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*12 The February Note transaction was never consummated and was a sham. Although Dorssers advanced approximately $1,200,000 in connection with the November Note, Dorssers did not advance new funds as contemplated by the express terms of the February Note. The November 2008 Promissory Note was not canceled and remains unpaid. And, the plain terms of the February Note and Medina Deed of Trust are blatantly inconsistent with the transaction that Dorssers asserts occurred. Thus, nothing is owed on the February Note and Medina Deed of Trust.
Further, Dorssers did not receive delivery of the February Note. Although Dorssers testified that in 2009, while staying at a property owned by or rented to Hazelrigg III, he briefly held a stack of papers containing the original February Note and Medina Deed of Trust, the Court finds his version of events to be self-serving and inaccurate. Although the Court found Dorssers to be a generally truthful witness, his memory often seemed poor and he appeared particularly confused about the timing and sequence of these events.
After delivery of the February Note became an issue in this case, possession of the February Note was requested by Dorssers' present counsel. The Court ordered Trustee's counsel to hold the original February Note.FN10 Among the documents delivered with the February Note was a reconveyance of the Medina Deed of Trust (the "Medina Reconveyance") which purported to be signed by Dorssers. However, Dorssers testified that the signature was a forgery, that he would not have signed something that would have risked nullifying his security interest, and that the signature was not done in the pattern of his regular signature. The Court finds that Dorssers, indeed, did not sign the Medina Reconveyance.
FN10. The Court ruled the production of the original note was not to alter the status quo of the parties with regard to whether "delivery" had or had not been effectuated.
On or about September 11, 2009, Dorssers was awakened in the middle of the night at his Monaco home by an incoming fax from Hazelrigg III. The fax was a "Memorandum of Understanding," back-dated to December 11, 2008. Dorssers immediately called Hazelrigg III to inquire about it. Hazelrigg III advised Dorssers that he needed to sign the document. The Memorandum of Understanding purported to set forth a December 11, 2008 agreement for Concept Dorssers to enforce the February Note and Medina Deed of Trust on behalf of other parties also purportedly secured by the Medina Deed of Trust. After Hendrik Dorssers saw Concept Dorssers was listed in the Memorandum of Understanding as being first position on the Medina Deed of Trust, Dorssers signed the document, faxed it back to Hazelrigg III, and went back to sleep. No Memorandum of Understanding bearing Mastro's original signature has been produced or offered into evidence. Dorssers admitted that the first time he ever saw the Memorandum of Understanding was when it was faxed to him in the middle of the night on September 11, 2009.
Hazelrigg III hired Cairncross & Hempelmann, P.S. ("Cairncross") to represent Concept Dorssers with regard to the February Note and Medina Deed of Trust. In September 2009, on behalf of Concept Dorssers and other investors ostensibly covered under the Medina Deed of Trust, Cairncross caused a Notice of Default to be issued, asserting the entire February Note was in default. Dorssers eventually obtained separate counsel and terminated efforts to foreclose on the entire $12,000,000 February Note.
Mastro's and Linda's Use of LCY Account Funds
*13 Mastro and Linda distributed to themselves or spent for their benefit $995,106 from the LCY Account, net of amounts that they withdrew and later re-deposited back into the account. They used the LCY Account funds to pay for luxury automobiles, fine dining, designer clothing, trips to ski resorts, travel to Europe and Palm Springs, gold and lawyers. Examples include: (a) a cash payment of $125,000 to Linda on January 20, 2009, (b) the purchase of 100 gold coins FN11, (c) payment of $85,500 to Mastro's attorneys (Bucknell and Frush), as well as attorneys representing Linda (Gossler), and Michael K (Malnati),FN12 (d) payments of more than $73,000 on the Bentley and the Rolls Royce, and (e) expenditures of more than $42,000 on luxury travel (including stays in London, Paris, Rome, Milan, and Gstaad, Switzerland).
FN11. Notably, these coins were purchased in August or September of 2009, and are not to be confused with the gold coins purchased later in December 2009–January 2010.
FN12. On approximately February 17, 2010, Mastro used funds from the LCY Account to purchase cashier's checks payable to his attorneys as follows: Bucknell ($20,000) and Frush ($10,000). On approximately March 8, 2010, Mastro used funds from the LCY Account to purchase cashier's checks payable to his and Linda's attorneys as follows: Bucknell ($15,000), Gossler ($12,000), Frush ($10,000), and Malnati ($8,000). On approximately April 20, 2010, Mastro used funds from the LCY Account to make two payments totaling $10,500 to Michael K's attorney, Malnati.
