Opinion
Case No. 98-11864-SSM, Adversary Proceeding No. 98-1478
March 8, 2000
Richard L. Lash, Esquire, Bounassissi, Henning, Campbell Moffett, Fairfax, VA, of Counsel for the plaintiff
George LeRoy Moran, Esquire, Fairfax, VA, of Counsel for defendants Donald L. Shipman, Donald L. Shipman, Trustee, and Kym L. Shipman
James W. Reynolds, Esquire, Odin, Feldman Pittleman, P.C., Fairfax, VA, of Counsel for intervenor Donald F. King, chapter 7 trustee
MEMORANDUM OPINION
This is an action by Orix Credit Alliance, Inc. ("Orix") objecting to the debtors' discharge and for a determination that real property held in a purported trust actually belongs to the debtors individually and is subject to Orix's judgment lien. The chapter 7 trustee, Donald F. King, was permitted to intervene and has counterclaimed for a determination that the property is indeed held in a trust, but one that he may revoke so as to bring the property into the bankruptcy estate. A trial was held without a jury on October 21, 1999. The debtors were present in person and were represented by counsel. Orix and the chapter 7 trustee were present by counsel. This opinion constitutes the court's findings of fact and conclusions of law as required by F.R.Bankr.P. 7052.
Facts
Donald L. Shipman and Kym L. Shipman are husband and wife. They filed a joint voluntary petition under chapter 7 of the Bankruptcy Code in this court on March 9, 1998, and have not yet been granted a discharge. Orix is a judgment creditor of Mr. and Mrs. Shipman in the amount (including costs and attorney's fees) of $320,323, based on a judgment entered against them on May 9, 1994, by the United States District Court for the Eastern District of Virginia. That judgment was docketed on May 13, 1994, in the clerk's office of the Fauquier County Circuit Court.
The issues in this case center on a tract of land of approximately 20 acres titled in the name of Mr. Shipman as trustee and on a trucking business known as Manna Transport, Inc. ("Manna"). The complaint alleges in Count I that the debtors should be denied a discharge because they transferred the ownership of the trucking business to their minor children on the eve of bankruptcy. It further alleges in Count III that the alleged trust under which Mr. Shipman holds title to the real estate is a sham and should be disregarded. As a result, Orix argues, the lien of its judgment against Mr. and Mrs. Shipman attaches to the real estate. The trustee, while taking no position on the denial of discharge, joins with the debtors in asserting that a valid trust was properly created — with the result that Orix's judgment lien never attached to the property — but parts company with the debtors by arguing that the trust is revocable by Mr. Shipman and that he, as trustee, may exercise that power, thereby bringing the trust property into the bankruptcy estate.
Count II also sought denial of discharge and alleged that the debtors, in violation of § 727(a)(3), Bankruptcy Code, had unjustifiably concealed, destroyed, or failed to keep or preserve recorded information, including books, documents, records, and papers, from which their financial condition or business transactions might be ascertained. Specifically, it was alleged that the debtors had failed to keep written records relating to the alleged land trust. At the conclusion of the plaintiffs evidence, the court granted the debtors' motion for judgment as a matter of law and dismissed Count II.
A.
The real estate in question is located in Fauquier County, Virginia, at 10117 Highland Drive, Marshall, Virginia, and has the legal description of Lots 28 and 33, Cliffs Mill on Carter's Run subdivision. Lot 28 is improved by a house and garage; Lot 33, which adjoins it, is unimproved. The property is assessed for real estate tax purposes at $942,800, although the debtors testified at the meeting of creditors that they believe the fair market value to be approximately $500,000. At the time of the meeting of creditors, the property was still subject to a deed of trust that had a balance of approximately $10,000, but that deed of trust has since been paid off.
Record title to Lot 28 is vested in "Donald L. Shipman, Trustee," by virtue of a deed from Shenandoah Service Corporation ("Shenandoah") dated October 5, 1981, and recorded on October 16, 1981, in the clerk's office of the Circuit Court of Fauquier County. The deed recites that the property had been the subject of an unrecorded contract dated February 8, 1979, between Shenandoah and American Excavating Co., Inc. ("American Excavating"), of which Mr. Shipman was president, and that American Excavating had assigned its rights under the contract to Mr. Shipman as trustee. Mr. Shipman as trustee contemporaneously executed a deed of trust against the property in favor of Shenandoah to secure the unpaid balance of the purchase price in the amount of $25,055.39, repayable in monthly installments of $252.13. Lot 33 was conveyed to "Donald L. Shipman, Trustee" by a separate deed from Shenandoah dated November 10, 1981, and recorded on January 6, 1982. That deed contains a recitation similar to that of the Lot 28 deed concerning the assignment of American Excavating's contract purchase rights. Neither deed identifies the beneficiaries of the trust or refers to a trust document or sets forth in any manner the terms of the trust or the trustee's powers with respect to the property.
