Opinion
No. 4-02-bk-00378-JMM, Adversary No. 4:02-ap-00159-JMM.
December 5, 2007
MEMORANDUM DECISION
On November 15, 2007, the court conducted a trial on the remaining issues in this adversary proceeding. The instant adversary proceeding was commenced on December 16, 2002 (Adv. Dkt. #1), and it framed issues concerning: (1) A $92,000 cash account; (2) Pennsylvania real property; and (3) New York real property. The Pennsylvania and New York properties have, by separate dispositions of this court, been abandoned from the estate. Therefore, the estate claims no further interest in those properties. Thus, the only remaining disputes center around the fund of money. As to those disputes, the issues are:
(1) Is the fund of money from the sale of the San Diego residence property of the estate?
(2) If so, is there a valid lien against the fund in favor of Mel Marin, as trustee of a trust?
(3) Is the fund subject to an Arizona homestead exemption?
The court has now reviewed the pertinent administrative file in this case, the adversary file, the law, the evidence presented by each party, and the legal arguments. After reviewing all of these matters, the court now issues its Memorandum Decision.
JURISDICTION
Jurisdiction over this core proceeding is conferred by 28 U.S.C. §§ 157(b)(2)(A), (K), and (O), and 28 U.S.C. § 1334.
FACTS
A. The Real Property — 1151 Turquoise Street, San Diego, California
The Debtor was previously married to Eva Marinkovic. Together, the couple resided in San Diego, California, at a residence located at 1151 Turquoise Street (Ex. 16). On October 26, 1999, the couple, as owners, recorded a Declaration of Homestead on this residence (Ex. 16).
B. Happy Trust One
Eighteen months before the Debtor and his wife signed and recorded the Declaration of Homestead, on April 23, 1998, the Debtor only, and without the participation of Eva Marinkovic, executed a revocable trust, styled "Happy Trust One," naming himself as the Trustor and his son, Melvin M. Marin, as the Trustee (Ex. B). Although the document notes "I have transferred assets" into the trust, there is no evidence to support that, as of April 23, 1998, such transfer included the San Diego residence. The trust instrument contains no list of assets allegedly transferred. (Ex. B).
C. Happy Trust Three
As noted above, the Debtor and his wife, Eva, on October 26, 1999, recorded a Declaration of Homestead affecting their community property at 1151 Turquoise Street, San Diego, California (Ex. 16).
One month later, on November 22, 1999, the Debtor alone, and again without the participation of his wife, Eva, executed another revocable trust, this one styled "Happy Trust Three." The Debtor's son, Melvin M. Marin, was again named as Trustee. (Ex. 1 and C.)
In Happy Trust Three, the Debtor transferred "my entire undivided one-half interest in the premises and land at 1151 Turquoise St., San Diego, CA" to the trust (Ex. 1, para. 1.5). The transfer to the trust also included "my interest in any proceeds which may result from the sale of the same real . . . property to this trust." (Ex. 1, para. 1.6.)
In Article 4 thereof, the Debtor granted a lien on the Turquoise Street trust property in favor of the trustee, Mel Marin. (Ex. 1, Article 4.) This trust document was never recorded.
A Quitclaim Deed from the Debtor to Mel M. Marin, Trustee, dated November 23, 1999, was recorded in San Diego County on June 26, 2000 (Ex. 2 and F). It affected the 1151 Turquoise Street property. Another deed, a "Grant Deed," was also recorded in San Diego County on August 10, 2000 conveying the Debtor's interest in the Turquoise Street property to Happy Trust Three (Ex. 5).
An addendum to Happy Trust Three was executed on September 12, 2000, but no specific reference was made concerning the 1151 Turquoise Street property. Instead, only other real properties in Pennsylvania, New York, Tucson, and Yugoslavia were described. (Ex. 3.)
D. Happy Trust Five
Within a month after executing Happy Trust Three, the Debtor signed another revocable trust, this one named "Happy Trust Five." (Ex. 4.) It was dated December 18, 1999.
