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West v. Christensen

United States District Court, D. Utah, Central Division

August 1, 2017

DAVID C. WEST, TRUSTEE, Plaintiff/Appellant,
v.
MARLESE CHRISTENSEN, Defendant/Appellee.

          MEMORANDUM DECISION AND ORDER

          Clark Waddoups United States District Court Judge

         Appellant David C. West, Trustee of the Chapter 7 Bankruptcy Estate of Louis R. Christensen, challenges the November 7, 2016 Memorandum Decision of the bankruptcy court and its judgment denying the Trustee's Motion for Summary Judgment and granting Defendant/Appellee Marlese Christensen's Cross-Motion for Summary Judgment. After full consideration of the written briefing from the parties, the court has determined that oral argument would not be helpful to the court in deciding the appeal. See DUCivR 7-1(f). For the reasons stated below, the court AFFIRMS the bankruptcy court's determination that the Trustee has not established that Marlese Christensen received a “transfer of an interest of the debtor in property” and thus the Trustee cannot avoid the transfer as preferential or fraudulent.

         JURISDICTION AND STANDARD OF REVIEW

         This court has jurisdiction pursuant to 28 U.S.C. § 158 (a) and (c). Venue is proper under the provisions of 28 U.S.C. §§ 1408 and 1409. This is a core proceeding under 28 U.S.C. § 157 (b)(2)(F) and (H).

         This court reviews a “bankruptcy court's findings of fact for clear error, its legal conclusions de novo, and mixed questions of law and fact de novo.” In re Adam Aircraft Industries, Inc., 805 F.3d 888, 893 (10th Cir. 2015). The parties agree that there are no contested issues of fact in this appeal, only questions of law.

         BACKGROUND

         The Debtor, Louis R. Christensen, married Marlese Christensen, the appellee, in 2006. Prior to their marriage-a second marriage for both of them-the couple entered into a prenuptial agreement which, among other things, reserved to each of them their pre-marital, separate property including real property owned by Marlese in Washington Terrace, Utah. In 2010, the couple concluded they needed a larger home and decided to buy property located at 1706 Bonita Bay Drive in St. George, Utah (the “Bonita Bay Property”). (Appellant's App'x, Findings of Fact, Conclusions of Law, and Final Judgment 1-4; Dkt. No. 8.) The couple jointly selected the home, used over $40, 000 in marital funds to make an initial down payment and purchase the home, lived in the home together, and used another approximately $40, 000 of marital funds to landscape the home and increase its value. Both husband and wife contributed income to the household and home-related expenses. (Id.) The title to the property, however, was conveyed solely in the Debtor's name. In approximately mid-March 2010, about two weeks after the Debtor obtained title to the property, he presented Marlese with two signature pages for documents he represented were intended to place title to the Bonita Bay Property in both of their names. Marlese signed the pages without being shown the rest of either document. She later discovered that one signature page was actually for a quitclaim deed purporting to give the Debtor an equal ownership interest in her Washington Terrace separate property, while the other signature page was for a trust deed on her Washington Terrace home purporting to secure a $120, 000 loan the Debtor independently obtained using Marlese's separate property as collateral. The Debtor subsequently arranged for Marlese's signatures on these pages to be notarized and attached to the documents described above, all without Marlese's presence or knowledge. (Appellant's App'x, Decl. of Marlese Christensen 2-4, Second Decl. of Marlese Christensen 2-3; Dkt. No. 8.)

         Eventually Marlese discovered the existence of the loan against her separate property and the facts concerning how it was obtained. She hired a lawyer to assist her. The Debtor responded on November 3, 2010 by “kicking [Marlese] out” of the Bonita Bay Property and filing for divorce on December 6, 2010. (Id.) Marlese then learned that the Debtor was attempting to sell the Bonita Bay Property and learned, for the first time, that her name was not on the title to the Bonita Bay Property as she had believed. In an effort to put potential purchasers on notice of her interest in the property, Marlese's attorney recorded a Notice of Interest. (Id.) In January 2011, a buyer was located for the property at a sales price of $290, 000. The net proceeds after paying closing costs were $272, 133.76, which were held by the title company. On January 26, 2011, Marlese released her Notice of Interest on the Bonita Bay Property in exchange for the title company issuing her a check for $120, 000 on January 27, which she immediately used to pay off the Debtor's loan and thus secure the release of the fraudulently obtained trust deed on her separate Washington Terrace property.[1] The Debtor received the remaining proceeds of $152, 133.76. (see id., Findings of Fact, Conclusions of Law, and Final Judgment 5; Dkt. No. 8.)

         Before the divorce could be finalized, the Debtor filed a bankruptcy petition with the United States Bankruptcy Court for the District of Utah on July 22, 2011. A bifurcated divorce decree was entered on April 11, 2013 terminating the marriage, but because of the Debtor's pending bankruptcy case, the divorce court reserved the property division for later disposition. (Appellant App'x, Findings of Fact, Conclusions of Law, and Final Judgment 2; Dkt. No. 8.) On July 11, 2013, the bankruptcy Trustee-the appellant here-filed a complaint against Marlese seeking to recover the $120, 000 she received after the sale of the Bonita Bay Property.[2]Following a number of proceedings in the bankruptcy court, the automatic stay was lifted to allow the Debtor and Marlese “to return to state court and litigate the division of their marital property and [Marlese's] interest in the $120, 000 that was transferred to her.” (Appellant App'x, Order and Judgment on Def.'s Mot. for Summ. J. and Pl.'s Mot. for Partial Summ. J.; Dkt. No. 8.) Marlese then sought to resolve the remaining property issues by filing a motion for summary judgment in the divorce court, which was unopposed and granted on January 22, 2016. The bankruptcy Trustee chose not to participate in the divorce court proceedings. (Appellant App'x, Supp. Memo. re Mot. for Summ. J. and Mem. in Support filed by David C. West 12; Dkt. No. 8.)

