Kessler-Maue v. Maue (In re Maue)

611 B.R. 367

IN RE: Jan Gregory MAUE and Mary Elizabeth Maue, Debtors.

Cristi Kessler-Maue, Martin J. Maue, and James Craig Maue, Plaintiffs,

v.Jan Gregory Maue and Mary Elizabeth Maue, Defendants.

Case No. 18-13683-MLB

Adversary No. 19-01002-MLB

United States Bankruptcy Court, W.D. Washington, at Seattle.

Signed December 23, 2019

J. Ronald Denman, Bleakley Bavol and Denman, Tampa, FL, Danial D. Pharris, Lasher Holzapfel Sperry & Ebberson PLLC, Seattle, WA, for Plaintiffs.

Thomas E. Lester, Lester & Associates, P.S. Inc., Bellingham, WA, for Defendants.

MEMORANDUM DECISION

Marc Barreca, U.S. Bankruptcy Court Judge

INTRODUCTION

This matter came before me for trial on the complaint filed by Cristi Kessler-Maue ("Cristi "), Martin J. Maue ("Martin ") and James Craig Maue ("Craig ") (collectively "Plaintiffs "), seeking (1) a determination of the amount of debt owed by Jan Gregory Maue ("Jan ") and Mary Elizabeth Maue ("Mary ") (collectively "Defendants "); (2) a determination that such debt is nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (a)(4) and (a)(6) ; and (3) an order enjoining Defendants from taking any further action in connection with family trusts and removing or suspending Jan as trustee.¹ The underlying claims are for breaches of fiduciary duties owed by Jan as trustee for three family trusts: the Maue Family Liquidity Trust ("MFLT "); the Ruby Mae Maue Trust ("RMMT "); and the Maue Property Trust ("MPT ") (collectively the "Trusts "). Having reviewed the evidence and considered the arguments of counsel, and otherwise having good cause, I enter the following findings of fact and conclusions of law.² As discussed more fully below, I will enter a judgment liquidating and allowing the Plaintiffs' underlying claim and imposing a surcharge against the Defendants in the amount of $853,067.84, of which I determine that $686,496.60 is nondischargeable under §§ 523(a)(4) and (a)(6). I will also enjoin Jan from taking further actions concerning the Trusts, and I find that grounds exist to either remove or suspend Jan as trustee.

PROCEDURAL HISTORY

On September 25, 2018, the Defendants filed a petition for relief under chapter 13 of the Bankruptcy Code. On January 7, 2019, the Plaintiffs timely filed the present adversary proceeding. In addition to the claims for relief discussed in this decision, the Plaintiffs initially objected to entry of the Defendants' discharge under §§ 727(a)(2), (a)(4) and (a)(5), but have since withdrawn the objection.

Administration of the bankruptcy estate is heavily affected by adjudication of the present adversary proceeding. A chapter 13 plan has not been confirmed. On March 1, 2019, I entered an order denying confirmation. See Bankr. W.D. Wash. Case No. 18-13683-MLB, Dkt. No. 110. Within that same order, I continued the chapter 13 trustee's motion to dismiss subject to recall, continued the chapter 13 trustee's objection to exemptions subject to recall, continued the Plaintiffs' objection to exemptions subject to recall and consolidated the Defendants' objection to proofs of claim nos. 4 and 5 into the present adversary proceeding.³ I held a five-day trial from August 26-30, 2019.

JURISDICTION

I have jurisdiction over "all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b).⁴ A matter "arises under" title 11 if its existence depends on a substantive provision of the Bankruptcy Code and involves a cause of action created or determined by a statutory provision of the Bankruptcy Code. Battle Ground Plaza, LLC v. Ray (In re Ray) , 624 F.3d 1124, 1131 (9th Cir. 2010). "A proceeding ‘arises in’ a case under the Bankruptcy Code if it is an administrative matter unique to the bankruptcy process that has no independent existence outside of bankruptcy and could not be brought in another forum, but whose cause of action is not expressly rooted in the Bankruptcy Code." Id. The Ninth Circuit has adopted the " Pacor test" for determining the scope of "related to" jurisdiction. Montana v. Goldin (In re Pegasus Gold Corp.) , 394 F.3d 1189, 1193 (9th Cir. 2005) (citing Pacor Inc. v. Higgins , 743 F.2d 984, 994 (3d Cir.1984) ). Under the Pacor test, "related to" jurisdiction exists if the outcome of the proceeding could have a conceivable effect on the bankruptcy estate and if the outcome could alter the debtor's rights or liabilities (either positively or negatively) in such a way which would impact administration of the estate. Id. "A bankruptcy court's ‘related to’ jurisdiction is very broad, ‘including nearly every matter directly or indirectly related to the bankruptcy.’ " Sasson v. Sokoloff (In re Sasson) , 424 F.3d 864, 869 (9th Cir. 2005) (citing Mann v. Alexander Dawson (In re Mann) , 907 F.2d 923, 926 n.4 (9th Cir. 1990) ).