This new trust had an additional ingredient. Using a Power of Attorney (Ex. 6) signed by Eva Marinkovic 18 years earlier (dated April 2, 1981, and recorded April 9, 1981), the Happy Trust Five purported to transfer to the trustee, Mel M. Marin, not only the Debtor's interest in the 1151 Turquoise Street property, but also his wife, Eva's, one-half interest as well. (Ex. 4, para. 1.1 and 1.5; Ex. 6.)
A Quitclaim Deed purporting to transfer Eva Marinkovic's one-half interest to the trustee was also executed December 18, 1999, but was never recorded. (Ex. 5.) Eva Marinkovic never signed this latest (or indeed, any) trust instrument, nor the Quitclaim Deed conveying her interest.
Two months after the execution of Happy Trust Three, and five days after the Happy Trust Five and the Quitclaim Deed were executed by the Debtor, a dissolution of marriage petition was filed by Eva Marinkovic against the Debtor. (Ex. 31.)
E. The San Diego Divorce Case
On or about December 23, 1999, a dissolution of marriage petition was filed against the Debtor by his wife, Eva Marinkovic, in San Diego County, Case No. D456656 (Ex. 31).
On May 17, 2000, in the course of the dissolution proceeding, the parties agreed to sell the family residence at 1151 Turquoise Street, and also agreed that the sale proceeds were to be held in an interest-bearing trust account, subject to further domestic court orders. (Ex. 7.)
A sale occurred, and on or about August 11, 2000, Fidelity National Title Company transmitted its check for $93,346.53 to Eva Marinkovic's attorney, Michael P. Richter, for deposit into his trust account. (Ex. 8.)
During the dissolution proceeding, Mel Marin, the Debtor's son and trustee of the three revocable trusts, made various appearances in the divorce court, seeking to advocate on behalf of the Happy trusts. ( See, e.g., Ex. 19 and 18(d).)
F. The Debtor's First Arizona Bankruptcy Case
On August 22, 2001, in an effort to stop a pending foreclosure on some Arizona apartments owned by the Debtor, the Debtor filed a chapter 13 bankruptcy case in the District of Arizona, Case No. 4:01-bk-03665. Some preliminary proceedings occurred in the bankruptcy case, but it was eventually dismissed and the case closed on October 26, 2001 ( see Ex. 11, Dkt. #70).
G. The Marin Lien
On October 22, 2001, while the Debtor's first chapter 13 case was pending, but three months before the second Arizona case was filed, Mr. Marin recorded, in Pima County, Arizona, a document entitled "Security Agreement and Lien," which instrument was dated August 15, 2001. (Ex. 15.) Amongst the listed property purportedly affected was "the cash proceeds following the sale of property at 1151 Turquoise St., San Diego, CA held pending resolution of courts by Michael Richter [Eva Marinkovic's divorce attorney]." (Ex. 15.) The lien was for $140,000, to which Mr. Marin attached various time sheets. (Ex. 15.)
In any event, at the time of the Pima County recording, the family court division of the Superior Court of San Diego County still had control over the Turquoise Street sale proceeds, as they were in custodia legis until that court ordered their disbursement. ( See Ex. 13, Transcript of January 4, 2002, at 3, lines 27-28, see also Ex. 7, court's order that proceeds are to be held pending further order of the court.)
H. The Happy Trust Three New York Bankruptcy Case
On October 23, 2001, finding a new forum in the effort to stave off a foreclosure of the Tucson apartment property, Happy Trust Three filed a chapter 11 case in the Bankruptcy Court for the Northern District of New York, Case No. 01-66282 (SDG).
Bankruptcy Judge Stephen G. Gerling.
The case was short-lived. The secured creditor on the Tucson property successfully persuaded the court to dismiss the proceeding. In its dismissal order, the court noted that it was "clear" that Happy Trust Three was formed by the Debtor and Mr. Marin for, among other things, "to divest Eva Marinkovic, the mother of the Debtor's [Happy Trust Three] trustee, of her community property rights in and to the [Tucson] Property." (Ex. 12, at 2.)
That case was dismissed on January 31, 2002.
