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In Re v. Rosendo Gonzalez

UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE NINTH CIRCUIT


April 5, 2011

IN RE:
SHANEL ANN STASZ,
DEBTOR.
SHANEL ANN STASZ,
APPELLANT,
v.
ROSENDO GONZALEZ, CHAPTER 7 TRUSTEE,
APPELLEE.

Appeal from the United States Bankruptcy Court for the Central District of California Hon. Alan Ahart, Bankruptcy Judge, Presiding. Bk. No. LA 05-43980 AA

NOT FOR PUBLICATION

SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL O F THE NINT H CIRCUIT

MEMORANDUM*fn1

Argued and submitted on March 16, 2011 at Pasadena, California

Filed - April 5, 2011

Before: PAPPAS, DUNN and KIRSCHER, Bankruptcy Judges.

Chapter 7*fn2 debtor Shanel Stasz ("Stasz") appeals the bankruptcy court's Order Compelling Turnover of Estate Property. We AFFIRM.

FACTS

On October 13, 2005, Stasz filed a petition for relief under chapter 7. Rosendo Gonzalez ("Gonzalez") was appointed trustee. Gonzalez has spent the past five years attempting to collect and reduce to money the property of the bankruptcy estate given resolute opposition by Stasz.*fn3 Because of the parties' familiarity with the circumstances, only those facts necessary to understand the current appeal are recited here.

On July 10, 2001, two trusts were allegedly created: the Alta Loma Ultra Trust (the "Alta Loma Trust"), and the West Hollywood Domestic Non Grantor Trust (the "West Hollywood Trust"). Stasz signed the trust instrument as Settlor of the Alta Loma Trust, and Allen Spaulding ("Spaulding"), an employee of Stasz' attorney, Carl E. Lovell, Jr. ("Lovell"), signed the trust instrument as Settlor of the West Hollywood Trust. Lovell was named as trustee of both trusts. Attached to the West Hollywood Trust as Schedule A is the statement, "The amount of corpus originally contributed by the Settlor is One Thousand Dollars ($1,000.00 US)."

In 2004, in a pleading filed in a Los Angeles County state court lawsuit filed by Stasz against Lovell, Stasz v. Lovell et al., case no. BC325059, Stasz purported to rescind both trusts:

On or about, November 24, 2004, pursuant to the provisions of Section 1689 of the California Civil Code, Plaintiff [Stasz] gave notice in writing of rescission to Defendant, Carl E. Lovell, Jr., as Trustee West Hollywood Domestic Grantor Inst. and to Carl E. Lovell, Jr., as Trustee of the Alta Loma Ultra Trust, of [] all transfers, including transfers involved in connection with Exhibits 2 through 5 inclusive attached hereto and Trusts involved in the Plan on the grounds that (1) the consideration for the obligation of the Plaintiff who is the rescinding party has failed, in whole or in part, through the fault of the Defendant, Carl E. Lovell, Jr.: the consideration for the obligations of the rescinding party, before it was rendered to her, failed in a material respect due to his negligence; and (3) the contract, including but not limited to the so-called PRIVATE ANNUITY AGREEMENTS contained in Exhibits 3 and 5 attached hereto which are part of the Plan, are unlawful for causes which do not appear by their terms or conditions, and the parties are not equally at fault.

Later, in Adversary Proceeding No. 06-1481 in the bankruptcy case, the bankruptcy court found that Stasz had rescinded both trusts by this statement. Order re Statement of Uncontroverted Facts and Conclusions of Law at ¶ 23. This Order was appealed by Stasz to the BAP, which affirmed the bankruptcy court; the Court of Appeals affirmed the BAP, and the Supreme Court denied certiorari. See supra n.3, 2007 Bankr. LEXIS 4830.

When Stasz filed her bankruptcy petition and schedules in 2005, she listed the West Hollywood Trust as an asset on her Schedule B, valued at "$0.00." She did not claim an exemption as to the trust in her original Schedule C, nor did she ever amend Schedule C later to claim any exemption for West Hollywood Trust.*fn4

In 2009, Gonzalez became aware for the first time of the existence of an account at a branch office of Morgan Stanley Smith Barney ("Morgan Stanley") in the name of West Hollywood Trust. The account reportedly held approximately $220,000. On June 22, 2009, counsel for Gonzalez sent an email to Morgan Stanley, asserting that these funds were property of the bankruptcy estate and demanding that Morgan Stanley turn over these assets to Gonzalez. On June 25, 2009, Morgan Stanley issued a check to Gonzalez in the amount of $220,889.15.

