Bird v. McCauley et al

Filing 26

MEMORANDUM DECISION AND ORDER On Bankruptcy Appeal: the 9/30/14 decision of the US Bankruptcy Court for the District of Utah in Adversary Proceeding No. 12-2313, Bankruptcy Case No. 10-30907, is Reversed and Remanded for a determination of whether the post-petition transfer of the Ballard property was an avoidable transfer. Signed by Judge Tena Campbell on 9/18/15 (alt)

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION
In re EUGENE V. MCCAULEY JR.,
Debtor.
J. KEVIN BIRD, Chapter 7 Trustee,
Appellant,

MEMORANDUM DECISION
AND ORDER
ON BANKRUPTCY APPEAL

v.
Case No. 2:14-cv-00749-TC
MICHAEL MCCAULEY, SUSAN KNORR,
NANCY GALLEGOS, ELIZABETH
MCCAULEY, and RE MCCAULEY, LLC,
Appellees.

Bankruptcy Case No. 10-30907

(Adversary Proceeding No. 12-2313)

This appeal arises from the Chapter 7 bankruptcy of Eugene V. McCauley, Jr. When Mr.
McCauley filed his bankruptcy petition, he and his wife, Elizabeth, were living on a ranch in
Ballard, Utah (“the Ballard property”). Record title to the Ballard property was held by R.E.
McCauley, LLC (REM), an LLC formed by Mr. McCauley’s mother. Two weeks after Mr.
McCauley filed his bankruptcy case, his sister, Susan Knorr, acting as REM’s manager, signed a
deed conveying the Ballard property to herself and her other two siblings, Michael McCauley and
Nancy Gallegos.
Appellant J. Kevin Bird, the bankruptcy trustee, filed an adversary proceeding, seeking a
declaration that Mr. McCauley was the equitable owner of REM and the Ballard property. The
Trustee also sought to avoid the post-petition transfer of the Ballard property to Mr. McCauley’s
siblings. The case was tried before the bankruptcy court in March 2014. The bankruptcy court

concluded that Elizabeth McCauley was not the sole member of REM and did not hold her
membership interest for Mr. McCauley’s benefit. Based on these conclusions, the bankruptcy
court dismissed the Trustee’s claims without reviewing the post-petition transfer.
The Trustee now appeals. For the reasons explained below, the bankruptcy court’s
decision is reversed and remanded to the bankruptcy court to decide whether the post-petition
transfer of the Ballard property was an avoidable transfer.
BACKGROUND1
I.

Factual Background
Ruth McCauley had four children: Eugene McCauley, Michael McCauley, Susan Knorr,

and Nancy Gallegos. Eugene McCauley was incarcerated from June 1, 2000, until May 20, 2008.
On June 5, 2000, Ruth McCauley formed the Ruth E. McCauley Revocable Trust (“the
Trust”) and named herself and Ms. Knorr as co-trustees. On the same day Ruth McCauley
created the Trust, she also executed a separate will that poured over all of her property to the
Trust upon her death.
On June 23, 2004, Ruth McCauley organized R.E. McCauley, LLC (REM), naming
herself as sole member and manager. On May 21, 2005, Ruth McCauley updated REM’s records
to add Ms. Knorr as a member. At trial, Ms. Knorr claimed that this change established her
ownership of a 50% membership interest in REM. But Ms. Knorr had previously testified that

1

The court takes the facts from the bankruptcy court’s Pretrial Order, in which the parties
agreed to “uncontested facts” that were established by admissions or stipulation of the parties.
(Pretrial Order, Appellant’s App. 16, ECF No. 12-1.) The court has also added other facts from
the record that were not included in the Pretrial Order and has identified these additional facts by
citations to the record.
2

