In re LaForce

577 B.R. 908

IN RE: Raymond H. LAFORCE, Debtor.

Case No.: 14–2967–JCO

United States Bankruptcy Court, S.D. Alabama, Southern Division.

Signed September 6, 2017

Robert M. Galloway, Galloway Wettermark Everest & Rutens, LLP, Gordon G. Armstrong, III, J. Willis Garrett, Mobile, AL, for Debtor.

MEMORANDUM OPINION AND ORDER

JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE

Pending before the Court is a Motion for Authority and Amended Application to Enforce Property Division Provisions of Judgment of Divorce and Supporting Brief filed by Creditor Candace LaForce, (Docs. 468, 494, 653), and the Trustee's Response in Opposition thereto. (Doc. 683). A hearing was held on the Motion on August 1, 2017. Appearing before the Court was the Trustee, Lynn Harwell Andrews and counsel for the Trustee, A. Richard Maples. On behalf of Creditor Candace LaForce was attorney Irvin Grodsky. Creditor Candace LaForce was also present.

Having considered the record before it, the pleadings and Motion presented at the hearing, as well as the arguments of the parties, this Court orally found that Creditor Candace LaForce's Motion for Authority was due to be GRANTED. So as not to delay her enforcement of the Judgment of Divorce while this Court drafted the memorandum opinion herein, an interim Order granting the Motion was entered in the record of this case. This Court further finds as follows.

FACTUAL AND PROCEDURAL HISTORY

Debtor Raymond LaForce (hereinafter "Husband" or "Debtor") and Creditor Candace LaForce (hereinafter "Wife") were married for approximately 27 years, until September 22, 2011, when Wife filed for divorce in the Mobile County Circuit Court (hereinafter "Domestic Relations Court"). On the date of the divorce filing, Wife and Debtor owned personal and real property that was acquired after the marriage, which is classified under Alabama law as marital property. This property makes up the marital estate. On the date of the divorce filing, most of the personal property and real property were titled in Debtor's name only. The Divorce Complaint requested an equitable division of the property in the marital estate.

On September 23, 2011, the Domestic Relations Court entered a pretrial order requiring the Wife and Debtor to maintain the status quo of their household bills and to refrain from disposing of any savings accounts, household furnishings or other assets of the marital estate. (Doc. 653 at 20). On March 27, 2014, the Domestic Relations Court entered an order awarding Wife "immediate possession of the Ferrari pending the hearing." (Doc. 653 at 21).

On September 11, 2014, Debtor filed an individual Chapter 11 petition seeking bankruptcy protection.¹ Wife is not a co-debtor in the bankruptcy and has not filed a separate bankruptcy proceeding.

The divorce trial was scheduled and then continued multiple times. The divorce was set again for trial on December 17, 2014. On the day of trial, the case was called and Wife appeared and was represented by counsel. (Doc. 653 at 22). Debtor appeared pro se . (Doc. 653 at 22). After calling the case, the Domestic Relations Court entered an order granting the Debtor a final continuance. In the order, the Domestic Relations Court chastised the Debtor for his delay and held the Wife had an equitable interest in all assets and may have an equitable responsibility for some debt included in the marital estate. (Id. ). The Domestic Relations Court cautioned that the trial would be reset only once more for Debtor to retain counsel, and, once counsel was retained, trial preparations must begin immediately with no delay in discovery despite having new counsel. (Id. at 23).

On February 6, 2015, this Court granted relief from stay to authorize the Domestic Relations Court to adjudicate the divorce proceeding and to enter a final Judgment of Divorce determining all marital issues, including a division of marital property of the parties, subject to the Bankruptcy Court retaining jurisdiction over the enforcement of said Judgment to the extent that it affected the Debtor's bankruptcy estate. (Doc. 167).

On January 20, 2016, the Domestic Relations Court entered a Judgment of Divorce granting the parties a divorce, ordered a division of the marital property, awarded alimony, and divided the obligations for certain debts of the marriage. (Doc. 653 at 24–26).

The Judgment of Divorce equitably divided the marital estate consisting of real and personal property acquired after the date of marriage, as follows:

1. Awarded to Wife is the marital home located at 6373 Muirwood Drive, subject to the indebtedness on the home, the contents of the marital home, a painting titled "Woman in Red Dress," two vehicles, i.e., a 2002 Mercedes SLK and a 2008 Ferrari F430, the Debtor/Husband's interest held in the name of Debtor/Husband in a leased 2013 Porsche, a boat described as a 26' Regulator, 25% of the shares of stock of Raymond and Associates, subject to payment of certain debts, and 40% of Debtor/Husband's net BP settlement claim, after payment of creditors.