Here, I have exclusive jurisdiction to determine and enter final judgment as to whether the debt owed to Plaintiffs is nondischargeable under §§ 523(a)(2), (a)(4) and (a)(6). Dietz v. Ford (In re Dietz) , 760 F.3d 1038, 1043 (9th Cir. 2014). Additionally, I have authority and jurisdiction to adjudicate and liquidate Plaintiffs' underlying state law claims. Id. at 1043-50 (a bankruptcy court may liquidate a debt and enter final judgment in conjunction with finding the debt nondischargeable); Sasson , 424 F.3d at 870 (holding that "bankruptcy courts have jurisdiction and power to enter money judgments in adjudicating nondischargeability adversary proceedings"); Stanbrough v. Valle (In re Valle) , 469 B.R. 35, 43 (Bankr. D. Idaho 2012) ("In the case of an unliquidated debt, the bankruptcy court must necessarily determine liability and damages in order to establish the underlying debt. Adjudication of the underlying claim, which arises under nonbankruptcy law, becomes part and parcel of the dischargeability determination and thus integral to restructuring the debtor-creditor relationship.") (internal citations omitted).

Whether I have jurisdiction to grant Plaintiffs the injunctive relief requested is a closer call. Plaintiffs seek entry of an order that restrains Defendants from taking any further action in connection with the Trusts and that either suspends or removes Jan as trustee.

As indicated earlier, the scope of matters covered by "related to" jurisdiction is broad and covers proceedings that may have a conceivable effect on the bankruptcy estate and that could alter the administration of the estate. The bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1). Courts construe § 541 broadly to bring any and all the debtor's property rights within the bankruptcy court's jurisdiction. See United States v. Whiting Pools, Inc. , 462 U.S. 198, 205 n.9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). "[W]hile assets transferred to a trust do not ordinarily become property of the bankruptcy estate of the trust's trustee, powers that a debtor who is trustee of a trust may exercise for his or her own benefit become property of the estate." Cutter v. Seror (In re Cutter) , 398 B.R. 6, 19 (9th Cir. BAP 2008) (citing Askanase v. LivingWell, Inc. , 45 F.3d 103, 106 (5th Cir. 1995) ); see also In re Gifford , 93 B.R. 636, 640 (Bankr. N.D. Ind. 1988) ("Thus, what comes to the bankruptcy estate is not only the property in which the debtor has an interest, but also, the powers the debtor can exercise for its own benefit over property regardless of the title debtor may be acting under.").

Here, property held by the Trusts is likely not property of the estate. Conversely, Defendants' beneficial interest in the Trusts and Jan's legal interest as trustee are property of the estate. Therefore, the bankruptcy estate is affected to the extent Plaintiffs seek an order, under applicable nonbankruptcy law, to restrain Jan from exercising his right to administer the Trusts and to either remove or suspend him as trustee. I therefore have "related to" jurisdiction to determine whether the requested injunctive relief is appropriate.

For these reasons, I have jurisdiction over the parties and the subject matter of this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in the Western District of Washington pursuant to 28 U.S.C. § 1409.⁵

FINDINGS OF FACT

A. Family Background

1. Jan is the brother of the Plaintiffs and a debtor in this chapter 13 proceeding.

2. Mary, who is Jan's wife and a co-defendant in connection with the Plaintiffs' claims, is also a debtor in this chapter 13 proceeding.

3. Mary testified and I find that she has been married to Jan for 45 years and that they have lived in Washington for 26 years.

4. Plaintiffs and Jan's parents, Howard J. Maue ("Howard ") and Ruby May Maue ("Ruby "), established a number of trusts during their lifetimes, however the only trusts created by them at issue in this litigation are the RMMT and the MFLT.

5. Plaintiffs and Jan also established the MPT to hold certain real property.

6. Jan was appointed trustee of the Trusts and remains the trustee.

7. Ruby died in 1995.

8. Howard died on March 11, 2017.

B. The Family Trusts

RMMT

9. The RMMT was established by Ruby, as the grantor, on September 18, 1992 and became irrevocable upon Ruby's death. See Pls.' Ex. 1.

10. The beneficiaries of the RMMT are Howard, Cristi, Craig, Martin and Jan, as well as Howard's grandchildren.

11. While Howard was alive, each beneficiary of the RMMT was entitled to so much of the income or principal of the trust as the trustee deemed necessary for the health, support and maintenance of the beneficiaries.

12. After the death of Howard and Ruby, the RMMT called for the remaining assets to be divided and distributed outright to Craig, Martin, Cristi and Jan, per stirpes .

13. The corpus of the RMMT consisted primarily of securities.

14. The terms of the RMMT require that the trustee provide semi-annual reports of trust finances.

15. The RMMT provides that the trustee shall receive compensation for his services as "agreed by the trustee and a...