Opinion
Case No. 13-13043
01-27-2014
In Re ARTHUR B. SAMS DONNA K. SAMS Debtors
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
__________
Beth A. Buchanan
United States Bankruptcy Judge
Chapter 7
Judge Buchanan
ORDER GRANTING AMENDED MOTION FOR TURNOVER
This matter is before this Court on the Amended Motion For Turnover Order [Docket Number 18] (the "Motion") filed by Richard D. Nelson, Chapter 7 Trustee (the "Trustee"), the Memorandum In Opposition To Motion For Turnover Of Property [Docket Number 19] filed by Arthur and Donna Sams (the "Debtors") and the parties' respective pre-hearing memoranda and witness and exhibits lists [Docket Numbers 26 and 27]. An evidentiary hearing was held on December 16, 2013 (the "Hearing").
By the Motion, the Trustee seeks turnover of a savings account at Fifth Third Bank with an approximate balance as of the petition date of $12,027 (the "Account") less any exemptions that the Debtors may be entitled to claim with respect to the Account. The Account is titled in the name of Debtor Donna Sams and, as acknowledged at the Hearing, interest income from the Account is reported under Debtor Donna Sams' social security number. As disclosed in their Statement of Financial Affairs, the Debtors maintain that the funds in the Account belong to their son and that the Debtors are holding the funds for their son's benefit because he is incarcerated and therefore unable to conduct his own financial affairs.
Prior to his conviction and incarceration, the Debtors' son signed a power of attorney (the "POA"), which was drafted by his criminal attorney. The POA designated Debtor Donna Sams as her son's attorney in fact to act in his stead on certain matters relating to his personal and financial affairs, including the authority to withdraw funds from her son's financial accounts. After the Debtors were no longer able to financially support their son's expenses due to their own financial problems, Debtor Donna Sams testified that she liquidated her son's retirement account as authorized by the POA and deposited the funds in the Account at Fifth Third Bank. In support of her testimony, Debtor Donna Sams offered into evidence a letter dated March 1, 2012 from Fidelity Investments to the Debtors' son acknowledging receipt of the request for third party access to his retirement plan account and approving Debtor Donna Sams as an authorized agent with the ability to exercise control over the account. Also offered into evidence was an August 2012 bank statement showing an initial deposit into the Account of $13,026.49 on August 9, 2012. Debtor Donna Sams testified that it was her belief and understanding that the funds in the Account remained her son's funds and were to be used for his benefit. She further testified that the funds in the Account were in fact used solely for her son's benefit on expenses such as clothing ordered from the prison catalogue and payment of her son's income taxes and, despite their own financial difficulties, the Debtors never used the funds in the Account for their own personal expenses. Accordingly, the Debtors maintain that Debtor Donna Sams holds only legal title to the Account and that the equitable interest in the Account is not property of the estate because the Account is held in trust for the benefit of their son.
The bankruptcy estate is comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). However, "[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 under subsection (a)(1) . . . 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). "Unless a countervailing federal interest exists, state law determines whether a debtor has a property interest for purposes of § 541(a)(1)." Kitchen v. Boyd (In re Newpower), 233 F.3d 922, 928 (6th Cir. 2000) (citing Butner v. United States, 440 U.S. 48 (1979)). Under Ohio law, the party asserting that funds held in trust are not property of the estate has the burden of establishing the existence of a trust by clear and convincing evidence. See In re Toland, 346 B.R. 444, 448 (Bankr. N.D. Ohio 2006) (citing Gertz v. Doria, 578 N.E.2d 534, 535 (Ohio Ct. App. 1989) (discussing express trusts)); Excel Ass'n Mgmt., Inc. v. Huntington Nat'l Bank, N.A. (In re Team Am., Inc.), 414 B.R. 237, 242 (S.D. Ohio 2009) (citing Univ. Hosps. of Cleveland, Inc. v. Lynch, 772 N.E.2d 105, 116 (Ohio 2002) (discussing constructive trusts)).
