SHEARER v. TITUS et al

Filing 10

MEMORANDUM OPINION & ORDER denying 1 Bankruptcy Appeal filed by ROBERT SHEARER and appeal filed by the Tituses and affirming the order of the bankruptcy court. Signed by Chief Judge Joy Flowers Conti on 11/14/17. (mh)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
Paul H. TITUS & Bonnie Titus,
Appellants
Cross-Appellees

Civil Nos. 17-479, 17-548

v.
Robert SHEARER,
Trustee for the Chapter 7 Bankruptcy
Estate of Paul Titus,
Appellee
Cross-Appellant.

(Bankruptcy No. 10-23668)
(Adversary Proceeding No. 10-2338)

OPINION
CONTI, Chief District Judge
I.

Introduction

The long-running saga precipitated by the Titus and McConomy law firm’s
breach of its lease agreement in 1999 continues.1 Now pending before the court
are a second set of cross-appeals (Case No. 17-479, ECF No. 8; Case No. 17-548,
ECF No. 5) by Robert Shearer, the Trustee for the Chapter 7 Bankruptcy Estate
of Paul Titus (the “Trustee”) and Paul Titus and his wife Bonnie Titus (together,
the “Tituses”) from the bankruptcy court’s judgment order dated March 31,

1

The breakup of Titus & McConomy and the subsequent attendant litigation
spawned several other bankruptcy adversary proceedings dealing with many of
the same issues. See Cardiello v. Arbogast (In re Arbogast), 466 B.R. 287 (Bankr.
W.D. Pa. 2012), aff’d 479 B.R. 661 (W.D. Pa. 2012), aff’d Nos. 12-3866, 123867, 12-3868, 2013 WL 4007772 (3d Cir. Aug. 7, 2013); Cohen v. Sikirica (In re
Cohen), Adversary No. 07-2517, 2012 WL 5360956 (Bankr. W.D. Pa. Oct. 31,
2012), aff’d in part, rev’d in part, 487 B.R. 615 (W.D. Pa. 2013); Shearer v.
Oberdick (In re Oberdick), 490 B.R. 687, 703 (Bankr. W.D. Pa. 2013); Sikirica v.
Wettach (In re Wettach), 489 B.R. 496 (Bankr. W.D. Pa. 2013), aff’d 811 F.3d 99
(3d Cir. 2016).

2017, and entered on April 3, 2017, after remand. (the “April 3, 2017 Order,”
App’x J). 2 The appeals are fully briefed and ripe for disposition.

II.

Procedural History

The extensive procedural history is well known to the parties and will not
be recounted in full. Certain aspects of the procedural history, however, are
important to the issues raised in the cross-appeals.

A. The first bankruptcy court proceeding
On February 29, 2012, the bankruptcy court issued a lengthy opinion (the
“2012 BR Opinion,” App’x A) in which the bankruptcy court concluded that the
direct deposits of Paul Titus’ wages into a checking account held with his wife as
tenants by the entireties constituted constructively fraudulent transfers under
the Pennsylvania Uniform Fraudulent Transfer Act (“PUFTA”), 12 Pa. Cons.
Stat. §§ 5101-5110, unless they were used to pay for “reasonable and necessary
household expenses” (i.e., “necessities”).

The bankruptcy court placed the

burden of persuasion that funds were not used for necessities on the Trustee,
although it placed the burden to produce some useful evidence on the Tituses,
and limited the time frame for the recovery of constructively fraudulent
transfers to the four-year period from April 23, 2003 to April 23, 2007. The
bankruptcy court entered judgment in favor of the Trustee for $281,006.18.

B. The first cross-appeals to the district court
Both sides appealed the decision of the bankruptcy court. The Trustee
appealed the bankruptcy court’s failure to include transfers made after April 23,
2

The parties submitted a Joint Appendix at Case No. 17-479, ECF No. 9, which
includes the relevant prior opinions and orders. The court will cite to the Joint
Appendix.
2

2007 to June 30, 2010 in determining the time frame for recovering
constructively fraudulent transfers and the allocation of the burdens of
persuasion and production. Specifically, the Trustee argued that the bankruptcy
court erred by allocating the burden to the Trustee to prove that the wages were
not used for necessities. The Trustee argued that the Tituses should have the
burden to prove, as an affirmative defense, that those funds were used for
necessities.

