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In re Henshaw

United States District Court, D. Hawaii

February 8, 2018

In re MICHAEL DYLAN HENSHAW and KIMBERLY HENSHAW, Debtors.
v.
DANE S. FIELD, Trustee of the Bankruptcy Estate of MICHAEL DYLAN HENSHAW and KIMBERLY HENSHAW, Appellee. PHILIP DANIEL HENSHAW and BARBARA WRESSELL HENSHAW, Appellants, Adv. Pro. No. 12-90070

          ORDER AFFIRMING BANKRUPTCY COURT'S JUNE 2017 ORDER GRANTING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT

          DERRICK K. WATSON UNITED STATES DISTRICT JUDGE.

         INTRODUCTION

         Appellants Philip Daniel Henshaw and Barbara Wressell Henshaw (the “Henshaws”)[1] appeal the June 28, 2017 Final Judgment entered in Adversary Proceeding No. 12-90070, which rendered a final decision on the merits in accordance with the bankruptcy court's June 20, 2017 summary judgment determination in favor of Trustee Dane S. Field (“Trustee”). The bankruptcy court determined that (1) the Trustee was a bona fide purchaser for value who may be entitled to sell both Debtors and the Henshaws' 50% ownership interests in the subject real property held as joint tenants, pursuant to 11 U.S.C. § 363(b) and (h), and (2) the Trustee was entitled to summary judgment on the Henshaws' Counterclaim for reformation, which sought to reform the deed to the property to reflect the Debtors and Henshaws' intended ownership interests. The Henshaws appeal these rulings.

         Although the bankruptcy court granted his motion for summary judgment in the Adversary Proceeding below, the Trustee cross-appeals the court's conclusion that the Counterclaim did not amount to an impermissible collateral attack on a prior judgment entered in another adversary proceeding between these same parties. Because the Court AFFIRMS the decision of the bankruptcy court that the Trustee was a bona fide purchaser without notice of the Henshaws 2007 Reformation claim, the Court does not reach the issue raised in the Trustee's cross-appeal.

         BACKGROUND

         I. Bankruptcy Proceedings[2]

         On March 29, 2011, Debtors Michael Dylan Henshaw and Kimberly Henshaw filed their chapter 7 petition, and the Trustee was appointed to oversee the Debtors' estate. See Dkt. Nos. 1 and 3 in Bankr. No. 11-00853. The Trustee initiated two adversary proceedings concerning the real property jointly owned by the Debtors' estate and the Henshaws, commonly known as Units A and B of “The Power Farm” condominium project located at the street address now known as 76-875 and 76-875A, Hualalai Road, Kailua-Kona, Hawaii 96740, designated as TMK 3-7-6-007-019, C.P.R. Nos. 0001 and 0002 (the “Property”). The purchase price of the Property was $680, 000.00. The Henshaws contributed $595, 149.20 by refinancing their home in San Diego and $83, 000.00 from retirement account funds, for a total of $678, 149.20. In comparison, Debtors contributed $6, 970.20 towards escrow costs. See Adv. Counterclaim ¶ 6, Dkt. No. 8-1 (Ex. 1).

         The Henshaws now assert that, although title was taken as “joint tenants, ” the parties did not intend to indicate upon recordation that the Property was owned in equal shares.[3] The parties “mistakenly” believed that title taken as a joint tenancy would simplify their estate planning, “without changing the current ownership, ” which was intended to remain entirely with the Henshaws. Adv. Counterclaim ¶ 7, Dkt. No. 8-1. The Henshaws contend that the magnitude of this mistake did not become known until the Trustee filed the first adversary proceeding in 2011.

         A. Avoidance Action (Adv. Pro. No. 11-90105)

         On December 13, 2011, the Trustee filed an adversary complaint against the Henshaws in Adv. Pro. No. 11-90105 (“Avoidance Action”), asserting that Debtors had a 50% interest in the Property by operation of the June 22, 2007 deed (“2007 deed”), and had fraudulently transferred their 50% interest in the Property to the Henshaws by way of a Quitclaim deed dated December 30, 2009, recorded with the Bureau of Conveyances of the State of Hawaii (“Bureau”) as Document No. A-46450946, on March 19, 2010 (“2010 Quitclaim deed”). See Dkt. No. 8-1 (Ex. 5).