Stasz contacted Morgan Stanley, insisting that the funds in West Hollywood Trust were not property of the estate. At some time not clear in the record, Morgan Stanley contacted Gonzalez, instructing him not to disburse any of the funds from the West Hollywood Trust until the bankruptcy court could make a determination that they were estate property.

On January 27, 2010, Morgan Stanley filed a "Motion to Excuse Third-Party Morgan Stanley Smith Barney LLC's Compliance with 11 U.S.C. § 542." In the motion, Morgan Stanley indicated that it was unable to determine who was entitled to the funds it had paid to Gonzalez; it requested an order from the court confirming its rights and responsibilities with respect to the funds, and either (1) making a finding that the funds were not property of the bankruptcy estate and requiring Gonzalez to return the funds to Morgan Stanley, or (2) making a finding that the funds were property of the bankruptcy estate and confirming that Morgan Stanley's turnover under § 542 was proper.

Stasz filed an opposition to Morgan Stanley's motion on February 16, 2010, asserting three arguments: (1) Gonzalez' "seizure of the assets" was illegal because he was required to first file an adversary proceeding to require turnover; (2) there was a trustee of the West Hollywood Trust, Lovell, on the petition date, and therefore the trust funds were not property of the estate; and (3) the West Hollywood Trust was not rescinded.

Morgan Stanley's motion was heard on March 3, 2010. Before the hearing, the bankruptcy court posted a tentative ruling: "The 'Account' is not property of the estate and the Trustee shall return the Account funds to [Morgan Stanley]]." Morgan Stanley and Gonzalez were present at the hearing; Stasz did not attend. A transcript of that hearing is not included in the record. However, as reflected in the transcript of the later hearing discussed below, the bankruptcy court noted at this hearing that it was requested not to make a finding regarding property of the estate, but simply to order the funds be returned to Morgan Stanley. Hr'g Tr. 2:3-5 (March 31, 2010). The bankruptcy court granted Morgan Stanley's motion on March 3, 2010. The court's order merely directed return of funds by Gonzalez to Morgan Stanley; it did not include a determination of whether the money was property of the estate.

Gonzalez filed a Motion Compelling Turnover of Estate Property (the "Turnover Motion") on March 8, 2010 seeking to once again recover the funds in the Morgan Stanley account. In the Turnover Motion, he argued that the West Hollywood Trust was never a valid trust under Nevada law, and that the trust had been rescinded by Stasz in 2004 before she filed her bankruptcy petition. Attached to the motion was a declaration of Spaulding, in which he stated that he never intended to establish any trust for Stasz' benefit and that, contrary to the attachment to the West Hollywood Trust, he never paid $1,000 to fund the trust.

Stasz responded to the motion on March 16, 2010. She argued that collateral estoppel applied to render the Gonzalez motion moot, because the bankruptcy court on March 3, 2010 had ruled that the funds were not property of the estate; that she listed the West Hollywood Trust on her schedules, Gonzalez had not timely objected, and thus the funds were exempt; and the West Hollywood Trust was a valid trust.

Gonzalez replied on March 22, 2010, noting that the bankruptcy court had never ruled on whether the funds were property of the estate, and pointing out that Stasz had never claimed an exemption in the West Hollywood Trust on her schedules. He also expanded on his earlier arguments that the West Hollywood Trust was a sham and was rescinded by Stasz before she filed her bankruptcy petition.

Two days before the hearing on the Turnover Motion, Stasz submitted a declaration purportedly describing a conversation she had with Spaulding, in which he allegedly disputed statements he made earlier in his declaration.

The bankruptcy court conducted a hearing on the Turnover Motion on March 31, 2010. Gonzalez was represented by counsel and Stasz appeared pro se. When Stasz repeated her argument that the court had already ruled that the funds were not property of the estate, the court corrected her:

STASZ: You are now making a decision based on the validity of the trust. I asserted in my opposition to this motion that you had already decided that. . . .

THE COURT: Yeah, and I did not.

STASZ: Okay.

THE COURT: I clearly did not. I don't think you were at the hearing and I [] specifically was requested to make no finding. I remember this, and I didn't. So there was no such finding.