I. The Debtor's Second and Current Arizona Bankruptcy Case
On January 30, 2002, the day before the New York dismissal order was entered, the Debtor filed the instant bankruptcy case, No. 4-02-bk-00378, this time under chapter 11, in Tucson, Arizona.
In filing the bankruptcy case, the Debtor checked the box, on the petition, which stated that he was a resident of the state of Arizona, and had been for the greater part of the 180 days preceding the filing (Dkt. #1).
In his schedules, the Debtor listed, as his property, "approximately $97,000 in proceeds from sale of family home, being held by former-wife's attny. Div. Ct. did not divide it." (Ex. T; Dkt. #9, Sch. B, question 17.)
In his Schedule D, the Debtor listed himself as owing a secured debt to Mel M. Marin, as a "statutory lien for trustee's fees on all prop.[erty] in trusts at any time" for $150,000. (Ex. T; Dkt. #9, Schedule D.)
The Debtor's initial Schedule C (Exemptions) makes no mention of a claim of a homestead relative to the San Diego real property or its sale proceeds. The Debtor claimed exemptions solely under the Arizona statute, as authorized by 11 U.S.C. § 522(b)(1) and ARIZ. REV. STAT. § 33-1133(B). A homestead was not among them.
Mel Marin filed a secured proof of claim for $140,000, for his services as trustee of Happy Trust Three (Ex. H.)
During the course of the Debtor's chapter 11 case, on April 19, 2002, the court appointed Randall P. Sanders as the chapter 11 Trustee (Dkt. #56). Thereafter, Mr. Sanders began managing the Debtor's estate, eventually leading to the proposal of a Trustee's reorganization plan. ( See Ex. 26, dated April, 2003.) The Trustee's plan was confirmed on October 20, 2003 (Ex. 28 and Dkt. #310).
In the interim, on May 13, 2002, Eva Marinkovic filed a motion for stay relief, seeking to remand the issue of the division of the Turquoise Street sale proceeds to the Superior Court (Ex. Q). The matter was contested initially, but on September 24, 2002, a settlement was reached between the Trustee and Eva Marinkovic, the Debtor's former wife, wherein the proceeds from the residence sale were divided equally between them (Ex. R, K, 23, and 24). That settlement was approved by the bankruptcy court on November 1, 2002 (Ex. N; Dkt. #145). The chapter 11 Trustee received, from that settlement, the sum of $47,117.04 on November 22, 2002 (Ex. A).
It is against this fund that Mr. Marin asserts the Happy Trust Three lien.
Six and one-half months after this court approved the settlement, on June 9, 2003, the Debtor filed an Amendment to his Schedule C "Exemptions," claiming for the first time that the Turquoise Street proceeds were exempt pursuant to Arizona's homestead statute, and citing to ARIZ. REV. STAT. § 33-1101 et seq. (Ex. 21; Dkt. #250). The Trustee objected to the exemption (Ex. P), and this issue is also before the court in this adversary proceeding.
ISSUES
From the facts as established above, the court must now decide the issues in this adversary proceeding. They are:
1. Is the fund of money held by the Trustee, from the sale of the San Diego residence," property of the estate?"
2. Is the money subject to an Arizona or California homestead exemption?
3. Is there a valid lien against the fund in favor of Mel Marin, as trustee of Happy Trust Three?1. Are the Sale Proceeds from the San Diego Real Estate "Property of the Estate?"
The Bankruptcy Code, 11 U.S.C. § 541(a), defines what constitutes property of a bankruptcy estate. It generally consists of "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1).