         The adversary complaint asserted that Debtors' transfer of their joint interest in the Property was fraudulent in violation of 11 U.S.C. §§ 544(b) and 548(a)(1), and the Hawaii Uniform Fraudulent Transfer Act, Hawaii Revised Statutes (“HRS”) § 651C-4(a). On August 24, 2012, the bankruptcy court entered its “Order Granting Plaintiff's Motion for Summary Judgment Filed May 22, 2012, and Vesting Title to Real Property (TMK 3-7-6-007-019, C.P.R. Nos. 0001 and 0002) in Debtors and Defendants as Joint Tenants” and “Judgment Vesting Title to Real Property (TMK 3-7-6-007-019, C.P.R. Nos. 0001 and 0002) in Debtors and Defendants as Joint Tenants; Exhibit ‘A'” in Adv. Pro. No. 11-90105 (“Avoidance Order and Judgment”). The Avoidance Order and Judgment voided the pre-petition transfers of Debtors' one-half ownership interest in the Property to the Henshaws as constructively fraudulent transfers, and vested title to the Property in Debtors and the Henshaws as joint tenants, as described in the 2007 deed. The 2010 Quitclaim deed was rendered “null and void, having no effect whatsoever on the properties.” Avoidance Order at 4, Dkt. No. 26 in Adv. Pro. No. 11-90105. The Henshaws appealed the Avoidance Order and Judgment to the district court.[4]

         In its order affirming the bankruptcy court, the district court applied the parol evidence rule to the 2007 deed “to prevent admission of extrinsic evidence suggesting that the subject properties were held in anything other than a joint tenancy, ” reasoning that, “[a]pplication of this rule in this action makes common sense-third parties, including the Trustee, must be able to rely on the terms of a recorded deed.” In re Henshaw, 485 B.R. 412, 421 (D. Haw. 2013), aff'd, 670 F. App'x 563 (9th Cir. 2016). The district court further explained that:

if third parties such as creditors cannot rely on the face of a deed, then any assets held in joint tenancy will require investigation. It is for this very reason that “creditors are entitled to rely ‘on the face of the deed, '” regardless of whatever the equitable interests may be between the joint tenants. See In re Risler, 443 B.R. 508, 510 (Bankr. W.D. Wis. 2010) (quoting In re Teranis, 128 F.3d at 472). Indeed, especially in the bankruptcy context, allowing extrinsic evidence would open the door to collusion given that joint tenants' interests will often be aligned to shield assets from the bankruptcy trustee and/or creditors. The parol evidence rule is designed to prevent this type of possible fraud-the “rule discourages interested witnesses to a contract from committing fraud, perjury, or unintentional invention by making statements that the contract did not actually represent the agreement of the parties.”

In re Henshaw, 485 B.R. at 420 (footnote omitted). Although the Henshaws appealed the district court's order, the Ninth Circuit affirmed. In re Henshaw, 670 F. App'x 563, 564 (9th Cir. 2016).

         B. Sale Action (Adv. Pro. No. 12-90070)

         After the bankruptcy court entered the Avoidance Order and Judgment, the Trustee commenced Adversary Proceeding No. 12-90070 on September 13, 2012, under Section 363(b) and (h), seeking an order permitting the sale of both Debtors and the Henshaws' 50% ownership interests in the Property. Adv. Compl., Dkt. No. 8-1 (Ex. 1). The adversary complaint specifically noted that the Avoidance Order and Judgment voided as fraudulent transfers the pre-petition transfers of Debtors' ownership interest in the Property to the Henshaws via the 2010 Quitclaim deed, and revested title to the Property in Debtors and the Henshaws, as joint tenants each with a 50% ownership interest. Adv. Compl. ¶¶ 8-12.