Hr'g Tr. 1:24--2:9 (March 31, 2010). Gonzalez then summarized his position that the arguments of Stasz were purely conclusory, and that the reported conversation between Stasz and Spaulding was, at best, inadmissible hearsay.

The bankruptcy court orally ruled on the record granting the Turnover Motion. The court entered its Order Compelling Turnover of Estate Property on April 8, 2010. Stasz filed a timely appeal on April 20, 2010.

JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(A) and (E). We have jurisdiction under 28 U.S.C. § 158.

ISSUE

Whether the bankruptcy court erred in determining that the funds held on account of the West Hollywood Trust were property of the bankruptcy estate and in ordering that they be turned over to Gonzalez.

STANDARD OF REVIEW

Whether property is property of the estate is a question of law reviewed de novo. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 432 B.R. 812, 818 (9th Cir. BAP 2010).

The bankruptcy court's findings of fact are reviewed under the clearly erroneous standard. Goodrich v. Briones (In re Schwarzkopf), 626 F.3d 1032 (9th Cir. 2010).

DISCUSSION

Upon the filing of a bankruptcy petition, an estate is created comprised of all of the debtor's interests, legal and equitable, in property wherever located and by whomever held. § 541(a). In a chapter 7 case, the trustee is duty-bound "to collect and reduce to money the property of the estate for which such trustee serves . . . ." § 704(a)(3). Section 542(a) provides the means for a trustee to compel another entity to turn over property of the estate:

(a) Except as provided in subsection (c) or (d) of this section, an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.

Morgan Stanley never challenged in the bankruptcy court, and Stasz did not dispute, that it was in possession of funds in excess of $200,000 held on account of the West Hollywood Trust. Under the circumstances, however, Morgan Stanley was unable to determine if the funds were property of Stasz' bankruptcy estate.

It responded to Gonzalez' demands by initially turning over the money to him, and then later, by filing a motion seeking an order from the bankruptcy court directing disposition of the funds.

Since the property in question represented, in effect, cash, if the funds were property of the bankruptcy estate, Gonzalez could compel the turnover of those funds to him under § 542(a). The only real dispute in this appeal concerns whether the funds in the West Hollywood Trust are property of the estate. Since it is uncontroverted that the funds in the trust account at Morgan Stanley came from Stasz,*fn5 if the West Hollywood Trust was either a sham or had been rescinded before her bankruptcy petition was filed, those funds constituted property of the estate and were subject to turnover.

In granting his motion and ordering that Morgan Stanley turn over the funds to Gonzalez, the bankruptcy court found that the trust was either a sham, or that it had been rescinded before the filing of Stasz' bankruptcy petition. Stasz raises a number of objections to the bankruptcy court's order, all of which lack merit and are discussed below.

A. Stasz contends that, under the facts of this case, Gonzalez was required by Rule 7001 to file an adversary proceeding to obtain turnover of the West Hollywood Trust funds. While the law Stasz relies upon is outdated, current Rule 7001(1) does provide that a proceeding to recover money, other than one to compel the debtor to deliver property to the trustee, is an adversary proceeding. However, as the Panel recently held, a bankruptcy court's decision not to require an adversary proceeding is subject to a harmless error analysis, and under that standard, if the failure to commence an adversary proceeding did not cause prejudice, form should not be elevated over substance. Korneff v. Downey Reg'l Med. Ctr.-Hosp., Inc. (In re Downey Reg'l Med. Ctr.-Hosp, Inc.), 441 B.R. 120, 127-28 (9th Cir. BAP 2010), citing Austein v. Schwartz (In re Gerwer), 898 F.2d 730, 734 (9th Cir. 1990). Here, Gonzalez as trustee employed a contested proceeding, via the the Turnover Motion, to obtain an order from the bankruptcy court that the account funds be paid over to him. Stasz has not shown that she was in any way prejudiced by this procedure. Indeed, it is clear that Stasz received notice of the motion, objected to it, and had a full and fair opportunity to present her arguments to the bankruptcy court. Under Rule 9014, Stasz could, but did not, seek discovery or access to a variety of other procedures available to her. On this record, all things considered, Stasz has not shown she suffered any disadvantage in this case because Gonzalez utilized a motion, instead of a complaint, to recover the funds from Morgan Stanley. We therefore decline to elevate form over substance by reversing the bankruptcy court's order on this procedural ground.

