Authors: Spiros Avramidis & Andrew M. Thaler
There are many recurring themes in chapter 7 bankruptcy filings. One in specific is where a debtor discloses his interest in a vehicle, but either in the petition or the Section 341 Meeting of Creditors states that he holds only bare legal title in the vehicle; his child, spouse, or some other relative is the “real” owner. The story usually follows that the vehicle is in the debtor’s name for convenience or insurance purposes (oddly enough, the debtor usually claims an exemption in the vehicle, which is contrary to the position that he holds only bare legal title). For numerous reasons this “setup” will likely not prevent the vehicle from becoming bankruptcy estate property and administered by the chapter 7 trustee.
As eloquently stated by Chief Judge Craig in in re Balgobin, “when can a claimed equitable interest in property in which the debtor holds legal title, asserted by a third party, be given effect in bankruptcy?” In Balgobin, the court looked at whether the vehicle was held by the debtor in an express or constructive trust. Under NY law, an express trust may only be created by writing, unless part performance is “unequivocally referable to the [unwritten] agreement.”
As eloquently stated by Chief Judge Craig in in re Balgobin, “when can a claimed equitable interest in property in which the debtor holds legal title, asserted by a third party, be given effect in bankruptcy?” In Balgobin, the court looked at whether the vehicle was held by the debtor in an express or constructive trust. Under NY law, an express trust may only be created by writing, unless part performance is “unequivocally referable to the [unwritten] agreement.”
In this Firm’s experience, most debtors that raise this equitable argument neither have a written agreement creating an express trust nor part performance defeating the writing requirement. According to Balgobin, paying the expenses of a vehicle does not defeat the statute of frauds because it is not difficult to see why an alleged equitable owner would pay for a vehicle without an express trust; the alleged equitable owner may need it for work or some other necessity. In other words, the alleged equitable owner paying for the vehicle does not unequivocally show that it’s being held in an express trust because there are other more probable reasons for the payment.
The Balgobin court then looked at whether the vehicle was held in a constructive trust. Under NY law, a constructive trust arises if four elements are met: “(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the subject res made in reliance on that promise; and (4) unjust enrichment.” Assuming that the first three elements can be met, in most cases, unjust enrichment cannot be shown. To meet the requirement of unjust enrichment, the alleged equitable owner must show that the debtor acted with some sort of inequitable conduct. However, a debtor that testifies he merely holds bare legal title in a vehicle is implicitly, if not explicitly, refuting an assertion of inequitable conduct.
Other courts have found that the Trustee, as a hypothetical lien holder under 11 U.S.C. § 544, has superior interest in a vehicle than an entity claiming an equitable interest. In re Waldorf, No. 1991 WL 129805, at *3 (W.D.N.Y. July 9, 1991). Courts hold that allowing an equitable owner of a vehicle to defeat a lien holder would undermine New York public policy. Id. Specifically, New York Vehicle Traffic Law (“VTL”) § 2108(c) states that “[a] certificate of title issued by the commissioner is prima facie evidence of the facts appearing on it” and VTL § 2130 states that “[a] person who, with fraudulent intent … makes a material false statement … or conceals any other material fact, in a application for a certificate of title … is guilty of a felony.” Accordingly, the court reasons, allowing an equitable owner to defeat a Trustee, as a hypothetical lien holder, would offend New York public policy, which requires candor in obtaining a certificate of title. It should be noted that
It should be noted that the Balgobin court cited and discussed the Waldorf decision. Although the Balgobin court did not consider the § 544 argument because the parties did not raise it, the Court seemed to strongly suggest that it would have decided consistent with the holding in Waldorf.
Lastly, for joint debtors, as mentioned above, a vehicle’s title is prima facie evidence of ownership. Accordingly, a non-titled spouse cannot claim an exemption in the vehicle. See, e.g., In re Miller, 167 B.R. 782, 784 (Bankr. S.D.N.Y. 1994) (“To permit an untitled spouse to assert an exemption in a titled spouse's asset, to the detriment of their creditors, fails the olfactory test.”).
It is important that prospective debtors and bankruptcy practitioners understand the nuances of debtor’s property interests vis-à-vis bankruptcy estate property. Filing for bankruptcy without a full and clear understanding of the interests a bankruptcy trustee has in a prospective debtor’s property is likely to create unpleasant surprises and administration of property that a debtor and third parties believed would be protected from the trustee.
The Balgobin court then looked at whether the vehicle was held in a constructive trust. Under NY law, a constructive trust arises if four elements are met: “(1) a confidential or fiduciary relationship; (2) a promise, express or implied; (3) a transfer of the subject res made in reliance on that promise; and (4) unjust enrichment.” Assuming that the first three elements can be met, in most cases, unjust enrichment cannot be shown. To meet the requirement of unjust enrichment, the alleged equitable owner must show that the debtor acted with some sort of inequitable conduct. However, a debtor that testifies he merely holds bare legal title in a vehicle is implicitly, if not explicitly, refuting an assertion of inequitable conduct.
Other courts have found that the Trustee, as a hypothetical lien holder under 11 U.S.C. § 544, has superior interest in a vehicle than an entity claiming an equitable interest. In re Waldorf, No. 1991 WL 129805, at *3 (W.D.N.Y. July 9, 1991). Courts hold that allowing an equitable owner of a vehicle to defeat a lien holder would undermine New York public policy. Id. Specifically, New York Vehicle Traffic Law (“VTL”) § 2108(c) states that “[a] certificate of title issued by the commissioner is prima facie evidence of the facts appearing on it” and VTL § 2130 states that “[a] person who, with fraudulent intent … makes a material false statement … or conceals any other material fact, in a application for a certificate of title … is guilty of a felony.” Accordingly, the court reasons, allowing an equitable owner to defeat a Trustee, as a hypothetical lien holder, would offend New York public policy, which requires candor in obtaining a certificate of title. It should be noted that
It should be noted that the Balgobin court cited and discussed the Waldorf decision. Although the Balgobin court did not consider the § 544 argument because the parties did not raise it, the Court seemed to strongly suggest that it would have decided consistent with the holding in Waldorf.
Lastly, for joint debtors, as mentioned above, a vehicle’s title is prima facie evidence of ownership. Accordingly, a non-titled spouse cannot claim an exemption in the vehicle. See, e.g., In re Miller, 167 B.R. 782, 784 (Bankr. S.D.N.Y. 1994) (“To permit an untitled spouse to assert an exemption in a titled spouse's asset, to the detriment of their creditors, fails the olfactory test.”).
It is important that prospective debtors and bankruptcy practitioners understand the nuances of debtor’s property interests vis-à-vis bankruptcy estate property. Filing for bankruptcy without a full and clear understanding of the interests a bankruptcy trustee has in a prospective debtor’s property is likely to create unpleasant surprises and administration of property that a debtor and third parties believed would be protected from the trustee.
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