         The divorce court entered findings of fact to include that “[a]lthough title to the Bonita Bay Property was solely in [the Debtor's] name, the home was marital property in which both spouses had an interest at the time the petition in this case was filed and also at the time of [the Debtor's] subsequent bankruptcy petition.” (Appellant App'x, Findings of Fact, Conclusions of Law, and Final Judgment 5; Dkt. No. 8.) The divorce court also entered conclusions of law that upheld the prenuptial agreement and confirmed that each spouse retained his or her separate property. In addition, the divorce court concluded that “[t]he Bonita Bay Property was marital property in which each party had an equal interest at the time the petition in this case was filed;” “[w]hen the divorce petition was filed, the Bonita Bay Property came under the auspices of this Court;” [t]he subsequent bankruptcy petition filed by [the Debtor] did not divest this Court of jurisdiction over the Bonita Bay Property or any of the other marital property;” and “[the Debtor's] bankruptcy petition did not divest Marlese of her equal ownership interest in the Bonita Bay Property.” (Id. at 6.) Then, to equitably adjust the division of marital property, the divorce court awarded Marlese “an additional $12, 000 from the proceeds of the sale of the Bonita Bay Property above and beyond the one-half to which she was entitled as a result of her ownership interest.” (Id.) The value of Marlese's one-half interest in the Bonita Bay Property was set at $136, 066.88. (Id. at 8.)

         The divorce court's findings, conclusions, and final judgment were filed with the bankruptcy court on August 18, 2016, approximately one month after all briefing on a third round of competing summary judgment motions had been filed in bankruptcy court. The bankruptcy court issued a Memorandum Decision on November 4, 2016, concluding that the Trustee's claim, seeking to avoid the $120, 000 distribution of the Bonita Bay Property proceeds to Marlese as a preferential transfer under § 547, is barred by issue preclusion. The bankruptcy court reasoned that because the divorce court concluded that the Bonita Bay Property was marital property to which Marlese had an equal interest exceeding $120, 000 at the time of the transfer, when Marlese received $120, 000 in proceeds from its sale, she was not receiving a “transfer of an interest of the debtor in property” under 11 U.S.C. §547(b), but receiving her own property. (Mem. Decision 20, Dkt. No. 1-2.) Alternatively, based on equitable considerations under Utah divorce law, the Debtor's fraudulent actions, policy concerns about a bankruptcy court undermining property settlements by finding preferential or fraudulent transfers in the absence of evidence of collusion, and in the absence of Utah or Tenth Circuit law requiring otherwise, the bankruptcy court determined that the Bonita Bay Property and its sales proceeds were equally owned at the time of the transfer notwithstanding that title was held solely in the Debtor's name. (Id.) The Trustee raises three issues on appeal: (1) whether the bankruptcy court erred by determining that the Trustee's suit is barred by issue preclusion because the issue of ownership was decided by the state divorce court; (2) whether the bankruptcy court erred when it ruled that Marlese Christensen was not receiving a “transfer of an interest of the debtor in property” under 11 U.S.C. § 547(b) but was instead receiving her own property; and (3) whether the bankruptcy court erred by concluding that the holding in In re Harrell, 2001 WL 2986130 (Bankr. D. Utah 2007) is distinguishable and/or otherwise not applicable to this action.

         ANALYSIS

          I. Issue preclusion

          Under Utah law, a state court judgment has a preclusive effect on an issue in a later federal court action when four elements are satisfied: (1) “the party against whom [issue preclusion] is invoked was a party or in privity with a party to the prior adjudication;” (2) “the issue previously decided is identical with the one presented in the action in question;” (3) the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action” and (4) “the prior action has been finally adjudicated on the merits.” Moss v. Kopp, 559 F.3d 1155, 1161 (10th Cir. 2009). The bankruptcy court determined that all four elements of issue preclusion had been met, although it ruled separately on the merits of the Trustee's ownership argument in the event that a decision rendered by the state divorce court on an unopposed motion for summary judgment did not constitute the “complete, full, and fair litigation” element of the test. (Mem. Decision 15, Dkt. No. 1-2.) The Trustee does not challenge this element, however. The Trustee challenges only the bankruptcy court's determination that issue preclusion applies based on an argument that the state court decision addressed a different issue than the issue in this action. The court disagrees with the Trustee and affirms the bankruptcy court.

         “When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.” Restatement (Second) of Judgments § 27, Issue Preclusion-General Rule (1982). Whether this doctrine is applicable “does not depend on whether the claims for relief are the same.” Robertson v. Campbell, 674 P.2d 1226, 1230 (Utah 1983). Rather, “[w]hat is critical is whether the issue that was actually litigated in the first suit was essential to resolution of that suit and is the same factual issue as that raised in a second suit.” Id. The Trustee argues that the divorce court action was not a “quiet title action to determine ownership” of the Bonita Bay Property, but rather a “divorce proceeding to make an equitable division.” (Appellant Br. 23, Dkt. No. 7.) The nature of the action, however, is not the critical question:

It is not the identity of the thing sued for, or of the cause of action, which determines the conclusiveness of a former judgment upon a subsequent action, but merely the identity of the issue involved in the two suits. If an issue presented in a subsequent suit between the same parties or their privies is shown to have been determined in a former one, the question is res judicata [or collateral estoppel], although the actions are based on different ...

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