Opinion
Case No. 02-22859, Adversary Proceeding No. 03-2018.
March 30, 2007
Richard M. Levy, Esq., Kroll, McNamara Evans Delchanty LLP, West Hartford, CT, Counsel for Plaintiff CadleRock Joint Venture II, L.P.
Edward P. Jurkiewicz, Esq., Lawrence Jurkiewicz LLC, Avon, CT, Counsel for Plaintiff John J. O'Neil, Jr., Chapter 7 Trustee.
John A. Barbieri, Esq., New Britain, CT, Counsel for Defendants.
MEMORANDUM OF DECISION
I.
Marc G. Beaudoin ("the debtor") filed a Chapter 7 petition on October 2, 2002, and John J. O'Neil, Jr. ("the trustee") was appointed trustee of the debtor's bankruptcy estate. CadleRock Joint Venture II, L.P. ("CadleRock") and the trustee, as joint plaintiffs (together "the plaintiffs"), on February 6, 2003, commenced the present adversary proceeding by filing a five-count complaint against the debtor and his wife, Loretta Beaudoin ("Loretta") (together "the defendants"). The complaint seeks, in the first count, to impose a constructive trust on property owned by L retta; a judgment, in the second count, against Loretta based on unjust enrichment; and, in the remaining three counts, denial of the debtor's discharge pursuant to Bankruptcy Code sections 727(a)(2)(A), 727(a)(2)(B), and 727(a)(4)(A).
The parties, at the trial held on November 29 and December 7, 2006, presented both testimonial and documentary evidence, and, subsequent thereto, submitted memoranda of law in support of their respective positions.
The court, on November 29, 2006, granted the trustee's motion to consolidated for purposes of trial, the instant adversary proceeding with Adversary Proceeding No. 04-2080, filed by the trustee on October 1, 2004, seeking to recover, as allegedly fraudulent transfers, certain prepetition payments made by the debtor. The court will issue separate rulings on the merits of the complaints.
II. BACKGROUND
The following factual background concerns a number of interrelated transactions over a period of seventeen years in regard to three parcels or real property.
A.
The debtor's parents, on August 25, 1986, transferred to the debt r, by warranty deed, title to their family residence, located at 278 Corbin Avenue, New Britain, Connecticut ("the Corbin property"). The debtor, on that date, obtained a $50,000 loan from American Savings Bank, secured by a first mortgage on the Corbin property. The entire proceeds of such loan were used for the benefit of the debtor's parents who were to continue to reside on the Corbin property.
The debtor, a carpenter by occupation, on December 21, 1989, purchase from Paul Bongiovanni ("Bongiovanni") a three-family dwelling located at 74 Linsley Avenue, Meriden, Connecticut ("the Linsley property") as an investment with the intention of renovating and renting the units. At that time, the Linsley property was subject to a first mortgage in the original amount of $100,000, granted by Bongiovanni to Meriden Trust and Safe Deposit Company ("Meriden Trust") on August 14, 1987. As of May 1, 1989, Meriden Trust had assigned the Bongiovanni mortgage to Central Bank; and Centerbank Mortgage Company ("Centerbank"), on October 18, 1991, acquired it from the Federal Deposit Insurance Corporation, as receiver of Central Bank. (Pl. Exh. 5.) The debtor assumed, as part of the purchase price, the Centerbank mortgage. The debtor, on January 12, 1990, obtained from American Savings Bank, a $10,000 equity line of credit, secured by a second mortgage on the Corbin property, to finance some of the renovations to the Linsley property.
B.
The debtor, on July 20, 1990, married Loretta. At that time, Loretta was the owner of a residence located at 52 Ridgewood Street, New Britain, Connecticut (`the Ridgewood property"), which was subject to a first mortgage, in the original amount of $50,000. Loretta, on October 18, 1990, quitclaimed a one-half interest in the Ridgewood property to the debtor to enable the defendants to obtain from Travelers Mortgage Services, Inc. a loan for $40,000, secured by a second mortgage in the Ridgewood property. The debtor used the $40,000 proceeds, together with $12,000 from the sale of his Corvette, for renovations to the Linsley property. Subsequent to an August 14, 1992 due date for a balloon payment under the Linsley mortgage, the debtor and Centerbank, on March 23, 1993, signed a modification agreement extending the note to provide for a balloon payment on August 14, 1997.