In 1984, Mr. Shipman sought to borrow $50,000 from McLean Savings and Loan Association ("McLean"), in order to complete construction on Lot 28. McLean apparently became concerned that the deed to Lot 28 did not expressly give Mr. Shipman the power to pledge the property, and they asked Mr. Shipman for a written trust instrument. Mr. Shipman in turn telephoned his attorney, Andrew Goodman, to prepare such an instrument. Mr. Goodman prepared a 5-page Declaration of Trust, which he transmitted, unsigned, to McLean, apparently with the expectation that it would be signed at settlement. As drafted by Mr. Goodman, the grantor and initial trustee of the trust was Mr. Shipman, and the beneficiaries were his wife, his child Nathanael, "and any children born hereafter." The initial corpus was the sum of $10.00, with provision for Mr. Shipman "or any other person" to make additions to the corpus at any time. The trustee was given broad powers to manage, sell, encumber, and dispose of any property in the trust, including real property, and broad discretion to either accumulate or distribute income and to invade principal for the support, welfare, and education of the beneficiaries. As drafted, the trust would terminate upon the later of Mr. Shipman's death or "the date when there is no beneficiary under the age of 25 years." Relevant to the present litigation, the declaration included the following language:
Mr. Goodman's handwritten notes from his telephone discussion with Mr. Shipman concerning the terms of the trust are, to say the least, sketchy. They show the beneficiaries as Mrs. Shipman, Nathanael and "one — unborn — due — Oct.-Nov. 84." Also included are the notations "Broadest possible powers," "buy sell," and "no termination date."
Mrs. Shipman was pregnant at the time with their second child, Nicolas. Nathanael is currently 17 and Nicolas is 14.
12[.] Revocability. This trust shall be revocable at the sole option of the Grantor, at any time, by instrument in writing delivered to the Trustee. Upon such revocation, the entire trust principal and accumulated income shall revert to the Grantor[.]
No signed copy of the declaration has been found or produced, and at trial the debtors testified that they did not recall ever signing the declaration. It was suggested by the debtors' counsel that the declaration may have become unnecessary because in the interim a "deed of correction" dated June 19, 1984, had been executed by Shenandoah with respect to Lot 28, reaffirming the conveyance to Mr. Shipman, as trustee, but adding the following language, which was recited to have been inadvertently omitted from the original deed:
TRUSTEE shall have the powers and authority to:
Publicly or privately, and without order of any court, mortgage, create a security interest in, pledge, or sell for its fair market value any or all of the trust property and any reinvestments thereof from time to time, and to lease such property for periods beginning or ending after the termination of the trust. No purchaser, secured party, or mortgagee shall be obligated to see to the application of any purchase, loan, or mortgage money. In addition to the foregoing powers and authority, the Trustee shall have all the discretion and powers enumerated in Section 64.1-57 of the Code of Virginia, 1950, or amendments thereto now in effect.
The loan from McLean closed on July 2, 1984, and a deed of trust dated that same date securing McLean's loan against Lot 28 was recorded on July 12, 1984. However, the deed of correction from Shenandoah, although dated June 19, 1984, was not recorded until September 21, 1984, some ten weeks after the loan closing. Although the deed of correction granted Mr. Shipman broad power to sell or mortgage the property, it did not identify the beneficiaries, refer to a trust instrument, or otherwise describe the terms of the trust.
Since 1984, the mortgage payments on the property have consistently been made from the debtors' personal funds, and they have deducted the interest on their personal income tax returns. Likewise, the debtors have made the real estate tax payments on the two lots from their own funds, and have deducted those on their personal income tax returns. On their schedules, the debtors did not list any interest either in the real property itself or the purported trust. At the meeting of creditors, however, they informed the chapter 7 trustee of the existence of the property and of their contention that it was held in trust. In response to questions from Orix's counsel, Mr. Shipman testified as follows:
It was testified that at certain points when the debtors were strapped for cash, the money to make the mortgage payments was given to them by their church or by friends.
The meeting of creditors was not actually presided over by the trustee, but by a member of his law firm. The issue of whether a trustee may delegate his or her responsibility to preside over a meeting of creditors is not before me, and I express no view.
Q. Is the Trust a written Trust?
A. Yes.
Q. Where is the written Trust?
A. Well, if you want to chase it back. Ah — Kenny Glennan [sic] Goodman drew it up[.] McLean Savings Loan when they, ah — financed the construction was it was filed then. That when it was done way back in `78, urn `79 whenever that was. McLean Savings Loan was taken over by NVRC I think they have been taken over again. Several years ago, I called NVRC to get a copy and they faxed me a copy on an old fax machine, so there is a copy around somewhere. But at the time my secretary filed it and of course the company is no longer in business and I can't get a hold of her to find out where she filed it but I do have a copy of it.
Q. You do have a copy?
A. [by debtors' counsel] I believe I have an unsigned copy.
Q. So you have no signed copy by [sic] signed by Mr. Shipman.
A. [by debtors' counsel] No, it can be gotten, it is a matter of record.
(emphasis added). Subsequent to the meeting of creditors, the debtors' bankruptcy counsel furnished the trustee with an unsigned copy of the instrument prepared by Mr. Goodman. It was only after counsel for the trustee brought the existence of the revocation powers in paragraph 12 to the attention of debtors' bankruptcy counsel that the debtors took the position that it had never been signed.
For what transpired during the meeting of creditors (which was recorded only on audio tape), I rely on the transcript prepared by the trustee (Tr.Exh.4) rather than the transcript prepared by Orix (Pltf.Exh. 13). The differences in any event are not significant and do not affect the Court's analysis.