To the extent that the Debtors argue that the funds in the Account are the subject of an express trust, the Debtors have failed to establish the existence of an express trust by clear and convincing evidence. "Under Ohio law, an express trust requires: (1) 'an explicit declaration of trust, or circumstances which show beyond a reasonable doubt that a trust was intended to be created'; (2) 'an intention to create a trust'; and (3) 'an actual conveyance of . . . property . . . to [a] trustee[.]'" Booth v. Vaughan (In re Booth), 260 B.R. 281, 290-91 (B.A.P 6th Cir. 2001) (quoting Ulmer v. Fulton, 195 N.E. 557, 564 (Ohio 1935)). The POA itself does not establish an express trust. A power of attorney creates an agency relationship, not a trust relationship. See generally 91 OH. JUR. TRUSTS § 13 Distinguishing Trusts From Other Legal Relationships (2013) (noting that a trust is distinct from that of a principal and agent); see also RESTATEMENT (THIRD) OF TRUSTS § 5 cmt. e (2003) (noting that "[a]n agent may be entrusted with possession of property of the principal, but this does not make the agent a trustee"). Nor does the POA have any express language authorizing the Debtors to create a trust on behalf of their son. See Scott v. Lyons, 2009 Ohio App. LEXIS 972, at **13-16, 2009 WL 653045, at **5-6 (Ohio Ct. App. Mar. 13, 2009) (finding that agent had no power to create a trust on behalf of the principal pursuant to a power of attorney because the power of attorney did not include any provision expressly authorizing the agent to create trusts). While there is no requirement that an express trust be created in writing, see In re Harvey, 2012 Bankr. LEXIS 2303, at *8, 2012 WL 1865426, at *3 (Bankr. N.D. Ohio May 22, 2012) ("A formal trust agreement is not necessary; rather, a trust can be shown to exist from the circumstances surrounding its creation.") (citing Ulmer v. Fulton, 195 N.E. 557, 563-65 (Ohio 1935)), there was no evidence submitted regarding their son's intent to create an express trust. See In re Toland, 346 B.R. at 448 ("At a minimum, the existence of an express trust requires a showing, by clear and convincing evidence, of an intent to create a trust . . . ."). Accordingly, the Debtors have not established that the Account is held in an express trust for their son.
The Debtors appear to primarily rely on a constructive trust theory to support their claim that the Account is not property of the estate. Under Ohio law, a constructive trust is an equitable remedy that arises without regard to the intention of the parties:
[A]gainst one who, by fraud, actual or constructive, by duress or abuse of confidence, by commission of wrong, or by any form ofPoss v. Morris (In re Morris), 260 F.3d 654, 667 (6th Cir. 2001) (quoting Ferguson v. Owens, 459 N.E.2d 1293, 1295 (Ohio 1984) (per curiam)). As a general principle, the Sixth Circuit Court of Appeals has made it clear that bankruptcy courts are not authorized to recognize a claim for a constructive trust unless "state law has impressed property with a constructive trust prior to its entry into bankruptcy." In re Morris, 260 F.3d at 666 (citing XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc.), 16 F.3d 1443, 1451 (6th Cir. 1994)). The Sixth Circuit has recognized that narrow exceptions to this general restriction may be appropriate: (1) where the property at issue would not be subject to distribution to creditors in the bankruptcy case, such as where a pre-petition divorce decree declared the parties' respective property rights and awarded specific property to a non-debtor, because recognition of a constructive trust in such circumstances would not implicate the bankruptcy rationale of ratable distribution to creditors, id. (citing McCafferty v. McCafferty (In re McCafferty), 96 F.3d 192, 196-97 (6th Cir. 1996)); (2) to enforce a judgment entered by a state court post-petition, provided that the state court action was initiated pre-petition, the creditor obtained relief from stay to pursue the action and the judgment would be considered effective prior to the filing of the bankruptcy petition under state law, id. at 667 (citing In re Newpower, 233 F3d. at 936); and (3) where state law impressed the property in dispute with a constructive trust by operation of law prior to the petition date, such as where a debtor had a duty under a settlement agreement that was incorporated in a pre-petition state court judgment to convey the property at issue to the creditor. Id. at 667-69 (holding that under Ohio law, where there is a duty to convey property, "it is not necessary for a court to impress a constructive trust by decree . . . [r]ather, in Ohio it attaches by operation of law").
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. It is raised by equity to satisfy the demands of justice.
An argument could be made under the In re Morris rationale that a constructive trust attached to the Account by operation of law because Debtor Donna Sams established the Account in her individual name rather than as an agent for her son in contradiction to her obligations under the POA. In re Morris, 260 F.3d at 668; see also In re McCafferty, 96 F.3d at 198 (noting in dicta that under Ohio law it appears unnecessary for a court to declare a constructive trust; rather "it arises by operation of law to prevent unjust enrichment") (emphasis in original). As her son's agent under the POA, Debtor Donna Sams had a fiduciary duty to act solely for her son's benefit when performing the acts authorized by the POA. See e.g., Burchfield v. McMillian-Ferguson, 2011 Ohio App. LEXIS 2115, at **6-7, 2011 WL 2112414, at *3 (Ohio Ct. App. May 24, 2011). Debtor Donna Sams arguably breached her fiduciary duty by establishing the Account in her own name. Id. ("The law is zealous in guarding against abuse in a fiduciary-principal relationship. Any transfer of property from a principal to his attorney-in-fact is viewed with some suspicion. Self-dealing transactions by a fiduciary are presumptively invalid.") (internal citations omitted). Under Ohio law:
"A constructive trust is imposed where a person holding title to property is subject to an equitable duty to convey it to another on the ground that he would be unjustly enriched if he were permitted to retain it. The duty to convey the property may arise because it was acquired through fraud, duress, undue influence or mistake, or through a breach of a fiduciary duty, or through the wrongful disposition of another's property."Bilovocki v. Marimberga, 405 N.E.2d 337, 340 (Ohio Ct. App. 1979) (quoting 5 Scott on Trusts, Section 404.2 (1967)) (emphasis added); see also, NPF IV, Inc. v. Transitional Health Servs., 922 F. Supp. 77, 84 (S.D. Ohio 1996) (noting that a breach of fiduciary duty may be the basis for a constructive trust under Ohio law). Accordingly, a case could be made that a constructive trust arose based on a breach of fiduciary duty from what appears on its face to be the misappropriation of the Debtors' son's retirement funds in a manner inconsistent with Debtor Donna Sams' fiduciary obligations under the POA.