B. Stasz next argues that Gonzalez was precluded from seeking turnover under the doctrine of collateral estoppel because the bankruptcy court had previously determined that the funds were not property of the estate when it ordered that they be repaid by Gonzalez to Morgan Stanley. Of course, a close review of the record shows this argument is simply incorrect as a matter of fact. As discussed above, as the bankruptcy court later explained, it did not rule at the March 3, 2010 hearing, a hearing that Stasz did not attend, that the funds at Morgan Stanley were not property of the estate. Indeed, the order entered by the bankruptcy court makes no such finding. If Stasz believed an error was made by the bankruptcy court, it was the obligation of Stasz to provide a transcript of the March 3 hearing to support her argument on appeal. Rule 8009(b)(9); Morrissey v. Stuteville (In re Morrissey), 349 F.3d 1187, 1188 (9th Cir. 2003). That Stasz made this argument in her briefs, and again at oral argument, is perplexing.

C. Stasz argued that because she listed the West Hollywood Trust in her schedules, they are exempt because Gonzalez failed to object to her exemption within the statutory period. But Stasz' position is, again, flawed.

Gonzalez presented evidence from the bankruptcy court's records that Stasz had never properly claimed the West Hollywood Trust exempt in either her original Schedule C or in any of the amended Schedule Cs she had filed. The Code requires the debtor to file a list of property that is claimed as exempt. § 522(l). Rule 4003(c) instructs a debtor to list exempt property on the schedule of assets required to be filed by Rule 1007. Rule 1007 in turn requires the debtor to file schedules using the appropriate Official Forms. And Official Form 6 includes Schedule C, on which the debtor claims property as exempt, and requires the debtor to provide the following information for each item claimed exempt: (1) a description of the property; (2) the law authorizing the exemption; and (3) the value of the exemption along with the current market value of the property.

If she indeed intended to claim the alleged trust asset exempt, Stasz complied with none of these statutory or rule requirements to do so. Schwab v. Reilly, 130 S.Ct. 2652, 2669 (2010) ("Where, as here, a debtor accurately describes an asset subject to an exempt interest and on Schedule C declares the 'value of [the] claimed exemption' as a dollar amount within the range the Code allows, interested parties are entitled to rely upon that value as evidence of the claim's validity."). Thus, Stasz' argument that Gonzalez failed to object to her exemption within the statutory period misses the point: he was under no obligation to object to an exemption claim that Stasz never properly asserted.*fn6

D. Contrary to Stasz' arguments, Gonzalez presented sufficient evidence to show that the West Hollywood Trust was a sham. First, he established that the trust did not meet the threshold requirements under applicable Nevada law for establishing a trust. Under those statutes, "a trust is created only if: 1. The Settlor properly manifests an intention to create a trust; and 2. There is trust property, except as provided in NRS 163.230." NEV. REV. STAT. § 163.003. Gonzalez submitted the sworn declaration of Spaulding, the putative Settlor of the West Hollywood Trust, in which he testified he never manifested intent to create a trust for the benefit of Stasz, and in fact did not know her or the secondary beneficiaries under the trust. Spaulding recounted that he was an employee of Stasz' attorney, and simply signed the trust documents at the direction of his employer. He further stated that he did not pay the $1,000 that the West Hollywood Trust documents alleged that he did as Settlor. Thus, Gonzalez argued, there was no evidence of a manifested intent by the Settlor to create this trust nor the creation of a trust corpus at the time of forming the trust.

We have found no case law in Nevada interpreting Nev. Rev. Stat. § 163.003 or discussing the creation of inter vivos express trusts. However, in resolving trust questions, the Nevada Supreme Court has relied on the Restatements of the Law of Trusts. Pryor v. Pryor, 734 P.2d 718, 719 (Nev. 1987). Although there is some diversity in interpretations of "manifests an intention to create a trust," there is no dispute that transfer of property from the Settlor to the trust is required at the time of trust creation. RESTATEMENT (THIRD) OF TRUSTS § 16(1) ("If the property owner undertakes to make a donative inter vivos disposition in trust by transferring property to another as trustee, an express trust is not created if the property owner fails during life to complete the contemplated transfer of the property."). Comment a. to § 16 of the Restatement simplifies that wording: "A transfer of the intended trust property is required for the creation of an express trust." Schedule "A" attached to the West Hollywood Trust states: "The amount of the corpus originally contributed by the Settlor is One Thousand Dollars ($1,000 US)." The only evidence before the bankruptcy court was Spaulding's statement in his declaration: "I never contributed One Thousand Dollars, or any amount, to the West Hollywood Trust."