The Trustee did not challenge the 2012 BR Opinion’s analysis

relating to an offset for nonwage deposits (explained or unexplained) into the
checking account. (See Trustee’s Appeal, Case No. 12-1560, ECF No. 5).
The Tituses pointed to five purported errors by the bankruptcy court in
their first appeal: (1) not following the decisions made by the state trial court
before removal when determining the applicable legal standards; (2) imposing a
burden of producing evidence about account expenditures and deposits on the
Tituses and the timing of imposing this burden unfairly prejudiced the Tituses;
(3) calculating the amount of liability because there was insufficient evidence to
support its finding that certain unidentified deposits were from Mr. Titus’s
wages; (4) finding that a “transfer” occurred pursuant to PUFTA, and that the
Tituses may be jointly and severally liable as “transferees”; and (5) finding
liability because Mr. Titus’s liability was discharged in the bankruptcy
proceedings.

C. The district court’s first opinion
On September 30, 2013 (the “September 30, 2013 Opinion,” App’x C), this
court affirmed in part and vacated in part the 2012 BR Opinion and remanded
the adversary proceeding for further consideration.

Specifically, this court

disagreed with the bankruptcy’s court’s limitation to a four-year look-back
period and directed it on remand to decide whether the Trustee may recover
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constructively fraudulent transfers from April 23, 2007, to May 28, 2010. This
court affirmed that the Trustee could recover any funds not spent on necessities,
not just those used for luxuries; affirmed the bankruptcy court’s assignment of
the burden of persuasion to the Trustee on all elements of the claim, including
whether funds were spent on necessities; and affirmed that the Tituses had the
burden to produce “at least some useful evidence” regarding the deposits and
withdrawals from the checking account. This court held that the bankruptcy
court erred, however, by failing to give the Tituses notice or opportunity to meet
their burden of production and remanded to allow them to produce evidence
about unexplained deposits and expenditures.

D. The remand in the bankruptcy court
After considerable proceedings on remand, the bankruptcy court issued a
thoughtful and thorough opinion (the “2017 BR Opinion”, App’x I) and entered
a judgment order in favor of the Trustee for $273,862.68. (App’x J). The
bankruptcy court concluded that the transfers made from April 23, 2003 to May
28, 2010 could be subject to recovery and the same methodology3 used in the
first trial must be used again.

The bankruptcy court applied that same

methodology to the new evidentiary record. The bankruptcy court (based on
stipulations by the parties) grouped deposits into the checking account into
three categories: (1) wages of $1,125,255.58; (2) explained nonwages of
$634,998.83; and (3) unexplained nonwages of $268,167.09. The bankruptcy
court grouped withdrawals from the checking account into three categories: (1)

3

The bankruptcy court called its methodology the “Other Deposit” Methodology,
which the Trustee refers to as the “Non-Necessities Approach.” The Trustee
advocates the “Total Transfer Approach,” which the bankruptcy court referred to
as the “Other Deposit Irrelevant” methodology. For clarity and consistency, this
court will adopt the naming conventions used by the bankruptcy court.
4

conceded necessities; (2) conceded non-necessities; and (3) unknown or
disputed transactions. The bankruptcy court resolved the disputed transactions
and found that the withdrawals from the account consisted of: (1) necessities of
$1,134,000.67; and (2) non-necessities of $1,000,133.51 (including the
unknown transactions).

On appeal, neither side challenges the bankruptcy

court’s factual findings about the disputed withdrawals.
Applying the Other Deposit Methodology, the bankruptcy court found that
the non-necessities could be offset by the amount of the explained nonwages
and by the original balance in the account ($1,000,133.51 less $634,998.83 less
$91,272.00 = $273,862.68). The bankruptcy court entered judgment in favor of
the Trustee and against the Tituses for $273,862.68.

E. The pending cross-appeals to the district court
The Trustee’s appeal raises several related issues: (1) the bankruptcy court
should have used the Other Deposit Irrelevant methodology on remand; (2) the
Trustee did not waive his right to argue for the Other Deposit Irrelevant
methodology by not raising it in the first appeal; (3) the Other Deposit
Irrelevant methodology is not mandated by the law of the case; and (4) the
Third Circuit Court of Appeals’ intervening decision in Sikirica v. Wettach, 811
F.3d 99 (3d Cir. 2016), mandates use of the Other Deposit Irrelevant
methodology. Essentially, the Trustee argues that once he establishes that Paul
Titus’ wages were transferred into the entireties checking account, a rebuttable
presumption arises that those funds were not used in exchange for reasonably
equivalent value.