she held her REM membership interest in her capacity as Ruth McCauley’s personal
representative and as trustee of the Trust. The bankruptcy court found Ms. Knorr’s initial
testimony more credible and concluded that, at all times, Ms. Knorr held her membership interest
solely as Ruth McCauley’s personal representative and trustee of the Trust. (Findings of Fact &
Conclusions of Law, Appellant’s App. 112, ECF No. 12-1.) In response to discovery requests in
the adversary proceeding, no tax returns or any other business records were produced for REM,
except its initial organizational documents and periodic updates filed with the Utah Department
of Commerce.
On July 22, 2006, Ruth McCauley died, which made Ms. Knorr sole trustee of the Trust.
In addition, the Trust became irrevocable. Ms. Knorr was also executor of Ruth McCauley’s will,
which required that all of Ruth McCauley’s non-Trust assets became assets of the Trust. So
when Ruth McCauley died, the Trust became the owner of Ruth McCauley’s membership
interest in REM. The Trust also owned an unknown2 amount of cash and some real property in
Roosevelt, Utah.
The Trust agreement required distribution of the Trust assets in equal shares among Ruth
McCauley’s four children. By May 2008, Ms. Knorr had distributed substantially all of the Trust
property to herself, Michael McCauley, and Ms. Gallegos. But she had not made any significant
distributions to Eugene McCauley and had not made any distribution of the Trust’s membership
interest in REM. At that time, REM owned an account at Mountain America Credit Union. It

2

The amount of cash and other Trust assets is unknown because Ms. Knorr did not make
a list of Trust assets and did not perform an accounting to show how she distributed the Trust
assets. (Findings of Fact & Conclusions of Law, Appellant’s App. 113.)
3

also owned the Ballard property, which consisted of a sixty-acre ranch parcel with a residence, an
adjoining 120-acre parcel, and Dry Gulch Irrigation water shares.
Eugene McCauley was released from prison on May 20, 2008. Around the time of his
release, Ms. Knorr arranged for Eugene McCauley and his wife, Elizabeth McCauley, to move
onto and live at the Ballard property. The McCauleys paid no rent but were responsible for
maintenance, repairs, utilities, water, and taxes. In an application for homeowner’s insurance,
Eugene McCauley identified himself as owner and the policy’s loss payee.3 He also signed and
recorded an easement in favor of Moon Lake Electric that burdened the Ballard property.
On May 25, 2008, Ms. Knorr signed a document that stated, “The Ruth E McCauley
Revocable Trust has been revoked as of the 25th day of May 2008 and any and all assets have
been distributed as I Susan K Knorr the Trustee have seen fit.” (May 25, 2008 Document,
Appellant’s App. 874, ECF No. 12-5.) Eugene McCauley, Michael McCauley, Ms. Knorr, and
Ms. Gallegos all signed the document as beneficiaries of the Trust. Ms. Knorr maintains that she
kept no accounting of the Trust assets or her distribution of the assets to herself and her siblings.
Within three weeks after Eugene McCauley and Elizabeth moved onto the Ballard
property, Ms. Knorr arranged to make Eugene McCauley signatory on the REM bank account.
On the signatory application, Eugene McCauley was identified as an “authorized
signer/manager” for REM, and his address, phone number, and email address were listed as the
contact information for REM. When Ms. Knorr made Eugene McCauley signatory, the REM

3

A loss payee is one “named in insurance policy to be paid in event of loss or damage to
property insured.” Loss Payee, Black’s Law Dictionary (6th ed. 1990).
4

account had a balance of $49,303.20. After becoming a signatory, Eugene McCauley was the
only party who wrote checks from the REM account.
On March 5, 2009, Ms. Knorr updated REM’s records to change her status from member
to manager and to name Elizabeth McCauley as a member.
II.

Bankruptcy Court Proceedings
Eugene McCauley’s bankruptcy in this case stems from a November 4, 2002 judgment

against him, obtained by Yukon Excavation, LLC (“Yukon”) with a principal amount of
$92,754.03. On July 22, 2010, Yukon obtained a writ of garnishment directed to Ms. Knorr as
trustee of the Trust, and on August 2, 2010, the writ was served on Ms. Knorr. On August 11,
2010, Eugene McCauley closed the REM bank account. The next day, he filed his petition for
Chapter 7 bankruptcy. In his bankruptcy schedules, Eugene McCauley identified Yukon as the
only creditor with a significant claim against him.
On August 30, 2010, Ms. Knorr, signing as manager of REM, conveyed the Ballard
property to herself, Michael McCauley, and Ms. Gallegos. On September 9, 2010, Ms. Knorr
filed articles of dissolution for REM. The articles identified the reason for dissolution as “PUT
THE PROPERTY IN OUR INDIVIDUAL NAMES. DISSOLVED THE LLC.” (Articles of
Dissolution, Appellant’s App. 1074, ECF No. 12-6.) Ms. Knorr provided a retroactive
dissolution date of May 20, 2009. On September 9, 2010 (the date the articles were filed), and
May 20, 2009 (the retroactive dissolution date), Elizabeth McCauley was the only member of
REM listed on the records filed with the Utah Department of Commerce. In March 2014, at the
time of the trial in the adversary proceeding, Eugene and Elizabeth McCauley continued to reside
at the Ballard property rent free.
5

