Opinion
Bankruptcy No. 11-19790-LT7 Adversary No. 13-90063-LT
08-25-2017
In re: CHADWICK C. COLLINS, Debtors. NANCY L. WOLF, TRUSTEE, Plaintiff, v. CHARLES G. COLLINS, JANELLE L. COLLINS, AND CHADWICK C. COLLINS, Defendants.
WRITTEN DECISION - NOT FOR PUBLICATION
MEMORANDUM DECISION (Rent Recovery)
This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
As the Court has previously noted, this is not a case of bad actors or wrongdoing. Rather, this case is an example of what happens when an informal family deal is scrutinized through the cold objective lens of laws designed to govern impersonal commercial transactions.
Defendants initially agreed to transfer property between themselves as part of a loving father's attempt to financially help his son move his growing family into a better home; father gave money to be used for a down payment for the new home. Son and his wife initially agreed to deed an interest in their old home to the father while retaining some interest. Eventually, however, the deal as initially contemplated did not make sense because father did not qualify for the favorable financing terms available to his son; they never formally transferred title to father or otherwise completed the original transaction. The consequences of their decision to discard legal formality in favor of an informal arrangement are many.
The Court has already determined that the real property ("Property") was not legally transferred from the Debtor, Chadwick Collins, and his wife, Janelle, to his father, Charles Collins. The Court has also already ruled that the Property was held as community property as between Debtor and Janelle. The Court, therefore, ruled that the entire Property was property of the Debtor's bankruptcy estate. Defendant Charles Collins has been ordered to turn the Property over to the Trustee, and the Court is informed that he has done so.
The final determination of this issue followed reconsideration of a decision as a result of intervening California case law. --------
The Trustee also seeks to recover the net rent Charles garnered from the Property during the bankruptcy case. In a prior decision the Court determined that the Trustee could recover net rent and that the right arose as of the petition date. See Dkt. No. 214. The sole remaining issue is the amount of net rent recoverable. The parties have resolved many of the issues.
The parties have stipulated that the amount of the net rents collected by Charles for the years 2012 and 2013 were $18,248 and $6,434, respectively. The parties have also stipulated as to the amounts of the gross rents collected by Charles for the years 2014, 2015 and 2016 in the amounts of $26,590, $26,830 and $29,501, respectively. The parties were unable, however, to stipulate to the amount of expenses Charles was entitled to deduct from the gross rents in years 2014 through 2016. Thus, on the last day of the first half of 2017, the Court held an evidentiary hearing on the expenses side of the equation. For the reasons set forth below, the Court concludes that the net rents (prior to consideration of principal paid to the secured lender) for the years 2014, 2015 and 2016, are $15,421.39, $11,880.70, and $21,129.13, respectively. These, with the net rents stipulated to for 2012 and 2013, total $73,113.22. From this Charles may subtract the stipulated principal paid on the mortgage of $10,934.69, for a total of $62,178.43. This is the amount Charles must turnover to the Trustee.
Relevant Background
In 2000, Chadwick and Janelle Collins, husband and wife, purchased a residence at 1480 Beech Tree Road, San Marcos California (the "Property") and took title as Joint Tenants. In 2002, Chadwick and Janelle decided to move into a larger house. In an effort to facilitate the move, Chadwick's father, Charles Collins, agreed to take the Property. He also agreed to assume responsibility for the mortgage thereon and to make a down payment on the new home. The down payment was made in a series of payments.
Charles memorialized the initial agreement in a Purchase Agreement dated August 5, 2002 ("Purchase Agreement'). The Purchase Agreement provided the terms of the transaction including that upon closing, title to the home would be held as "Charles G. Collins & The Collins Family Trust, Join (sic) Tenants With Rights of Survivorship (JTWROS)." The Purchase Agreement also provided "Charles G. Collins has the right to rent, sell, or improve the property without condition or liability to the Collins Family Trust. All loan payments through MLCC, taxes, other assessment, property insurance, and homeowner's fees are to be paid by Charles G. Collins." The parties to the Purchase Agreement were "Buyer: Charles G. Collins" and "Seller: Chadwick & Janelle Collins." The Purchase Agreement was signed by Charles, Chadwick, and Janelle.