The Trustee argues that the Tituses failed to meet their

burden to produce evidence that the wages were actually used to pay for

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necessities and seeks judgment for the entire amount of Paul Titus’ wage
transfers ($1,125,255.88).4
The Tituses’ appeal raises an issue concerning a purported error made by
the bankruptcy court when it failed to offset their liability by the amount of
unexplained nonwages ($268,167.09). The Tituses argue that the amount of the
judgment against them should be $5,695.59.

III.

Factual Background

The parties do not contest the factual background. To summarize:
The bankruptcy proceedings arose out of the dissolution in
1999 of the Pittsburgh law firm of Titus & McConomy, in which
Mr. Titus had been a partner. Titus & McConomy rented office
space from Trizechahn Gateway LLC (“Trizec”) under a long-term
lease agreement. In July 2000, Trizec filed a breach of contract
suit against Titus & McConomy’s former partners in state court for
unpaid rent due under the lease. 467 B.R. at 601. In 2006, the
state trial court found Mr. Titus and other Titus & McConomy
partners jointly and severally liable in the amount of $2.7 million,
which, due to interest and costs, subsequently increased to more
than $3 million. Id.
After the dissolution of Titus & McConomy, Mr. Titus
worked for the law firm of Schnader Harrison Segal & Lewis
(“Schnader Harrison”). Beginning in July 2002, Mr. Titus had
Schnader Harrison directly deposit his wages into a checking
account he owned with his wife as tenants by the entireties. On
April 23, 2007, Trizec filed a fraudulent transfer action against the
Tituses in state court in an effort to collect on the judgment. Id.
The fraudulent transfer action contained three claims under
Pennsylvania’s Uniform Fraudulent Transfer Act (“PUFTA”), 12
PA. CONS. STAT. §§ 5101–5110. The first claim is for actual
fraudulent transfer under 12 PA. CONS. STAT. § 5104(a)(1), and the
second and third claims are for constructive fraudulent transfer
under 12 PA. CONS. STAT. §§ 5104(a)(2)(ii) and 5105. Titus, 467
B.R. at 602. In the constructive fraudulent claims it is alleged that
the direct deposits by Schnader Harrison into Mr. and Mrs. Titus’
checking account constituted constructive fraudulent transfers.
4

In the alternative, the Trustee suggests that the offset for necessities be prorated by the
proportion of wage and nonwage deposits into the checking account.
6

On May 20, 2010, TRZ Holdings, Trizec’s parent and
successor in interest, filed an involuntary chapter 7 bankruptcy
petition against Mr. Titus, who removed the fraudulent transfer
action to the bankruptcy court. Id. The bankruptcy court entered
an order substituting the Trustee for Trizec as plaintiff in the
fraudulent transfer action. Id. The Trustee prosecuted the claims
under the authority and derivative standing granted by 11 U.S.C.
§ 544(b)(1). Id. at 602.
September 30, 2013 Opinion, App’x C at 1-3.

IV.

Jurisdiction and Standard of Review

Federal district courts have appellate jurisdiction over the final judgments,
orders, and decrees of the bankruptcy court. 28 U.S.C. § 158(a)(1). When a
district court examines a bankruptcy court’s decision, “legal determinations are
reviewed de novo, factual findings are reviewed for clear error, and discretion is
reversed for abuse.” Official Comm. of Unsecured Creditors of J. Allan Steel Co.
v. Nucor-Yamato Steel Co. (In re J. Allan Steel Co.), 336 B.R. 226, 228–29
(W.D. Pa. 2005) (citing In re Sharon Steel Corp., 871 F.2d 1217, 1222 (3d Cir.
1989)). Mixed questions of fact and law must be broken down and reviewed
under the applicable standard. First Jersey Nat’l Bank v. Brown (In re Brown),
951 F.2d 564, 567 (3d Cir. 1991).

V.

