A chapter 7 trustee sought to avoid as a fraudulent conveyance a debtor’s transfer of real property to his sister by quit claim deed for no consideration. The bankruptcy court ruled that the debtor held only bare legal title, so the transfer could not be avoided. The bankruptcy appellate panel affirmed, and the trustee appealed to the 10th Circuit.
The debtor’s mother purchased property with her common law husband as joint tenants. Shortly after the acquisition they conveyed the property to the debtor and his sister and to the mother’s common law husband as joint tenants with right of survivorship. The debtor later conveyed his interest in the land to his sister and the common law husband for no consideration using a quit claim. Almost a year later, the debtor and his wife filed bankruptcy.
In the bankruptcy the chapter 7 trustee sought to avoid the debtor’s transfer of his interest in the property as a fraudulent transfer under Section 548 of the Bankruptcy Code: The transfer was within two years before the bankruptcy, the debtor was insolvent at that time, and he received less than reasonably equivalent value.
However, applicable state law “allows a resulting trust to form when one party (the payor) provides the consideration for a piece of property, but enters into an agreement with another non-paying party ‘without fraudulent intent’ for the non-paying party to hold the property in trust for the payor.” Based on an evidentiary hearing the bankruptcy court found that the debtor had only bare legal title since his mother intended to create a resulting trust for the mother’s benefit.
The trustee attacked this result based on the argument that joint tenancy is incompatible with a resulting trust. In particular “a joint tenancy requires the ‘four unities’ of time, title, interest, and possession.” The trustee argued this means that the “joint tenants’ shares are all equal and the duration and quality, legal or equitable, of their estates are the same.” In this case, since the common law husband held both legal and equitable title to a one-third interest in the property, the trustee argued that both the debtor and his sister must also hold both legal and equitable titles as joint tenants.
While acknowledging that joint tenancy normally requires the four unities, the 10th Circuit noted that applicable state case law held that a joint tenancy does not bar the existence of an equitable trust (while also acknowledging that the “case law does not state precisely why a resulting trust would not destroy the unity of interest in a joint tenancy”). The court interpreted the cases as providing two bases for this conclusion: (1) a resulting trust is an equitable remedy that overrides joint tenancy without destroying it; or (2) a resulting trust prevails over a joint tenancy, with the potential of converting interests into tenancy in common. In either case, a constructive trust could be imposed on a joint tenancy interest.
The trustee also relied on 10th Circuit precedent in which the court stated that the state’s resulting trust statute “does not apply when title to property is taken in joint tenancy.” The BAP attempted to distinguish this 10th Circuit precedent from the current case on a factual basis. Among other things, both the debtor and his mother were available to testify that the intent was for the debtor to hold the property in trust for the mother, while the parents who created a trust in the prior case were not alive to testify.
Taking a different approach, the 10th Circuit noted that the state supreme court subsequently held that joint tenancy was not a bar to a resulting trust. After parsing whether the state supreme court decision could be distinguished from the 10th Circuit precedent, the court decided that, although the state supreme court opinion did not explicitly state that the prior 10th Circuit decision was incorrect, implicit in the state decision was a rejection of the broad holding in the 10th Circuit case.
Since the trustee did not challenge the fact that there was an intent to create a resulting trust or the legal conclusion that bare legal title cannot be avoided, once the 10th Circuit concluded that a resulting trust could be created for land held in joint tenancy, it became a foregone conclusion that the lower court decisions were correct and the trustee lost.
If someone transfers property for no consideration, there is an almost knee jerk reaction that as long as the transferor is insolvent the transfer must be avoidable as a fraudulent conveyance. As this case illustrates, that is not necessarily the case.
Vicki R. Harding, Esq.