In short, the evidence before the bankruptcy court was adequate to show that the Settlor did not manifest the intention to create the West Hollywood Trust, and did not transfer property to establish the trust corpus. Consequently, the bankruptcy court could properly conclude that the required elements for creation of a trust under Nevada law were not met.

Rather than challenging the legal sufficiency of Gonzalez' argument, Stasz instead attempted to impeach the Spaulding declaration. Two days before the March 31 hearing, she submitted her own declaration that she had spoken with Spaulding, and that he denied some of the statements he made in the declaration. Gonzalez objected to the late submission of the Stasz declaration and objected to any hearsay statements in that declaration. While the bankruptcy court did not expressly rule on Gonzalez' objection, it apparently gave little weight to Stasz' declaration. As the finder of fact, the court was not required to value Stasz' version of the facts over those reflected in the Spaulding declaration.*fn7 Where there are two permissible views of the evidence, the fact finder's choice between them cannot be clearly erroneous. Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 574 (1985); Rifino v. United States (In re Rifino), 245 F.3d 1083, 1086 (9th Cir. 2001).

Gonzalez also submitted evidence that all funds in the West Hollywood Trust came from Stasz and that there had been no trustee of that trust since 2006. Together with the evidence that the trust did not comply with the requirements of Nevada law to establish a trust and that Stasz had contributed all funds in the trust, we conclude that the bankruptcy court did not err in determining that the West Hollywood Trust was a sham.

E. The bankruptcy court determined that, even if the trust were not a sham, it had previously ruled that Stasz had rescinded the trust in 2004. Stasz alleges that she did not rescind the trust. However, she did not address this issue in her opening brief, and thus waived its consideration in this appeal. Ghahremani v. Gonzales, 498 F.3d 993, 997-98 (9th Cir. 2007) (issues not raised and argued in the opening brief are deemed waived). Indeed, she made only one conclusory reference to the rescission in her reply brief that Gonzalez made "nonsensical arguments that Stasz had revoked the trust within a Complaint that was never served nor adjudicated in Los Angeles and was void for lack of jurisdiction." Stasz Reply Br. at 4. Stasz provided no explanation, argument or supporting authority for this statement.

Even were we to consider this issue, the bankruptcy court had an adequate basis to conclude that Stasz rescinded the West Hollywood Trust in 2004, before she filed her bankruptcy petition. In an earlier adversary proceeding, wherein the bankruptcy court set aside as a fraudulent conveyance the transfer of Stasz' condominium to the Alta Loma Ultra Trust, the bankruptcy court determined that both the Alta Loma Trust and the West Hollywood Trust had been rescinded by Stasz in 2004. The bankruptcy court made that specific finding of fact and incorporated it into a separate Order re Statement of Uncontroverted Facts and Conclusions of Law at ¶ 23.*fn8 Stasz unsuccessfully challenged that order before this Panel and the Ninth Circuit, and was denied certiorari by the Supreme Court. We are therefore comfortable in concluding that the bankruptcy court's conclusion that Stasz rescinded the West Hollywood Trust is law of the case. Milgard Tempering v. Selas Corp. of Am., 902 F.2d 703, 715 (9th Cir. 1990) ("Under the doctrine [of law of the case], a court is generally precluded from reconsidering an issue previously decided by the same court, or a higher court in the identical case.); Richardson v. United States, 841 F.2d 993, 996 (9th Cir.), amended, 860 F.2d 357 (9th Cir. 1988). For the doctrine to apply, the issue in question must have been "decided explicitly or by necessary implication in [the] previous disposition." Liberty Mutual Ins. Co. v. E.E.O.C., 691 F.2d 438, 441 (9th Cir. 1982). That the West Hollywood Trust was rescinded by Stasz in 2004 was "decided explicitly . . . in the previous disposition." Stasz is therefore precluded from arguing that she did not rescind the trust in connection with Gonzalez' motion in the same bankruptcy case, and the bankruptcy court was under no compulsion to revisit the question.

CONCLUSION

We conclude that the bankruptcy court did not err in determining that the West Hollywood Trust was a sham, or that it had been rescinded. Therefore, the bankruptcy court correctly decided that the funds in the account at Morgan Stanley, which had been contributed by Stasz, were property of the bankruptcy estate which must be turned over to Gonzalez. We AFFIRM the Turnover Order of the bankruptcy court.


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