Legal Analysis

Because the issues overlap, the court will consider the cross-appeals
together. The crux of the disputes relates to who bears the risk arising from the
following unknown information: (1) the source of deposits into the account; and
(2) the inability to trace deposits into a checking count to specific expenditures
from that account. Money is fungible and deposits into a checking account are
rarely earmarked for a particular purpose. These dilemmas are addressed in the
law by assigning a burden of persuasion and a burden of production. This court
resolved the applicable burdens in the first appeal.
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The bankruptcy court

performed a careful and thorough analysis on remand which was consistent
with this court’s instructions.
As an initial matter, it is now clear that this court correctly allocated the
burdens of persuasion and production. In Wettach, the Third Circuit Court of
Appeals affirmed the “consensus view of courts in this circuit.” 811 F.3d at 109.
The Trustee has the burden of persuasion on all elements of a constructive
fraudulent transfer claim under PUFTA, including the need to prove a lack of
reasonably equivalent value for the transfers. Id. at 107. Debtors, on the other
hand, have the burden to produce at least some useful evidence with respect to
the uses of the transferred funds to rebut the presumption against receipt of
reasonably equivalent value. Id. at 109. The Third Circuit Court of Appeals
viewed the allocation of the burdens as legal issues, but considered the question
whether the deposits funded non-necessary expenditures to be an evidentiary
finding, which it reviewed for clear error. Id. at 109, 111.

A. The Trustee’s appeal
The Trustee significantly misapprehended the prior opinions in this case.
The bankruptcy court properly cited and relied on Skretvedt v. E.I. DuPont De
NeMours, 372 F.3d 193, 202-03 & n.13 (3d Cir. 2004) (the interrelated
doctrines of appellate waiver, mandate rule, law of the case, and collateral
estoppel prevent parties from pursuing on remand arguments that they did not
raise or were resolved in the initial appeal).
The issue whether nonwage deposits would reduce the Tituses’ liability
was part of the first appeal. In relevant part, the bankruptcy court in the 2012
BR Opinion held:
[I]n order for the Trustee to prevail on his constructive fraudulent
transfer actions, he must preponderantly prove, in particular, that
the direct deposits of the Debtor’s wages into the Entireties
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Checking Account funded the Objectionable Expenditures. Put
differently, the Trustee, in order to so prevail, needs to
preponderantly prove that no money that was deposited into the
Entireties Checking Account during the lookback period other
than such indirect wage transfers funded such expenditures.”
2012 BR Opinion, App’x A at 51. The bankruptcy court gave the Tituses a full
offset for $142,974 in social security (i.e., nonwage) benefits that were deposited
into the account, explaining “it is at least as likely as not” that those benefits
funded Objectionable Expenditures.

Id. at 51-52.

The bankruptcy court

explained that the Tituses could not have produced any meaningful information
to trace the expenditures of the social security benefits and therefore did not
impose on them the burden to do so. Id. at 52 n.13.5
The Trustee argued in the first appeal that the use of funds to purchase
necessities was an affirmative defense, such that the burden should have been
on the Tituses to prove that wage deposits were used for necessities. This court
rejected the Trustee’s argument. It held that the bankruptcy court “correctly
place[d] the burden of proving that funds were not used for necessities on the
Trustee.” September 30, 2013 Opinion, App’x C at 10. This court reiterated that
the bankruptcy court’s ruling on that issue was affirmed. Id.
That decision was not subject to reconsideration after the remand to the
bankruptcy court or in this second appeal. The Trustee never challenged the use
of the Other Deposit methodology. Consideration of a different methodology
was never part of this court’s mandate to the bankruptcy court on remand.
The Trustee’s reliance on Wettach is misplaced. The Wettach decision did
not discuss, much less mandate, use of the Other Deposit Irrelevant
methodology rather than Other Deposit methodology.

To the extent that

Wettach is on point, it actually undercuts the Trustee’s position.
5

The

The bankruptcy court noted on remand that the impact of nonwage deposits into the
checking account was also “brought front and center” by the Tituses’ motion to alter or
amend the 2012 judgment. See 2017 BR Opinion, App’x I at 21-22.
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bankruptcy court in Wettach offered the debtors a “dollar-for-dollar reduction
against any liability” for nonwage deposits into the account. The Third Circuit
Court of Appeals recognized that this offset was given, without criticism. 811
F.3d at 111.
Regardless of the procedural history, use of the Other Deposit
methodology was appropriate under the facts and circumstances of this case.
The bankruptcy court ultimately made factual findings on all expenditures from
the checking account, which neither side appealed. The bankruptcy court found
on remand that the Tituses explained the source of most of the nonwage
deposits. This was entirely consistent with the instruction of this court that the
Tituses be given the opportunity to do so. See September 30, 2013 Opinion,
App’x C at 25 (“On remand, the Tituses may produce evidence about the
unexplained deposits . . . .”). The Trustee’s proposed Other Deposits Irrelevant
methodology would require the bankruptcy court to ignore this further factual
development and is entirely contrary to this court’s instruction on remand.6
The crux of the Trustee’s argument is that all non-necessities should be
presumed to be purchased with wages.