At trial, the bankruptcy court heard testimony from each of Ruth McCauley’s children
and from Elizabeth McCauley. When asked about the March 5, 2009 change in membership that
named Elizabeth as the sole member of REM, Ms. Knorr testified that she did not remember
making the change or the reason for doing so. (Trial Tr., Appellant’s App. 411-12, ECF
No. 12-2.) Elizabeth testified that, until she learned about it in the adversary proceeding, she had
never heard of REM and was not aware she was a member. (Trial Tr., Appellant’s App. 541,
ECF No. 12-3.) Michael McCauley testified that he had no membership interest or involvement
in REM. (Id. at 512.) And Ms. Gallegos testified that she knew nothing about REM until the
adversary proceeding. (Id. at 519.)
On September 30, 2014, the bankruptcy court issued its Findings of Fact and Conclusions
of Law. (Appellant’s App. 110-38, ECF No. 12-1.) The bankruptcy court concluded that the
Trustee failed to prove that Elizabeth was the sole member of REM. Although Elizabeth was the
only member identified in state records, the court concluded that Ruth McCauley’s former
membership interest in REM had not been distributed and remained an asset of the Trust, with
Ms. Knorr holding the beneficial interest in trust for her siblings.
The bankruptcy court also rejected the Trustee’s theories of resulting trust, constructive
trust, and alter ego4 and therefore held that the Trustee failed to prove that Elizabeth held her
REM membership interest for Eugene McCauley.
For constructive trust, the court could not determine “whether the Trustee [was] alleging
a constructive trust should be imposed to give effect to an oral express trust or as a matter of

4

The Trustee does not reiterate its resulting trust or alter ego arguments before this court.
Accordingly, the court limits its analysis to the Trustee’s constructive and resulting trust theory.
6

equity because a party has been unjustly enriched.” (Id. at 127.) Addressing both alternatives,
the bankruptcy court declined to find an oral express trust because it found no evidence that
Elizabeth received a beneficial interest in REM. Rather, Ms. Knorr held all beneficial interest in
REM as trustee of the Trust because Ruth McCauley retained such interest until her death.
The bankruptcy court also denied the constructive trust claim to the extent it was
premised on an equitable notion that Elizabeth was holding her REM interest for Eugene
McCauley’s benefit. According to the bankruptcy court:
The only evidence the Trustee relies upon for this proposition is the fact that
Elizabeth is Eugene’s wife, that she was not a beneficiary of Ruth’s Trust and that
she disavows any knowledge of receiving a membership interest in REM. The
Trustee also asserts that each of Eugene’s siblings received some cash and a
parcel of real property, and the Court should conclude that Eugene received REM.
The Trustee’s oversimplified characterization of the facts is not supported by the
evidence. The Trustee has not even attempted to define what the Trust assets
were and simply argues that Michael, Susan, and Nancy each received a parcel of
real property, therefore Eugene should have received a parcel of real property.
The problem with the Trustee’s theory is that based on the evidence before the
Court, the Trust assets were not distributed equally but it is not possible to
determine the inequality of distribution of Trust assets or that REM and the
Ballard Property approximate Eugene’s equal share of the Trust assets.
(Id. at 130–31.) Without evidence of a nequal distribution of the Trust assets, and without
evidence of the value of Elizabeth’s membership interest, the bankruptcy court determined it was
impossible to balance the equities or decide if a constructive trust should be imposed.
With these conclusions, the bankruptcy court held that the Trustee had failed to prove his
claims. The bankruptcy court therefore dismissed the Trustee’s claims and granted judgment in
the Defendants’ favor.

7

ANALYSIS
I.

