Court: District Court, E.D. New York; October 24, 1983; Federal District Court
An adversary proceeding has been initiated by Daniel McColley, the trustee of North American Dealer Group, Inc. (NADG), against defendants Howard S. Bass, Brooklyn Savings Bank, and the Internal Revenue Service (IRS) for the turnover of a real property located at 5 Merrywood Drive, West Orange, New Jersey. The legal title to the property is held by Bass, but the trustee asserts that NADG is the equitable owner, making the property part of the debtor's estate. The IRS is involved due to a tax lien related to Bass's liabilities but has agreed to allow the sale of the property, permitting its lien to attach to the proceeds. The Brooklyn Savings Bank is included as a nominal party with no claims against it.
NADG filed for Chapter 11 bankruptcy on December 24, 1980, which was later converted to a Chapter 7 liquidation on February 12, 1981. McColley was elected as trustee on April 22, 1981. NADG's pre-bankruptcy financial status included assets valued at approximately $2 million, secured debts of about $1,009,870, and unsecured debts totaling around $25 million. The company, established in 1973 by Bass and a partner, focused on selling extended automobile warranties.
The Merrywood property, purchased on July 15, 1977, for $172,000 as Bass's residence, had associated debts of a first mortgage from Brooklyn Savings Bank and a second purchase money mortgage. Records indicate that NADG financed various expenses related to the property, including payments marked as "officer loans" to Bass and others. Notably, expenses were paid directly by NADG, suggesting a financial connection to the property despite Bass holding legal title.
NADG funds were used for payments related to the Merrywood house, including first mortgage payments to Brooklyn Savings Bank and late charges, as confirmed by the trustee's investigation. Since his appointment, the trustee has maintained all mortgage payments, which include taxes. The second mortgage was structured for three years and was to be satisfied before the debtor's bankruptcy petition. NADG also made payments for property improvements, maintenance, and appliances from the purchase date until bankruptcy. Bass, the debtor, admitted uncertainty regarding his own mortgage payments. Since the bankruptcy filing, minimal payments for repairs or improvements have occurred. The trustee has paid for insurance after being informed that Bass's coverage had lapsed, and Bass did not object to this. After Brooklyn Savings Bank initiated foreclosure proceedings, the trustee acted to halt them at the request of Bass or his attorney. Bass continues living in the property but has not paid rent to the trustee, except for ordered payments beginning April 1, 1983, to be held in escrow. Records indicate no rent was received prior to the trustee's appointment, although a bookkeeper noted Bass was credited with two months’ rent, which was not collected. Bass's stock in NADG was sold to Carexco in 1980, with an initial cash payment of $12,500 and subsequent monthly payments, alongside the forgiveness of $500,000 in corporate loans. Carexco was established by Richard Childs, who was also associated with Properties Insurance Company, which provided insurance for NADG's car warranty contracts.
He is entitled to receive $1,375,000 from service contracts sold by NADG at a rate of $3 per contract, with no liability for this amount if NADG ceases operations without financial benefit. The contract stipulates that NADG will cover certain expenses related to the sale. A collateral agreement guarantees a portion of the purchase price, potentially $200,000, by Richard Childs and Gremesco, Inc., of which he is president.
Attached as Schedule H is a list of real and tangible property owned by NADS as of specified dates, including 5 Merrywood Drive, West Orange, New Jersey, which is linked to a Consultant Contract. A handwritten note indicates the deed is titled in Howard Bass's name. The schedule lists additional properties, including real estate in Staten Island and Palm Springs, along with two mortgaged boats and various leased items.
The contract affirms that, as of the sale, Bass covenanted that the house belonged to NADS. It specifies that Bass must continue living at 5 Merrywood Drive, with a two-year lease at a net monthly rent of $1,200, and conditions on carrying charges. Bass holds an option to purchase the property for $200,000 before the lease expires. If not exercised, Bass may renew the lease for another two years at a fair market rate, determined by arbitration if the parties cannot agree. Should he choose to renew, he retains an option to purchase at fair market value, also subject to arbitration if necessary. Unexercised options will lapse after the stipulated period.
The term ‘carrying charges’ encompasses expenses such as pool maintenance, utilities, and general maintenance of the property. Bass retains the right to terminate the lease with thirty days' notice. A lease copy is included as Exhibit G. The agreement stipulates that neither NADS nor the Buyer has claims on personal property at '5 Merrywood Drive, West Orange, New Jersey,' except for essential operational equipment of NADS. An integration clause states that the written contract represents the complete agreement, governed by New York law, and modifications must be in writing and signed by both parties. The consulting contract requires NADG to pay Bass a salary, cover life insurance and medical costs, provide a car and insurance, and possibly forgive debts owed by Bass. It also addresses the ownership of one of three lots in Monmouth Beach, indicating that Bass is to transfer title of one lot to himself while implying a transfer of the other two to NADG, although he claims he did not do so. Bass acknowledges making rental payments and receiving some payments under the contract, totaling $86,307.72 and $94,230.64 in consulting fees. The trustee argues that NADG is the equitable owner of the Merrywood property, which is legally titled in Bass's name, citing that NADG financed and maintained it. Bass argues the property is his, as he claims to have repaid loans to NADG for its purchase, retaining a security interest, with the title to remain in his name until obligations are met. He has the option to purchase the property for $200,000 or deduct that amount from the purchase price of his stock if he decides to stay after fulfilling contract conditions.