C.
The defendants, on July 31, 1995, sold the Ridgewood property to Jeffrey and Inez Jennings. The defendants, with their two minor children, had been residing at the Ridgewood property, but had been seeking to sell it and move to the larger Corbin property. With the exception of some water and sewer liens on the properties for which he was paying monthly installments, the debtor, as of July 31, 1995, was curren on all indebtedness.
On the Ridgewood property sale date, the outstanding balances of the two mortgages on the property exceeded the property's sale price. To consummate the sale to the Jennings, the defendants were required to bring to the closing sufficient cash to pay the shortfall and various closing costs. The debtor, on that date, transferred title to the Corbin property to Loretta, who was in a better position than the debtor to obtain a mortgage loan on the Corbin property sufficient to provide the funds needed to complete the Ridgewood sale. Loretta obtained a mortgage loan on the Corbin property for $85,000 from Centerbank. At Centerbank's request, the debtor's need to Loretta recited that he transferred the Corbin property to Loretta for consideration of $108,000. An appraisal valuing the Corbin property at $85,000 as of July 31, 1995 was received into evidence. (Pl. Exh. 59.) The proceeds of the mortgage loan obtained by Loretta were distributed as follows:Corbin Property Ridgewood Property
Payment of balance of debtor's first mortgage to American Savings Bank (Pl. Exh. 11) $29,747.05 Payment of balance of debtor's second mortgage to American Savings Bank (Pl. Exh. 11) 9,824.80 Miscellaneous costs (water, sewer, taxes, closing costs, etc.) (Pl. Exh. 11) 9,452.89 Payment from debtor to his parents for vacating the Corbin property and moving to senior housing (Tr. at 146) 20,000.00 Shortfall due from defendants at Ridgewood closing (Pl. Exh. 20) 15,230.58 ___________ Total $84,255.32D.
The debtor was current on the Linsley mortgage payments through January, 1997. He had completed the renovations to the property and had been renting the mits, but, in late 1996 or early 1997, all three tenants vacated the units within a short time. As a result of losing the rental income, he was unable to make the payments on the Linsley mortgage and, in February 1997, defaulted. Centerbank, on March 31, 1997, assigned the Linsley mortgage to CadleRock. CadleRock, on November 19, 1997, commenced an action in state court to foreclose on the Linsley property, and, on December 7, 1997, obtained a judgment of strict foreclosure. Title to the Linsley property vested in CadleRock on May 7, 1999. The debtor did not appear at either the foreclosure or the deficiency hearings. The state court, on August 16, 1999, finding the outstanding balance on the Linsley mortgage to be $119,383.06 and the value of the property to be $50,000, awarded CadleRock a deficiency judgment of $69,383.06 against Bongiovanni and the debtor.E.
Since July 31, 1995, the defendants and their children have resided at the Corbin property. The defendants are both employed and both contribute roughly equal amounts towards the family's living expenses. Each maintains a separate checking account and pays certain expenses therefrom. The debtor has generally paid the mortgage payments and utilities from his account, while Loretta has paid the expenses for health insurance, food, daycare and transportation from her account. Loretta also maintains a savings account in her name. The debtor has used his carpentry skills to do various repairs and home improvements over the years to the Corbin property, including installation of a new roof and siding. Although the materials used for such improvements were often charged to the debtor's contractor credit card account, Loretta paid such charges from her savings account. Loretta has twice refinanced the mortgage on the Corbin property — on July 5, 2001 with a $70,000 mortgage Ioar from American Savings Bank, and again, on November 8, 2001, with a similar mortgage Ioan from Webster Bank.
III. ARGUMENTS OF THE PARTIES
The gist of the plaintiffs' complaint is that the debtor's 1995 transfer of the Corbin property to Loretta ("the transfer") was a sham intended to fraudulently conceal the debtor's continued ownership of such property from his creditors. The plaintiff's allege that the transfer was made for inadequate consideration and that the lebtor thereafter continued to exercise all of the rights and responsibilities of ownership.
Counts I and II seek either imposition of a constructive trust in favor of the debtor's estate on the Corbin property, or payment to the estate by Loretta of the value thereof, asserting that Loretta was unjustly enriched by receipt of the Corbin property. The plaintiffs contend that Loretta "has obtained or holds the legal right to property which she ought not, in equity and good conscience, hold and enjoy." (Complair ¶ 10.)
