Sender v. Werth (In re Werth)

IN RE VIRGINIA ANTOINETTE WERTH, Debtor.

HARVEY SENDER, Chapter 7 Trustee, Plaintiff - Appellee, v. VIRGINIA ANTOINETTE WERTH, Defendant - Appellant.

BAP No. CO-16-022

Bankr. No. 13-30926

Adv. No. 14-01528

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT

May 8, 2017

NOT FOR PUBLICATION^*

Chapter 7

OPINION

Appeal from the United States Bankruptcy Court for the District of Colorado

Before KARLIN, Chief Judge, JACOBVITZ, and MOSIER, Bankruptcy Judges.

JACOBVITZ, Bankruptcy Judge.

When Appellant Virginia Werth filed a Chapter 7 bankruptcy case she did not disclose an interest in beachfront property in Mexico, claiming she was not required to disclose it because it was not estate property. Upon learning of this property and its post petition sale, the Chapter 7 Trustee (the "Trustee") filed an adversary proceeding, seeking a determination that it was property of the bankruptcy estate, and for turnover of the sale proceeds pursuant to 11 U.S.C. § 542.¹ The bankruptcy court entered judgment in favor of the Trustee. Appellant appeals the judgment and order for turnover. For the reasons set forth below, we affirm the bankruptcy court's order.

I. FACTUAL BACKGROUND

a. Creation of the property interest at issue

Debtor's now-deceased husband, Ronald Werth, purchased a one-third share (with his brother Alvin and his father also each purchasing a one-third share) in beachfront property in Guaymas, Sonora, Mexico (the "Property") in the 1980s. Because Mexican law prohibits foreign nationals from owning beachfront properties as individuals,² each of them purchased the Property through a trust (the "Mexican Trust"). A Mexican financial institution served as the trustee of the Mexican Trust, and each held his one-third interest as a beneficiary of the Mexican Trust. The interests of the beneficiaries inthe Mexican Trust are hereinafter referred to the "Mexican Trust Interest" and the one-third interest initially held by Ronald is hereinafter referred to as "Ronald's Mexican Trust Interest." Ronald and Alvin's father passed away in 1998, leaving his one-third Mexican Trust Interest to a third son. Alvin passed away in 2002, and Ronald passed away two years later, in 2004.

Prior to his death, Ronald created the Ronald Werth Trust (the "Werth Trust"). Ronald and his wife, Virginia (the "Debtor"), served as co-trustees of the Werth Trust. Upon Ronald's death, the Debtor became the sole trustee of the Werth Trust. In conjunction with the creation of the Werth Trust, Ronald also executed his last will and testament (the "Will"), which devised all of his assets not specifically mentioned in the Will to the Werth Trust. Ronald's Mexican Trust Interest was not mentioned in the Will and was to be held by the Werth Trust. Upon Ronald's death, the assets of the Werth Trust were to be distributed between two different trusts established by the Werth Trust: one solely for the benefit of the Debtor (the "Marital Trust") and the other for the benefit of the Debtor and Ronald's children (the "Family Trust"). Ronald's Mexican Trust Interest was to be distributed to the Family Trust.

The Debtor served as the sole trustee of the Marital Trust and the Family Trust and served as the personal representative of Ronald's probate estate. Upon Ronald's death, the Debtor, now also the sole Trustee of the Werth Trust, divided the Werth Trust's assets between the Marital and Family Trusts. Although the Debtor claims to have allocatedRonald's Mexican Trust Interest to the Family Trust in August 2005,³ the Debtor never documented the transfer of that asset to the Family Trust in the Mexican public record, in the probate case, or anywhere else until after she filed bankruptcy.

Approximately two years after the Debtor claims she allocated Ronald's Mexican Trust Interest to the Family Trust, the Debtor and Alvin's surviving spouse initiated a legal proceeding in Mexico to have their Mexican Trust Interests transferred into their names (the "Intestacy Proceeding"). They hired Maria Isabel Lizarrage Zatarain (the "Representative") under a power of attorney⁴ to represent them, and the Debtor did not appear in person at the Intestacy Proceeding in Mexico. The Intestacy Proceeding resulted in entry of a judgment distributing Ronald and Alvin's Mexican Trust Interests to the Debtor and Alvin's spouse individually on October 15, 2007 (the "Intestacy Proceeding Judgment"). At trial, the Debtor testified she never intended to have any ofthe Mexican Trust Interest transferred to her individually,⁵ and that she believed Ronald's Mexican Trust Interest belonged to the Family Trust on the petition date.⁶

