Palsata Tr. v. Fitzgerald

PALSATA TRUST, Debtor/Appellant, v. JOHN P. FITZGERALD, III, Acting Trustee/Appellee.

Civil Action No. 1:21-cv-376 (RDA/IDD)

United States District Court, E.D. Virginia, Alexandria Division

March 30, 2022

MEMORANDUM OPINION AND ORDER

Rossie D. Alston, Jr. United States District Judge

This matter comes before the Court on Appellant Palsata Trust's (“Appellant”) appeal of the United States Bankruptcy Court for the Eastern District of Virginia's (“Bankruptcy Court”) order dismissing its Chapter 7 bankruptcy action and imposing a refiling bar. The Court dispenses with oral argument because it would not aid in the decisional process. Fed.R.Civ.P. 78; E.D. Va. Loc. Civ. R. 7(J). The Court has reviewed the record, Appellant's opening brief (Dkt. 6), Appellee John P. Fitzgerald, III, the Acting United States Trustee's (“Appellee”) brief (Dkt. 8), and Appellant's reply brief (Dkt. 10). Having considered the issues presented in this appeal, the Court affirms the judgment of the Bankruptcy Court for the reasons that follow.

I. BACKGROUND

The trustee of the Appellant Palsata Trust is Palwinder Singh who signed and filed all of the documents on behalf of Palsata Trust in its bankruptcy case. Dkt. 8-1 at 12. Palsata Trust owns property in Great Falls, Virginia (the “Property”). Id. at 93. The Property is also the mailing address provided to the bankruptcy court for service upon Palsata Trust. Id. at 9. Palsata Trust acquired the Property in 2015 from Singh as a “gift” for no consideration. Id. at 30-31. In addition to Palsata Trust's case, since 2010 Mr. Singh has filed eight bankruptcy cases in his own name.

All but one were dismissed without completion. The last three of these cases were dismissed with bars to refiling.

Although Singh suggested he had transferred the Property to Palsata Trust in 2015, he has continued to claim he owns the Property in three separate bankruptcy cases, each of which were brought after that transfer. See Case No. 17-12173 (Bankr. E.D. Va.) (Dkt. 22 at 3; Dkt. 99 at 13); Case No 18-14050 (Bankr. E.D. Va.) (Dkt. 29 at 3; Dkt. 31 at 1); No. 20-10424 (Bankr. E.D. Va.) (Dkt. 25 at 3; Dkt. 33 at 2). Each of these bankruptcy petitions have sought to stop foreclosure actions against the Property. In the most recent case involving Mr. Singh, the Bankruptcy Court found that Mr. Singh filed the case in bad faith and barred him from refiling for one year. See Case No. 20-10424, Dkt. 33. Both this Court and the Fourth Circuit affirmed. See Singh v. Fitzgerald, No. 1:20-cv-327, 2020 WL 6268538, at *1 (E.D. Va. Sept. 23, 2020), aff'd, No. 20-2143, 2021 WL 2070372 (4th Cir. May 24, 2021). That one-year refiling bar expired on March 12, 2021.

While the refiling bar from his most recent case was pending, Singh filed this case on behalf of Palsata Trust. Dkt. 8-1 at 9. Appellee filed a motion to dismiss the case seeking a two-year bar to refiling against both the Palsata Trust and Singh. Id. at 38-60, 61-85.

Like the Motion to Dismiss, the Hearing Notice was mailed to both Palsata Trust and Singh at the Property. Id. at 88. The next day, on February 11, 2019, the bankruptcy court mailed a notice to Palsata Trust, at the Property's address, containing the procedures for the hearing on the Motion to Dismiss. Id. at 89-90. Neither Singh nor Palsata Trust responded to the Motion to Dismiss. Instead, five days before the hearing, Palsata Trust filed its own voluntary motion to dismiss the case. Id. at 117. Singh signed the motion on behalf of Palsata Trust and again identified the Property as the Palsata Trust's only address. Id. at 119.

Neither Singh nor any other representative of Palsata Trust appeared at the hearing on the Motion to Dismiss. Id. at 135. After the hearing, the bankruptcy court granted Appellee's motion, dismissed the case, and imposed a two-year bar to refiling upon both Palsata Trust and Singh individually. Id. at 133, 145. In support of the dismissal, the Bankruptcy Court held (1) that Palsata Trust was ineligible to be a debtor under the Bankruptcy Code, (2) that Palsata Trust was Singh's alter-ego, and (3) that Singh filed Palsata Trust's case was a bad-faith attempt to avoid the pending prohibition against his filing and to “frustrate the rights of his creditors by abusing the bankruptcy system.” Id. at 140-44.

