Miller v. Short (In re Short)

625 B.R. 678

IN RE: Jonathon Daniel SHORT, Debtor.

Timothy Miller, Trustee, Plaintiff,

v.Andrea Short and Jonathon Daniel Short, Defendants.

Case No. 18-45299

Adv. Pro. No. 19-4448

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed February 16, 2021

Jeffrey H. Bigelman, Osipov Bigelman, P.C., Southfield, Michigan, Attorney for Plaintiff Timothy J. Miller, Trustee

Alexander J. Berry-Santoro, William C. Babut, Babut Law Offices, PLLC, Ypsilanti, Michigan, Attorney for Defendants

OPINION REGARDING DEFENDANTS’ TWO MOTIONS TO DISMISS AND FOR SUMMARY JUDGMENT

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

The pending motions in this adversary proceeding require the Court to decide whether a Chapter 7 Trustee, as successor to the Debtor's interests and on behalf of the bankruptcy estate, can assert a claim for the imposition of a constructive trust on real property titled in the name of a non-debtor. The Court concludes that the answer is "yes," if the requirements are met for such a constructive trust under applicable state law. The Court concludes that such a claim is not barred by the Sixth Circuit Court of Appeals decision in XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc. ), 16 F.3d 1443 (6th Cir. 1994), or later Sixth Circuit cases.

The issue arises in the context of two motions filed by the Defendants: (1) the motion entitled "Defendant Jonath[o]n D. and Andrea Short's Motion to Dismiss Plaintiff's Complaint, and for Summary Judgment" (Docket # 26 the "Defendants’ First Motion"); and (2) the motion entitled "Defendant, Jonath[o]n D. and Andrea Short's Motion to Dismiss Plaintiff's Amended Complaint, and, for Summary Judgment" (Docket # 94 the "Defendants’ Second Motion").

For the reasons stated below, the Court must deny the Defendants’ request for dismissal of, or summary judgment on, the Plaintiff Trustee's constructive trust claim. Based on the arguments made in Defendants’ motions, and on the present record, genuine issues of material fact preclude summary judgment in favor of the Defendants.

II. Relevant facts and procedural history

A. Purchase and renovation of Swan Creek residence

Defendant Andrea Short ("Andrea") is the wife of the Defendant Jonathon Short ("Jonathon"), the Debtor in the underlying Chapter 7 bankruptcy case. Jonathon, Andrea, and their children reside at 8590 Swan Creek Road, Newport Michigan (the "Property"), as they did when the underlying Chapter 7 bankruptcy case was filed by Jonathon on April 11, 2018.

The Property was purchased in November 2009 from the United States Department of Housing and Urban Development, for $18,000.00.¹ The Property was purchased with proceeds from a personal loan taken out by Jonathon, Andrea, and Andrea's parents.²

The Property is titled solely in Andrea's name.³ The Defendants say that this is because Jonathon was working at the time of the closing on the Property, and could not attend.⁴ Otherwise, according to Andrea, Jonathon's name also would have been on the deed.⁵ The Trustee alleges that the Property was titled in Andrea's name alone in an effort to shield it from Jonathon's creditors.⁶

The Property was in poor condition and the Defendants did not move into the house until fifteen to eighteen months after it was purchased.⁷ Before the Defendants and their children could move into the Property, the new roof had to be replaced and the interior of the house had to be "rehabbed."⁸ The new roof was installed by a contractor.⁹ The interior drywall was done by Jonathon, Andrea, family and friends.¹⁰ Jonathon testified that he did plumbing work; an electrician friend of Andrea's father helped Jonathon with the electrical work; and Andrea's father installed most of the insulation.¹¹ Jonathon's brother, a heating and cooling contractor, performed the labor associated with updating the furnace and air conditioning.¹² The bathrooms were rehabbed with help from friends and family.¹³ The Defendants continued to do work on the kitchen after moving into the Property.¹⁴ They also financed foundation and waterproofing work that was done on the basement and received a grant for lead remediation.¹⁵

The Defendants say that they paid off the loan used to purchase the Property with funds from their joint bank account.¹⁶ Andrea testified in her deposition that the cost of repairs made to the Property was paid out of the Defendants’ paychecks.¹⁷ But the Defendants admit that, throughout their marriage, Jonathon was "the primary wage-earner with his income providing nearly all the family's household income."¹⁸ Andrea testified that she worked full time at Dairy Queen, earning $10 per hour, until October 2010.¹⁹ In December 2010, she went to school for nine months to get a certificate as a medical assistant.²⁰ In 2012, she began working at a hospital part time, 56 hours every two weeks, for $12 per hour.²¹ In 2018, she reduced her hours to less than 20 hours per week.²²