Bass presented testimony from his attorney, Bernard Hubscher, regarding difficulties faced at NADG related to an agreement with Proprietors Insurance Company, which threatened to cancel extended automobile warranty policies. Hubscher indicated that such a cancellation would threaten NADG's viability. Bass sought Hubscher's assistance to negotiate the sale of his stock, which began months before the sale was finalized. Hubscher described the negotiations as prolonged but noted that the final agreement was drafted hastily under pressure from Richard Childs, who indicated that the agreement needed to be signed quickly to avoid losing the deal.
During negotiations, discussions centered on securing Bass's home, with proposals for him to pay rent and later reimburse $200,000 if he received a payment of $1.5 million from the sale. Hubscher highlighted Bass's concerns regarding lack of security for the payment, which were partially addressed through a personal guarantee from Childs or one of his corporations, but no formal security agreements were established.
Hubscher challenged the representation of property in Schedule H, asserting it did not accurately reflect the ownership claims and was merely a list of properties previously associated with NADS. Bass echoed this sentiment, arguing that the written contract misrepresented the agreement and that his handwritten notes during property discussions indicated ongoing negotiations rather than finality. He emphasized that his list of properties was prepared in response to a request and did not signify agreement to the terms of the sale.
Negotiations regarding property title involved a dispute over ownership of 5 Merrywood Drive. The parties reached an agreement stating that this property would be covered under a consultant contract, ensuring full payment owed under that contract, with the individual agreeing to make rental payments. The rental payments were structured to allow the other party to expense $2,500 related to improvements, leading to the inclusion of ambiguous language about a supposed existing lease, which the negotiators would likely deny in testimony.
Under 11 U.S.C. § 541, a debtor's estate includes all legal or equitable interests in property at the case's commencement. § 542 mandates that anyone in possession of property must deliver it to the trustee, barring inconsequential value. The case hinges on whether the debtor has a legal or equitable interest in the property according to state law. The trustee's argument is based on the notion that Bass is a constructive trustee of the Merrywood property. A constructive trust arises when retaining property would unjustly enrich the holder, as articulated in relevant case law. New Jersey courts indicate that a constructive trust can be imposed to prevent unjust enrichment, typically involving wrongful acts such as fraud or breach of a confidential relationship. The doctrine emphasizes the necessity of conscience and good faith in property relations.
A legal estate is held by A, but B is entitled to the land based on equitable principles. Equity enforces B's rights by imposing a trusteeship on A to convey the property for B's benefit, rather than invalidating A's legal estate. The concept of a "constructive trust" serves to compel a title holder to transfer ownership to someone wrongfully deprived. The determination of whether NADG has been wrongfully deprived of the Merrywood property hinges on the credibility of witnesses, particularly Bass and Hubscher. The court does not find Bass credible regarding his claim of ownership or security interest in the property.
Key evidence includes Bass's admission on a financial document indicating the property belonged to NADS and was subject to a consultant contract. The phrasing used by Bass in the documentation suggests he did not equate the property with his personal ownership. Furthermore, Bass's assertions of an oral security agreement contradict the detailed written contract he signed, which included an integration clause. The court finds it implausible that a businessman would have such a significant agreement orally, especially with legal representation.
The title not being conveyed at the time of sale is noted, but there are plausible explanations for this delay related to the company’s turmoil and the timing of the property acquisition. The court considers that the title being held in Bass's name is consistent with other properties where ownership was similarly retained despite being associated with the company. Overall, the evidence suggests that Bass's claims regarding the Merrywood property lack credibility.
Bass, an officer of NADG and its fiduciary, improperly retained legal title to the Merrywood property, resulting in unjust enrichment. His own admission confirms that the property belongs to the debtor, establishing that NADG holds equitable title. Consequently, Bass is ordered to transfer title to the trustee. The IRS's claims will attach to the proceeds per their agreement with the trustee. The trustee has also asserted a claim for Bass's occupancy of the property from May 19, 1982, to March 31, 1983, at $1,200 per month, as well as for payments made thereafter, which are currently held in escrow. Given that the Merrywood property is part of the estate, Bass is liable for its use during the claimed period, and the trustee may deposit the escrowed funds into the estate's general funds. Bass is directed to transfer the title of 5 Merrywood Drive to the trustee, with a judgment of $12,000 awarded to the plaintiff against the defendant.
