Opinion
Case No. 02-69781, Adv. Proc. No. 03-03069.
December 9, 2003
MEMORANDUM OPINION
In this adversary proceeding plaintiffs Carl Hodges Sr. and Virginia E. Hodges filed a complaint to obtain injunctive relief prohibiting the proposed sale of real property located at 704 Courthouse Drive in Middlesex County, Virginia. Plaintiffs purchased the property in the 1950s, built their marital home upon it, and Carl Hodges continues to reside there. Plaintiffs claim an equitable interest in the property despite having deeded it to their daughter, debtor Deborah Randle, on August 23, 2000. Through this adversary proceeding they seek to prevent a sale of the property by the defendant, who is trustee of their daughter's chapter 7 bankruptcy case.
For the reasons stated in this opinion, the court finds that plaintiffs hold an equitable interest in the subject property by virtue of a constructive trust and an express trust. The court further finds that the trustee holds only legal title to the real property subject to the plaintiffs' equitable interest and therefore may take no further action regarding the property.
Findings of Fact.
PROCEDURAL HISTORY
Deborah Randle filed a chapter 7 bankruptcy petition on November 13, 2002, and Keith Phillips was appointed and serves as chapter 7 trustee. Debtor's parents, Carl Hodges, Sr. and Virginia E. Hodges, filed this adversary proceeding seeking an injunction to prevent the trustee from selling real property in Middlesex County, Virginia, as an asset of debtor's estate. The trustee filed an answer seeking a determination that debtor holds both legal and equitable title to the property.
Hearing on the Hodges' complaint was held on September 4, 2003. At the completion of the evidence, the court took the matter under advisement. Subsequently, counsel for the Hodges filed a brief in support of plaintiffs' position.
FACTS
Carl Hodges Sr. acquired three contiguous parcels of land in Middlesex County, Virginia, in the 1950s. Over a period of years he built a house on the land for himself and his wife, Virginia. The Hodges moved into the house when it was completed in 1963 and raised their daughter Deborah and her five siblings there. Virginia Hodges moved out of the home in the late 1980s due to marital problems, but Carl continues to live there today.
In 1998, Mr. Hodges became unable to work and stopped paying the property taxes due on the land Some time after the taxes were in arrears, Carl and Virginia Hodges agreed that they would transfer legal title to the real property to their daughter Deborah. The Hodges intended for Deborah to become the overseer of the property for the purpose of keeping the property taxes paid so that Mr. Hodges could continue to live in the home. The Hodges further intended by the transfer for their daughter preserve the property for all of the children after the Hodges were deceased. On August 23, 2000, the Hodges transferred legal title to the land to Deborah by deed of gift. The deed represents the only written evidence of the parties' transfer.
Deborah Randle nee Hodges filed a chapter 7 bankruptcy petition on November 13, 2002. She listed her parents' property on her schedule C but described the nature of her interest as none and listed its value as $0.00.
Conclusions of Law.
Pursuant to § 363(b)(1) of the Bankruptcy Code the trustee has the power to sell property of the debtor's bankruptcy estate.See 11 U.S.C. § 363(b)(1). Section 541 of the Code defines property of the estate as "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). This section also provides however that "[p]roperty in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest . . . becomes property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." 11 U.S.C. § 541(d). The bankruptcy trustee's power to sell property of the estate is therefore limited when a third party owns an equitable interest in property to which the debtor has only legal title.
CONSTRUCTIVE TRUST
The primary equitable interest to consider in this context is the remedial constructive trust. In Virginia, a constructive trust arises by operation of law when a constructive trustee retains the property of a beneficiary and is unjustly enriched by continued retention. See Citizens Fed. Bank v. Cardian Mortgage Corp. (In re Cardian Mortgage Corp.), 122 B.R. 255, 259 (Bankr. E.D. Va. 1990); Faulknier v. Shafer, 264 Va. 210, 215, 563 S.E.2d 755, 758 (2002); Leonard v. Counts, 221 Va. 582, 589, 272 S.E.2d 190, 195 (1980). Upon a finding of unjust enrichment, Virginia law imposes three additional requirements on a court considering imposition of a constructive trust: identification of a trust res; transfer of the res to the constructive trustee; and, in cases of commingling of the res and other interests by a creditor, tracing of the res. See Sec'y of Labor v. Moseley (In re Alamance Knit Fabrics, Inc.), 251 B.R. 293, 295 (M.D.N.C. 1999); In re Cardian Mortgage Corp., 122 B.R. at 259-60. Parole evidence is sufficient to satisfy these additional requirements as long as the evidence is clear and convincing. Sutton v. Sutton, 194 Va. 179, 185, 72 S.E.2d 275, 278 (1952). The Supreme Court of Virginia has defined clear and convincing evidence as an intermediate standard of proof that "produce[s] in the mind of the trier of fact a firm belief or conviction as to the allegations sought to be established."Sayler v. Sayler, 216 Va. 521, 525 n. 4, 219 S.E.2d 889, 893 n. 4 (1975) (quoting Fred C. Walker Agency, Inc. v. Lucas, 215 Va. 535, 540-41, 211 S.E.2d 88, 92 (1975)).