At trial, Mr. Shipman testified that the only trust of which he is a trustee is what he described as the "family trust" for Lots 28 and 37. He testified that the beneficiaries of the trust were his wife (whom he married in 1979) and his children. Mrs. Shipman likewise testified that the beneficiaries of the trust were herself and the children. According to Mr. Shipman's trial testimony, the trust "was an oral trust when it was first established." He testified that he did not want to see the property pass on to developers, and that his intention was to preserve the real estate in a "family trust forever" as "a heritage thing," analogous to the way he understood the great English manors had been preserved for centuries. His understanding was that the deed from Shenandoah placed the property in an "eternal" trust, with the result that it would remain "indefinitely" in the Shipman family. With respect to the written trust agreement prepared by Mr. Goodman at the time the McLean loan was taken out, he acknowledged that he "must have" asked Mr. Goodman to prepare it, but that he never "approved" it or signed it.
Mr. Shipman testified that he had traveled to England — which was his wife's birthplace — several years previously and had visited a number of the great houses.
B.
As noted, the other issue in this adversary proceeding involves the debtors' interest, or lack thereof, in Manna Transport, Inc. The record shows that the company was incorporated on June 29, 1995, approximately a year after Orix had obtained its judgment against the debtors. Mr. Shipman testified that he was out of work at the time and had a large number of debts. When he applied for a job at a soft drink bottling plant, he was told they had no position at the plant, but that the company needed truckers. Mr. Shipman decided to exploit that need by setting up a trucking company. In Manna's articles of incorporation, Mr. Shipman is named as the incorporator. The initial named directors are Mr. and Mrs. Shipman, and their two minor children, Nathanael and Nicolas, then aged 14 and 11, respectively. Mr. Shipman testified that the startup capital consisted of $3,000, which came from the sale of stock belonging to the two children, together with approximately $29,000 in funds borrowed from what he described as three "dear friends."
There is no record of a formal organizational meeting having been held, nor were stock certificates issued. Tax returns filed by the corporation for 1995, 1996, and 1997, however, consistently listed Nathaniel and Nicolas as each owing 50% of the stock. Additionally, in applying for a bank loan after the corporation was set up, Mr. Shipman represented to the bank that the children were the owners of the business, as a result of which the bank declined to make the loan. Gross revenues and net profits for 1995 through 1997, as reflected on the tax returns, were as follows:
Year Revenue Profit
1995 (6 months) $159,710 $0 1996 $490,784 (5,516)
1997 $845,129 (4,431)
Mr. Shipman testified at trial that the corporation, to which he devotes essentially all his working hours, is currently grossing approximately $1 million per year and that it has, net of secured debt, approximately $125,000 in assets. The company has never paid a dividend. For 1995 through 1998, only Mrs. Shipman received a salary from the company. Only in the 1% months prior to the trial has Mr. Shipman begun taking a formal salary (of $500.00 per week). Previously, according to his trial testimony, "if I needed money, I took it from the company." Since the inception of the company, he has worked full time for it, doing, as he testified, "whatever it takes to make the company go," including acting as dispatcher, driver and equipment repairer. According to Mr. Shipman's testimony, his wife is president, he is treasurer, and his 17-year old son Nathanael is vice president.
The 1997 income tax return for Manna reflected paid-in capital of $2,900 and retained earnings of — $19,121, for total shareholder equity of — $16,221.
After Orix, in an effort to enforce its judgment, subpoenaed documents related to Manna, Mr. and Mrs. Shipman consulted an attorney. When the attorney reviewed the corporate records of Manna, he determined that the stock certificates had never been issued. He thereupon prepared, for Mr. and Mrs. Shipman's signature, as treasurer and president, respectively, two share certificates, each for 1,500 shares. One was issued to Mrs. Shipman as custodian for Nathanael under the Virginia Uniform Transfers to Minors Act, and the other to her as custodian for Nicolas. The share certificates are dated March 2, 1998, which was seven days prior to the filing of Mr. and Mrs. Shipman's chapter 7 petition. The attorney also prepared corporate bylaws and various shareholder consents. These were also dated and signed March 2, 1998. The same attorney then prepared and filed Mr. and Mrs. Shipman's chapter 7 petition and schedules. The debtors' schedules do not disclose any interest in Manna, nor does their statement of financial affairs reflect their position as officers and directors of the corporation.
Conclusions of Law and Discussion I.
This court has subject matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(H) and (J), this is a core proceeding in which final judgments and orders may be entered by a bankruptcy judge, subject to the right of appeal. Venue is proper in this district under 28 U.S.C. § 1409(a). The defendants have been properly served and have appeared generally.
With respect to the land trust, Mr. Shipman has been named a party both in his individual capacity and in his capacity as trustee, but Nathanael and Nicolas, the purported beneficiaries, have not. Under Virginia law, however, the beneficiaries of a land trust are not required to be made parties to litigation affecting the land held by the trust. Air Power, Inc. v. Thompson, 244 Va. 534, 422 S.E.2d 768 (1992).
II.
With respect to Manna Transport, Inc., the sole question before the court is whether the debtors, within one year prior to the filing of their bankruptcy petition, transferred or concealed their ownership of the corporation with the intent to hinder, delay, or defraud their creditors or the bankruptcy trustee. If so, under § 727(a)(2), Bankruptcy Code, they are not entitled to a discharge. Orix, as plaintiff, has the burden of proof, and the standard of proof is preponderance of the evidence. Harmon v. McGee (in re McGee), 157 B.R. 966, 973 (Bankr E.D. Va. 1993).
