Murphy v. Felice (In re Felice)

480 B.R. 401

In re Ernest J. FELICE and Michelle Felice, Debtors.Harold B. Murphy, Plaintiff

v.Ernest J. Felice, Michelle Felice, Danielle J. Felice and Ernest O. Felice in his individual capacity and as Trustee of the Ernest O. Felice Family Trust, Defendant.

Bankruptcy No. 07–17589–FJB.

Adversary No. 08–01355.

United States Bankruptcy Court,

D. Massachusetts.

Eastern Division.

Oct. 5, 2012.

Recognized as Unconstitutional

28 U.S.C.A. § 157(b)(2)(C)

Kathleen R. Cruickshank, Murphy & King P.C., Boston, MA, for Plaintiff.

Jordan L. Shapiro, Shapiro & Hender, Malden, MA, for Defendant.

MEMORANDUM OF DECISION

FRANK J. BAILEY, Bankruptcy Judge.

I. INTRODUCTION

This is an action by the chapter 7 trustee against debtor Ernest J. Felice, his sister, and his father to establish the bankruptcy estate's interest in certain family trusts; in the final count, the trustee also objects to the debtors' discharge. The issues before the Court are, as to each count, (1) whether the bankruptcy court has authority under 28 U.S.C. § 157 to enter a final order; (2) whether that authority is consistent with Article III of the United States Constitution; and (3) whether the defendants are entitled to a jury trial.

II. BACKGROUND FACTS and PROCEDURAL HISTORY

Ernest J. Felice (“Ernest”) and Michelle Felice (“Michelle”) (together, the “Debtors”) filed a joint petition for relief under chapter 7 of the Bankruptcy Code on November 28, 2007. On their initial bankruptcy schedules, the Debtors listed no real property. On May 3, 2010, they amended Schedule A to include Ernest's life estate in real property located at 20 Mandalay Drive, Peabody, Massachusetts (“Mandalay Drive”). The Debtors stated that the listing of Mandalay Drive was “for information and disclosure purposes only as the asset is NOT property of the estate[.]” The chapter 7 trustee, Harold B. Murphy (the “Trustee”), disagreed with this characterization and commenced the present action against the Debtors, Ernest's father, Ernest O. Felice (“Ernest Senior”), and Ernest's sister, Danielle Felice (“Danielle”) (collectively, the “Defendants”). Except as noted below, the following facts appear undisputed.

Ernest Senior and his wife, Phyllis Felice (“Phyllis”), owned Mandalay Drive as tenants by the entirety. On September 21, 1981, Ernest Senior created the Felice Realty Trust (the “1981 Realty Trust”), naming himself as trustee and Phyllis as beneficiary. That same day, the couple deeded Mandalay Drive to Ernest Senior as trustee of the 1981 Realty Trust. On January 10, 2001, following his wife's death, Ernest Senior transferred 100 percent of the beneficial interest in the 1981 Realty Trust to himself. The 1981 Realty Trust contained a provision providing for its self-termination on September 21, 2001.

On September 27, 2001, Ernest Senior's children, Ernest and Danielle, created two trusts: the Ernest O. Felice Realty Trust (the “2001 Realty Trust”) and the Ernest O. Felice Family Trust (the “Family Trust”). Ernest and Danielle are co-trustees of both trusts and co-beneficiaries of the Family Trust. The 2001 Realty Trust holds Mandalay Drive for the benefit of the Family Trust.

The same day his children created the 2001 Realty Trust and Family Trust, Ernest Senior deeded Mandalay Drive to Ernest and Danielle as trustees of the 2001 Realty Trust, subject to a reserved life estate in the property for himself.¹ The parties agree that the deed that transferred Mandalay Drive from the 1981 Realty Trust to the 2001 Realty Trust contains a scrivener's error. It identifies the grantor as “Ernest O. Felice, as trustee of the Ernest O. Felice Family Trust.” It should have read “Ernest O. Felice, as trustee of the Felice Realty Trust” because, as of September 27, 2001, Ernest Senior still held Mandalay Drive in his capacity as trustee of the 1981 Realty Trust.² The Family Trust's beneficial interest in Mandalay Drive inured to the Family Trust's co-beneficiaries, Ernest and Danielle. ³ The Family Trust contains a “Spendthrift Clause” prohibiting Ernest and Danielle from selling, pledging, or transferring their interests in the trust and removing their interests from the reach of creditor process.

On January 14, 2003, Ernest and Danielle executed a First Amendment to the Family Trust, granting Ernest 75% of the beneficial interest and Danielle, 25%. The First Amendment provided that Danielle would automatically forfeit her interest if she ceased using the second floor of Mandalay Drive as her primary residence.⁴ The Trustee alleges Danielle has done just that. The Defendants neither admit nor deny this and the factual allegations on which it is founded.