In September of 2002, however, Chadwick applied to refinance the mortgage on the Property through Merrill Lynch Credit Corporation ("MLCC"), his employer. Chadwick signed a promissory note dated September 6, 2002 ("2002 Note"). The 2002 Note had a fixed interest rate of 4.875%. The 2002 Note provided that the Deed of Trust securing the 2002 Note:
describes how and under what conditions I may be required to make immediate payment in full of all amounts I owe under this Note. Some of those conditions are described as follows: ... If all or any part of the Property or any Interest in the Property is sold or transferred... without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument. However, this option shall not be exercised by Lender if such exercise is prohibited be Applicable Law.The 2002 Note was secured by a Deed of Trust recorded October 1, 2002, which named the borrowers as "Chadwick C. Collins, Janelle L. Collins, HUSBAND AND WIFE," ("2002 Deed of Trust").
In late 2002 or early 2003, Chadwick and Janelle vacated the Property, and, shortly thereafter, Charles began to lease the Property to a tenant through a property manager; he continued to do so until recently. Since vacating the Property, neither Chadwick nor Janelle has resided at the Property.
In 2008, Chadwick again refinanced through MLCC. Chadwick submitted a Uniform Residential Loan Application which he executed on May 31, 2008 ("2008 Loan Application"). In the 2008 Loan Application under "Assets and Liabilities," "Schedule of Real Estate Owned," Chadwick listed an ownership interest in the Property with a value of $500,000.00. He designated the Property as "Rental," but did not indicate that it was Charles who was collecting the rent. Chadwick signed a promissory note dated May 31, 2008 ("2008 Note"). The 2008 Note had a fixed interest rate of 2.717%. Like the 2002 Note, the 2008 Note provided that the deed of trust securing same would provide:
If all or any part of the Property or any interest in the Property is sold or transferred ... without Lender's prior written consent, Lender may require immediate payment in full of all sums secured by this Security Instrument.This language was directly above Chadwick's signature.
The deed of trust securing the 2008 Note was recorded June 11, 2008, in favor of MLCC and naming as "Borrower," "CHADWICK C COLLINS, A MARRIED MAN, Janelle L Collins" ("2008 Deed of Trust"). The 2008 Deed of Trust provides that Chadwick covenants "that Borrower is lawfully seized of the estate hereby conveyed and has the right to grant and convey the Property and that the Property is unencumbered, except for encumbrances of record." It also provides "If all or any part of the Property or any interest in the Property is sold or transferred..., Lender may require immediate payment in full of all sums secured by this Security Instrument." The 2008 Deed of Trust was executed by Chadwick and Janelle.
The problem for Charles, and the reason the Court is involved, is the fact that, despite the requirement in the written Purchase Agreement that title was to be held by Charles and the Trust as joint tenants, title was never transferred. Neither Chadwick nor Janelle executed a grant deed before Charles took possession of the Property. Chadwick executed a grant deed years later, but Janelle never did, and the ineffective grant deed was never recorded. Likewise, Charles never formally assumed either of the obligations secured by the Property.
Notwithstanding until December 31, 2016, Charles controlled leasing, paid expenses, and collected rents for the Property.
History of This Case
On December 12, 2011, Debtor filed his bankruptcy petition. He did not schedule the Property, nor did he schedule any claims relating to the Property.
On January 6, 2012, the Trustee conducted the initial Meeting of Creditors in the Bankruptcy case.
On February 15, 2012, in response to the Trustee's request at the first Meeting of Creditors, Chadwick's attorney provided the Trustee with copies of: the Purchase Agreement; Schedule E's from Charles' tax returns for 2004 through 2010; and copies of checks showing payment to mortgage holder being made by Charles.
On April 10, 2012, Charles' attorney, Ronald J. Cozad, sent a letter to counsel for the Trustee with a copy to Charles stating he was aware the trustee "may be contemplating asserting a claim against [the Property] in the pending bankruptcy case."