On July 10, 2009, the date of Mastro's bankruptcy filing, the balance in the LCY Account was $379,039.37. However, despite being an asset of the estate, the LCY Account was not listed in the bankruptcy schedules filed by Mastro. On March 29, 2010, the Court entered an order stating: "Michael R. Mastro and Linda A. Mastro shall take no action to transfer or encumber any interest in [the LCY Entities] or any asset of the foregoing entities without written permission of the Trustee or leave of the Court" (the "Agreed Order"). As of March 29, 2010, the balance in the LCY Account was $60,692. In contravention of the Agreed Order, after March 29, 2010, Mastro and Linda disbursed substantially all of these remaining LCY Account funds.
Transaction with Jaguar Land Rover Bellevue
On or about February 2009, Mastro and Linda undertook a series of transactions with Jaguar Land Rover Bellevue (the "Bellevue Dealership") to extract the cash equity from their three vehicles. Mastro's and Linda's Bentley, Rolls Royce, and Range Rover were owned free and clear of encumbrances at the time. The Bellevue Dealership purchased Mastro's and Linda's vehicles FN13 for $300,000, and then immediately sold them back to Mastro and Linda as "used" vehicles.
FN13. Although Mastro and Linda had previously transferred the Rolls Royce to LCY LLC—Series Automobile, the vehicle apparently was titled in Linda's name at the time of the Bellevue Dealership transaction.
By check dated February 18, 2009, Bentley Bellevue (an entity affiliated with the Bellevue Dealership), paid Linda $300,000 in "loan proceeds." The Rolls Royce was the purported collateral for the loan. The $300,000 was deposited into Mastro's and Linda's joint account at Charles Schwab.
The $300,000 check from Bentley Bellevue was effectively a tender of funds for the purchase of Mastro's and Linda's Rolls Royce. In addition, pursuant to similar transactions, at least $65,000 was received for the Land Rover, and at least $50,000 was received for the Bentley.
Following receipt of the funds, Mastro and Linda then executed purported purchase agreements to buy back each of their "used" vehicles from the Bellevue Dealership. The Court does not believe Linda's assertions that she was not involved in the Bellevue Dealership transactions.
Notably, the transactions with the Bellevue Dealership coincide almost exactly in time with the purported encumbrance of Mastro's and Linda's Medina Residence.
*14 On approximately March 23, 2009, Mastro purchased 100 gold bars (the "Gold Bars") for a payment of $99,300. The Trustee asserts that the funds used to purchase the Gold Bars came from the sale proceeds of the Rolls Royce. The Gold Bars were shipped to Mastro's and Linda's Medina Residence on April 15, 2009. There were less than three months between the date the Gold Bars were shipped and the date of the bankruptcy filing. Yet, the Gold Bars were not listed in the bankruptcy schedules filed by Mastro.
Mastro and Linda have refused to disclose the location of the Gold Bars or to reveal whether they have been disposed of. Linda asserted that she had no knowledge of the Gold Bars. The Court finds it inconceivable that Linda did not know that the Gold Bars existed, were delivered to her house, and were property of the estate. Thus, this Court finds that the Gold Bars existed on the date of petition, that Mastro and Linda have at all times known where the Gold Bars are located, and that the Gold Bars are currently in Mastro's and Linda's possession or control.
Disposition of the Rolls Royce
On July 28, 2010, in direct violation of the Agreed Order, Mastro and Linda sold the Rolls Royce that Linda had previously transferred to LCY LLC—Series Automobile to a third party buyer for $272,000. The sales proceeds were in the form of checks payable to the order of Linda Mastro. These checks were deposited into Mastro's and Linda's account at U.S. Bank.
Ownership of the Big Rings
Toward the beginning of 2010, Linda sought a determination that she was the owner of the Big Rings as her separate property. Linda submitted a declaration to Judge Steiner FN14 in December 2009 in which she swore under penalty of perjury that the 15.93 Carat Ring was her wedding ring given to her by Mastro 20 years ago and that the 27.80 Carat Ring was a gift given to her 4 years ago. In January Linda submitted another declaration in which she swore that "[a]t the time Mike proposed that we be married, he gave me a 15.93 karat white gold mounted engagement ring." On June 9, 2010, Judge Steiner entered an Order Granting Linda's Motion for Partial Summary Judgment Regarding Rings and Dissolving Preliminary Injunction ("Partial Summary Judgment Order Regarding Rings"). In that order, the Court ruled that Linda was the owner of the Big Rings—the 15.93 Carat Ring and 27.80 Carat Ring as her separate property.