Count I of the complaint is solely an objection to discharge. It does not seek to subject Manna's assets to the claims of Mr. and Mrs. Shipman's creditors. The court accordingly expresses no view as to whether the bankruptcy trustee or the creditors could reach Manna's assets.
Section 727, Bankruptcy Code, provides in relevant part as follows:
(a) The court shall grant the debtor a discharge, unless —
* * *
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be, transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition[.]
Specifically, the complaint alleges that the issuance of the share certificates to Nathanael and Nicolas on March 2, 1998, constituted a fraudulent transfer to the children of the debtors' interest as the owners of Manna. In this connection, there can be little doubt that Mr. Shipman, in setting up Manna, intended to put its assets beyond the reach of his judgment creditors and further that he set up Manna in order to provide himself and his wife with a livelihood. Even accepting his testimony that the initial $3,000 capital contribution came from liquidation of assets belonging to his children, the capital contribution was fairly nominal in amount, and by far the bulk of the funds needed to get the business going came from loans made by friends of Mr. and Mrs. Shipman. Furthermore, what value Manna has today in excess of its initial capitalization is largely the result of Mr. Shipman's efforts. As noted above, he received no formal compensation for the first three years of the corporation's existence, yet devoted fall time to its operation and, from his testimony, appears to have been almost single-handedly responsible for its success. This is behavior more typical of an owner building a business through "sweat equity" than of an employee. Additionally, the failure of the debtors on their statement of financial affairs to disclose their positions as officers and directors of Manna is, to say the least, troubling.
At the same time, and despite the complete lack of such corporate formalities as the holding of an organizational meeting, issuance of share certificates, maintenance of corporate minutes, or the holding of annual meetings, what little documentation there is — namely, the income tax returns for the corporation — has from the outset consistently reported Nathanael and Nicolas as the shareholders of the corporation. Additionally, when Mr. Shipman sought a bank loan for the business, he represented that the children were the shareholders, as a result of which the bank declined to make the loan.
Although the issue is close, given the consistency of the position taken throughout the four years of the corporation's existence that the children were the shareholders, the court cannot find that issuance of the share certificates to Mrs. Shipman as custodian for the children seven days prior to the bankruptcy filing effected any change in what had always been represented to be the ownership of the corporation. Consequently, the court cannot find that a "transfer," as such, of the debtor's interest in the corporation occurred within one year of the filing of the bankruptcy petition.
In so ruling, the court recognizes that § 727(a)(2) can also be violated if the debtors, within the one year period preceding the bankruptcy, "concealed" their ownership of Manna with intent to hinder, delay, or defraud creditors or the bankruptcy trustee, even though the formal transfer of ownership occurred outside the one-year period. See Rhode Island Depositors Economic Protection Corp. v. Hayes (In reHayes), 229 B.R. 253 (1st Cir. BAP 1999); Xerox Fin. Svcs. Life Ins. Co. v. Sterman (In re Sterman), — B.R. —, 1999 WL 1041806 at *4 (D. Mass. 1999) ("[A] concealment of a property interest that occurred more than one year prior to the filing may still provide a basis for denial of discharge if it continues within the year preceding the filing."). Here, however, the theory of continuing concealment was neither raised in the complaint nor argued by the plaintiff at trial, and the court declines to fashion a case for the plaintiff that the plaintiff has not made for itself. Accordingly, the court concludes that Orix has failed to prove the grounds for denial of discharge in Count I, and Count I will be dismissed.
III.
The remaining issue involves the validity and revocabiliry of the trust under which Mr. Shipman purportedly holds title to the Fauquier County real estate. As noted, Orix asserts that the trust is a sham and should be disregarded. The debtors say that there is a trust, and that it is irrevocable. The chapter 7 trustee agrees that there is a trust, but says that it is revocable.
No issue is raised by the pleadings concerning the manner in which the debtors' respective interests in the land trust were listed — or more accurately, not listed — on their schedules and statement of financial affairs. However, the court cannot lightly pass over without comment the total failure of the debtors and their counsel to schedule those interests. Even if Mr. Shipman held title, as he contends, solely as trustee for his wife and children, his ownership was required to be disclosed on the statement of financial affairs in response to Question No. 14 concerning property held for another. Similarly, Mrs. Shipman's interest as a beneficiary of the land trust was required to be disclosed on the schedule of assets in section 19 of Schedule B.
A.
The initial question, obviously, is whether a valid trust was ever created. As noted, Shenandoah, in conveying the property to Mr. Shipman as "trustee," did not specify, either in the deed of conveyance or in another writing, who the beneficiaries of the trust were and what the purpose of the trust was. As far as the evidence reveals, Shenandoah did not care what happened to the property. According to the recitals in the deeds, it had contracted to sell the two lots to Mr. Shipman's company, American Excavating, which then assigned its contract rights to Mr. Shipman as trustee. There is no evidence that Shenandoah knew or cared who the beneficiaries of the trust were. Nor, for that matter, is there any evidence that American Excavating, as assignor of the contract purchase rights, knew or cared. According to Mr. Shipman's testimony, the decision to take title to Lots 28 and 33 as trustee was a unilateral one on his part, with a view to ensuring that the property would remain in his family "forever." This would be consistent with the declaration of trust prepared two and a half years later by Mr. Goodman at Mr. Shipman's request. That declaration, as noted, treats Mr. Shipman, not Shenandoah or American Excavating, as the settlor of the trust.