On April 26, 2012, the Trustee's counsel sent a letter to Charles' attorney, Mr. Cozad, asserting that the Property was property of Chadwick's bankruptcy estate and asserting a claim by the Trustee for its recovery.
On May 11, 2012, Charles' attorney, Mr. Cozad sent a letter to counsel for the Trustee disputing the assertion that" 'the [Property] should be liquidated for the benefit of creditors.' "
On June 29, 2012, Charles' counsel, Mr. Cozad sent a letter to counsel for the Trustee stating Charles "is in the process of retaining attorney Susan Stevenson" and "request[ing] forbearance on the complaint for 60 days to allow Ms. Stevenson time to come up to speed."
On March 7, 2013, the Trustee filed a complaint commencing this Adversary Proceeding ("Complaint"). The Trustee sought a declaratory judgment that Charles had no interest in the Property; that the Property was property of the bankruptcy estate; and that the Property was the community property of Chadwick and Janelle. The Trustee also sought an order directing Charles to turn over the Property to the Trustee. Finally, the Trustee sought authority to sell the Property.
On March 11, 2013, the Trustee served the Complaint on Defendants.
After several rounds of summary judgment, the matter went to trial. In a Memorandum Decision entered August 29, 2016, the Court concluded that as of the petition date Chadwick had an ownership interest in the Property; and that as of the petition date Chadwick and Janelle owned the Property as Community Property. The Court, thus, ruled that the Property was property of the estate. The Court concluded, based upon the conduct of the parties from 2002 onward, that Defendants Charles and Chadwick made a conscious decision not to transfer title of the Property to Charles and the Trust in order to enable Charles to take advantage of beneficial financing that was available to Chadwick alone as an employee of the lender.
On December 2, 1016, the Court ruled that the Complaint was broad enough to include a claim for the postpetition rents. See Dkt. No. 161 & 163.
On December 13, 2016, the Court entered the Order for Turnover, in which it iterated that the Property was property of the bankruptcy estate and held as community property. Dkt. No. 164. The Court also ruled that Charles held no interest in the Property. The Court ruled that the Trustee could use, sell, or lease the Property pursuant to Code § 363. Finally, the Court and ordered the Defendants to turn the Property over to the Trustee. The Court reserved the issue of the Trustee's claim against Charles for monetary damages based upon postpetition rents collected.
The parties have briefed the issue. Dkt. Nos. 176 & 186. Defendants renewed the argument about the scope of the Complaint that the Court had already rejected. Dkt. No. 176. Defendants also argued that the Trustee could not recover any rents which were collected before the Trustee filed the Complaint. Id.
At a status conference the issue of how far back the Trustee could reach was discussed. The Court requested and considered further briefing. The Court determined that the petition date was the appropriate reach-back date. See Dkt. No. 214. The Court and parties recognized that the amount of the rents and the expenses associated therewith, to the extent not stipulated, would require an evidentiary hearing.
Factual Analysis
The parties stipulated to the net rents recoverable for 2012 and 2013. They have also agreed to the gross rents for 2014, 2015, and 2016. They have stipulated to some expenses to be netted from 2014, 2015, and 2016. The factual issues to be resolved are the remainder of expenses to be netted from the gross rents for the years 2014 to 2016.
Stipulated Facts
Net Rents 2012 and 2013
As noted above, the parties have stipulated to the net rents for 2012 and 2013 at $18,248 and $6,434.
Gross Rents 2014, 2015 and 2016
The parties have also stipulated to the gross rents collected by Charles for the years 2014, 2015 and 2016 in the amounts of $26,590, $26,830 and $29,501.
They also agree to reduction of the gross rents for 2014, 2015, and 2016 in the following amounts:
Homeowner's Fees
$960 for each of 2014, 2015 and 2016.
Real Property Taxes
2014 - $5,623.71; 2015 - $5,774.04; and 2016 - $5,895.96.
Mortgage Interest
2014 - $1,257.66; 2015 - $1,244.45; and 2016 - $1,234.91.
Real Property Insurance
2014 - $618.48; 2015 - $592.98; and 2016 - $561.00.