FN14. Mastro's bankruptcy case and the attendant adversary proceedings were transferred from Judge Steiner to Judge Barreca on October 4, 2010. Following the transfer of the case, Judge Steiner ruled on various matters that were pending before him. Unless the distinction between Judge Steiner and Judge Barreca is relevant, they are referred to as "the Court".
As the case progressed, Linda's statements in her declarations ultimately proved to be false. On June 17, 2011, by oral ruling, Judge Barreca vacated the Partial Summary Judgment Order Regarding Rings, and entered the Order Granting Trustee's Motion to Set Aside Partial Summary Judgment Order Regarding Rings on June 22, 2011. Further, on June 20, 2011, the Court entered an Order Granting Trustee's Motion for Order Preserving Assets ("Order Preserving Assets"). The Order Preserving Assets required Mastro and Linda to deliver the Big Rings to K. Alan Smith Jewelers by June 22, 2011, pending the outcome of this lawsuit. Mastro and Linda have failed to comply with the Order Preserving Assets.
Gold Coins and Payment of Mastro's and Linda's Attorneys by Hazelrigg III
*15 On approximately December 14, 2009, Hazelrigg III wrote a $160,000 check to Pacific Funding Group, an entity owned by a business associate of Hazelrigg III. The funds were used to (1) purchase gold coins (the "Gold Coins") that were delivered to Mastro's and Linda's Medina Residence and (2) to pay Mastro's and Linda's attorneys. Specifically, on December 16, 2009, funds from the Pacific Funding Group account were used to purchase $33,000 in cashier's checks payable to Mastro's and Linda's attorneys. On December 17, 2009, funds from the Pacific Funding Group were used to purchase a cashier's check payable to Miles Franklin in the amount of $125,000. Mastro then used the cashier's check to pay for Gold Coins that he had ordered from the Miles Franklin Company on approximately January 4, 2010. The Gold Coins were shipped to Mastro's and Linda's Medina Residence on January 19, 2010.
On approximately January 19, 2010, Centurion Financial Group ("Centurion"), a Hazelrigg III entity, transferred $28,645 to Eric deGooyer by undated check posted in deGooyer's personal account. On the same date, $28,645 was withdrawn from deGooyer's account to purchase several checks payable to Mastro's and Linda's attorneys. At the time of these transactions, Centurion owed Mastro in excess of $20 million and purported to be unable to pay the amount due.
Despite proving that these transactions occurred, the Trustee presented no evidence that the funds from Hazelrigg III ($160,000) or from Centurion ($28,645) constituted property of the estate or depleted estate assets through any setoff or other effect of the post-petition transactions.
Furnishings, Fixtures, and Other Personal Property in the Medina Residence
When the Mastro bankruptcy was filed in July 2009, Mastro and Linda failed to turn over to the Trustee various property in the Medina Residence that Linda asserted belonged to her as separate property. The Trustee retained the firm of James G. Murphy, Inc. to inventory the personal property in the Medina Residence. The Appraisal Report by James G. Murphy, Inc. (the "Murphy Appraisal"), dated January 13, 2010, accurately describes the furnishings, fixtures, and other personal property in the Medina Residence on the date of the inventory. Linda made annotations on the Murphy Appraisal to indicate which property was claimed to be separate.
Linda asserted four sources of separate property: (1) property she brought into the marriage, as set forth in her Premarital Agreement (2) property she inherited from her mother and sister (cash, a residence, jewelry, personal property, and household furnishings), as set forth in their respective wills, (3) property gifted to her by Mastro during their marriage, and (4) property gifted to her from others.
Specifically, Linda asserted that the wine collection described in the Murphy Appraisal was gifted to her as hostess gifts over the years. She also asserted that the Chihuly Chandelier described in the Murphy Appraisal was a gift to her from the artist. In rebuttal, the Trustee produced a letter from the Chihuly Studio to Mastro indicating that the Chihuly chandelier was purchased by Mastro and Linda. Linda claimed she had documentation to prove the Chihuly chandelier was a gift to her, but rested her case without offering the alleged documentation.
*16 The Trustee filed the present adversary proceeding on September 29, 2009. The summons and complaint were served on the LCY Trust, Compass Trust Corporation and Compass S.A. (the "Belizean Entities") through their agents, William Vigal ("Vigal") and Mary Simon ("Simon"). Vigal and Simon denied that they were agents of the Belizean Entities and challenged the validity of the service of process, but on December 18, 2009, Judge Steiner ruled that the Belizean Entities were validly served by service on Vigal and Simon. The Belizean Entities sought leave to appeal the ruling but their motion for leave to appeal was denied.
