Resulting Trusts in Bankruptcy
By Andrew J. Christensen
It seems to me that the issue of resulting trusts is coming up more often recently. Maybe it is because property values are increasing. I am getting a lot of questions about this from other bankruptcy attorneys and from clients.
The problem arises when a debtor files bankruptcy but their name is on title to the home of a parent or other family member. This most often occurs when parents add their children on title for inheritance purposes so that the house will go straight to the children when the parents pass. This is usually by adding the child as a joint tenant with right of survivorship. Many times the debtor does not live in the parent’s house, and has never paid any money toward the mortgage. The family understands that the house belongs to the parents, not the children, but that it is intended that the children inherit the house later. The problem is that from the perspective of a bankruptcy trustee looking at the title document, it appears that the debtor is an equal co-owner with the parents, and equally entitled to a share of the value. This can be a nightmare for the debtors when there is significant equity in their parents’ homes, because the bankruptcy trustees will want to get at the equity to pay creditors.
The situation also commonly arises when a debtor is on title to the house and mortgage loan of another family member in order for the other family member to qualify for financing. This gives the family member a better mortgage interest rate. The debtor may or may not contribute to the payments or live at the property. Again, it appears on paper that the debtor owns an equal share of the value of the house.
It would not be fair in these cases for creditors or a bankruptcy trustee to take away the house that really belongs to the parents or other family member in order to pay the debts of another person. The good news is that in California there is a legal doctrine to protect homeowners in this exact situation. It is called the resulting trust doctrine. It has been around for over 100 years, and there is a body of case law on the subject. A resulting trust means that a court can decide that in the situations described above, the house really belongs fully to the parents who live in the house and pay for it, and does not belong to the debtor/child who is on title only for inheritance or other purposes.
A resulting trust is imposed by operation of law when the circumstances of a transfer of property show that the transferee was not intended to take the beneficial interest. In our examples above with the parent/child situation, the parent is the transferor, and the child/debtor is the transferee. The basic conceptual basis of the resulting trust law in California is that there are times when the legal title to property is held in a manner that does not directly represent the true ownership interests of the parties, such as when title is used as an estate planning device rather than reflecting a true present beneficial ownership interest.
California courts will use the resulting trust rules to protect the true beneficial interests of the parties. One way they do this with resulting trusts is by the general policy that the person who pays the purchase price should be considered the owner of the property to the extent they paid for it. The courts look to see who paid for it, who acts as the owner, what the parties intended, and whether there is evidence of a gift.
If you have your name on title to your mother’s house, but it really isn’t your house, then you have a resulting trust situation. When the trustee or creditors are demanding in chapter 13 that the debtor pay into the plan the value of all the non-exempt equity in another persons property, then the debtor should respond to the objection to confirmation with evidence that the debtor holds bare legal title only, and does not truly have a beneficial interest. A few cases on resulting trust fact patterns are cited below.
Resulting trusts can also be imposed on a partial ownership basis, or a pro tanto resulting trust based on the value of each owner’s contribution. This is useful for example when one party paid the down payment, and the other (usually the debtor) helps make mortgage payments. So even though the title may be 50/50 ownership as joint tenants, the debtor may only really have a much smaller beneficial interest if the debtor’s mortgage or down payment contributions have been smaller than half the total payments.
Another piece of useful information here is IRS Publication 936, which explains tax deductions for mortgage payments. The amount of your tax deduction is based on the amount you paid, not on the amount of ownership interest. This means that the debtor can take a full tax deduction for whatever portion of the payment she makes, and still make a resulting trust argument. This is important for a situation where one party pays the down payment on the property, but your debtor client makes the ongoing monthly mortgage payments for example, or contributes some portion of the monthly payment.
It should be pointed out that there is also a strong argument that the chapter 13 trustee does not have standing under §1302 to challenge the resulting trust claim being made by the debtor. In re Kutner, 3 B.R. 422 (Bankr. N.D. Tex. 1980). Only creditors should be making these arguments. If no creditor is opposing the debtor’s assertion of a resulting trust, then there is no party in interest that has standing to object.
There is a long line of California case law on resulting trusts going back over 100 years. I believe it is important to raise these arguments in bankruptcy court, even though debtor’s counsel may get a lot of push back from the trustee, creditors, or the court who disfavor resulting trust arguments. I have prevailed on resulting trust arguments in a number of cases over the years. It all comes down to the evidence that can be brought to show that putting the debtor’s name on title was for inheritance purposes only, and was not intended as a gift, and evidence of who has paid what amounts for the down payment and/or mortgage. It is a very fact-specific inquiry that requires more than a simple declaration of the debtor that he does not own the house.
