In Re: William B. Starr Suzanne C. Starr

In re: William B. Starr Suzanne C. Starr, DebtorsRuth A. Slone, Plaintiff

v.Stephen W. Vallo, Defendant

Case No. 09-37457

Adv. No. 10-3279

UNITED STATES BANKRUPTCY COURT

FOR THE SOUTHERN DISTRICT OF OHIO

WESTERN DIVISION AT DAYTON

Dated: March 24, 2011

This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.

Guy R. Humphrey

United States Bankruptcy Judge

Decision on Trustee's Motion for Summary Judgment

and Defendant's Cross-Motion for Summary Judgment

I. Introduction

The issue presented by the parties to the court on their cross-motions for summary judgment is whether the granting of a mortgage on real estate by the debtor's former spouse constitutes the "conveyance" of that real property under the debtor's separation agreement that triggered the former spouse's obligation to pay the debtor $50,000. On that premise, the Chapter 7 trustee seeks to recover that amount from the former spouse as property of the debtor's bankruptcy estate.

The court concludes that the granting of a mortgage in Ohio does not constitute the "sale or conveyance of said real estate" as that term is used in the separation agreement. Therefore, to the extent that the trustee's motion for summary judgment and her complaint seek an order requiring the immediate payment of $50,000, that relief is denied. In addition, the defendant's cross-motion for summary judgment is granted to that limited extent.

However, resolution of the issue regarding the timing of the payment may not resolve the adversary proceeding in its entirety. While the court concludes that the trustee is not entitled to an order requiring the immediate payment of $50,000 by the defendant, the debtor's, now the trustee's, entitlement to be paid $50,000 or such greater sum¹ upon the "sale or conveyance of said real estate" constitutes property of the debtor's bankruptcy estate. The trustee's complaint requests "judgment... against the defendant in the amount of $50,000" and "[f]or interest, costs of this action, and such other and further relief as is just and proper." Accordingly, an issue remains as to whether the trustee intendsto administer this asset through this adversary proceeding or in another manner. The court will schedule a joint pretrial conference in this adversary proceeding and a status conference in the estate case to address that issue.

II. Findings of Fact

These undisputed facts are taken from the "Fact Stipulation" and the documents which the parties attached and incorporated into that Stipulation. Adv. Doc. 12.

Defendant Stephen C. Vallo (the "Defendant") and Debtor Suzanne C. Starr (the "Debtor") are divorced. On November 29, 2000, the Defendant and Debtor signed a Separation Agreement (the "Separation Agreement"). While the Defendant was represented by counsel during the negotiation of the Separation Agreement, the Debtor waived representation. Defendant's counsel drafted the Separation Agreement.

The Separation Agreement contains the following provision pertaining to the allocation of the real estate owned by the parties at the time of their separation (the "Property"):

The HUSBAND shall retain the marital residence located at 855 Hawthorne Drive, Tipp City, Ohio and shall indemnify and hold the WIFE harmless from all indebtedness thereon, including installments for taxes and assessments, all of which the HUSBAND expressly agrees to pay. The WIFE shall convey her interest in said real estate to the HUSBAND by good and sufficient Quit Claim Deed. Upon sale or conveyance of said real estate by the HUSBAND, at any future time, the HUSBAND agrees to pay to the WIFE the sum of FIFTY THOUSAND DOLLARS ($50,000) for her equity in said property; provided further, however, that in the event that said residence should sell at a price in excess of ONE HUNDRED THIRTY FIVE THOUSAND DOLLARS ($135,000), the WIFE shall be entitled to an additional amount equal to TWENTY FIVE PERCENT (25%) of the amount by which the net sale proceeds exceed the sum of ONE HUNDRED THIRTY FIVE THOUSAND DOLLARS ($135,000).

Adv. Doc. 12 (Exh. A, p. 2, § C) (italics added). The Separation Agreement was incorporated into the Defendant's and Debtor's Decree of Dissolution filed with the Common Pleas Court of Miami County, Ohio on January 17, 2001 (the "Decree of Dissolution").