Jurisdiction and Standard of Review
The Trustee appeals the bankruptcy court’s dismissal of all claims in the adversary

proceeding. This court has jurisdiction under 28 U.S.C. § 158(a) to review the Trustee’s appeal.
The Trustee contends that reversal is warranted because the bankruptcy court misapplied the law
and failed to consider or give proper weight to relevant, uncontroverted facts. These are
questions of law that the court reviews de novo. See Osborn v. Durant Bank & Trust Co. (In re
Osborn), 24 F.3d 1199, 1203 (10th Cir. 1994) (“[W]hen a lower court’s factual findings are
premised on improper legal standards or on proper ones improperly applied, they are not entitled
to the protection of the clearly erroneous standard, but are subject to de novo review.”),
abrogated in part on unrelated grounds by Eastman v. Union Pac. R.R., 493 F.3d 1151, 1156
(10th Cir. 2007); Bird v. Winterfox, LLC (In re Kitts), 442 B.R. 818, 824 (D. Utah 2010)
(“Failure to consider or give proper weight or significance to relevant evidence . . . presents a
question of law.”).
II.

REM Membership
The Trustee first asserts that, at the time Eugene McCauley filed his bankruptcy petition,

Elizabeth McCauley was the sole member of REM. The bankruptcy court rejected this position
and concluded that, even though Elizabeth was the only member listed in REM’s state records,
Ruth McCauley’s former interest in the company had not been distributed and continued to be an
asset of the Trust. This conclusion is inconsistent with the uncontroverted facts in this case.
Before the trial in the adversary proceeding, the parties stipulated to the following: Ruth
McCauley formed REM on January 23, 2003. (Pretrial Order, Appellant’s App. 19, ECF
8

No. 12-1.) Ruth McCauley was the sole member and manager until May 25, 2005, when she
updated REM’s records to add Ms. Knorr as a member.5 (Id. at 19–20.) When Ruth McCauley
died in July 2006, her interest in REM, along with her other assets, poured over into the Trust by
operation of her pour-over will. (See id. at 17.) Then, on March 5, 2009, Ms. Knorr updated
REM’s records to reflect that Elizabeth had become a member and Ms. Knorr’s status had
changed from member to manager. (Id. at 20.)
Although the bankruptcy court concluded that state filings could not determine REM’s
membership, the documents on record with the Utah Department of Commerce provide the only
evidence from which a court could determine who held membership interests in REM. And
when viewed together with the parties’ stipulated facts, the records confirm that, before Ruth
McCauley died, Ms. Knorr and Ruth McCauley were members of REM. When Ruth McCauley
died, her interest in REM poured over into the Trust, with Ms. Knorr acting as sole trustee. So
after Ruth McCauley’s death, Ms. Knorr held or controlled 100% of the REM membership
interest and did so as trustee and personal representative of Ruth McCauley’s estate.
On March 5, 2009, Ms. Knorr updated the Utah Department of Commerce’s records to
reflect that her interest in REM changed from a membership interest to a managing interest. (Id.
at 20.) In the same filing, Ms. Knorr identified Elizabeth McCauley as a member. (Id.) And as
of particular dates both before and after the Debtor’s bankruptcy filing, Elizabeth was the only

5

As explained above, the bankruptcy court also made a factual finding that when Ms.
Knorr was a member of REM, she held her membership interest as trustee of the Trust and later
as personal representative of Ruth McCauley’s estate. Ms. Knorr did not hold a personal
ownership interest in REM. (Findings of Fact & Conclusions of Law, Appellant’s App. 112,
ECF No. 12-1.) The court does not see any error in this finding.
9