         The Henshaws asserted a Counterclaim for reformation of the 2007 deed on November 14, 2012, alleging for the first time that “[t]itle was taken, by Grant Deed, as joint tenants solely for estate planning purposes so that Debtors would have a right of survivorship[, however] [n]either [the Henshaws] nor Debtors believed that joint tenancy was an irrefutable indication of equal ownership[.]” Adv. Counterclaim ¶ 7, Dkt. No. 8-1 (Ex. 2). They contend that, although Debtors lived in the Property while paying rent, the Henshaws at all times treated the Property as their own, including taking all tax advantages, such as the mortgage interest deduction and depreciation, while reporting the income and paying income tax on the rent. According to the Henshaws, their “plan was for the Debtors to eventually purchase the [Property] from [them] by obtaining their own mortgage for the full purchase price of $680, 000 and purchasing the [Henshaws'] interest in the Property.” Adv. Counterclaim ¶ 8. Shortly after the July 2007 purchase, however, “Debtors began to fall behind on their rent payments. By August 2009, [the Henshaws], not wanting to evict their son and his family, began looking to refinance the Property to take advantage of lower interest rates and to lower the monthly payment they were making.” Adv. Counterclaim ¶ 9. Over the next several months, the Henshaws spoke with several lenders, at which point, they claim “it became [clear] that in order to refinance the Property it was necessary to abandon the estate planning joint tenancy and to convert the title to reflect [the Henshaws'] sole ownership.” Id. Sometime in November 2009, the Henshaws asked that Debtors affect this change in record ownership so that they could refinance the Property. Id.

         The Counterclaim asserts that the Henshaws are entitled to reformation of the 2007 deed because “the form of title fails to clearly reflect the true intent of the [Henshaws] and Debtors in that it arguably appears to vest the Debtors with a 50% interest in the Property, ” Adv. Counterclaim ¶ 16, and the 2007 deed's failure “to clearly reflect the true intent of the parties resulted from a mutual mistake by [the Henshaws] and Debtors, including but not limited to, that having record title vest to the parties as joint tenants would result in an equal ownership by Debtors and [the Henshaws].” Id. ¶ 17. The Henshaws again aver that the true intent of the parties when they purchased the Property in 2007, was as follows:

On about July 3, 2007, [the Henshaws] and Debtors mutually agreed to co-own the Property. Actual ownership was agreed to be entirely with [the Henshaws] with Debtors to have record title and a right [of] survivorship for estate planning purposes. This agreement was later reduced to writing by the issuance of a Grant Deed. Title was vested in [the Henshaws] and Debtors as joint tenants.

Adv. Counterclaim ¶ 15. The Counterclaim attempts to reform the 2007 deed so that the parties' respective ownership interests are “equivalent to their respective contributions to the purchase price.” Adv. Counterclaim ¶ 16.

         The Trustee moved for summary judgment on the Counterclaim as matter of law because (1) a deed cannot be reformed against a bankruptcy trustee who takes the position of a bona fide purchaser for value; and (2) the Counterclaim constitutes an impermissible collateral attack on the Avoidance Order and Judgment issued in Adv. Pro. No. 11-90105. Adv. Mem. in Supp. of Mot. for Summ. J., Dkt. No. 8-1 (Ex. 4). In opposition to the Trustee's motion for summary judgment, the Henshaws maintain that the Trustee was not a bona fide purchaser because he had constructive notice as of March 29, 2011, the date of the commencement of Debtors' chapter 7 case, via the 2010 Quitclaim deed, of a competing claim of ownership to the Property. Adv. Mem. in Opp'n to Mot. for Summ. J., Dkt. No. 8-1 (Ex. 6). In reply, the Trustee argues that the Henshaws cannot properly rely on the 2010 Quitclaim deed to provide notice of anything because it was “a fraud on creditors and the bankruptcy estate, ” and a null and void deed without legal effect. Adv. Reply at 5, Dkt. No. 8-1 (Ex. 8).

         II. Bankruptcy Court ...


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