The Belizean Entities filed an answer to the complaint and asserted that the Court had no personal jurisdiction over them. The Court confirms the earlier finding that Vigal and Simon were agents of the Belizean Entities at the time of service and that the Court has personal jurisdiction over the Belizean Entities.
The Belizean Entities refused to participate in discovery in this lawsuit. On March 26, 2010, the Court granted the Trustee's motion to compel discovery from the Belizean Entities (the "Discovery Order"). The Belizean Entities refused to comply with the Discovery Order. On May 25, 2010, the Court granted the Trustee's motion for sanctions against the Belizean Entities for refusing to comply with the Discovery Order (the "Sanctions Order"). The Belizean Entities were ordered to pay a fine of $1,000 per day from the date of the Sanctions Order to the date they fully complied with the Discovery Order. The Belizean Entities have refused to comply with the Sanctions Order, and a total of $402,000 in sanctions have accrued against the Belizean Entities through conclusion of trial on July 1, 2011.
Summary Judgment Regarding Self–Settled Trust
On March 25, 2010, the Trustee filed a motion for partial summary judgment asking the Court to rule that the Irrevocable Trust and LCY Trust were self-settled trusts and that the assets of the trusts were property of the bankruptcy estate. On March 26, 2010, the Belizean Entities produced documents purporting to show that Compass Trust Corporation and Compass S.A. had resigned their positions relating to The LCY Trust, terminated The LCY Trust, and transferred the assets of The LCY Trust to Mastro and Linda. The documents purported to be dated March 19, 2010.
On May 28, 2010, Judge Steiner entered an Order Granting Plaintiff's Motion for Partial Summary Judgment Regarding Self–Settled Trusts ("Summary Judgment re Self–Settled Trusts"), ruling that the Irrevocable Trust and LCY Trust are self-settled trusts and, as such, are void as to Mastro's creditors as a matter of law. Similarly, this Court confirms that the Irrevocable Trust and LCY Trust are self-settled trusts and, as such, void as to Mastro's Creditors. Mastro's and Linda's transfers into the Irrevocable Trust were conveyances of assets for their own use and benefit. The same is true for the LCY Trust.
Sale of the Clyde Hill House
*17 On July 16, 2010, the Court entered an order granting the Trustee's motion to sell the Clyde Hill house "free and clear of all liens" for a sale price of $1,925,000. The net proceeds of the sale were $1,769,470.18. Pursuant to a court-approved settlement agreement with Avatar, the bankruptcy estate recovered $750,000 of the net proceeds and the remainder was paid to Avatar.
Sale of the Medina Residence
On December 3, 2010, the Court entered an order authorizing the Trustee to transfer the Medina Residence from LCY LLC—Series Home to the bankruptcy estate and to sell the Medina Residence. Pursuant to this order, the Trustee sold the Medina Residence on December 8, 2010. The total net proceeds of the sale were $8,358,989.64. The Trustee placed the net proceeds of the sale of the Medina Residence into an interest-bearing account pending resolution of claims asserted by Concept Dorssers and Hendrik Dorssers seeking recovery of a portion of the proceeds.
This Court has jurisdiction pursuant to 28 U.S.C. secs. 157(a)-(b), sec. 1334(a)-(b), and 11 U.S.C. secs. 105, 542, 544, 547, 548, 549, 550 and 551.FN15 This is a core proceeding under 28 U.S.C. sec. 157(b)(2)(B), (C), (E), (H), (K) and (O). The parties have stipulated to trial before the United States Bankruptcy Court without a jury.
FN15. Absent contrary indication, all "Code" and "Section" references herein are to the Bankruptcy Code, 11 U.S.C. secs. 101–1532.
Mastro and Hazelrigg III's Refusal to Testify and Produce Documents
Based on Mastro's and Hazelrigg III's refusal to testify and produce documents based on the Fifth Amendment right against self-incrimination, the Court draws a negative inference with respect to Mastro's financial condition during times material to this case, and with respect to all transactions in which Mastro and Hazelrigg III were participants. See e.g., Baxter v. Palmigiano, 425 U.S. 308, 318 (1976); In re Babbidge, 175 B.R. 708, 721 (Bankr.W.D.Mo.1994); In re Bailey, 145 B.R. 919, 927 (Bankr.N.D. Ill 1992). However, the Trustee presented sufficient evidence to support the Court's findings independent of the Court's need to draw any negative inferences. In essence, the negative inferences the Court draws with regard to transactions in which Mastro and Hazelrigg III participated buttress, but do not dictate, any finding or conclusion set forth herein.