Each of the Sixth Circuit cases recognizing exceptions to the general rule in Omegas Group, however, involved circumstances where there was some pre-petition judicial action that either specifically created or recognized the equitable interest giving rise to the imposition of a constructive trust. See Mason v. Clark (In re Book), 2013 Bankr. LEXIS 3912, at *5-6, 2013 WL 5300694, at *2 (Bankr. N.D. Ohio Sept. 17, 2013) (analyzing Sixth Circuit case law and noting that while a state court need not declare a constructive trust has been created, some judicial action must have established or recognized the parties' legal and equitable interests in the property). In this case, there is no pre-petition adjudication by a court expressly declaring that Debtor Donna Sams holds the Account in a constructive trust for her son or otherwise establishing the parties' rights to the Account. Nor was there any proceeding pending pre-petition to determine the parties' rights to the Account. Id. 2013 Bankr. LEXIS 3912, at *10, 2013 WL 5300694, at *4 (noting that Sixth Circuit precedent at a minimum requires a creditor to have pursued a claim with respect to the property before the bankruptcy case was filed).
Even if one were to interpret Sixth Circuit precedent as not requiring a pre-petition judicial claim or determination as giving rise to a constructive trust, the Debtors' claim still fails because the Debtors have not provided clear and convincing evidence to trace the funds from their son's retirement account to the Account at issue. Amedisys, Inc. v. JP Morgan Chase Manhattan Bank (In re Nat'l Century Fin. Enters., Inc.), 377 Fed. App'x 531, 538 (6th Cir. 2010) ("This court has held that it is beyond peradventure that, as a general rule, any party seeking to impress a trust upon funds for purposes of exemption from a bankrupt estate must identify the trust fund in its original or substituted form.") (internal quotations and citations omitted); Estate of Cowling v. Estate of Cowling, 847 N.E.2d 405, 412 (Ohio 2006) (holding that "before a constructive trust can be imposed, there must be adequate tracing from the time of the wrongful deprivation of the relevant assets to the specific property over which the constructive trust should be placed," which must be proven by clear and convincing evidence). While the Debtors offered evidence that in March of 2012 Fidelity Investments acknowledged Debtor Donna Sams' authority under the POA to exercise control over her son's retirement account there is no documentary evidence proving that the funds removed from her son's retirement account are in fact the same funds deposited into the Account in August of 2012. While this Court finds Debtor Donna Sams' testimony to be credible, based on the Sixth Circuit's general disfavor of constructive trusts in bankruptcy and the high evidentiary standard required to prove the existence of a constructive trust, this Court finds that the Debtors have failed to meet the required evidentiary burden. See Univ. Hosps. of Cleveland, Inc. v. Lynch, 772 N.E.2d 105, 116 (Ohio 2002) (suggesting "judicial caution in accepting oral evidence which is intended to contradict absolute conveyances" in determining whether to recognize a constructive trust) (internal quotations and citations omitted)). Accordingly, this Court holds that the Account is property of the estate, subject to any applicable exemptions that the Debtors may assert.
This Court's decision arguably may give rise to a claim by the Debtors' son resulting from the turnover of the funds to the Trustee for the benefit of the estate. The Debtors may be entitled to file a claim on behalf of their son. See 11 U.S.C. § 501(c). In light of the timing of this Court's decision in relation to the claims bar date set in this case, this Court hereby extends the time for the Debtors to file a claim on behalf for their son to February 28, 2014. Fed. R. Bankr. P. 3004, 9006(b). Any timely claim filed by the Debtors on behalf of their son is subject to objection, if any, by the Trustee.
WHEREFORE, IT IS HEREBY ORDERED THAT:
1. The Motion is GRANTED.Distribution list: Default List
2. The Debtors are hereby ordered to turn over the funds in the Account to the Trustee within thirty (30) days of entry of this Order.
3. In light of this Court's order, the Debtors may, if they so elect and subject to objection (if any) by the Trustee: (a) file any applicable amendments to their Schedule C claim of exemptions, and (b) file a claim on behalf of their son pursuant to 11 U.S.C. § 501(c) on or before February 28, 2014.