DO YOU TRUST ME? RESULTING TRUSTS, CONSTRUCTIVE TRUSTS, AND EQUITABLE LIENS Robert F. Anderson Christine E. Brimm

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1 DO YOU TRUST ME? RESULTING TRUSTS, CONSTRUCTIVE TRUSTS, AND EQUITABLE LIENS Robert F. Anderson Christine E. Brimm NOVEMBER 17, 2016 I. RESULTING TRUSTS A. What is a Resulting Trust? 1. Short Definition When real property is conveyed to one person, but the consideration is paid by another, a presumption arises that the person who paid for it intended to benefit himself, and a resulting trust is created. Jocoy v. Jocoy, 562 S.E.2d 674 (S.C. Ct. App. 2002). However, when the conveyance is made to a spouse, child or other person for whom the purchaser has a duty to provide, this presumption does not attach. Instead, the presumption is that the purchaser intended a gift or advancement. Either of these presumptions is rebuttable on a showing of the purchaser s intent to the contrary through parol evidence. Id. at (internal citations omitted). 2. Discussion Patriotism may be the last refuge of the scoundrel, as Boswell recorded Samuel Johnson once said; but equally the claim that real estate is protected as a result of a resulting trust is the last refuge of a Debtor s flailing attempts to retain that asset. In Bankruptcy, whether there can be a resulting trust imposed is governed solely by reference to State law. Property interests are created and defined by state law. Butner v. United States, 440 U.S. 48, 55, 99 S. Ct. 914, 918, 59 L. Ed. 2d 136 (1979). In order to impose a resulting trust, South Carolina law requires the consideration of the following circumstances: Equity devised the theory of resulting trust to effectuate the intent of the parties in certain situations where one party pays for property, in whole or in part, that for a different reason is titled in the name of another. McDowell v. S.C. Dep t of Social Servs., 296 S.C. 89, 370 S.E.2d (Ct. App. 1987). The general rule is that when real estate is conveyed to one person and the consideration paid by another, it is presumed that the party who pays the purchase money intended a benefit to himself, and accordingly a resulting trust is raised in his behalf. Caulk v. Caulk, 211 S.C. 57, 43 S.E.2d 600 (1947). The presumption, however, may not be in accord with the truth. It may be rebutted and the actual intention shown by parole evidence. Larisey v. Larisey, 93 S.C. 450, 77 S.E. 129 (1913), Hayne Fed. Credit Union v. Bailey, 327 S.C. 242, , 489 S.E.2d 472, 475 1

2 (1997). See also In re Prince, C/A No DD, 2011 WL , at *3 (D.S.C. Jul. 12, 2011) (citing Bailey, 327 S.C. at 249, 489 S.E.2d at 475). The party attempting to establish a resulting trust has a very high burden of proof. See Glover v. Glover, 268 S.C. 433, 437, 234 S.E.2d 488, 489 (1977). It is well settled that the evidence to establish a resulting trust must be definite, clear, unequivocal and convincing. Moore v. McKelvey, 266 S.C. 95, 98, 221 S.E.2d 780, 781 (1976) (quoting Hodges v. Hodges, 243 S.C. 299, 306, 133 S.E.2d 816, 819 (1963); Green v. Green, 237 S.C. 424, 430, 117 S.E.2d 583, 586 (S.C. 1960)) (emphasis added); see also In re Blackwell, 1998 WL , at *4 (quoting ACLI Gov t Secs, Inc. v. Rhodes, 764 F.2d 1033, 1035 (4th Cir. 1985)). The determination of whether a resulting trust should be imposed is specific to the time of the transaction. South Carolina law is clear that a resulting trust arises, if at all, only at the time of the purchase of the land or good at issue. In Re: Prince, 2011 WL , at *3 (citing Larisey v. Larisey, 93 S.C. 450, 77 S.E. 129, 130 (1913) (emphasis added); see also Moore v. McKelvey, 266 S.C. 95, 98, 221 S.E.2d 780, 781 (1976) (quoting Hodges, 243 S.C. at 307, 133 S.E.2d at 820); Green, 237 S.C. at 436, 117 S.E.2d at 589 (quoting 54 Am. Jur., Trusts, 204, at 159); Surasky v. Weintraub, 90 S.C. 522, 73 S.E. 1029, 1032 (1912) (quoting Olcott v. Bynum, 17 Wall. 59, 21 L. Ed. 570). In determining whether a resulting trust arises, the court must look to the status of the parties at the time the deed was executed. Surasky, 90 S.C. at 522, 73 S.E. at A resulting trust cannot arise from subsequent transactions, change of circumstances or intention. In re Prince, 2011 WL , at *3 (quoting Larisey, 93 S.C. 450, 77 S.E. at 130). Evidence to rebut the presumption of resulting trust must pertain to the actual intent of him who pays the purchase