Bankruptcy Judge Nancy Hershey Lord of Brooklyn, N.Y., rejected the notion that someone else’s secret ownership can take property out of the bankrupt estate, even if the third party paid the purchase price and all expenses for 30 years.
Parents filed an involuntary chapter 7 petition against their son. After the order for relief, the trustee filed a motion to sell real property that evidently had significant value because it was subject to liens aggregating $23.7 million.
The parents objected to the sale, contending that their son, the debtor, held only legal title. The parents wanted Judge Lord to rule that their son held title for them in a constructive trust.
The parents alleged that they paid the purchase price, paid all expenses for 30 years, and got all income. They contended that their son agreed to transfer title to them “on request.” Significantly, the parents never requested a transfer of title, and the son never refused to do so, so far as the record reveals. However, the parents showed that a rabbinical court decided before bankruptcy that they, not the son, owned the property. The parents evidently did not contend that the decision by the rabbinical court would be binding on the bankruptcy court.
Judge Lord rejected the parents’ constructive trust theory in her Feb. 14 opinion.
Four elements must be shown to give rise to a constructive trust under New York law: (1) a confidential relationship, (2) a promise, (3) a transfer of property made in reliance on the promise, and (4) unjust enrichment.
To establish a constructive trust in the bankruptcy context within the Second Circuit, Judge Lord said that courts require “some unjust conduct by the debtor relating to the subject property.”
The parents’ constructive trust theory failed, Judge Lord said, because they did “not assert any misconduct by the debtor.”
Consequently, imposing a constructive trust would amount to “enforcing the parties’ intent, rather than rectifying an alleged fraud,” Judge Lord said.
Judge Lord said that the parents realized “considerable benefit” from the arrangement, because they said they would have been unable to purchase the property originally without using their son as the front man. The parents benefitted, the judge said, because they enjoyed ownership for more than 30 years “to which they would not have otherwise been entitled.”
Although the bankrupt estate might be enriched by selling the property for the benefit of creditors, Judge Lord said that the facts “do not show that such enrichment would be unjust.”
Judge Lord’s case is similar to Gold v. Harper (In re Ambrose-Burbank), a case we reported in late January. There, a woman fully paid for a car that she alone drove. Nonetheless, the car went to her friend’s trustee because title was in the friend’s name.