Merrill Lynch Note
The total amount of principal paid between December 7, 2011 and December 1, 2016 was $10,934.79.
Disputed Amounts
Tax Return Expenses
Charles claims as an expenses $250.00 for each of the disputed years for tax expenses. He testified that he paid his tax preparer $500.00 in each of the years to prepare a return for the LLC through which he held and rented the Property and his "Airport Property." He testified that in reaching the $250.00 figure, he simply divided the total by the number of properties and attributed half to each. The Court finds Charles' testimony to be credible and his approach reasonable. The Court will allow the expense of $250.00 for tax return expenses for each of the disputed years for a total of $750.00.
Property Management Services
Charles seeks to net out fees of $3,300.00 per year for property management services. This amount includes $1,200 for Peggy Alderman while she was providing some of the management services. There is no real dispute that Ms. Alderman's services benefitted the estate. The remainder is for services rendered by Charles. Charles calculated his amount by multiplying his self-assigned hourly rate of $275 by one hour a month for his services which included monthly inspections of the exterior of the Property, rental rate analysis, generally managing the Property, and negotiations with and addressing the demands of the tenant to the extent needed above the services provided by Ms. Alderman. During the period when Ms. Alderman provided services, Charles actually asks for less than an hour a month because he does not otherwise request compensation for her services.
The Court found Charles' testimony on this point to be credible. The Court accepts his factual assertions that he performed the services explained. Indeed, the Court accepts his entire relevant testimony on this point as credible; he spent far more than an hour a month on average.
The issue for the Court is whether these services provided a benefit to the estate which would justify the allowance of the expense. The Court finds that they did.
Not only did Charles provide physical inspections of the Property assuring that it did not fall into disrepair, but he also monitored the market to assure the Property was renting at an appropriate amount. Over the course of the disputed period Charles used this information to increase the rent.
Further, Charles testified that the long term tenants were demanding; he gave examples to prove it, and Ms. Alderman's testimony made clear that he was frequently called on to make decisions and to engage in negotiations. Finally, there was a serious flood, water damage, and mold problem during this time period. It is clear that Charles spent hours dealing with this issue. The Court will allow as an expense to be netted $3,300.00 for each year 2014 through 2016.
Mileage Reimbursement
Charles seeks to set off mileage expenses of $111.97 for 2014, $232.76 for 2015, and $120.42 for 2016 for the trips he took to inspect the Property. As the Court has held that Charles' routine inspections of the Property were protective of an asset that has been determined to belong to the estate, the Court will allow these expenses for a total of $465.15. The slightly increased mileage in 2015 was appropriate given the flood related issues.
Repairs
Charles seeks to set off repair expenses of $135.00 for 2014, $16,055.02 ($6,000.00 of which he acknowledges was reimbursed) for 2015, and $1,230.00 for 2016. Charles testified that he did in fact incur these expenses and that he received only $6,000 in reimbursement from the USAA, the insurance company, in 2015. With respect to the insurance proceeds, the Trustee contends that Charles received at least $7,000 in insurance proceeds from USAA in 2015. Despite somewhat confusing deposition testimony, the Court is persuaded by the testimony of Charles that the amount received was $6,000.
At trial, Charles provided documentary evidence supporting his testimony up to $126.66 for 2014, $10,146.96 for 2015, and $0.00 for 2016. The Court has considered the testimony of Charles and the arguments made by the Trustee and finds that between his testimony and the documentary evidence that Charles has provided sufficient evidence that he incurred the expenses as alleged.
At the trial, the Trustee made the point that the expenses claimed for 2015 were not reflected in Debtor's 2015 tax return. Debtor replied that since he was not going to owe any taxes in 2015, he did not strain to include all possible expenses. When asked why he did not max out the expenses on the tax return to increase the LLC's net operating loss, Charles explained that he did not think the LLC could carry forward the losses, so it did not matter. The Court accepts Charles's explanation and does not find that the inconsistency undercuts his testimony on the issue of expenses for the purposes of this matter.