price at the time of the transaction, and limited, according to his intention at that time.... Larisey, 93 S.C. at 450, 77 S.E. at 129 (emphasis added) (citations omitted); see also McDowell v. S.C. Dep t of Social Servs., 296 S.C. 89, 370 S.E.2d 878 (Ct. App. 1987) ( creation of resulting trust depends on the intention of the person furnishing the consideration : and that the Settlor and Beneficiary s actual intent is narrowly circumscribed to the time of purchase, and neither before nor after this particular moment. See In re Prince, 2011 WL , at *3 (citing Larisey, 93 S.C. at 450, 77 S.E. at 130 (emphasis added); Moore v. McKelvey, 266 S.C. 95, 98, 221 S.E.2d 780, 781 (1976) (quoting Hodges, 243 S.C. at 307, 133 S.E.2d at 820); Green, 237 S.C. at 436, 117 S.E.2d at 589 (quoting 54 Am. Jur., Trusts, 204, at 159); Surasky, 90 S.C. at 522, 73 S.E. at 1032 (citations omitted). In re Prince, 2011 WL , at *4, fully explains this principal. In Prince, the Chapter 13 debtor in the Chapter 13 plan, proposed to value a lien held by Vanderbilt that was secured by a mobile home. The debtor argued that the mobile home constituted property of the estate by virtue of a resulting trust arising in favor of the debtor; Vanderbilt contended that the mobile home loan was not property of the estate and could not be valued in the debtor s plan. Id. The bankruptcy court found that the mobile home by the debtor s father-in-law from Vanderbilt law and titled in the father-in-law s name. Id. The debtor s name was on neither the Vanderbilt sales contract nor the mobile home certificate of title. Id. It was undisputed that the mobile home was originally purchased to provide the father-in-law s ill wife a place to live. Id. At the time of the debtor s father-in-law s purchase of the mobile home, debtor was married to the father-in-law s son, and moved into the home with her husband to care for the father-in-law s wife. Id. The debtor lived in 2

3 the mobile home continuously since it was purchased in Id. The father-in-law never lived in the home. Id. The debtor also made payments on the mobile home from 2000 through Id. The debtor testified that she had an agreement with the father-in-law that she would continue to make payments on the mobile home until it was fully paid for, at which time the father-in-law would transfer ownership to the debtor. Id. at *2. In 2007, however, the father-in-law signed a voluntary surrender in favor of Vanderbilt and requested that Vanderbilt take possession of the mobile home. Id. The debtor argued that she had an equitable interest in the mobile home that arose from a resulting trust; the debtor contended that a resulting trust arose because she lived in the mobile home continuously from 2000 through 2008 and made mortgage payments from 2000 through Id. at *3; and because of this the mobile home constituted property of the estate within the meaning of 541 and she could value Vanderbilt s lien secured by the mobile home in her Chapter 13 plan. Id. The bankruptcy court applied the general rule of Bailey to determine when the resulting trust arose, which includes the rule that the presumption of resulting trust may be rebutted by the actual, contrary intent of the parties. Id. (citing Bailey, 327 S.C. at , 489 S.E.2d at 475). It held that no resulting trust arose in favor of the debtor on account of the father-in-law s intent on the date of the purchase of the mobile home when the certificate of title to the mobile home was granted only in his name. Id. at *4. The court opined [A]mple evidence was presented which made [the father-in-law s] intent with respect to his ownership of the mobile home clear. [The father-in-law] did not intend for the mobile home to be owned by the Debtor.... There is no evidence that the parties intended for Debtor to have an ownership interest in the mobile home; in fact, there is evidence to the contrary, as [the father-in-law] refused Debtor s request that he transfer ownership to Debtor on numerous occasions, insisting instead that she pay for the mobile home in full before obtaining ownership. Id. See also In re Flucker, 466 B.R. 342, 347 (Bankr. D.S.C. 2011) (no resulting trust imposed in favor of debtor residing in residence based on the lack of intent of purchaser of residence and debtor that debtor retain an ownership interest therein at time of purchase); In re Lee, C/A No JW, 2011 WL , at *3 (Bankr. D.S.C. Feb. 28, 2011) (same). 