The Debtor's daughter, Rhonda Hathaway, replaced the Debtor as trustee of the Family Trust in August 2013.⁷ On December 26, 2013, the Debtor filed a Chapter 7 bankruptcy petition in the District of Colorado. The Debtor did not list either Ronald's Mexican Trust Interest or the Property in her statements and schedules. The Property was sold in May 2014, generating net sale proceeds of $156,840.49. A one-third share of the net sale proceeds was deposited into the Debtor's bankruptcy attorney's trust account by two transfers: (1) $20,060 on May 27, 2014; and (2) $30,000 on October 28, 2014, after closing of the sale and dissolution of the Mexican Trust.⁸ The Debtor did not amend her statements and schedules at any point during the bankruptcy case to list Ronald's Mexican Trust Interest or the proceeds from the sale of the Property as an asset of the bankruptcy estate.

b. Adversary Proceeding for Turnover

Upon learning of the sale of the Property, the Trustee filed a Complaint for Turnover of Property of the Estate Pursuant to 11 U.S.C. § 542, and for Entry of Judgment, seeking turnover of the $52,280 proceeds to the Trustee.⁹ The Trustee alleged the Debtor held Ronald's Mexican Trust Interest on the petition date and failed to disclose that interest in her statements and schedules. The Trustee alleged Ronald's Mexican Trust Interest became property of the bankruptcy estate when the Debtor filed the petition, and requested turnover of the proceeds of the sale of the Property allocated to the bankruptcy estate's interest in the Mexico Trust. The Debtor's answer asserted that she did not hold Ronald's Mexican Trust Interest individually and instead contended that any interest she held "was held in constructive and/or implied trust for the benefit of the [Family Trust],"¹⁰ and that any proceeds from the sale of the Property remained property of the Family Trust.

At trial, the Trustee called Hector Calatayud Izquierdo, an expert in "Mexican trust law and in foreign real estate ownership in coastal areas"¹¹ (the "Expert"), as a witness. The Expert testified that Mexican law prohibited foreigners from individually owning title to real property within fifty kilometers from the Mexican shoreline, andrequired that title must be held in a trust naming a Mexican financial institution as trustee and the foreign national as the beneficiary. The Expert reviewed the documents filed in the Intestacy Proceeding and testified that there was no mention of Ronald's Mexican Trust Interest being transferred to another trust or that the Debtor would hold the interest as trustee or in a fiduciary capacity.¹² The Expert explained that under the Intestacy Proceeding Judgment, each of Ronald and Alvin's one-third Mexican Trust Interests were distributed to the Debtor and Alvin's widow, in their individual capacities, on October 15, 2007.¹³ The Expert also testified that under Mexican law it would have been possible for a United States trust to be the beneficiary of the Mexican Trust.¹⁴

The bankruptcy court issued an order (the "Order") finding that the Intestacy Proceeding Judgment resulted in the transfer of Ronald's Mexican Trust Interest from the Family Trust to the Debtor individually.¹⁵ Because the Debtor never took any subsequent action to transfer the Mexican Trust Interest into the Marital Trust or Family Trust, the bankruptcy court concluded that she thus still owned Ronald's Mexican Trust Interest individually on the bankruptcy petition date. Accordingly, the bankruptcy court determined that Ronald's Mexican Trust Interest and any proceeds from the sale of the Property attributable to Ronald's Mexican Trust Interest became property of thebankruptcy estate pursuant to § 541(a). Based on this determination, the bankruptcy court ordered turnover of $52,280 to the Trustee for the benefit of the bankruptcy estate pursuant to § 542(a) and entered a judgment in favor of the Trustee in that amount.

II. APPELLATE JURISDICTION

This Court has jurisdiction to hear timely filed appeals from "final judgments, orders, and decrees" of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.¹⁶ The Debtor appeals the Order and corresponding judgment, which finally disposed of an adversary proceeding on the merits.¹⁷ This Court thus has jurisdiction over this appeal. None of the parties elected to have this appeal heard by the United States District Court for the District of Colorado following the Debtor's timely appeal. Therefore, the parties have consented to appellate review by this Court.

III. STANDARD OF REVIEW

We review the bankruptcy court's factual findings for clear error and its legal conclusions de novo.¹⁸ The Debtor argues that because Ronald's Mexican Trust Interest is not property of the bankruptcy estate under § 541, the bankruptcy court erred in ordering its turnover pursuant to § 542. Whether a property interest is included in thebankruptcy estate under § 541(a) and subject to turnover pursuant to § 542 is a legal conclusion reviewed de novo.¹⁹ Mixed questions of law and fact are reviewed under the de novo or clearly erroneous standards, depending on whether the mixed question involves primarily the consideration of legal principles or a factual inquiry.²⁰ Whether the Debtor owned Ronald's Mexican Trust Interest upon...