In the instant case, each of the trusts (Happy Trusts One, Three, and Five) created by the Debtor, as settlor, were revocable trusts. The beneficiaries were:Happy Trust One Happy Trust Three Happy Trust Five
Beneficiaries: The Debtor "and my assignees." (Ex. B, para. 1.6.) Beneficiaries: The Debtor "and my interests." (Ex. 1, para. 1.4.) Beneficiary: The Debtor's wife, Eva Marinkovic. (Ex. 4, para 1.1.) Trusts One and Three exist for the Debtor's benefit, as he is both the beneficiary and the settlor. Trust Five, ostensibly established for Eva Marinkovic, has been compromised by the bankruptcy Trustee and Eva, and Eva has relinquished and never made a claim to the $47,117.04 currently held by the bankruptcy Trustee, which funds were generated solely by the sale of the Turquoise Street property. Only the Debtor or his trustee, Mel Marin, as a secured creditor, claim interests therein for the Debtor's benefit.As a threshold matter, the November 1, 2002, the bankruptcy court's final order approving the settlement (as to the sale proceeds) also settled the issue of the court's jurisdiction over those proceeds as being property of the estate. Under the doctrine of law of the case, a court "is precluded from reexamining an issue previously decided by the same court, or a higher court, in the same case." In re Wiersma, 483 F.3d 933, 941 (9th Cir. 2007) (citation omitted). Applying that doctrine here, this court concludes that it has already determined that the proceeds of the trusts are property of the estate.
An additional, and legally significant fact that supports the conclusion that the trusts assets are also property of the bankruptcy estate are that the Debtor himself listed them as either his property or property in which he retained the beneficial interest, in his bankruptcy schedules. These included not only the proceeds from the sale of the San Diego Turquoise Street property, but also his properties in Tucson, Pennsylvania, and New York. (Ex. T, Schedules A. and B.) This admission against interest carries great weight in any factual analysis over ownership of the trusts.
Furthermore, it is established law that a self-settled, revocable trust in which the debtor is also the beneficiary is property of a debtor's estate. Feinman v. Lombardo, 214 B.R. 260, 265 (D. Mass. 1997); In re Dias, 37 B.R. 584, 586 (Bankr. D. Idaho 1984). As noted by Judge Gerling in In re Steffan, 97 B.R. 741, 745 (Bankr. N.D.N.Y. 1989):
Judge Stephen D. Gerling was also the New York Bankruptcy Judge in the short-lived Happy Trust Three chapter 11.
Where the debtor, "in one capacity or another" dominates all aspects of the trust to the extent that he exercises absolute dominion and control over his assets, his interest in the trust has been found to constitute property of the estate.
* * *
It is axiomatic that all rights the debtor had in the trust at the time of filing inure to the bankruptcy estate.
Accordingly, regardless of whether the proceeds originated from either the Debtor's interest in California real property or from a beneficial interest in a trust created for his benefit, both end with the same legal conclusion — the trust assets are property of the Debtor's estate under § 541(a) and, unless exempt, may be administered for the benefit of the Debtor's creditors.
The court therefore finds and concludes that the proceeds held by the Trustee, derived from the sale of the San Diego property, in the sum of $47,117.04, are assets of the Debtor's bankruptcy estate.
2. Does the Debtor Have an Exemption in the $47,117.04 Amount?
Having found that the monies belong to the Debtor's estate, the next question is whether the Debtor is entitled to claim a homestead exemption therein.
The Debtor claimed, in his amended Schedule C, an Arizona homestead exemption in the funds. (Ex. 21; Dkt. #250.) The Debtor, in both this case and his former Arizona chapter 13 case, checked the box which asserted that he was an Arizona resident, and had been one for the greater part of the preceding 180 days (Dkt. #1, prior Case No. 4:01-bk-03665; Dkt. #1, this case). As an Arizona resident, he was entitled to assert Arizona exemptions, which he did.
However, at trial last month, for the first time in the almost six years since this case was filed, the Debtor testified that he had always intended to remain a California resident, and that California's exemption statutes should apply. The court finds and concludes that the Debtor is judicially estopped from changing his position on this issue, since he filed two bankruptcy petitions in Arizona wherein he signed the petitions and checked the box maintaining that he was an Arizona resident. Moreover, every exemption which he claimed in this case was made pursuant to the Arizona, not the California statutes. Arizona exemptions are only applicable to Arizona residents. Finally, the Debtor has never amended (for a second time) his exemption claims, found in Schedule C, to claim the applicability of any California statutory exemption. Thus, he has waived the right to rescind his election at this late date, and the doctrine of judicial estoppel prevents the Debtor from changing his position to the detriment of other interested parties. Hamilton v. State Farm Fire Cas. Co., 270 F.3d 778, 782 (9th Cir. 2001) (judicial estoppel prevents a party from "playing fast and loose" with a court).