On January 28, 2008, Ernest executed a Second Amendment to the Family Trust. This occurred after he filed bankruptcy and without permission of the Court. The Second Amendment gave Ernest and Danielle each a 50% beneficial interest in the Family Trust.

On April 30, 2008, Ernest and Michelle signed an affidavit (the “2008 Affidavit”) under penalty of perjury in which they averred: “Neither of us are aware of who the beneficiaries of the Ernest O. Felice Trust are. Neither of us have ever been informed by Ernest O. Felice of (sic) anyone else that either of us are beneficiaries of this trust.”

On November 21, 2008, the Trustee commenced the present adversary proceeding. In his Amended Complaint (hereinafter “Complaint”), the Trustee seeks: (1) a declaration that Ernest held a 100 percent beneficial interest in the Family Trust at the time he and Michelle filed bankruptcy and, consequently, that Ernest owns Mandalay Drive subject to the life estate of Ernest Senior; (2) a declaration that Ernest's interest in Mandalay Drive is property of the Debtors' bankruptcy estate pursuant to 11 U.S.C. § 541; (3) reformation of the deed executed by Ernest Senior that purportedly transferred Mandalay Drive into the 2001 Realty Trust; (4) avoidance and recovery for the benefit of the estate of Ernest's post-petition transfer of one-half of his beneficial interest to his sister Danielle; (5) a declaration that the Debtors have no claim of exemption in Mandalay Drive; and (6) denial of the Debtors' discharge.⁵ In response, the Defendants argue that by virtue of the Spendthrift Clause in the Family Trust and § 541(c)(2) of the Bankruptcy Code, Ernest's interest in Mandalay Drive is excluded from property of the estate. On May 3, 2010, the Debtors filed a motion in the adversary proceeding for “Determination that the Debtor's Beneficial Interest in Various Trust Documents is not an (sic) Property of the Estate, Due to the Spendthrift Clause Contained Therein” (the “Defendants' Motion”). The Trustee filed a cross-motion for summary judgment.

On September 20, 2010, after a hearing on the Defendants' Motion and the Trustee's Cross–Motion for Summary Judgment, I ordered the parties to file briefs addressing the following issues for each count of the complaint: (1) whether the relief requested constitutes a “core” proceeding under 28 U.S.C. § 157; and (2) whether the Defendants have a right to a jury trial under the Seventh Amendment. The Trustee filed his response, arguing that each count is a core proceeding and that no count carries a right to a jury trial. The Defendants have filed the required brief, but theirs sets forth no arguments regarding the Court's jurisdiction under 28 U.S.C. § 157. In a separate document, their Statement in Compliance with Pretrial Order, the Defendants clearly stated that they do not consent to the bankruptcy court's entering final judgment on any count it determines to be “non-core.” The Defendants did brief the jury issue, but in doing so they treated the Complaint as if it were one to recover specific real property under a fraudulent conveyance theory. The Defendants argue that since such an action has historically been brought at common law, the Seventh Amendment guarantees them a right to a jury trial.

III. DISCUSSION

First, in view of the record of proceedings and the relief requested by the Defendants, this Court, pursuant to 28 U.S.C. § 157(b)(3), must determine whether the claims made by the Trustee in this adversary proceeding are “core” or “otherwise related to” the Debtors' case under title 11. Second, in light of the Supreme Court's decision in Stern v. Marshall, 564 U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), I recognize that even if a proceeding is “core” under § 157, a bankruptcy judge may not have constitutional authority to enter a final order on it. See Siegel v. F.D.I.C. (In re IndyMac Bancorp Inc.), 2011 WL 2883012, at *6 (C.D.Cal. July 15, 2011) (after Stern, “it is insufficient to simply meet Congress's definition of core under § 157(b)(2)(C)”). Accordingly, I must determine a bankruptcy judge's constitutional authority to do so. And third, the Defendants having generally demanded a trial by jury, I must determine whether they are entitled to one under the Seventh Amendment to the Constitution. The Court must address each of these issues with respect to each count of the Complaint.

A. The Extent of Ernest's Interest in Mandalay Drive and Whether Such Interest is Property of the Estate

Count I involves two separate issues: (1) whether Ernest's interest in Mandalay Drive is property of the bankruptcy estate; and (2) the extent of his interest on the petition date. I must analyze jurisdiction and the right to a jury trial separately with respect to each issue.

1. Determining Whether Ernest's Beneficial Interest in the Family Trust Constitutes Property of the Estate

Pursuant to section 541(a)(1) of the Bankruptcy Code,⁶ all legal and equitable interests of a debtor in property as of the commencement of the case become property of the estate. This general rule is subject to the exception set forth in § 541(c)(2), which excludes from the estate a debtor's beneficial interest in a trust if the trust contains a restriction on the transfer of that interest that would be enforceable under “applicable...