The Trustee also made a point that Charles had not provided his full QuickBooks record. The Court does find this curious but not fatal to Charles. The Court found Charles to be a highly believable, albeit also frustrated and fatalistic, witness. The Court, thus, finds the testimony of Charles to be credible on this issue and finds that he did in fact incur expenses of at least the total amount claimed despite the inconsistent tax returns, the lack of QuickBooks evidence, and the lack of receipts for all expenses, and finds that he incurred repair expenses of $135.00 for 2014, $10,055.02 (this is net of the $6,000.00 he acknowledges was reimbursed) for 2015, and $1,230.00 for 2016, which will be netted off the gross rental income. These repairs obviously benefitted the estate.
Pest Control
Charles seeks to set off pest control expenses of $440.00 for 2014, $67.00 for 2015, and $440.00 for 2016. The Court accepts Charles's testimony that he actually incurred these expenses and finds that they benefitted the estate and are properly allowed against turnover.
Bank Fees
Charles seeks to set off bank fees of $89.45 for 2014, $57.50 for 2015, and $36.00 for 2016. The Court accepts Charles's testimony that he actually incurred these expenses and finds that they benefitted the estate by allowing Charles to maintain the rents for the Trustee's ultimate collections and are properly allowed as a rental offset.
Cleaning Expenses
Charles seeks to set off cleaning expenses of $1,580.00 for 2015, and $280.00 for 2016. The Court accepts Charles's testimony that he actually incurred these expenses and finds that they benefitted the estate by allowing Charles to maintain a rent paying tenant at the Property and are properly allowed against turnover. Again, the Court believes his testimony that the tenants were demanding.
Conclusions
2012
The stipulated net rent recoverable by the Trustee is $18,248.00.
2013
The stipulated net rent recoverable by the Trustee is $6,434.00.
2014
The stipulated gross is $26,950. The stipulated expenses are $7,202.19. The Court finds the disputed expenses are allowed in the amount of $4,326.42. The net rent recoverable by the Trustee is $15,421.39.
2015
The stipulated gross is $26,830. The stipulated expenses are $8,571.47. The Court finds the disputed expenses are allowed in the amount of $15,542.28. The net rent recoverable by the Trustee is $11,880.70.
2016
The stipulated gross is $29,501. The stipulated expenses are $8,651.87. The Court finds the disputed expenses are allowed in the amount of $5,656.42. The net rent recoverable by the Trustee is $21,129.13.
Total Recovery
The total net rent recoverable by the Trustee is $73,113.22 less the stipulated principal paid down on the mortgage of $10,934.79 for a total recovery of $62,178.43.
Conclusion.
If any party detects a math error, he or she should file a document setting out the alleged error within seven days of the filing of this document. The Court will review such a document and file an amendment if appropriate. Otherwise, the Trustee should promptly submit the final judgment. DATED: August 25, 2017
/s/_________
LAURA S. TAYLOR, Chief Judge
United States Bankruptcy Court In re: CHADWICK C. COLLINS, CASE NO.: 11-19790-LT7 NANCY L. WOLF, TRUSTEE v. CHARLES G. COLLINS, JANELLE L. COLLINS, AND CHADWICK C. COLLINS, ADV. NO.: 13-90063-LT
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified employee in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION (Rent Recovery)
was enclosed in a sealed envelope bearing the lawful frank of the bankruptcy judges and mailed via first class mail to the party at their respective address listed below: Nancy L. Wolf, Trustee
P.O. Box 420448
San Diego, CA 92142 Kevin J. Hoyt, Esq.
Estes & Hoyt, A.P.C.
550 West C Street, Suite 530
San Diego, CA 92101 Jennifer E. Duty, Esq.
Gordon Rees LLP
101 West Broadway, Ste 2000
San Diego, CA 92101 Susan C. Stevenson, Esq.
PYLE SIMS DUNCAN & STEVENSON
A Professional Corporation
401 B Street, Suite 1500
San Diego, CA 92101
Said envelope(s) containing such document was deposited by me in the City of San Diego, in said District on August 25, 2017.
/s/_________
Regina A. Fabre, Judicial Assistant