Pursuant to the Code, "insolvent" means a "financial condition such that the sum of such entity's debts is greater than all of such entity's property, at a fair valuation, exclusive of—(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity's creditors; and (ii) property that may be exempted from property of the estate under Section 522 of this title ." 11 U.S.C. sec. 101(32).
Similarly, RCW 19.40.021 provides that,
(a) A debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation.
(b) A debtor who is generally not paying his or her debts as they become due is presumed to be insolvent.
(d) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.
(e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset.
RCW 19.40.021(a)-(b), (c)-(d).
Prior to August 21, 2008, and continuing through August 21, 2009, the date of the court order granting the Chapter 7 petition, Mastro was insolvent. First, Mastro had an unreasonably small amount of capital for the business in which he was engaged. Given (a) the extremely poor and declining economic conditions, especially regarding real estate property values, (b) the distressed condition of financial markets, and (c) the illiquid nature of Mastro's assets and his available sources of liquidity, Mastro retained an unreasonably small amount of capital at August 21, 2008, and at all times through August 2009, to support his ongoing operations. In essence, his operations were doomed to fail.
Second, Mastro was unable to pay obligations to his lenders as the obligations became due. Most of Mastro's financing from banks was short term secured and unsecured notes. Declining real estate values and a decrease in real estate sales made it impossible for Mastro to comply with all the demands that his bank lenders were making for payment or additional collateral on his maturing bank debt.
Finally, Mastro's assets exceeded his liabilities. Mastro's financial statements showed his net worth at the end of 2008 to be approximately $125.6 million. However, Mastro's financial statements did not provide a reliable assessment of his financial condition, as they were often based on Mastro's own assessments of value and/or outdated professional appraisals. Moreover, they were unaudited and not prepared in accordance with generally accepted accounting principles. Mastro's amended bankruptcy schedules, filed nine months later, showed Mastro's net worth to be negative $196.4 million. In the amended bankruptcy schedules, Mastro valued his assets at approximately $384.6 million and his liabilities at approximately $581.0 million. Therefore, the Court concludes that given the abysmal state of the real estate market as of August 21, 2008, Mastro's assets had already depreciated in value so as to make him balance sheet insolvent. Mastro became insolvent sometime before August 21, 2008, and remained insolvent at all times through August 21, 2009.
Mastro's Intent to Hinder, Delay, or Defraud His Creditors
Mastro was insolvent on or before August 21, 2008—the date of the formation of the Mastro Irrevocable Trust Agreement. The transfers of the Clyde Hill House, Highlands House, and Medina Residence from the long-standing Revocable Trust into the Irrevocable Trust were undertaken by Mastro with intent to hinder, delay or defraud his creditors. The Clyde Hill House, Highlands House, and Medina Residence were among Mastro's and Linda's most valuable assets, and they were transferred for no consideration—at a time when Mastro's businesses were suffering and Mastro was getting pressure from Friends and Family and other creditors. The Irrevocable Trust was designed to give Mastro and Linda use of the Clyde Hill House, Highlands House, and Medina Residence, or proceeds of such properties, while depriving their creditors of the ability to recover from the assets. Although the Irrevocable Trust Agreement had language appearing to give some vague protections to Friends and Family, these apparent protections were more cosmetic than substantive. Moreover, the exhibit purporting to list the "protected" Friends and Family, attached to the executed Irrevocable Trust Agreement, is blank. Further, even if the protections for Friends and Family were enforceable, the Irrevocable Trust Agreement would have placed the assets beyond the reach of most of Mastro's creditors.
*19 Only two months after forming the Irrevocable Trust, as the economy and real estate markets suffered continued decline, Mastro and Linda utilized an increasingly complex series of transactions and entities—the Delaware LCY Entities and Belizean LCY Trust—to supersede the Irrevocable Trust. They also attempted to shield even more assets from creditors. In October 2008, while Mastro was insolvent, Mastro and Linda transferred to the LCY Trust not only the Medina Residence FN16, but also the Big Rings and other LCY LLC Series Jewelry, the Rolls Royce, and approximately $1,000,000 to fund a secret bank account—the LCY Account. All of these assets were transferred for no consideration. Despite putting these assets in trust, Mastro and Linda continued to enjoy them and intended to do so for the remainder of their lives. Indeed, after transferring ownership of the assets to the LCY LLC Entities, Mastro and Linda continued to live in the Medina Residence, possess their jewelry, drive the Rolls Royce and spend the LCY Account funds on themselves. The LCY Trust lacked even superficial protections for Friends and Family creditors. Moreover, the LCY Trust was structured in a manner to ensure that Mastro had unilateral control over the assets therein. Although Compass S.A. was the protector of the LCY Trust, Mastro was the one-man Advisory Committee to Compass S.A., holding veto power over Compass S.A.