3. Gift Presumption When a conveyance is made to a spouse or child or to any other person for whom the purchaser is under a legal obligation to provide, the presumption of a resulting trust does not arise: [W]hen the conveyance is taken to a spouse... no [resulting trust] presumption attaches. [Bailey, 327 S.C. 242, 249, 489 S.E.2d 472, 475 (1997)]. On the Contrary, the presumption in such a case is that the purchase was designated as a gift or advancement to the person to whom the conveyance is made. Id. at 249, 489 S.E.2d (citing Lollis v. Lollis, 291 S.C. 525, 354 S.E.2d 559 (1987)). The presumption may be rebutted and the actual intention shown by parole evidence. Id. Bowen v. Bowen, 352 S.C. 494, 499, 575 S.E.2d 553, 556 (2003); Green, 337 S.C. at 430, 117 3

4 S.E.2d at 586. If a presumption of a gift arises, the evidence to rebut the presumption must be clear, cogent, and convincing. See In re Blackwell, 1998WL , at *4 (citation omitted); Lollis, 291 S.C. at 529, 354 S.E.2d at 561 (1987) (citing Mims v. Mims, 286 S.E.2d 779 (1982)). In Windsor Props. Inc. v. Dolphin Head Constr. Co., Inc., 331 S.C. 466, 498 S.E.2d 858 (1998) (Windsor Props.), a creditor who loaned money to a corporation that was wholly-owned by the husband and whose loan was also personally guaranteed by the husband sought to avoid the transfer from the corporation to the corporation s owner s wife as constructively fraudulent under S.C. Code Ann Windsor Props., 331 S.C. at 471, 498 S.E.2d at (1998). The South Carolina Supreme Court determined that because the property was transferred from the corporation, which was wholly-owned by the corporation s husband to the corporation s owner s wife, the transfer was in reality an intra-family transfer, and consequently, the burden of proof shifted to the defendant-wife to show that there was consideration for the transfer and that the transaction was bona fide. Windsor Props., 331 S.C. at 471, 498 S.E.2d at to show that the transfer to be a gift or an advancement. See, e.g., In re Blackwell, 1998 WL , at *4 (holding presumption of gift not rebutted); Lollis, 291 S.C. at 529, 354 S.E.2d at 561(same); Legendre v. S.C. Tax Comm n, 215 S.C. 514, 519, 56 S.E.2d 336, (1949) (same). In In re Thames, the Chapter 7 trustee brought an action to avoid a transfer of one-half undivided interest in real property from a husband to his wife as constructively fraudulent under the Bankruptcy Code because it was made without adequate consideration while the husband was insolvent. Thames, 21 B.R. at 705. The debtors-defendants (husband & wife) filed a joint petition for relief under Chapter 7 in December, Id. On February 21, 1975, the debtors-defendants jointly purchased a house and four lots for use as their residence, which was financed by a note and secured by a mortgage. Id. The Bankruptcy Court found that contrary to the intention of Mr. and Mrs. Thames, the new residence was titled in the name of Mr. Thames instead jointly. Id. Within one year of the debtors-defendants petition date, Mr. Thames transferred a one-half interest in this property to Mrs. Thames in consideration of Mrs. Thames one half of the mortgage payments paid against the principal balance of the outstanding loan secured by the residence and the promise to assume one half of the loan obligation already undertaken as original promisor. Id. at 706. The mortgage payments on the property were paid out of a joint checking account and in part by a flower business owned by Mrs. Thames. Id. at 705. The bankruptcy court imparted that the rebuttable presumption of a resulting trust arose on account of Mrs. Thames payment of part of the purchase price and her contribution to the making of mortgage payments on the property. Id. At In addressing whether the presumption of resulting trust could be rebutted by circumstances showing a contrary intention[,] the bankruptcy court stated, the defendants evidence of their co-ownership of previous residences and the defendants intention that the residence be jointly titled in their names is sufficient to rebut the presumption of a gift, especially, since that presumption arose because of the titling error of a third party. Id. at 707. Accordingly, the bankruptcy court held that, by virtue of a resulting trust, Mrs. Thames was the equitable owner of an undivided one-half interest in the residence transferred and the transfer was not for a lack of reasonably equivalent value. Id. at