The fact that the deed of conveyance did not name the beneficiaries of the trust and did not impose any duties on Mr. Shipman as trustee does not, solely on that ground, defeat the validity of a conveyance into trust, in light of Va. Code. Ann. § 55-17.1, which provides in relevant part as follows:
No trust relating to real estate shall fail . . . because no beneficiaries are specified by name in the recorded deed of conveyance to the trustee or because no duties are imposed upon the trustee. The power conferred by any such instrument on a trustee to sell, lease, encumber or otherwise dispose of property therein described shall be effective and no person dealing with such a trustee shall be required to make further inquiry as to the right of such trustee to act nor shall he be required to inquire as to the disposition of any proceeds.
In any case under this section, where there is a recorded deed of conveyance to a trustee, the interest of the beneficiaries thereunder shall be deemed to be personal property.
As explained by the Supreme Court of Virginia, Section 55-17.1 was enacted in 1962 to create a method of holding title to real estate patterned after the so-called "Illinois Land Trust." Curtis v. Lee Land Trust, 235 Va. 491, 494, 369 S.E.2d 853 (1988). As the Court noted, "The Virginia Land Trust . . . differs from a common-law trust in which legal title is vested in the trustee and equitable title is held by the beneficiaries." Id. Instead, "in a land trust, the complete title is vested in the trustee [and] the beneficial interest is personalry[.]" Id. Of significance to the present discussion, the Court further explained:
The land trust consists of two main documents: a trust agreement, which is not recorded, executed by the beneficiaries and the trustee; and a deed of trust which is recorded.
Id. (emphasis added). Thus, Section 55-17.1 does not eliminate the fundamental requirement of any trust that there be an agreement which identifies the beneficiaries and places duties on the trustee. See Woods v. Stull, 182 Va. 888, 902, 30 S.E.2d 675 (1944) ("The declaration [of trust] must be reasonably certain as to its material terms. If the language is so vague, indefinite, or equivocal that any one of the elements is left in uncertainty, the trust must fail."). See also Bluff Ventures L.P. v. Chicago Title Ins. Co., 950 F.2d 139, 145 n. 8 (4th Cir. 1991) (expressing doubt as to whether a valid land trust was created, since there was no evidence of a trust agreement). Instead, the land trust statute merely eliminates the requirement that the beneficiaries and duties be set forth in the recorded deed of conveyance to the trustee. Accordingly, there can be little doubt that a bare conveyance to a person as "trustee" would not actually give rise to a trust if the grantee were simply holding the property for his or her own benefit. 19 Michie's Jurisprudence, "Trusts and Trustees," § 7 (1991) ("[T]he owner of property cannot create a trust therein for his own benefit, with restrictions upon his right of alienation or his power to charge it with his debts[.]").
B.
The 1984 "deed of correction" for Lot 28 did not fill this void, since it merely gave Mr. Shipman the power to sell or encumber the property without the purchaser or mortgagee being required to see to the proceeds, and conferred on Mr. Shipman certain statutory powers. However, it did not in any sense define Mr. Shipman's duties vis-a-vis the (unidentified) beneficiaries.
Of course, the declaration of trust prepared by Mr. Goodman does identify the beneficiaries and does place a duty on the trustee to manage the property for their benefit. Inconveniently for the debtors, however, it also includes a power of revocation. It is perhaps not surprising, therefore, that the debtors now deny that the declaration was ever signed or otherwise adopted by them.
In this connection, the chapter 7 trustee urges that the debtors — having represented at the meeting of creditors that there was a signed trust agreement — are now judicially estopped from asserting to the contrary. Judicial estoppel is an equitable doctrine designed to protect the integrity of the judicial process. Hildebrand v. Kugler (In re Kugler), 170 B.R. 291, 302 (Bankr. E.D. Va. 1994). At its core, judicial estoppel acts on the maxim that "there is only one truth about a given set of circumstances." King v. Herbert J. Thomas Mem'l Hosp., 159 F.3d 192, 196(4th Cir. 1998). Its purpose is to prevent a party from benefitting by asserting inconsistent positions with respect to a particular set of facts. The doctrine applies equally to positions taken in the same litigation, Allex v. Zurich Ins. Co., 667 F.2d 1162, 1166 (4th Cir. 1982), or prior judicial or administrative proceedings. Lowrey v. Stovall, 92 F.3d 219, 224 (4th Cir. 1996). Informally, judicial estoppel has been described as a mechanism to prevent litigants from "blowing hot or cold" or "playing fast and loose" with the courts. Guiness PLC v. Ward, 955 F.2d 875, 899 (4th Cir. 1992).
The Fourth Circuit has established three elements that must be met before judicial estoppel may be applied:
(1) The party to be estopped must be asserting a position that is factually incompatible with a position taken in a prior judicial or administrative proceeding; (2) the prior inconsistent position must have been accepted by the tribunal; and (3) the party to be estopped must have taken inconsistent positions intentionally for the purpose of gaining unfair advantage.