The bankruptcy court found the

opposite -- that all non-necessities were purchased with explained nonwages.
The bankruptcy court’s finding is consistent with the burden of persuasion. The
Trustee failed to convince the factfinder that the non-necessities were
purchased with wages and therefore failed to prove that portion of his PUFTA
claim. In sum, the bankruptcy court’s finding was not erroneous.

B. The Tituses’ appeal

6

The bankruptcy court refused to give the Tituses a setoff for the unexplained
nonwages, which redounded to the Trustee’s benefit.
10

The Tituses’ appeal also lacks merit. The treatment of nonwage deposits
was raised and resolved by this court in the first appeal. The bankruptcy court
credited $142,974.00 of Mrs. Titus’s social security benefits, but declined to
deduct unexplained deposits from the objectionable expenditures. The Tituses
argued in their first appeal that the bankruptcy court failed to credit the full
amount of nonwage deposits into the entireties account against the
“objectionable expenditures.”
In the September 30, 2013 Opinion, this court recognized that the
bankruptcy court “declined to deduct unexplained deposits from the
objectionable expenditures” and stated: “The court agrees with this analysis.”
App’x C at 18-19. Quoting from Cohen, 487 B.R. at 625, this court explained
that placing the burden of production on the Tituses would incentivize them to
come forward with information and prevent them from avoiding judgment
merely by placing untraceable funds into the account. Id.
The bankruptcy court was not instructed on remand to reconsider placing
the burden of persuasion on the Tituses. The Tituses were given an opportunity
on remand “to produce evidence about the source of the unknown funds,” not to
relitigate the methodology which this court had already affirmed. App’x C at 19
(emphasis added). This issue is not a proper subject of the instant appeal.
Keeping the burden of production on the Tituses is consistent with the law
and common sense. By definition, they failed to meet their burden of production
on the “unexplained” nonwage deposits. The presumption that those deposits
did not receive reasonably equivalent value, therefore, was not overcome. The
Tituses were certainly in a better position than the Trustee to determine the
source of the unexplained deposits. Even if they were “nonwage,” the
unexplained deposits could have represented constructive (or actual) fraudulent
transfers. For example, if Paul Titus individually owned a rare painting, sold it
11

for $268,167.09, and deposited the proceeds into the entireties checking
account, those funds could not be used to offset objectionable expenses. See
2017 BR Opinion, App’x I at 19 n.8. The bankruptcy court’s finding with respect
to unexplained nonwages was not erroneous.

VI.

Conclusion

For the reasons set forth above, the court finds after de novo review that
the legal holdings of the bankruptcy court about the burden of persuasion and
the burden of production are correct and its factual findings are not erroneous.
The Judgment Order dated March 31, 2017 and entered April 3, 2017 will be
affirmed.

An appropriate order will be entered.

BY THE COURT:
/s/ Joy Flowers Conti
Joy Flowers Conti
Chief United States District Judge
Dated: November 14, 2017

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IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
Paul H. TITUS & Bonnie Titus,
Appellants
Cross-Appellees

Civil Nos. 17-479, 17-548

v.
Robert SHEARER,
Trustee for the Chapter 7 Bankruptcy
Estate of Paul Titus,
Appellee
Cross-Appellant.

(Bankruptcy No. 10-23668)
(Adversary Proceeding No. 10-2338)

ORDER
And now this 14th day of November, 2017, upon consideration of the
notices of appeal and the submissions of the parties, and for the reasons set
forth in the accompanying opinion,
It is hereby ordered that the order of the bankruptcy court dated March
31, 2017 and entered April 3, 2017, is hereby AFFIRMED.

BY THE COURT:
/s/ Joy Flowers Conti
Joy Flowers Conti
Chief United States District Judge

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