5 4. Bare Legal Title A person can only hold bare legal title if a trust is first imposed on that person for the benefit of another. A Debtor s bankruptcy estate consists of all legal or equitable interests of the debtor in property as of the commencement of the case. Mid-Atlantic Supply Inc. of Va v. Three Rivers Aluminum Supply Co., 790 F.2d 1121, 1124 (4th Cir. 1986) (citing 541(a)). If the Debtor holds only bare legal title to the Property then only bare legal title will become property of the estate. Id. at 1125 (citations omitted). In order to bifurcate a person s legal title and equitable title in real property and consequently determine whether the limitation in 541(d) applies, a trust must necessarily first be established for the benefit of another holding equitable title. See, e.g., In re Sanchez-Villalba, C/A No BKCAJC, 2012 WL , at *2 (Bankr. S.D. Fl. Feb. 24, 2012), aff d, Sanchez- Villalba v. Heckert, C/A No CV, 2013 WL (S.D. Fla. Feb. 12, 2013) ( A party can only hold legal title without an equitable interest if there is a trust relationship. ). In Sanchez-Villalba, the debtor filed a Chapter 13 and listed five parcels of property in her Schedules, which were titled in his name. Sanchez-Villalba, 2012 WL , at *2. The debtor and father testified that the properties were placed in the debtor s names in order to avoid a probate proceeding to obtain the property and that the debtor never made payments on the mortgages of the properties, never lived in the properties, and that the father s act of placing the properties in the debtor s name was not intended as a gift. Id. The trustee contended that the debtor owned a one-fourth interest in the properties and thus a value of one-fourth of the properties should have been included in the estate. Id. The debtor answered that she held bare legal title and, therefore, pursuant to 541(d), her one-fourth interest in the properties should not be included in the estate. Id. (citing 541(d)). The court relied on the debtor s ability to obtain credit through representation of ownership and found that the [d]ebtor has failed to prove the titling of the properties did not confer ownership upon the [sic] her and that the ownership of the properties was not taken into consideration by creditors with regard to extending credit to this [d]ebtor or otherwise forbearing collection of debt. Id. at **2 3. Accordingly, the court ordered the debtor to amend the plan to provide for her onefourth equity in the properties. Id. C. Sample Cases 1. Jocoy v. Jocoy, 562 S.E.2d 674 (S.C. Ct. App. 2002) Purchase price of home was paid by Mrs. Jocoy, but title was put in name of her daughterin-law. After Mrs. Jocoy was put in a nursing home, she sued daughter-in-law for transfer of title claiming that she (Mrs. Jocoy) was the beneficiary of a resulting trust. The Court held that no gift is presumed to a daughter-in-law, because the relationship is different from that of parent-child. Mrs. Jocoy was granted a resulting trust in the house. 5

6 2. Hayne Federal Credit Union v. Bailey, 489 S.E.2d 472 (S.C. 1997) Father paid for house, which was put in son s name. Father, and not son, dealt with the real estate agent and the closing attorney. Father occupied the house, and paid the insurance and taxes. Son never had anything to do with the house, except for showing up at the closing. The evidence was that Father intended to benefit himself, so the presumption of gift to his son was rebutted. However, the evidence demonstrated that Father put title in Son s name to defraud creditors and his soon-to-be-ex wife. Because a resulting trust is negated by fraudulent actions, the existence of a resulting trust was rebutted. 3. Anderson v. Architectural Glass Construction, Inc. (In re Pfister), 749 F.3d 294 (4 th Cir. 2014) Husband and Wife acquired real property and jointly financed the purchase price in their individual names. Husband intended the property to be used by a Company wholly owned by him, and the decision was made for the Company to lease the property from Husband and Wife. Instead of paying rent, the Company made the mortgage payments directly to the bank. Subsequent refinancing alternatively named either Husband and Wife as Borrowers, or named the Company as Borrower. Regardless, the Company always made the payments, and Husband and Wife pledged the property as