In Counts III, IV and V, the plaintiffs seek denial of the debtor's discharge, alleging that, despite transfer of title to the Corbin property to Loretta, the Debtor retained a beneficial ownership interest therein; that such beneficial interest was an asset which the debtor fraudulently concealed from creditors during the year preceding his bankruptcy filing (Count III), and from the trustee postpetition (Count IV); and that by filing his petition without scheduling such alleged interest in the Corbin property, the debtor made a false oath (Count V).
The relevant subsections of the Bankruptcy Code referenced in Counts III (§ 727(a)(2)(A)), IV (§ 727(a)(2)(B)), and V (§ 727(a)(4)(A)) provide:
(a) The court shall grant the debtor a discharge, unless —
. . .
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
. . .
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account;. . . .
The defendants contend that Loretta is sole holder of both legal and equitable title to the Corbin property; that she gave, as adequate consideration for the transfer, the entire $85,000 from the proceeds of the Centerbank mortgage she placed on the Corbin property; that, having paid the reasonably equivalent value for the Corbin property, she was not unjustly enriched by the transfer; and that the debtor did not have, and therefore did not conceal, any interest in the Corbin property after July 31, 1995.
IV. DISCUSSION A.
The court finds unsupported the plaintiffs' allegation that the debtor transferred the Corbin property to Loretta for inadequate consideration. The evidence adduced by the plaintiffs, as well as the testimony of the defendants, support the conclusion that Loretta provided consideration of approximately $85,000 from the proceeds of the Centerbank mortgage loan; that such amount was applied for the benefit of the debtor; and that such amount was reasonably equivalent to the value of the Corbin property.
B. Counts I and II — Constructive Trust and Unjust Enrichment
Imposition of a constructive trust is not a cause of action in itself, but prevides an equitable remedy that may be imposed by the court upon property held by on. who "by fraud . . ., by duress or abuse of confidence, by commission of wrong, or by any form of unconscionable conduct, artifice, concealment, or questionable means, or who in any way against equity and good conscience, either has obtained or holds the legal right to property which he ought not, in equity and good conscience, hold and enjoy. Moreover, the party sought to be held liable for a constructive trust must have engaged in conduct that wrongfully harmed the plaintiff." Wendell Corp. Trustee v. Thurston, 239 Conn. 109, 113-14 (1996). The issue raised by a claim for a constructive trust is, in essence, whether a party has committed actual or constructive fraud or whether he or she has been unjustly enriched. Stornawaye Properties, Inc. v. O'Brien, 94 Conn.App. 110, 176 (2006).
The trustee argues that the debtor's transfer of the Corbin property to Loretta was a fraudulent transfer under Connecticut's Uniform Fraudulent Transfer As ("the UFTA"), Conn. Gen. Stat. § 52-552a, et seq. Such argument is unavailing. The July 31, 1995 transfer of the Corbin property was clearly prior to the four-year statute of repose in the UFTA, Conn. Gen. Stat. § 52-552j. The trustee contends that the misstatement in the deed of the amount of consideration obscured the nature of the transfer and should permit the court to equitably toll the running of the limitation. The court need not consider whether such a statute of repose may ever be subject to equitable tolling because, even if it could be, the circumstances of the Corbin transfer would not justify doing so. Where, as here, the deed and Loretta's mortgage were property recorded and were a matter of public record, there can be no basis for a claim that the transter was concealed, even if the amount of the consideration recited in the deed was incorrect. Cf. Epperson v. Entertainment Express, Inc., 338 F.Supp.2d 328 (D. Conn. 2004 aff'd, 159 Fed. Appx. 249 (2d Cir. 2005), cert. denied, 126 S.Ct. 2296 (2006) ("[D]efendants could not, as a matter of law, have concealed the existence of the security interests . . . in light of UCC-1 filings" despite the mischaracterization of secured debt as a capital contribution on the debtor's balance sheet).