As of the date of the execution of the Separation Agreement and the filing of the Decree of Dissolution, the Property was encumbered by an open-end mortgage (the "First Mortgage"). On March 7, 2001 Ms. Starr quitclaimed her interest in the Property to the Defendant (the "Quitclaim Deed").

On August 17, 2007 the Defendant executed and delivered another open-end mortgage (the "Second Mortgage") on the Property to Unity National Bank, Division of Security National Bank of Piqua, Ohio ("Unity National Bank").

The Defendant continues to own and live at the Property and the Miami County, Ohio Auditor lists the current market value of the Property as $146,000.

III. Procedural Background

William Starr and Debtor Suzanne Starr filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on November 25, 2009.

On August 4, 2010 Ruth Slone (the "Trustee"), as trustee of the bankruptcy estate of William B. Starr and Suzanne C. Starr, initiated this adversary proceeding by the filing and serving of a complaint against the Defendant seeking to recover the amount of $50,000 pursuant to 11 U.S.C. § 542² (Adv. Doc. 1). The Defendant filed an answer on August 16, 2010 (Adv. Doc. 3).

This matter is before the court on the Trustee's Motion for Summary Judgment (the "Motion") filed on November 19, 2010 (Adv. Doc. 13) and the Defendant's Cross Motion for Summary Judgment (the "Cross Motion") filed on November 30, 2010 (Adv. Doc. 14). On November 19, 2010 the Trustee and the Defendant also filed the Fact Stipulation (Adv. Doc. 12), to which the following were attached and incorporated by reference: the Separation Agreement, the Decree of Dissolution, the Quitclaim Deed, the First Mortgage, the Second Mortgage, and a Miami County Auditor's record showing the County's appraised value of the Property. On January 13, 2011 the Defendant filed a Reply Brief in Further Support of Defendant's Cross-Motion for Summary Judgment (Adv. Doc. 16) and on January 14, 2011 the Trustee filed the Trustee's Reply (Adv. Doc. 17).

IV. Positions of the Parties

The Trustee argues that under Ohio law, a mortgage constitutes a conveyance of real property and therefore upon granting of the Second Mortgage, the Defendant became obligated to pay the Debtor $50,000 pursuant to the terms of the Separation Agreement, which money by virtue of her bankruptcy filing is property of the estate. The Defendant responds that, under Ohio law, a mortgage constitutes merely a security for a debt and is not a "sale or conveyance of said real estate" as provided by the Separation Agreement. The Defendant asserts that in Ohio a mortgage does not convey an interest in real property of the nature required to trigger his obligation to pay $50,000.

V. Legal Conclusions

A. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 05-02 of the United States District Court for the Southern District of Ohio. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E).

B. Summary Judgment Standard

The standard to address the filings is contained in Federal Rule of Civil Procedure ("FRCP") 56(c), made applicable to adversary proceedings through Bankruptcy Rule 7056, and states, in part, that a court must grant summary judgment to the moving party if:

the pleadings, the discovery and disclosure statements on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law.

FRCP 56(c). In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). If the burden is on the nonmoving party at trial, the movant must: 1) submit affirmative evidence that negates an essential element of the nonmoving party's claim or 2) demonstrate to the court that the nonmoving party's evidence is insufficient to establish an essential element of the nonmoving party's claim. Id. at 331-32. Thereafter, the opposing party "must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-51 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88.

C. Legal Conclusions

1. The Debtor's Right to Receive $50,000 orSuch Greater Sum is Property of the Estate

The initial issues which must be addressed in order to resolve the cross-motions for summary judgment are: a) is property of the estate involved in this adversary proceeding?; and, b) if so, what is the property of the estate in question?

Upon the filing of a bankruptcy case, a bankruptcy estate is created consisting 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 scope of § 541(a)(1) is intended to be broad and generally includes all interests of the debtor in property or assets, subject to certain exceptions and limitations provided by § 541(b) and (d). United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05 (1983).

The breadth of "property of the estate" has been emphasized in several reported decisions of the Bankruptcy Appellate Panel for the Sixth Circuit (the "BAP"). The BAP noted that "the courts have, across a wide variety of circumstances, almost uniformly adhered to the view that contingent interests are property of the estate under § 541(a)(1)," reviewed a litany of decisions finding...