This court has held that equitable property interests in the form of constructive trusts do not constitute property of the bankruptcy estate. See Lubman v. Wells (In re Wells), 296 B.R. 728, 733-34 (Bankr. E.D. Va. 2003); In re Cardian Morgage Corp., 122 B.R. at 260-61. Equity imposes a constructive trust in order to prevent the constructive trustee from disposing of property without accounting for the beneficiary's equitable interest. A trustee in bankruptcy therefore cannot sell property subject to a constructive trust because the debtor/constructive trustee does not own both legal and equitable title. The beneficiary of the constructive trust retains an equitable interest in the property, and the subject property is not property of the debtor's estate.
In this case the constructive trustee, Deborah Randle's chapter 7 bankruptcy trustee, would be unjustly enriched if the property on which the Hodges built their home and raised their children was deemed property of the bankruptcy estate. If the real property was deemed property of Deborah Randle's bankruptcy estate, the bankruptcy trustee could sell the property and use the funds to pay her creditors. According to the testimony at hearing, this was not the goal of the agreement entered into by Ms. Randle and her parents. The witnesses were clear that Mr. and Mrs. Hodges deeded the home to their daughter only in order that she pay the taxes to preserve the property for her parents during their lifetime and further preserve it for the children once the Hodges were deceased.
The evidence at hearing satisfied the clear and convincing standard for establishment of a constructive trust under Virginia law. The trust res was identified in the deed and by the witnesses' testimony as the real property located at 704 Courthouse Drive in Middlesex County, Virginia. Legal title to the res was transferred to Ms. Randle by deed executed on August 13, 2000, and upon the filing of her petition, legal title was vested in the bankruptcy trustee. All three parties to the agreement testified that by transferring legal title to Ms. Randle they intended for her to become only an overseer or steward of the property and not its absolute owner. Counsel for the plaintiffs offered into evidence Ms. Randle's bankruptcy petition schedules, which in recognition of her limited interest in the property listed its value as zero. As there was no evidence presented of commingling of the res and other interests by a creditor, the tracing of the res requirement is not applicable in this case. Upon weighing the evidence, the court finds that a constructive trust has been proven by clear and convincing evidence. EXPRESS TRUST
The court must also consider whether the Hodges retained an equitable interest in the real property because their agreement with their daughter was in the nature of an express trust. Under Virginia law, an express trust arises when parties "affirmatively manifest an intention that certain property be held in trust for the benefit of a third party." Old Republic Nat'l Title Ins. Co. v. Tyler (In re Dameron), 155 F.3d 718, 722 (4th Cir. 1998). The creating parties need not use any particular words, but need only show through words or circumstances their unequivocal intent to create a trust. See id. More importantly to this case, Virginia case law also provides that an express trust in land may be established by parol evidence. See Peal v. Luther, 199 Va. 35, 37, 97 S.E.2d 668, 669-70 (1957); Daniel v. Viar, 147 Va. 323, 328, 137 S.E. 526, 527 (1927). Similarly, the statute of frauds adopted in Virginia does not include a prohibition against parol trusts. See Va. Code Ann. § 11-2 (Michie 1999); Daniel v. Viar, 147 Va. at 328, 137 S.E at 527; 19 Michie's Jurisprudence of Virginia and West Virginia Trusts Trustees § 9 (2003) ("The seventh section of the English statute of frauds, requiring all declarations or creations of trust to be manifested and proved by writing, though reenacted in many of the American states, is not in force in Virginia . . . and, therefore, in [that state], trusts may be proven by parol evidence.").
In this case, the testimony of the Hodges and Deborah Randle provide conclusive proof that the parties intended to establish an express trust in the subject real property. In discussing the reasons for deeding the land to Ms. Randle, all three parties testified that she was to oversee the property during the Hodges' lifetimes and preserve it for the children after the Hodges were deceased. With this testimony, they identified their unambiguous intent to create a trust, to make Ms. Randle the trustee, and to make beneficiaries of the Hodges during their lifetimes and of the children following the deaths of their parents. Although this intent was proven by parol evidence, Virginia law is clear that parol evidence is admissible to establish an express trust in land
In summary, the court finds that Carl and Virginia Hodges have an equitable interest in the real property in the form of both a constructive trust and an express trust. The trustee therefore holds only legal title to the real property subject to the Hodges' interest and should not sell the property for the benefit of Ms. Randle's creditors.
A separate order will be entered.