2. Awarded to Debtor/Husband his interest in the Fowl River house in which he resided at the time and the contents therein, all interest in the Walker Key condominium and the contents therein, an indebtedness of $10,105.00, which was due for the Walker Key condo, a semicircle leather sofa, 2003 Harley Softtail, 2015 Lexus GS 350, 56'Hatteras, 2009 Skeeter boat, two Yamaha jet skis, proceeds from the Nissan GTR, 2014 Hayabusa, all other vehicles, 75% of the shares of stock held in the name of Debtor/Husband in Raymond and Associates, 60% of Debtor/Husband's net BP settlement, after payment of creditors, six acres on Shell Belt Road in Bayou La Batre, Alabama, and all interests in Savory, Inc.

On April 7, 2016, the Judgment of Divorce was amended by the Domestic Relations Court to include a stereo and four pinball machines, as well as to address the forthcoming BP claim. (Doc. 653 at 27). Under the Judgment of Divorce, Debtor/Husband received 61% and Wife received 39% of the marital estate property based upon the values assigned to the assets by the Domestic Relations Court. Debtor appealed the Judgment and the Alabama Court of Civil Appeals affirmed without issuing an opinion. (Doc. 653 at 28).

CONCLUSIONS OF LAW

The timing of the divorce and bankruptcy create the questions that are before this Court today. Did the pre-petition filing of the divorce action create a constructive trust for Wife's benefit, and does that constructive trust prevent the marital estate assets from entering the bankruptcy estate? This is one of the classic dilemmas of bankruptcy jurisprudence—which deserving class of creditors should receive the benefit of a debtor's limited assets to satisfy its claims against the debtor to the detriment of other deserving classes of creditors.

Interplay Between §§ 541(a) and (d)

The commencement of a bankruptcy case creates an estate 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). The reach of Section 541(a) is vast, but not limitless. Section 541(d) helps define those limits, "[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." § 541(d). Section 541 does not "specify what is or what is not 'an interest of the debtor in property,' so that one may determine the composition of a debtor's estate." In re Poffenbarger, 281 B.R. 379 (Bankr. S.D. Ala. 2002). Thus, the interplay between subsections (a) and (d) is not always easily reconciled. "When property held in the possession of a debtor is alleged to be held in trust by the debtor for a nondebtor, and therefore not estate property under subsection 541(a)(1) or (2), the burden rests upon the entity seeking to exclude the property from the estate to establish the existence of the [trust]." 5–541 Collier on Bankruptcy P 541.28 (16th 2017). "That entity must prove title and identify the trust fund or property and, where the fund or property has been commingled with the general property of the debtor, must sufficiently trace the property." Id. "When the existence of a prepetition constructive trust is established, the assets subject to the trust will typically be found ... not to be property of the estate." Id. (emphasis in original).

Constructive Trust Property is Not Property of the Estate

"A constructive trust is the formula through which the conscience of equity finds expression." Davis v. Barnfield, 833 So.2d 58, 64 (Ala. Civ. App. 2002). State law determines when/whether property is held by a bankrupt debtor in constructive trust for another. In re Poffenbarger, 281 B.R. 379, 388 n. 6 (Bankr. S.D. Ala. 2002) (citing In re Southmark Corp., 49 F.3d 1111, 1118 (5th Cir. 1995) ; In re Gen. Coffee Corp., 828 F.2d 699, 701–04 (11th Cir.1987), cert. denied, 485 U.S. 1007, 108 S.Ct. 1470, 99 L.Ed.2d 699 (1988) ; In re Oster, 261 B.R. 599, 601–02 (Bankr. M.D. Pa. 2000) ). Here, that is Alabama state law—more specifically, Section 30–2–51 of the Alabama Code, which is discussed in more detail below.

In Sledge v. Sledge , the Alabama Court of Civil Appeals defined and analyzed the creation of a "constructive trust" as follows:

A constructive trust is a creature of equity that operates to prevent unjust enrichment; such a trust will be imposed when a property interest has either been acquired by fraud or where, in the absence of fraud, it would be inequitable to allow the property interest to be retained by the person who holds it.

Sledge v. Sledge, 630 So.2d 461, 464 (Ala. Civ. App. 1993) (emphasis added) (quoting Coupounas v. Morad, 380 So.2d 800, 803 (Ala. 1980) ); Holley v. Holley, 660 So.2d 608, 610 (Ala.Civ.App. 1995).

Equity may also impress a constructive trust on property in...