The Debtor's trustee-son, Mel Marin, has no legal standing to argue that California exemption laws apply to the Debtor's case. Only a debtor, not his creditors, can assert this important right. While creditors may certainly object to any claimed exemption, they must do so within a short time window. FED. R. BANKR. P. 4003(c); Taylor v. Freeland Kronz, 503 U.S. 638, 112 S.Ct. 1644 (1992). Mr. Marin never filed an objection to the Debtor's exemptions.
Finally, the Debtor's claim to an Arizona homestead exemption is moot. The sale of the Turquoise Street residence occurred on or about August 11, 2000. Even if, arguendo, as of the day of the filing of the bankruptcy petition (January 30, 2002), or as late as the date of filing the amendment to Schedule C (June 9, 2003), the homestead exemption was valid, it has now become moot by the passage of time.
Under Arizona law, the cash proceeds from the sale of homesteaded property must be reinvested in another residential homestead within 18 months, or the exemption is lost. ARIZ. REV. STAT. § 33-1101(c). Since over five years have now passed since the $47,117.04 in proceeds came into the Trustee's hands, and since they are still there, no exempt status applies to the funds. The monies belong to the estate, for the benefit of the Debtor's creditors, since they were never reinvested in another Arizona residence.
Thus, the Trustee's objection to any homestead claim on such monies will be sustained.
3. Does Mel Marin Have a Perfected Lien on the San Diego Proceeds From the Sale of the Turquoise Street Residence? (a) Real Property
There was no evidence presented that Mel Marin, the trustee of the Happy One, Three, or Five Trusts, which were self-settled by the Debtor, ever perfected a lien by way of mortgage or deed of trust in the Debtor's former California residence in San Diego.
Although the Debtor's individual one-half interest in the community property was transferred to Mr. Marin, as trustee of the November 22, 1999 trust (Happy Trust Three), and that transfer was recorded in San Diego County on June 26, 2000, this instrument did not create a lien. Instead, it evidenced only a transfer of title. Similarly, although the trust instrument was also recorded in San Diego County on July 5, 2000, that document's language did not create a lien, either.
In order to create an enforceable, consensual lien on real property in California, the owner of the parcel must execute either a mortgage or deed of trust to a creditor. CAL. CIV. CODE § 2875 (special liens); § 2947 et seq; § 2898 (priority of mortgage or deed of trust over other liens); CAL. CIV. PROC. CODE §§ 725(a), 726 (foreclosure of mortgage or deed of trust); see also 27 Cal. Jur. 3d Deeds of Trust §§ 4, 28. Without such an instrument, no lien on the real property is legally valid. CAL. CIV. CODE §§ 1091, 2922; see also 27 Cal. Jur. 3d, supra, § 33. Thus, Mr. Marin, as the trustee of Happy Trust Three, has never had a duly executed, recorded and perfected lien on the San Diego residence. CAL. CIV. CODE §§ 1213-1215; § 2952.
This discussion may be a moot point, because Mr. Marin has never made a claim that he ever held a lien on the Debtor's and Eva Marinkovic's San Diego real property. His claim appears to be limited to the proceeds derived from the sale of that real estate.
(b) Personal Property
By the time this bankruptcy case was filed, on January 30, 2002, the San Diego property had already been sold and reduced to cash. That cash was held by Michael Richter, Eva Marinkovic's divorce attorney, in his trust account.
That money was, at all times, subject to the future orders of the San Diego County Superior Court. Thus, although the funds were physically located in Mr. Richter's trust account, they could not be disbursed by Mr. Richter without valid court orders. As a matter of law, that cash was in custodia legis. Jones v. United States, 179 F. Supp. 456, 458 (S.D. Cal. 1959) (" in custodia legis" is a "traditional legal concept envisioning an actual, physical possession of the property the Court"; such property is deemed subject exclusively to orders of that Court); BLACK'S LAW DICTIONARY (8th ed. 2004) ("The phrase is traditionally used in reference to property taken into the court's charge during pending litigation over it.")