With respect to the refiling bar, the Bankruptcy Court held that Singh had deceived the court by previously claiming to own the Property despite its transfer to Palsata Trust. Id. at 144. Further, Singh made no attempt to explain the “gratuitous transfer” of the property and, thus, the bankruptcy court found as a fact that the transfer was “clearly made in an attempt to frustrate Singh's creditors by placing the Property beyond their reach.” Id. 144-45. The court further noted Singh's three previous cases contained bars of 90 days, 180 days, and 1 year, respectively, and his unsuccessful appeals of each. Id. at 145. Thus, the court held that “when Singh filed the instant case on behalf of the Palsata Trust, he knowingly violated the bar to refiling issued in his previous personal bankruptcy.” Id. Because “a bar to refiling against only the [Palsata Trust] would not serve to dissuade Singh from filing another bankruptcy shortly after this case's dismissal, ” the Bankruptcy Court entered a two-year bar against both Palsata Trust and Singh. Id.

Palsata Trust timely filed a notice of appeal, which does not list Singh as an appellant. Id. at 93.

II. STANDARD OF REVIEW

“When reviewing a decision of the Bankruptcy Court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal.” Paramount Home Entm't Inc. v. Circuit City Stores, Inc., 445 B.R. 521, 526-27 (E.D. Va. 2010) (citation omitted). Thus, the district court reviews questions of fact under the “clearly erroneous” standard. Id. “The clear error standard requires ‘a reviewing court [to] ask whether on the entire evidence,' it is ‘left with the definite and firm conviction that a mistake has been committed.'” United States v. Span, 789 F.3d 320, 325 (4th Cir. 2015) (quoting Easley v. Cromartie, 532 U.S. 234, 242 (2001) (internal quotation marks and citations omitted)). Legal conclusions are reviewed de novo. In re Harford Sands Inc., 372 F.3d 637, 639 (4th Cir. 2004). In cases where the issues present mixed questions of law and fact, the Court employs “a hybrid standard, applying to the factual portion of each inquiry the same standard applied to questions of pure fact and examining de novo the legal conclusions derived from those facts.” Gilbane Bldg. Co. v. Fed. Reserve Bank of Richmond, 80 F.3d 895, 905 (4th Cir. 1996) (internal citation omitted). Decisions committed to the bankruptcy court's discretion are reviewed for abuse of discretion. See Robbins v. Robbins (In re Robbins), 964 F.2d 342, 345 (4th Cir. 1992).

III. ANALYSIS

The issue on appeal is Appellant Palsata Trust's contention that the Bankruptcy Court abused its discretion in dismissing this case and barring Palsata Trust from filing any additional bankruptcies for two years.

A. Whether Palsata Trust is a Business Trust

Though there are many type of trusts, only a “business trust” can qualify as a chapter 7 debtor. 11 U.S.C. §§ 109(b), 101(41), 101(9)(A). A non-business trust, however, falls under the bankruptcy code's definition of “entities.” 11 U.S.C. § 101(15); see also 2 Collier on Bankruptcy ¶ 109.03 (16^th ed. 2021) (“Certain entities that are not included in the definition of ‘person,' such as . . . trusts, are also ineligible to file under chapter 7.”). After Appellee made its prima facie case that Palsata Trust was not a business trust, Dkt. 8-1 at 139, the burden then shifted to Palsata Trust to prove its eligibility as a chapter 7 debtor. In re Cath. Sch. Emps. Pension Tr., 599 B.R. 634, 653 (B.A.P. 1st Cir. 2019). The Bankruptcy Court found that Palsata Trust was not a business trust and was therefore ineligible to enter chapter 7 bankruptcy.

This Court now reviews that factual finding using a clear error standard. Courts have developed a number of tests to determine whether a trust is a business trust. The Eastern District of Virginia has relied on an eight-factor test (“Williams factors”):

(1) whether the trust instrument's language indicates that the trust was intended to be a business trust; (2) whether the trust was created to transact business for the benefit of investors; (3) whether the beneficiaries have significant management and control of the trust and whether the trustee-beneficiary relationship resembles that of agent-principal; (4) whether there is any evidence of any attempt to comply with the state law recording requirements for business trusts; (5) whether the trust had any employees or business office; (6) whether the initial funding of the trust was by a conveyance of real property or by a pooling of assets by investors or beneficiaries or by selling shares; (7) whether the trust was created for the purpose of winding up the affairs of a predecessor business; and (8) whether the trust appears to be a land trust.

In re Mortg. Banking Tr., No. 08-17864, 2008 WL 3126186, at *7 (Bankr. D. Md. July 23, 2008) (citing Williams v. Equity Holding Corp., 498 F.Supp.2d 831 846 (E.D. Va. 2007)). Other courts follow the Sixth Circuit's “primary purpose” test outlined in In re Kenneth Allen Knight Tr., 303 F.3d 671, 680 (6th Cir. 2002), which states a business trust is one “created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors, ” whereas a trust “designed merely to preserve the trust res for beneficiaries” is typically not a business trust. Still other courts have adopted somewhat of a hybrid test containing...