FN16. The Clyde Hill House and Highlands House were sold in unrelated transactions.
In February 2009, growing increasingly desperate, Mastro and Linda went to the Bellevue Dealership to extract the equity from their vehicles. Around this same time, the Medina Deed of Trust was recorded against the Medina Residence—despite the lack of any intent by Linda, Mastro, or LCY LLC—Series Home to actually encumber the property. Rather, the recording of the Medina Deed of Trust was an attempt to hinder, delay or defraud Mastro's creditors by giving the appearance that the Medina Residence was encumbered while it really was not. Additionally, beginning in early 2009 and continuing through early 2010, Mastro acquired Gold Bars and Gold Coins—portable and difficult-to-trace assets which could be easily liquidated.
Defendants' Liability—Trustee's Maximum Recovery
The Trustee is entitled to recover the property and amounts set forth below. The Court notes that Mastro's and Linda's affairs were intentionally structured in a manner so as to make legal liability confusing and uncertain. Thus, where appropriate, this Court bases its conclusions regarding liability on alternate conclusions of law.
In some cases, multiple defendants have liability with respect to the same property. In other cases, there are multiple grounds for a defendant's liability. Notwithstanding multiple defendants being liable or multiple grounds for recovery, the Trustee's maximum recovery is limited to the total value of the property at issue (plus any other awardable amounts such as interest, fees, and costs).
Section 541 provides that the commencement of a bankruptcy case creates an estate comprised of
*20 (1) ... all legal and equitable interests of the debtor in property as of the commencement of the case.
(2) All interests of the debtor and the debtor's spouse in community property as of the commencement of the case that is-
(A) under the sole, equal, or joint management and control of the debtor; or
(B) liable for an allowable claim against the debtor, or for both an allowable claim against the debtor and an allowable claim against the debtor's spouse, to the extent that such interest is so liable.
(3) Any interest in property that the trustee recovers under section 329(b), 363(n), 543, 550, 553, or 723 of this title.
(6) Proceeds, product, offspring, rents, or profits of or from property of the estate ...
11 U.S.C. sec. 541(a). Separate property of a debtor's spouse is not property of the estate. The ultimate characterization of property as either separate or community property is determined according to applicable state law. See Dumas v. Mantle (In re Mantle), 153 F .3d 1082, 1084 (9th Cir.1998).
Washington law recognizes the right of spouses to have separate property under RCW 26.16.010. Separate property is defined as property acquired before marriage or acquired after marriage by gift, bequest, devise, descent, or inheritance. Id. "[T]he right of the spouses in their separate property is as sacred as is the right in their community property, and when it is once made to appear that property was once of a separate character, it will be presumed that it maintains that character until some direct and positive evidence to the contrary is made to appear." Guye v. Guye, 63 Wash. 340, 352 (1911). "Separate property continues to be separate property through all of its changes and transitions so long as it can be clearly traced and identified." In re Estate of Witte, 21 Wash.2d 112, 125 (1944). "[W]here separate funds have become so commingled with community funds as to make it impossible to trace the former or tell which are separate and which are community funds, all funds, or property into which they have been invested, belong to the community." See In re Estate of Binge, 5 Wn.2d 446, 456–57 (1940).
When property is acquired during a marriage, it is presumed to be community property. Beam v. Beam, 18 Wn.App. 444, 452 (Wash.Ct .App.1977); Binge, 5 Wn.2d at 488. The burden of overcoming this strong presumption is on the party asserting the separate nature of the property. Beam, 18 Wn.App. 452; see also e.g. Berol v. Berol, 37 Wn.2d 380, 381–82 (1950) (finding that husband's "bald statement" that a payment was made from separate funds was insufficient to establish the separate character of the asset); In re Estate of Allen, 54 Wn.2d 616, 622 (1959) (finding an "unsupported statement" that stock purchases were separate property insufficient to rebut the presumption that the assets were community property). The presumption in favor of community property "can be overcome only by clear and convincing evidence." Beam, 18 Wn.App. at 452.