As a result of the repairs and remodeling, the value of the Property greatly increased from the $18,000 price paid for it in 2009.²³ In December 2017, a real estate agent contacted by Andrea estimated that the market value of the Property was between $99,000 and $171,000.²⁴ The Trustee alleges that the current value of the Property is at least $170,000.²⁵

B. Defendants’ prior bankruptcy cases

Before the Property was purchased in 2009, the Defendants jointly filed two bankruptcy cases. The first of these was a Chapter 13 case filed on November 8, 2007.²⁶ At that time, the Defendants were residing in Monroe, Michigan. According to the Schedule A filed in that case, Andrea was the sole owner of the Monroe residence.²⁷ The Chapter 13 case was dismissed, without a discharge, on March 6, 2008.²⁸

Shortly thereafter, on March 28, 2008, the Defendants filed another Chapter 13 case.²⁹ Again, Andrea was named as the sole owner of the Monroe residence.³⁰ At the Defendants’ request, the case was converted to Chapter 7.³¹ The United States Trustee filed an adversary complaint for denial of discharge against Jonathon, based on the eight year bar under 11 U.S.C. § 727(a)(8).³² A default judgment was entered against Jonathon, and his discharge was denied.³³ Andrea was granted a discharge.³⁴

C. The current bankruptcy case and the Trustee's adversary complaint

Jonathon filed the current Chapter 7 bankruptcy case in April 2018, and listed the Property as his residence.³⁵ Jonathon did not list any ownership interest in the Property, or in any other real property, in his bankruptcy schedules.³⁶

The Trustee filed this adversary proceeding on October 6, 2019, alleging claims relating to the Property. The Trustee alleged a claim of constructive trust, based on Michigan law, against Andrea (Count I), a claim seeking delivery of the Property, as property of the estate, under 11 U.S.C. § 542(a) against Jonathon (Count II), and a claim seeking a sale of the Property under 11 U.S.C. § 363(h) against both Defendants (Count III).³⁷

The Defendants filed a motion to dismiss and for summary judgment on the original complaint (the "Defendants’ First Motion").³⁸ The Defendants argued that, as a matter of federal bankruptcy law, a constructive trust cannot be imposed by this Court. In support of this argument, the Defendants relied on the Sixth Circuit decision of XL/Datacomp, Inc. v. Wilson (In re Omegas Group, Inc. ), 16 F.3d 1443 (6th Cir. 1994). The Defendants also argued that, under the facts of this case, the requirements under Michigan law for the imposition of a constructive trust are not satisfied.

The Trustee responded that Omegas Group is distinguishable, and does not prevent the imposition of a constructive trust in this case.³⁹ The Trustee also argued that a constructive trust is appropriate in this case, under Michigan law.

Before the Defendants’ First Motion could be heard, the Trustee filed a motion to amend the complaint, to add claims based on theories of joint venture and partnership.⁴⁰ The Court granted the motion to amend, without prejudice to the Defendants’ pending motion.⁴¹

On September 16, 2020, the Trustee filed his amended complaint (the "Amended Complaint"), and that is the currently operative complaint in this case.⁴² Count I of the Amended Complaint seeks the imposition of a constructive trust against the Property. Andrea Short is named as the Defendant under this Count, and the Trustee alleges that:

In the present case, Debtor's sole income provided for the vast majority of the funds used to purchase of [sic] the [P]roperty, for its restoration and maintenance, and to satisfy its tax burdens.

By contrast, Mrs. Short has only minimally contributed, if at all, to the current equity in the Property.

Even though Debtor contributed substantially all of the equity to the Property (as Debtor and Mrs. Short intended), Debtor and Mrs. Short titled the Property in Mrs. Short's name solely to prevent Debtor's creditors from reaching the Property, thus unjustly enriching Mrs. Short at the expense of Debtor's creditors, whom Debtor now seeks to discharge without paying anything.

Though Mrs. Short holds legal title to the Property, the Court should impose a constructive trust upon the Property's equity in favor of the Debtor by virtue of his financial contributions and the improvements made by his labor, which would otherwise unjustly inure only to the benefit of Mrs. Short.⁴³

The Amended Complaint also alleges that:

Upon information and belief, even though Debtor and Mrs. Short intended to occupy the Property together and intended Debtor to make substantially all financial contributions to the Property, they made the decision to fraudulently title the Property solely in Mrs. Short's name to protect it as the Debtor was insolvent at the time having his bankruptcy discharge denied less than 11 months prior to the acquisition of the Property.⁴⁴

Count II of the Amended Complaint names Jonathon as the Defendant and seeks delivery of the equity in the Property, under 11 U.S.C. § 542(a). It alleges...