Therefore, Mr. Marin, as trustee of Happy Trust Three, has never had a valid recorded lien interest against the Turquoise Street real property in San Diego, nor in the proceeds from its sale. As a matter of law, cash from the sale, being in custodia legis, was beyond the reach of creditors. See Dunsmoor v. Furstenfeldt, 88 Cal. 522, 526-28, 26 P. 518 (1891) (stating general rule that money in custodia legis is not subject to garnishment, until the court has ordered it to be paid); Vallelunga v. Gomes, 102 Cal. App. 2d 374, 381-82, 227 P.2d 550, 554 (Ct.App. 1951) (court has power over monies in its custody until they are distributed pursuant to final decrees); CAL. CIV. PROC. CODE § 695.030 (property that is not assignable or transferable is not subject to enforcement of a money judgment).
The only document by which the trustee of the Debtor's trust, Mel Marin, attempted to create a lien for $140,000, is contained in a document dated August 15, 2001, entitled "Security Agreement and Lien" which recites that the trustee is granted a lien on "the cash proceeds following the sale of property at 1151 Turquoise St., San Diego, CA held pending resolution of courts by Michael Richter, 3390 Old Town Ave., C-109, San Diego, 92110." (Ex. 15.) This document was recorded October 22, 2001, but only in Pima County, Arizona.
At that time, said monies had never left the State of California. The funds were not in Mr. Marin's possession, and therefore his putative lien was not perfected in that traditional and statutory manner. CAL. COM. CODE § 9312(b)(3); § 9313(a). Nor had Mr. Marin perfected his personal property lien within the geographical boundaries of the State of California. Under California's Uniform Commercial Code, the money would be labeled "a general intangible," and thus perfection could have been accomplished by a filing with the California Secretary of State. Mr. Marin's purported security interest in the trust res, or in Debtor's beneficial interest in the trust in order to be perfected against other creditors, would require the filing of a financing statement with the California Secretary of State. CAL. COM. CODE § 9102(42); § 9310(a); § 9501(a)(2). This was never accomplished.
Even if the proceeds could be considered a "deposit account" or money collateral, Mr. Marin had neither control nor possession as the property was in custodia legis. CAL. COM. CODE §§ 9102(29), 9104, 9312(b)(1), 9312(b)(3), 9313(a).
Thus, the October 22, 2001, Arizona county filing failed to perfect any lien on those California funds. Therefore, when the Debtor filed chapter 11 on January 30, 2002 in Tucson, Arizona, no valid lien had been perfected by Mr. Marin. Thereafter, the automatic stay of 11 U.S.C. § 362 would have rendered void any post-petition attempts to perfect the lien, In re Schwartz, 954 F.2d 569, 573 (9th Cir. 1992), and the Trustee's statutory status as a hypothetical lien creditor on the date of filing trumped any unperfected lien claims of Mr. Marin. 11 U.S.C. § 544(a)(1).
Because no personal property lien was ever perfected, Mr. Marin was, and remains, an unsecured creditor of this estate for his services as trustee of Happy Trusts Two, Three, or Five.
The court will enter a ruling that Mr. Marin's claim for $140,000 shall be limited to an unsecured claim, should any monies remain after payment of administrative expenses. If monies remain and if he wishes to participate in any distribution to creditors, then Mr. Marin must prove that his $140,0000 claim has been earned, and that he is not otherwise impacted by the confirmed plan's requirement that any such claim be subordinated to the claims of the Debtor's other creditors. ( See Ex. 26, Dkt. #235; Ex. 28 and Dkt. #310; Dkt #264, Disclosure Statement at p. 10, treatment of "Class Four — Claims of Mel Marin.")
RULING
A separate order (FED. R. BANK. P. 9021) will be entered which:
1. Finds that the San Diego monies in the sum of $47,117.04 are property of the Debtor's estate;
2. Denies the Debtor's claim to a homestead exemption in the San Diego monies; and
3. Finds that Mel Marin, as trustee, does not have a valid lien on such San Diego monies, and his claim against the Debtor's estate, at best, be only a general unsecured claim.