Conn. Gen. Stat. § 52-552j states:
A cause of action with respect to a fraudulent transfer or obligation under sections 52-552a to 52-5521, inclusive, is extinguished unless action is brought: (1) Under subdivision (1) of subsection (a) of section 52-552e, within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant; (2) under subdivision (2) of subsection (a) of section 52-552e or subsection (a) of section 52-552f, within four years after the transfer was made or the obligation was incurred; or (3) under subsection (b) of section 52-552f, within one year after the transfer was made or the obligation was incurred.
The plaintiffs allege, in Count II, that Loretta was unjustly enriched by the transfer and seek to recover from her the value of the Corbin property. unjust enrichment is an "essentially equitable" doctrine, based on the principle that "in a given situation it is contrary to equity and good conscience for one to retain a benefit which has come to him at the expense of another." Weisman v. Kaspar, 233 Conn. 531, 550 (1995), quoting Connecticut National Bank v. Chapman, 153 Conn. 393, 399 (1966). "Plaintiffs seeking recovery for unjust enrichment must prove (1) that [Loretta was] benefitted, (2) that [Lorettal unjustly did not pay the [debtor] for the benefits, and (3) that the failure of payment was to the [debtor's] detriment." Hartford Whalers Hockey Club v. Uniroyal Goodrich Tire Co., 231 Conn. 276, 283 (1994).
The court, having found that Loretta gave the debtor adequate consideration for the transfer of the Corbin property, concludes that the plaintiffs have not met their burden of proving, by a preponderance of the evidence, that Loretta was unjustly enriched thereby. To the extent that the plaintiffs claim the debtor's payment of Loretta's mortgage payments or application of his carpentry skills to maintain, repair and improve the Corbin property, the court's conclusion, infra, that such matters were in the nature of family support preclude a finding of unjust enrichment. Accordingly, the court concludes that the plaintiffs cannot prevail on Count I or Count II of the complaint.
B. Counts III, IV, and V — Denial of Discharge
Courts generally have recognized the importance of the discharge to the debtor and, accordingly, have construed the provisions of § 727 liberally in favor of debtors. "Clearly, § 727 imposes an extreme penalty for wrongdoing. As such, [the Second Circuit Court of Appeals has] held that it must be construed strictly against those who object to the debtor's discharge and liberally in favor of the bankrupt." In re Chalasani, 92 F.3d 1300, 1310 (2d Cir. 1996) (citation and quotation marks ommited).
The plaintiff has the burden of proof in an adversary proceeding objecting to discharge. Fed.R.Bankr.P. 4005. The standard of proof is the preponderance of the evidence. Wolfson v. Wolfson (In re Wolfson), 152 B.R. 830, 832 (S.D.N.Y. 1991);Cf. Grogan v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654 (1991) (preponderance of evidence standard for fraud under § 523). "Once sufficient evidence is presented by the plaintiff to satisfy the burden of going forward with the evidence, the burden thereafter shifts to the debtor to provide evidence to rebut the plaintiff's prima facie case. The plaintiff, however, always bears the ultimate burden of proving, by a preponderance of the evidence, the essential elements of an alleged objection to discharge."Paine Webber, Inc. v. Gollomp (In re Gollomp), 198 B.R. 433, 440 (S.D.N.Y. 1996).
Although the transfer at issue occurred more than seven years prepetition, "a debtor's transfer of legal title to property prior to one year before the bankruptey petition date, coupled with a retention of certain attributes of beneficial owners ip into the one year reach-back period of Section 727(a)(2)(A), can constitute `a concealment' within the meaning of that Section." In re Ogalin, 303 B.R. 552, 557 (Bankr. D.Conn. 2004). Accordingly, the court must initially determine whether the debtor, following the transfer, retained the attributes of beneficial ownership of the Corbin property.
The plaintiffs argue that, following the Corbin transfer and continuing until the present, the debtor retained a beneficial interest in the Corbin property in that he resides there with his family, made payments on Loretta's mortgage from his checking account, provided the labor and materials for the maintenance, repairs and improvements to such property, and, on his applications for building permits, indicated his status as "owner."
The court credits the defendants' testimony that the debtor's payment on the Corbin mortgage were part of his contribution towards household expenses and not indicative of any retained ownership interest in the property. Copies of the defendants' joint tax returns for 1997-99 (Pl.'s Exh. 64, 65, 66) indicate that both defendants were employed, with Loretta providing more than half of their combined income. The defendants testified that, since their marriage in 1990, they had always mair ained separate checking accounts, and that they shared the household expenses. Following the transfer, the debtor generally made the payments on both the Linsley and Corbin properties and some of the household utilities. Loretta paid the larger share of the family expenses, including those for food, health insurance, daycare, car payments, clothing, etc. In addition, Loretta occasionally assisted the debtor in making his payments on the Linsley mortgage.
