000 for the property, it was clear that he stood to make a substantial gain on the sale of it. Norman's certified public accountant, Gary Davison of Davison and Associates, who had a Master's Degree in taxation, suggested that Norman and Olivia engage in the transactions detailed in the Agreement, as a way of eliminating Norman's tax liability for the gain.15 In an e-mail Norman sent to Gary Davison and Olivia on February 18, 2016, the day before Olivia and Norman entered into the Agreement, Norman expressed his understanding of the transactions that he and Olivia would have to undertake in order for Norman to avoid a substantial tax liability:
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