King, 159 F.3d at 196. With respect to the third element, judicial estoppel may not be imposed on a party where the inconsistent positions were the result of inadvertence or mistake. Id. The application of judicial estoppel in any particular case is necessarily fact-dependent, and the Fourth Circuit has instructed that it "should be applied with caution." Peugeot Motors, Inc. v. Eastern Auto Distributors, Inc., 892 F.2d 355, 356 n. 3 (4th Cir. 1989); Lowrey, 92 F.3d at 224.
In the present case, the court need not reach the issue as to whether the inconsistent positions were taken intentionally or because the debtors were honestly mistaken at the meeting of creditors as to whether the agreement prepared by Mr. Goodman had actually been signed. The reason the court need not reach that issue is because there has been no showing that the "prior inconsistent position" — namely, the testimony at the meeting of creditors — was "accepted by [a] tribunal." As the Fourth Circuit has explained, "The insistence upon a court having accepted the party's inconsistent position ensures that judicial estoppel is applied in the narrowest of circumstances." Lowrey, 92 F.3d at 224. Putting aside the question as to whether a chapter 7 trustee could ever be considered a "tribunal," the fact remains that the only action taken by the chapter 7 trustee in reliance upon the debtors' testimony at the meeting of creditors was to issue a notice of intent to revoke the trust. He made no ruling or finding, nor did he alter his position (for example, by abandoning the property), in reliance on the testimony. Accordingly, the requirement that the prior inconsistent position was accepted by a tribunal has not been satisfied, and judicial estoppel cannot be applied.
See In re Kincaid, 146 B.R. 387, 390 (Bankr. W.D. Tenn. 1992) (holding that a Section 341 meeting of creditors is not a judicial proceeding, but simply a meeting to uncover facts about the debtor's bankruptcy case).
C.
This is not to say that the prior inconsistent testimony cannot be weighed in determining whether the declaration prepared by Mr. Goodman was in fact signed. Fed.R.Evid. 801(d)(1)(A). And even if it were not signed, the court is entitled to infer that it accurately reflects Mr. Shipman's intent as communicated to Mr. Goodman. In this connection, it is important to note that the validity of a trust is not dependent upon the existence of a signed trust agreement. Virginia does not require that the terms of a trust be set forth in a writing, even where the corpus of the trust consists of real estate. Daniel v. Viar, 147 Va. 323, 137 S.E. 526 (1927); Sterling v. Blackwelder, 383 F.2d 282, 284 (4th Cir. 1967) (noting that Virginia is one of a minority of jurisdictions that will enforce an express trust in real estate created by a parole agreement). The conveyance to Mr. Shipman as trustee took place at a time when he was just recently married and would naturally be motivated to provide a home for his family. There is no suggestion in the record that the property was acquired for development or resale. Instead, relatively soon after acquiring the property, Mr. Shipman built a house on it in which he and his family reside to this day. Additionally, his request to Mr. Goodman to prepare a formal trust instrument naming his wife, his son Nathanael, and the unborn child as beneficiaries amply corroborates the intent, expressed in the deed, to hold the property in trust. Accordingly, the court cannot conclude, solely from the absence of a signed trust document, that the trust was ineffectual or a sham.
D.
There is, however, a separate issue to be considered. Although Orix has not argued that the trust is void because it violates the rule against perpetuities, the court is required to examine that issue in light of Mr. Shipman's trial testimony that his intent was to create an "eternal" trust that would keep the property in his family "forever."
The rule against perpetuities is of great antiquity and operates to prevent a grantor or testator from imposing restrictions on the transfer of property that extend unreasonably far into the future. The common-law rule, as it existed in Virginia at the time Lots 28 and 33 were deeded to Mr. Shipman as trustee, may be briefly stated as follows: "Every executory limitation, whether of real or personal estate, in order to be valid must vest in interest, if at all, within a life or lives in being and ten months (the utmost period of gestation) and twenty one years thereafter." 14B Michie's Jurisprudence, "Perpetuities and Restraints on Alienation," § 3 (1999); Joseph v. Pollak, 795 F. Supp. 163, 166 (E.D. Va. 1992) (in Virginia, the rule against perpetuities "requires that interests in property vest, if at all, within a life or lives in being plus twenty-one (21) years and ten (10) months.") The rigor of the common-law rule has been modified by statute in Virginia in two respects. First, instead of requiring that an interest must vest within the period prescribed by the rule, it is sufficient if it does vest within that period. Va. Code Ann. § 55-13.3(A); see Ryland Group, Inc. v. Wills, 229 Va. 459, 463 n. 2, 331 S.E.2d 399, 402 n. 2 (1985) (noting that the amendment adopts the "wait and see" approach to vesting). Second, in the context of a revocable intervivos trust, the determination of "lives in being" is made as of the date of the grantor's death, not of the creation of the trust. Va. Code Ann. § 55-13.2.
Section 55-13.3 did not become effective until approximately 9 months after the property was deeded to Mr. Shipman as trustee. Although the statute contains language making it applicable to "all interests heretofore created" provided no detrimental action had been taken in reliance on the common-law rule, Va. Code Ann. § 55-13.2(D), the Supreme Court of Virginia has declined to give the statute retroactive effect. Lake of the Woods Ass'n v. McHugh, 238 Va. 1, 7, 380 S.E.2d 872, 875-6 (1989) (holding right of first refusal that might be exercised beyond the period permitted by the rule against perpetuities was void).