The facts and circumstances described by both the plaintiffs and the defendants do not support an inference that the debtor retained any property interest in assets which he concealed for the purpose of hindering, delaying, or defraudung creditors. The Connecticut District Court, in a case in which the Internal Revenue service advanced an argument, similar to that of the present plaintiffs, that a husband retained a concealed beneficial interest in property transferred to his wife, held:
The IRS relies on the events subsequent to the transfer to show that, because the defendants acted as if [the husband] had a continuing interest in the Clintonville Road property, the original transfer was a mere sham. I find that the evidence presented is not persuasive on this point. [The husband] did continue to reside at the Clintonville Road property, but I see nothing unusual in a husband/father wanting to live with his family. The fact that [the husband] helped with the repairs to and maintenance of the property indicates nothing more than a desire to provide his family with a comfortable and safe home.
. . .
The Connecticut courts to my knowledge have never considered a husband's contributing to the mortgage payments on his wife's property to be proof of a prior fraudulent conveyance of that property from the husband to the wife. To the contrary, Connecticut places an obligation on a spouse and parent to support his family; there is both a common law and statutory duty to do so. The support obligation continues even if the wife owns property of her own.
United States v. Edwards, 572 F.Supp. 1527, 1536-1537 (D.Conn. 1983): see also Cadle Co. v. DiFabio (In re DiFabio), 2004 WL 5250438 (Bankr. D.Conn. 2004, aff'd B.R. (D.Conn. 2007).
The debtor acknowledges that he provided the labor for various improvements to the Corbin property, but denies paying for the materials. The debtor testified that he charged the materials using his business credit accounts with several su pliers because such suppliers sell only to the trade and not to the general public. However, actual payment of such charges were made from funds in Loretta's separate savings account.
The plaintiffs have not alleged that the debtor, following the transfer, ever claimed an ownership interest in the Corbin property on any financial statement. They argue that, by signing two applications for building permits for the Corbin property as "owner," the debtor recognized and represented to others that he had retained beneficial ownership of the Corbin Property. The court credits the debtor's testimony that one could apply for a building permit either as an owner or as a contracter, and that, as a contractor, he would be required, inter alia, to obtain a contractor's icense and provide worker's compensation insurance. The debtor's explanation is supported by the definition of "owner," under the Connecticut Home Improvement Act as "a person who owns or resides in a private residence and includes any agent thereof." Conn. Gen. Stat. § 20-419(6) (emphasis added).
Furthermore, it was Centerbank, then holder of the mortgage on the insley property, that suggested transferring the Corbin property to Loretta and that provided Loretta with the mortgage needed to effectuate the transfer. The plaintiff's have profferred no explanation as to how the defendants' acting on Centerhank's recommendation could be construed to show any intent to hinder, delay or defraud Centerbank, CadleRock's predecessor in interest on the Linsley mortgage.
On the basis of the evidence presented, the court concludes that the debtor did not, following the July 31, 1995 transfer of the Corbin property to Loretta, retain any beneficial interest therein. Consequently, the court concludes: (I) that the debtor did not conceal assets from his creditors or the estate either during the one year prepetition reach-back period or postpetition; (2) that the debtor did not make a false oath `in or in connection with the case" by not listing an interest in the Corbin property in his bankruptcy schedules; and (3) that the plaintiffs' objection to the debtor's discharge be overruled.
V. CONCLUSION
The court, having considered all the evidence presented by the parties and all arguments raised by the plaintiffs, concludes, in accordance with the fargoing discussion, that the debtor is entitled to judgment on all Counts of the complaint. The plaintiffs are not entitled to a constructive trust on the Corbin property; nor are the plaintiffs entitled to money damages. In addition, the plaintiffs' objections to the debtor's discharge pursuant to Bankruptcy Code §§ 727(a)(2)(A), 727(a)(2)(B), and 727(a)(4) are overruled, and the debtor will be granted a discharge. Judgment will so enter.