You Be the Judge: In re Stewart (E.D. Pa. 2008)

Caroline Stewart has lived in her house in South Philly for more than fifty years. Her husband's passed, her kids are grown and gone and she's alone. She pays the bills each month from her social security and pension checks.

Something got into Caroline Stewart's head in the fall of 2002. Maybe it was the chatter at the beauty shop. Maybe it was something she heard on the radio about inheritance taxes and the government and nursing homes taking everything folks had. She wanted to live in her own house until the day she died. She was afraid.

On December 9, 2002, Mrs. Stewart went down to her state congressman's office a few blocks away. She executed a deed conveying her house to her son, John Stewart, for $1. A staffer who worked for her congressman (not a lawyer) prepared the deed. It stated: Said Grantor for and in consideration of the sum of ONE ($1.00) DOLLAR and 00/100 lawful money of the United States of America, unto her well and truly paid . . . hath granted, bargained, sold, released and confirmed, and by these presents doth grant, bargain and sell, release and confirm unto the said Grantee his heirs and assigns, in fee.

A few months later, Mrs. Stewart thought about her daughter Susan and decided she should share in the house with John. So, Mrs. Stewart talked it over with John. He went to the same congressman's office and the same staffer prepared another deed, just like the first one only this time from John to John and Susan as tenants in common. Mrs. Stewart continued to live in the house. She paid the real estate taxes, but John took the deduction on his personal income tax returns for 2003 and 2004.

As it turned out, John had some problems with his credit cards. He filed for bankruptcy in 2005. The trustee in bankruptcy moved to sell John's interest in the house as property of the estate for the benefit of his creditors under 11 U.S.C. sec. 363(h)(trustee may sell the estate's interest and the interest of any co-owner (Susan) if partition is impracticable and then remit one half of the proceeds to the co-owner). John argued that the estate held only bare legal title to the house. Despite the unconditional deed, Mrs. Stewart retained the beneficial interest in the property under a resulting trust.

If the trustee wins, Mrs. Stewart loses the house to John's creditors. If the trustee loses, she stays and John's creditors get nothing.

You have the facts. Now here's the law.

1. Bankruptcy courts decide what is property of the estate (to be sold for the benefit of creditors) as a matter of federal law. But they look to state law, including the state law of trusts to determine the nature of the debtor's property rights at the time of the filing. Butner v. United States, 440 U.S. 48 (1979).

2. If the debtor holds only legal title to property (and not the beneficial interest), only that legal title becomes property of the estate, 11 U.S.C. sec. 541(d). Bare legal title is not worth anything to the estate.

3. Pennsylvania recognizes a resulting trust in favor of a grantor if the grantor did not intend to convey the beneficial interest in the property to the grantee. Pennsylvania appellate courts cite with approval the Restatement (2d) of Trusts sec. 404 (ALI 1959): A resulting trust arises where a person makes or caues to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or hlding the property should have a beneficial interest therein, unless the inference is rebutted or the beneficialinterest is otherwise effectively disposed of.

4. The Restatement (2d) of Trusts divides resulting trusts into three types: 1) where an express trust fails; 2) where the express trust does not exhaust the trust estate; and 3) the so-called purchase money resulting trust, where property is transferred to one person but another pays the purchase price, the property is subject to a purchase money resulting trust in favor of the party who pays. No Pennsylvania court has found a resulting trust to exist except in one of these three situations.

5. The Restatement (3d) of Trusts (superceding the Restatement (2d)) is organized in a way to suggest that when there is no express trust, the only type of implied resulting trust is a purchase money resulting trust. See Restatement (3d) Trusts sec. 7, comment a. No Pennsylvania court has yet cited with approval to the Restatement (3d) Trusts.

6. A party can establish a resulting trust only on proof that is "clear, explicit and unequivocal." See Galford v. Burkhouse, 320 Pa. Super. 21, 30 (1984).

7. In a stack of Pennsylvania cases, courts have held that when the language of a deed is clear, the parol evidence rule bars introduction of extrinsic evidence on the issue of the grantor's intention. Under Pennsylvania law, use of the word "grant" in a deed conveys fee simple title to property to the grantee. 21 P.S. sec. 2.

8. Pennsylvania law recognizes a presumption that a gift arises when a transfer of real property is to a "wife, child or other natural object of the bounty of the [transferor]."

You be the judge.

What did Mrs. Stewart intend to do with her house when she went down to her congressman's office?

Who's running an unauthorized practice of law out of a South Philly congressman's office?

What was John doing taking the property tax deduction for taxes on Mrs. Stewart's house if he had only "bare legal title?" (IRS tax fraud hotline: 1-800-829-0433).

Choose one (Alison, this is for you):

A. What kind of a pushover are you? Don't you believe in the rule of law?
B. What kind of insensitive, amoral beast are you? How are you going to sleep at night if you put Mrs. Stewart on the street?

It goes without saying that wagering on how Judge Diamond (E.D. Pa.) decided this case on appeal from the decision of Bankruptcy Judge Frank (Bankr. E.D. Pa.) would be unconsiconable. But see, 2008 WL 938920.