It is an interesting question whether the declaration of trust prepared by Mr. Goodman sufficiently addressed the rule against perpetuities. In particular, the provisions relating to termination of the trust and those providing for its continuation for the benefit of the descendants of deceased beneficiaries could be read in such a way as to postpone vesting of the property indefinitely as long as there was no failure of issue.
Although Mr. Goodman did not profess any expertise in the area of trusts, he testified by way of deposition that he had run his initial draft by his partner, Thomas Kenny (later a judge of the Circuit Court of Fairfax County, and now deceased), who was more knowledgeable in that area of the law.
Paragraph 5 of the declaration provides as follows:
Distribution of Principal Upon the later of (a) the death of the Grantor, and (b) the date when there is no beneficiary under the age of twenty-five years, unless sooner terminated by the Grantor, the Trustee shall distribute the principal of the trust to the beneficiaries, in equal shares, per stirpes.
Paragraph 6 of the declaration provides as follows:
Death of Beneficiary Prior to Trust Termination If any of the beneficiaries die before this trust is terminated, the Trustee shall continue to administer the trust for the benefit of such person or persons as the deceased beneficiary shall appoint by Will, specifically referring to this power of appointment. If the beneficiary fails to exercise this power, the trustee shall administer and distribute the income and principal of this trust for the benefit of the beneficiary's descendants, and if none are living, for the benefit of the remaining beneficiaries or his issue, as the case may be.
The issue is even more starkly presented, however, if the declaration of trust was neither signed nor adopted by Mr. Shipman, given his unequivocal trial testimony that he did not intend for the trust ever to terminate. The question therefore is whether, under Virginia law, a trust that does not by its terms terminate within the period of the rule against perpetuities is void ab initio or whether it is only void as to future interests that would vest more than 21 years and ten months after the death of a life in being at the time the trust were created (if the trust were irrevocable) or at the time of Mr. Shipman's death (if the trust were revocable).
It has been observed that no reported Virginia case has ever squarely held that a trust is void because it does not terminate within the period of the rule against perpetuities, Joseph, 795 F. Supp. at 166. It would appear, however, that the prevailing wisdom tends to that view. See 14B, Michie's Jurisprudence, "Perpetuities and Restraints on Alienation," § 10 ("[I]n order to prevent an express active trust from being at once subject to internal attack, it should by either clear implication or express provision be limited in point of time so as to comply with the rule against perpetuities."). It can be argued, moreover, that the need for the trust to terminate within the period of the rule is strongly implied from the holding in Otterback v. Bohrer, 87 Va. 548, 12 S.E. 1013 (1891). In that case, a testator had devised his extensive land holdings in trust with a provision that the trust would terminate — at which time the property would be sold, and the proceeds of sale distributed — when his youngest grandchild attained the age of twenty-one. In response to an argument that such a provision was "obnoxious to the rule of law against perpetuities," the Court held:
The testator has not gone farther than the law allowed in his limitations, but during the lives in being, and the utmost period of gestation, and twenty-one years thereafter. This estate must vest within that period. There can be no child born to any of his children who would not fulfill the conditions within the prescribed period. This is allowed by the law, and is in violation of no rule thereof, and so it is good.
Id. at 552, 12 S.E. at 1014. In Joseph, the District Court held that mere continuation of a trust beyond the period of the rale against perpetuities did not necessarily invalidate the trust, provided that all interests under the trust vested within that period. 795 F. Supp. at 167. In that case, as the District Court noted, "Nothing in the trust instruments indicates that the trust was meant to last in perpetuity." Id. at 168. Here, however, Mr. Shipman's testimony is clear that he intended that the property could never be sold or developed, at least while there were any descendants still living.
While the issue is not free from doubt, the court concludes that even where the intent is, as Mr. Shipman testified, to create a perpetual trust, the violation of the rale against perpetuities does not make the trust void ab initio but only invalidates those interests that would not vest within the period of the rale. Assuming the trust is otherwise effective, the right of the current beneficiaries (Mrs. Shipman, Nathanael, and Nicolas) to the rents and profits from the property has vested. Although continuation of the trust beyond the 21st birthday of the youngest grandchild (if there are any) would violate the rule against perpetuities, such violation would invalidate only interests arising thereafter, effectively giving the then-living beneficiaries the right to demand termination of the trust. Accordingly, the trust does not fail as to the current beneficiaries and is not void even if Mr. Shipman's intent was to tie the property up in a trust "forever."
E.
There remains the question of whether the alleged trust is otherwise sufficiently "certain in its material terms" so as to allow it to be enforced. Woods, 182 Va. at 902, 30 S.E.2d at 682. At trial, Mr. Shipman was notably vague as to any terms of the trust other than its perpetual duration and the general intent to provide a home for Mr. Shipman's wife and children and their descendants. How the purpose of the trust, as described by Mr. Shipman, would actually be carried out beyond the minority of the children is far from clear. When the children become adults, will they have a right to reside with their own wives and children on the property? If so, where? In the house that presently exists? In separate houses that they construct elsewhere on the property? Do the beneficiaries get to reside rent free? If so, is there any compensation for those beneficiaries who do not reside on the property? Although these are knotty questions, the court cannot find that the answers are so uncertain that a court of equity, if called upon by the beneficiaries to enforce the trust, would not be able to fashion relief consistent with the stated purpose of the trust. Accordingly, the court cannot find that the terms of the trust, even in the absence of a written declaration, are so "vague, indefinite, or equivocal" as to cause the trust to fail. Id.