*21 Premarital agreements are contracts subject to the principles of contract law. DewBerry v. George, 115 Wn.App. 351, 364 (Wash.Ct.App.2003). Under Washington law, a prenuptial agreement may provide for management and classification of future assets and debts. As long as the agreement is freely and intelligently made, it is generally regarded with favor. Friedlander v. Friedlander, 80 Wn.2d 293, 301 (1972). However, "[w]hen the evidence and unchallenged findings show the parties did not mutually observe an antenuptial property agreement, the court is not bound to enforce it, but may determine the intentions of the parties, in light of the circumstances before and during marriage, to determine its binding effect." See In re Marriage of Fox, 58 Wn.App. 935, 938 (Wash.Ct.App.1990) (following In re Marriage of Sanchez, 33 Wn.App. 215, 217–18 (1982)). "The burden is upon the spouse seeking to enforce such an agreement to show that it has been strictly observed in good faith." Fox, 58 Wn.App. at 938. "The laws of contract respecting rescission of antenuptial agreements, whether in writing or not, are applicable: an agreement ... to rescind may ... be in writing or inferred." Id. at 939.
In Fox, a couple entered into a premarital agreement to protect the wife's separate property—$179,172 received from the estate of her first husband. The premarital agreement provided that "the separate property of each would remain separate after marriage ." Id. at 936. The trial court found that during the marriage the wife had transferred "all of her separate funds ... to the joint community checking account, and the funds were then spent by both parties on improvements to the family home ... and other nonidentifiable items," and that the husband had deposited a $36,000 inheritance into the joint account, "which was spent by both parties on living expenses." Id. at 937–38. On appeal, the court noted that "disregard of [a premarital] agreement may establish an intent to abandon it, which may constitute a rescission when factually probable because each party knew the other" had used their separate property assets as community assets. Id. at 939. The court also found the passage of 11 years since the parties' execution of the agreement to be persuasive evidence that the parties had intended to abandon their original agreement. Id. The court held that the agreement was rescinded and abrogated. See id.
1. Linda has failed to establish her claims of separate property.
Linda asserted four sources of separate property: (1) property she brought into the marriage, (2) property she inherited from her mother and sister, (3) property gifted to her by Mastro during their marriage, and (4) property gifted from others. Each is addressed in turn.
a. Linda has provided no proof of pre-marriage separate property.
The Premarital Agreement between Linda and Mastro provided that she was to own and control her separate property and enhancements thereto, including property she brought into the marriage—allegedly cash ($204,301), a house ($450,000), a car ($20,000), jewelry ($1,000,000), furs ($200,000), and furniture ($100,000)—all totaling approximately $2,000,000. However, the itemization set forth above is the full extent of the itemization provided in the Premarital Agreement. Linda offered nothing in the record to (1) substantiate her annotations on the Murphy Appraisal designating various property as being acquired "before Mike", (2) demonstrate that any of this property still exists, or (3) explain what became of the proceeds from any of this property. For example, the furniture referenced in the Premarital Agreement was not specifically itemized or described, thus it cannot now be identified or traced. In sum, the Court cannot tell what furniture is encompassed by the Premarital Agreement. Likewise, no specific item of jewelry is itemized or described in the Premarital Agreement. The only jewelry referenced in the Premarital Agreement is described generically as "jewelry." Further, the Engagement Ring, alleged to be encompassed by the Premarital Agreement, was stolen. Linda testified that her subsequent diamond rings, including the Big Rings, were acquired years after her Engagement Ring was stolen. And, there is nothing in the record except for Linda's testimony regarding proceeds from the sale of the Hawthorne Hills house. This Court declines to believe Linda's bare assertions of what property was encompassed by the Premarital Agreement. Therefore, this Court holds that Linda has provided no credible proof of pre-marriage separate property. See Berol, 37 Wn.2d at 381–82.
b. Linda has provided no proof of remaining inherited separate property.
*22 Linda claims that during her marriage she inherited various furniture, jewelry, and other personal property from her mother and sister, rendering it separate property. The Court believes that Linda previously inherited property from her mother and sister as set forth in their respective wills. However, the Court does not believe Linda's self-serving testimony asserting that any of the inherited property remained in Linda or Mastro's possession at the date of petition. Moreover, the Court compared the wills of both Linda's mother and sister with the list of personal property prepared pursuant to the Murphy Appraisal, on which Linda made annotations to indicate which property was claimed to be separate. The Court was unable trace a devise of any specific piece of furniture or piece of jewelry from either will to the list of property in the Murphy Appraisal. One possible exception was that Linda identified a coral ring as being separate property on the Murphy Appraisal, and indicated that she had inherited it from her sister. However, the only reference to a coral ring is in Linda's mother's will, devising the ring directly to Linda (with no involvement of Linda's sister). Given the conflicting evidence, this Court concludes that the coral ring referred to in the Murphy Appraisal was not inherited from Linda's mother or sister, is community property, and is, therefore, property of the bankruptcy estate.
c. Linda's and Mastro's failure to abide by the terms of their Premarital Agreement rendered it abandoned and rescinded.