Here is a select list of just a few resulting trust cases from California and other courts across the country.
• In re Torrez, 827 F.2d 1299 (C.A.9,1987): “Under California law, a resulting trust is implied by operation of law whenever a party pays the purchase price for real property and places title in the name of another. The trust is presumed to result in favor of the person who paid the purchase price. California Civil Code § 853, repealed, ch. 820, §§ 5, 43, 1986 Cal.Stat. 439, 505. The repeal does not disturb California case law concerning resulting trusts. See Johnson v. Johnson, 192 Cal.App.3d 551, 237 Cal.Rptr. 644, 646 n. 1 (1987) (citing Recommendation Proposing the Trust Law, 18 Cal.L.Rev.Comm. Report at 501, 793 (1986))”
• In re Cecconi, 366 B.R. 83 (Bankr. N.D. Cal. 2007). A resulting trust is imposed by operation of law when the circumstances of a transfer of property show that the transferee was not intended to take the beneficial interest. In order to establish a resulting trust, it must be shown by clear and convincing evidence that the party claiming it paid the purchase price, and did not intend to give the other party a beneficial interest when their name was put on record title.
• Gomez v. Cecena, 15 Cal. 2d 363, 366-67, (1940) “one who claims a resulting trust in property has the burden of proving the facts establishing his beneficial interest by clear and convincing evidence.” The form of title presumption is rebutable by evidence that the parties did not intend a gift. “[S]uch a presumption may be rebutted by adequate proof that the grantee was not intended to have the beneficial interest.” […] “While no universal and immutable formula can be prescribed for determining the weight to be accorded testimonial evidence, it has frequently been said that testimony which is not inherently improbable and is not impeached or contradicted by other evidence should be accepted as true by the trier of fact.” In other words, the bankruptcy court should believe the declarations of the debtor and the other parties. The language “not inherently improbable” essentially means reasonableness and common sense. This would apply when it should be obvious what the result should be.
• Lloyds Bank California v. Wells Fargo Bank, 187 Cal.App.3d 1038, 1044-45, (Cal.App. 1 Dist.,1986) citing (Socol v. King (1950) 36 Cal.2d 342, 348,; Martin v. Kehl, supra, 145 Cal.App.3d at pp. 238–239, 193 Cal.Rptr. 312; 7 Witkin, op. cit. supra, § 126, p. 5484.) Pro tanto resulting trusts may be imposed to the extent of each party’s proportional contribution (such as when both the Debtor and another party contributed to the purchase price of the property).
• Jones v. Gore, 141 Cal. App. 2d 667, (1956). The presumption of legal title can be overcome by parol (oral) evidence and the testimony of the parties. “Parol evidence is admissible to prove the existence of a resulting trust” and such evidence does not violate the statute of frauds since such a trust is based in part on the fact that there is no writing.” In other words, the declarations of the parties can be valid evidence to show a resulting trust. See also G.R. Holcomb Estate Company v. Burke, 4 Cal. 2d 289, 299, (1935).
• Weisbart v. Momphard (In re Michael R. and Stepahanie Munro, 23 CBN 274, 2013, WL 74414 (Bankr. E.D. Texas 1/7/13) Home saved by resulting trust where father owned, paid, and lived in the home, and put his daughters name on the title only for inheritance purposes. The chapter 7 trustee could not sell her interest because she had bare legal title, and no equitable interest. The father was clearly the one intended to retain all beneficial interest in the home. This case was not in California, but it is helpful as an example of the facts and evidence that can be used to support a resulting trust argument here as well, and shows bankruptcy courts everywhere recognize this fundamental principal of equity.
• Kramer, Trustee v. chin In re Louise Reddington 23 CBN 648, 2013 WL 2404081 Bankr. EDNY 6-4-13: The court found no fraudulent conveyance of house to sibling because Chinese tradition that the eldest male receives the family home in order to care for the parents. The sister had the house in her name only because brother had some marital problems at the time. Also, sister defendant was not insolvent at the time, and everyone knew the house belonged to the brother. Again, this is not a California case, but is is a good example of unique facts that show who really owns the house.
• Burden, Trustee Ve. Richardson (In re Edmudn P and Sara A. Richardson, Bankr. ED Ky. 5/30/13. Transfer of bare legal title of land to defendant by debtor was not a fraudulent transfer because the property was held by the debtor in trust for the defendant. This was oral trust. The purpose was because the defendant mother couldn’t get credit in her own name.