One need not be too cynical to observe that in the process it also provides a home for himself.
F.
The final question is whether the trust is revocable. In this connection, the rule in Virginia is that after an express trust has been created, without a power of revocation expressly reserved, it can be revoked only by the consent of all the parties in interest. 19 Michie's Jurisprudence, "Trusts and Trustees" § 75; see also G. G. Bogert and G. T. Bogert, The Law of Trusts and Trustees, § 998 (2d ed. rev. 1992). The only apparent exception is where a right of revocation exists by necessary implication under the terms of the gift. Russell's Ex'rs v. Passmore, 127 Va. 475, 103 S.E. 652 (1920).
For the purpose of determining whether the power of revocation was reserved, it is first necessary to determine who should be treated as the grantor of the trust. Shenandoah was the grantor under the deed of conveyance, but there is no evidence that Shenandoah intended to impose any restrictions on Mr. Shipman's use of the property. Indeed, the deed of correction to Lot 28, which expressly confers on Mr. Shipman a power to sell the property, is inconsistent with the notion that Shenandoah intended to place any limitations whatever on Mr. Shipman's enjoyment of the property. Shenandoah did not designate any beneficiaries, nor did it place any duties on Mr. Shipman as trustee. It simply conveyed title as it was directed to do by the original contract purchaser, American Excavating. As noted above, the deed of conveyance was not sufficient, standing alone, to create a trust, and did not eliminate the requirement for a trust agreement. In this case, the only "agreement" was a unilateral one on Mr. Shipman's part: having taken title, he determined that he would hold the property in trust to provide a home for his wife and children. Since the determination of who the beneficiaries were and to what use the property would be put were made by Mr. Shipman, he is properly treated as the grantor of the trust.
As noted above, the evidence is in conflict as to whether the declaration of trust prepared by Mr. Goodman was actually signed. Although no one has been able to produce a signed copy, there was testimony by Mr. Shipman at the meeting of creditors that it was signed and that he later requested the successor bank to provide him with a copy and that a copy was sent to him by fax. Although the debtors now say they do not recall the declaration being signed, the court is entitled to view their change of position — coming as it did only after the existence of the language permitting revocation was brought to the their attorney's attention — with considerable skepticism.
It is true that in one significant respect the declaration is inconsistent with the handwritten notes taken by Mr. Goodman while talking with Mr. Shipman. The notes state "no termination," while the declaration includes a termination provision. It can reasonably be inferred, however, that Mr. Goodman, or at least his partner Mr. Kenny, recognized that the total absence of any termination language might offend the rule against perpetuities and therefore included language which they believed adequately addressed the issue. To what extent this was communicated to Mr. Shipman is unclear, since Mr. Goodman withheld part of his file concerning the transaction on the ground of attorney-client privilege. However, the court is unwilling to indulge a presumption that an experienced attorney would prepare an instrument totally at variance with his client's goals or would not advise the client of its import.
With respect specifically to the issue of revocability, there would have been sound tax reasons to create a revocable, rather than irrevocable, trust. In particular, if the trust were revocable, it would be treated for Federal income tax purposes as a "grantor trust," with the result that the real estate taxes and mortgage interest on the property could properly be deducted on Mr. Shipman's personal income tax return. 26 U.S.C. § 67 land 676. That in fact is what has happened. No fiduciary tax return was filed for the trust. Rather, Mr. and Mrs. Shipman simply deducted the real estate taxes and the mortgage interest on their personal income tax returns. This, as noted, would be perfectly proper if the trust were revocable but not otherwise. The "no termination" notation on the hand-written notes is not necessarily inconsistent with the existence of a power to revoke, since termination and revocation are different concepts. Even if Mr. Shipman had no subjective intent to revoke, a power to revoke could, as noted, be advantageous for tax reasons. Furthermore, a power of revocation would be entirely consistent with that portion of Mr. Goodman's notes reflecting "broadest possible powers" and "buy sell."
26 U.S.C. § 671 provides in pertinent part as follows:
Where it is specified in this subpart that the grantor . . . shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor . . . those items of income, deduction, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individual.
26 U.S.C. § 676(a) in turn provides in relevant part as follows:
The grantor shall be treated as the owner of any portion of a trust . . . where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non-adverse party, or both.
Viewed as a whole, the court is left with the definite conviction that the declaration of trust was in fact signed and that the unsigned draft that has been produced accurately reflects its terms. The court does not find Mr. Shipman's trial testimony to the contrary credible. Accordingly, the court concludes that the terms of the land trust included an express power of revocation. Mr. Shipman, as noted, is properly treated as the grantor of the trust. The power to revoke belongs to him and became property of the bankruptcy estate when he filed his chapter 7 petition. § 541(a), Bankruptcy Code. Accordingly, the trustee may exercise that power so as to bring Lots 28 and 33 into the bankruptcy estate and administer them for the benefit of Mr. Shipman's creditors.
IV.
For the foregoing reasons, final judgment will be entered for the debtors dismissing Counts I and II and directing the clerk to issue the debtors a discharge. Judgment will be entered on Count HI dismissing Orix's complaint and entering judgment for the trustee on his counterclaim determining and declaring that Mr. Shipman holds title to the real estate under a trust that includes a power of revocation that the trustee may exercise so as to bring the property into the bankruptcy estate.