collateral. In the last refinance, however, the Company was listed as the mortgagee on the mortgage document, even though it was not record owner. To rectify the problem, Husband and Wife deeded the property to the Company for $10 consideration. Wife filed bankruptcy seven months later, and the Trustee moved to avoid the Wife s transfer to the Company as a constructively fraudulent transfer. The Company argued that it had always owned the property by way of resulting trust, and that as a result, the Wife held only bare legal title (of no value) at the time of the transfer. The issue went to the Fourth Circuit, which held that there was no resulting trust under these facts. In reaching this conclusion, the Court looked at the presumption that arises in favor of a gift when one person pays for property that is titled in the name of a spouse or child. The Court noted that the Company was wholly owned by Husband, so the presumption arose that when the Company made payments on the property, it intended the payments to be a gift. To overcome the presumption that it was a gift, a party must prove by clear and convincing evidence that (1) it paid for the property (or committed to pay for the property), (2) with the intent to own it, (3) on the date of purchase. In re Pfister, 749 F.3d 299 (4 th Cir. 2014). The Court found that the facts demonstrated that on the date of purchase, there was no commitment by the Company to pay for the property, as it was entirely financed with a bank loan in the name of Husband and Wife. In addition, on the date of purchase, there was a clear intent that the Company lease the property, not own the property. 6

7 4. In re McCall, C/A No JW (D.S.C., Dec. 3, 2015) This Chapter 13 Debtor tried to buy a car pre-petition, but due to bad credit, her former step-mother agreed to buy the car in her name and finance it in her name. Debtor was to make all payments, and step-mother would transfer title to Debtor when it was paid in full. Debtor paid taxes and insurance. The Court found that the Debtor had an equitable interest in the vehicle through a resulting trust. There was no evidence that the Debtor s payments were intended to be a gift to step-mother. Instead, the evidence demonstrated that the parties intended the Debtor to be the owner of the vehicle at the time of purchase. Compare with In re Prince, C/A dd (D.S.C., July 13, 2011): Debtor tried to include mobile home as property of estate, even though mobile home was in name of Debtor s father-in-law and financed in his name. Debtor had lived in the mobile home since its purchase and had made payments on the mortgage, but the testimony indicated that the mobile home was purchased to provide a place to live for the father-in-law s wife who was ill at the time. The wife was now deceased, and the Debtor was living in the mobile home alone. The evidence did not demonstrate the intent that the Debtor own the mobile home at the time of its purchase, so there was no resulting trust. The Court noted that [a] resulting trust cannot arise from subsequent transactions, change of circumstances or intention. (quoting Surasky v. Weintraub, 73 S.E. 1029, 1031 (S.C. 1912). II. Constructive Trusts A. What is a Constructive Trust? A constructive trust arises whenever a party has obtained money which does not equitably belong to him and which he cannot in good conscience retain or withhold from another who is beneficially entitled to it as where money has been paid by accident, mistake of fact, or fraud, or has been acquired through a breach of trust or the violation of a fiduciary duty. SSI Medical Services, Inc. v. Cox, 392 S.E.2d 789, (S.C. 1990). Generally, fraud is an essential element giving rise to a constructive trust, although it need not be actual fraud. McNair v. Rainsford, 499 S.E.2d 488, 501 (S.C. Ct. App. 1998). B. Sample Cases 1. SSI Medical Services, Inc. v. Cox, 392 S.E.2d 789 (S.C. 1990) Cox worked as the manager of the automobile fleet for SSI Medical. When an auto lease expired, SSI and the leasing company would agree on the residual value of the vehicle, and if it sold at that value or more, SSI would pay nothing extra or would receive the excess. If it sold for less, then SSI owed the difference. Cox believed he could obtain better values on resale, so he began to sell the vehicles himself. When he sold a vehicle, he would receive a personal check payable to him or to cash. He would then deposit the check into his personal bank account, and obtain a cashier s check to pay the leasing company what was owed. Unbeknownst to SSI, Cox was retaining excess funds from these sales. 7