member of REM listed in the Utah Department of Commerce records. (Id. at 21.) No other
records or membership changes were filed with the state. REM did not produce any other
records in discovery that show additional members of REM. Moreover, the other McCauley
siblings confirmed that they had no interest in REM or did not know that REM existed until this
case was filed. Under these circumstances, the state records provide undisputed evidence that
Elizabeth was the sole member of REM when Eugene McCauley filed his bankruptcy petition in
August 2010.
The bankruptcy court reached a different decision based on its conclusion that Ruth
McCauley’s interest in REM was never distributed. The bankruptcy court explained, “When
REM’s filing with the Utah Department of Commerce on March 5, 2009 added Elizabeth as a
member of REM and removed Ms. Knorr as a member, Ruth McCauley’s membership interest in
REM remained an asset of the Trust.” (Findings of Fact & Conclusions of Law, Appellant’s
App. 121.) This conclusion overlooks the fact that the Trust had been revoked when Ms. Knorr
named Elizabeth as a member of REM. On May 25, 2008, Ms. Knorr, Eugene McCauley,
Michael McCauley, and Ms. Gallegos all signed a document confirming that all assets of the
Trust had been distributed and the Trust revoked. (May 25, 2008 Document, Appellant’s App.
874, ECF No. 12-5.) In other words, all of the siblings confirmed that the Trust no longer held
any property, including Ruth McCauley’s former REM membership interest. It is not clear when
Ruth McCauley’s interest in REM was transferred from the Trust or to whom it was transferred.
But, as of May 25, 2008, the Trust no longer held any interest in REM. And nearly a year later,
Ms. Knorr updated REM’s public records to list Elizabeth as REM’s sole member. This filing,
combined with the fact that the Trust no longer held an interest, confirms that Elizabeth held a
10

100% membership interest in REM. Because the bankruptcy court’s decision conflicts with the
undisputed and stipulated facts, the court reverses the bankruptcy court’s ruling on this issue.
III.

Constructive Trust
The Trustee also appeals the bankruptcy court’s conclusion that Elizabeth was not

holding her membership interest in REM for Eugene McCauley’s benefit and maintains that this
decision should be reversed on a theory of constructive trust. In Utah, there are multiple legal
standards that courts apply to determine whether a constructive trust should be imposed. Section
160 of the Restatement (Second) of Trusts provides one such standard. Because the bankruptcy
court failed to acknowledge and apply § 160, the Trustee argues its decision should be reversed.
In Parks v. Zions First National Bank, 673 P.2d 590 (Utah 1983), the Utah Supreme
Court adopted Section 160 and explained that this section “presents the broadest possible
application of a constructive trust.” Id. at 599. Section 160 “provides that a constructive trust
may arise where a person holding title to property is subject to an equitable duty to convey it to
another on the ground that he would be unjustly enriched if he were permitted to retain it.” Id.
(quotations omitted). The plaintiff in Parks was a surviving husband who sought a constructive
trust against his late wife’s estate. The estate included property accumulated during the marriage
titled solely in the wife’s name. The wife’s will provided only a life estate in the marital
residence and a monthly stipend for the husband. Because the husband had contributed
financially to the estate, he sued to establish his equitable interest in half of the marital estate and
relied on a constructive trust theory.

11

Although the circumstances in Parks did not satisfy other tests for imposing constructive
trusts, the court concluded that the husband held an equitable interest and the estate would be
unjustly enriched if it retained sole ownership of the marital property. As a result, Section 160
provided a remedy for the husband.
Utah courts have since applied Section 160 in other contexts to impose constructive
trusts. In In re Estate of Lefevre, 2009 UT App 286, 220 P.3d 476, the plaintiffs had not made
financial contributions to their deceased father’s property but claimed an equitable interest as his
heirs. The Utah Court of Appeals agreed and held that the plaintiffs were entitled to a
constructive trust to be imposed against the children of their stepmother who held legal title to
the property. In Rawlings v. Rawlings, 2010 UT 52, 204 P.3d 754, the Utah Supreme Court
similarly held that, despite the fact that the plaintiffs had not contributed to their deceased
father’s property, they had an equitable claim as his children and because they had paid taxes and
other expenses related to the property. The court therefore concluded that a constructive trust
was appropriate against a sibling who held legal title.
Applying § 160 to the facts of this case, the court concludes that the Trustee has met his
burden to provide clear and convincing evidence to support his claim for constructive trust. See
Taylor v. Rupp (In re Taylor), 133 F.3d 1336, 1342 (10th Cir. 1998) (“[T]he circumstances
requiring imposition of a constructive trust must be found to exist by clear and convincing
evidence.” (quotations omitted)).
When Ruth McCauley died in July 2006, the terms of the Trust required that the Trust
property be distributed equally among her four children. Under this provision, all four siblings,
including Eugene McCauley, had an equitable interest in the Trust’s property. The bankruptcy
12