Much proof was presented, and many arguments made, regarding Mastro's and Linda's Premarital Agreement. As discussed below, even if the Premarital Agreement had been honored and was enforceable, Linda failed to meet her burden of showing various assets were her separate property. That said, Linda and Mastro failed to implement the provisions of their Premarital Agreement, thereby rendering it abandoned and rescinded. See generally, Fox, 58 Wn.App. at 939–40. Linda's testimony demonstrated that Mastro and she abandoned their Premarital Agreement, commingled all of their property, and enjoyed all of their property together.
The Premarital Agreement is a relatively short document, only eight pages exclusive of exhibits. It appears to have been entered into primarily to preserve Mastro's separate property. The recitals to the Premarital Agreement state that Mastro held substantial property "which he will continue to own after marriage as his separate property," and that he intended "to continue devoting all his time and effort ... to the management and enhancement of his separate property." In exchange, Mastro was "obligated to compensate Linda and the community for his earnings and acquisitions being his separate property ... and for her joining in, or consenting to, the transactions." Community property was to be created mainly via the Mastro Special Account ($200,000 per year) and Mike and Linda Mastro Account ($5,000 per month). In effect, under the terms of the Premarital Agreement, Mastro and Linda were to share a very limited amount of community property as compared to the extent of their combined estates.
*23 The Premarital Agreement also endeavored to preserve Linda's separate property per the terms set forth therein. In essence, each party's pre-marriage property was to remain separate, any future enhancements to separate property were to remain separate, and community property was to be created via the Mastro Special Account and Mike and Linda Mastro Account. The Premarital Agreement further provided for what would happen in the event of the parties' separation, dissolution, or deaths. However, the majority of the Premarital Agreement (five of eight pages) is devoted to discussion of maintaining separate property and creating community property.
Mastro and Linda contravened the terms of the Premarital Agreement with regard to maintaining separate property and creating community property. For example, Linda and Mastro failed to open the only two bank accounts specifically contemplated by the Premarital Agreement. No "Mike & Linda Mastro Account" was ever opened. Linda testified that her old account at Peoples' Bank (now U.S. Bank) was intended to serve as the Mike & Linda Mastro Account, and that Mastro consistently made deposits into that account, primarily for her to manage. However, although Mastro was added as an authorized signator on that account, the U.S. Bank account is indistinguishable in that respect from Mastro's and Linda's other accounts. Mastro and Linda jointly held numerous personal bank accounts post-marriage, including accounts at U.S. Bank, Charles Schwab, HSBC, the LCY LLC account at JP Morgan Chase, and a new account in Palm Desert, California. Likewise, no "Mastro Special Account" was opened to provide for the gradual accumulation of community property in the amount of $200,000 per year. Linda offered no evidence that Mastro consistently deposited $200,000 per year into any account, as required by the Premarital Agreement. Rather, Mastro and Linda enjoyed their property together. In sum, both Mastro and Linda failed to maintain the separateness of their separate property following marriage, and failed to create community property as they had agreed.
d. Aside from the disregarded Premarital Agreement, other evidence is inconsistent with Linda's claims of holding and controlling separate property.
Even if Mastro's and Linda's Premarital Agreement had been followed and remained enforceable, Linda's claims regarding separate property fail. Linda testified repeatedly that she had authorized Mastro to sign her name on any documents he chose to execute on her behalf. As a practical matter, ceding control over all of her legal and financial affairs at a time in her life when she was perfectly capable of handling her own affairs is inconsistent with Linda's assertions of holding separate property. Mastro had Linda's unconditional blessing to control every business and financial aspect of their lives, regardless of what property may be affected.
For example, Linda testified during trial that she does not now know the location of the two Big Rings that she claims are her separate property via gift. She testified that she gave them to Mastro because she was "sick of those rings." According to Linda's attorney, Mastro refuses to tell Linda where the rings are located. Linda testified that she does not believe they have been sold, but does not know for sure. This arrangement of leaving Mastro in joint control and possession of the Big Rings is wholly inconsistent with a claim of separate property.
e. Linda has not established that she received any post-marriage gifts from Mastro that are separate property. <<< Continued In Next Post >>>
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Posted by Jay D. Adkisson, a co-author along with Chris Riser of Asset Protection: Concepts & Strategies (McGraw-Hill 2003) with main website http://www.assetprotectionbook.com
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