8 SSI brought an action against Cox and sought an order requiring Cox to hold funds in his bank account in a constructive trust for the benefit of SSI. The court found that Cox was an employee of SSI and was in a position of trust and responsibility, and the profits Cox retained were acquired through a breach of trust and fiduciary duty. The funds did not equitably belong to Cox and SSI was entitled to a constructive trust. 2. In re Wicker, C/A JW Husband and Wife filed bankruptcy and both claimed a homestead exemption in the residence. The Trustee objected to the Wife s exemption because the property was titled solely in the name of the Husband. The Wife was able to present clear and convincing evidence that she believed that she had an ownership interest in the property, and in reliance on that mistaken belief, she used inheritance money she had received to make improvements on the property. There was evidence that Husband also believed the Wife owned a one-half interest, and bank and mortgage documents supported that belief. The Court held that there was a mistake as to the title, and imposed a constructive trust in favor of the Wife. III. EQUITABLE LIENS A. What is an Equitable Lien? For an equitable lien to arise there must be a debt owing from one person to another, specific property to which the debt attaches, and an intent, expressed or implied, that the property will serve as security for the payment of the debt. First Federal Sav. & Loan Ass n of Charleston v. Bailey, 450 S.E.2d 77, (S.C. Ct. App. 1994). Although not judicially recognized until a judgment is entered declaring its existence, an equitable lien relates back to the time it was created by the conduct of the parties. Id. at 81. B. Sample Cases 1. In re Houston, 409 B.R. 799 (D.S.C. 2009) A Chapter 7 Trustee, as bona fide purchaser without notice, has rights superior to a holder of an equitable lien. In this case, the bank recorded the mortgage in the wrong county. Although the facts might have established the bank s right to an equitable lien, it could not defeat the Trustee s superior position as a bona fide purchaser. 2. First Federal Sav. & Loan Ass n of Charleston v. Bailey, 450 S.E.2d 77 (S.C. Ct. App. 1994) HOA obtained judgments against homeowner for unpaid assessments, which judgements were recorded subsequent to the mortgage. When the mortgagee brought a foreclosure action, the HOA argued that its judgments should relate back to the recording of the covenants, because the covenants established the continuing lien for assessments. The court held that the judgments could relate back only to when the assessment amount became due. 8

9 3. Regions Bank v. Wingard Properties, Inc., S.E.2d (S.C. Ct. App, June 22, 2011) Wingard entered into a residential home purchase agreement for the sale of Lot 38 to Covington. Covington wrote a check for the deposit on October 20, 2006, and the checked was cashed on November 14, In the interim, Wingard pledged Lot 38 as collateral to Regions Bank, and one day before the check was cashed, the mortgage was recorded. The court found that Covington was entitled to a first priority equitable lien in the amount of his payment for the property. The court found it important, in considering all of the equities involved, that Regions Bank knew about Covington s interest in the property. 4. Horry County v. Ray, 674 S.E.2d 519 (S.C. Ct. App. 2009) County sold property at an auction, and disbursed funds before the purchaser s cashier s check cleared. It was subsequently determined that the cashier s check was fraudulent. As a result, County placed a lis pendens on the property. The new owner obtained a mortgage for the property by HCSB. When HCSB later foreclosed and sold the property, the County argued that it had an equitable lien on the property. As against the person who gave the fraudulent cashier s check, the County probably would have had an equitable lien. However, as against HCSB, which was innocent, the equities would not permit the finding of an equitable lien. The court also discussed the legal implications of the lis pendens, and found that it was rendered invalid when a summons and complaint were not filed within the 20 day period. 9