court found that Ruth McCauley’s estate was not distributed equally as required by the Trust.
The court does not disagree with this finding. But even accepting an unequal distribution of
Ruth McCauley’s estate, the bankruptcy court found evidence that Eugene McCauley’s siblings
received substantial distributions from the Trust while he was incarcerated. Ms. Gallegos or her
designees received over $18,000 from REM in 2006. Ms. Knorr received approximately $40,000
from the Trust. And Michael McCauley received over $58,000 from the Trust’s accounts.
(Findings of Fact & Conclusions of Law, Appellant’s App. 114.) Each of the siblings, except
Eugene McCauley, had received substantial proceeds from the Trust before Eugene McCauley
was released from prison. The parties also stipulated that “[e]xcept for the Trust’s ownership
interest in REM . . . [Ms. Knorr] had distributed substantially all of the property of the Trust to
Michael McCauley, herself, and [Ms. Gallegos] by May 2008.” (Pretrial Order, Appellant’s App.
18.) In sum, when Eugene McCauley was released from prison on May 20, 2008, he had not
received any distribution from the Trust and the only remaining Trust property was the Trust’s
ownership interest in REM.
On May 25, 2008, the Trust was revoked, with the representation from the four siblings
that all Trust assets had been distributed. At trial, Michael McCauley and Ms. Gallegos
confirmed that they claimed no interest in REM. If the REM interest was not distributed to
Eugene McCauley, it remained with Ms. Knorr. But on March 5, 2009, Ms. Knorr disclaimed
any interest she may have had in REM and identified Elizabeth as REM’s only member. The
bankruptcy court relied on the Utah Revised LLC Act for the conclusion that, even if Elizabeth
was the only member of REM, she did not own REM’s assets. Although the statute does state
that a member of an LLC has no interest in specific property of the company, Utah Code Ann.
13

§ 48-2c-701(2), it also defines a “member” of an LLC as a person with “an ownership interest in
a company.” Id. 48-2c-102(14)(a). As of March 2009, Elizabeth was the only member of REM
and therefore the only person with an ownership interest in the company.
Although Elizabeth was the sole member of REM, there is no evidence that she held her
membership interest for herself. Elizabeth was not a beneficiary of the Trust. And she had no
knowledge of REM or the fact that she was the LLC’s only member. Eugene McCauley,
however, did have an equitable interest in REM as one of Ruth McCauley’s heirs and as a
beneficiary of the Trust.
Moreover, Eugene McCauley had plenary control over REM’s assets. As the parties
stipulated before trial, when Eugene McCauley was released from prison on May 20, 2008, Ms.
Knorr arranged for him and Elizabeth to move onto and live at the Ballard Property. Eugene
McCauley paid no rent but was responsible for all maintenance and repairs and paid for utilities,
water, and taxes. Eugene McCauley identified himself as the owner of the Ballard Property on
an application for homeowner’s insurance. In addition, he signed a recorded easement that
burdened the Ballard Property. Ms. Knorr also made Eugene McCauley a signatory on the REM
account, and after becoming signatory, Eugene McCauley was the only person who wrote checks
from the REM account. In short, Eugene McCauley had exclusive possession and control over
REM’s assets.
Under these circumstances, there is clear and convincing evidence that Elizabeth was
merely a nominee who held her REM membership interest on Eugene McCauley’s behalf.
Eugene McCauley had a equitable interest in REM and exercised that interest. Elizabeth, on the
other hand, had no involvement and no knowledge of REM. She would be unjustly enriched to
14

retain a 100% ownership interest in a company that was clearly under Eugene McCauley’s
exclusive control. As such, a constructive trust should be imposed to reflect Eugene McCauley’s
interest in REM and REM’s assets, including the Ballard Property and the REM bank account.
ORDER
For the foregoing reasons, the September 30, 2014, decision of the United States
Bankruptcy Court for the District of Utah in Adversary Proceeding No. 12-2313, Bankruptcy
Case No. 10-30907, is REVERSED and REMANDED for a determination of whether the postpetition transfer of the Ballard property was an avoidable transfer.
SO ORDERED this 18th day of September, 2015.
BY THE COURT:

TENA CAMPBELL
U.S. District Court Judge

15