Antonia Quevillon, then age 70 and in poor health, consulted attorney Carl Baylis about her estate plan. Mr. Baylis prepared a living trust for her, and arranged transfer of apartment buildings she owned into the trust’s name. The trust named Mr. Baylis himself as co-trustee—to serve along with Ms. Quevillon’s daughter Estelle Ballard.
Ms. Quevillon died shortly after the trust was executed. For the next twenty years Mr. Baylis and Ms. Ballard acted as co-trustees, managing the trust’s property.
A dispute arose between the trustees and the beneficiaries (other than Ms. Ballard) over whether the apartment buildings should be sold. Ms. Ballard resisted efforts to sell the buildings, probably at least partly because she lived in one of the apartments rent-free, and most of her living expenses were paid by the trust.
Although Ms. Ballard eventually agreed to sale of the properties, she did not cooperate with actual sales. Finally the other beneficiaries sued both trutees for breach of their fiduciary duties. The lawsuit ultimately resulted in a judgment against Mr. Baylis personally for almost $1 million; in addition, Mr. Baylis was ordered to repay the trust $27,000 he had used to defend and settle an earlier lawsuit against him by the beneficiaries.
Mr. Baylis responded to the judgment by filing bankruptcy. If successful, the bankruptcy proceedings would result in discharge of all his debts, including those owed to the beneficiaries of Ms. Quevillon’s trust.
Bankruptcy rules, however, permit the court to refuse to discharge debts for breach of fiduciary duty—without specifying precisely how to apply the exception. Mr. Baylis argued that his behavior was not a “defalcation,” the term actually used by the bankruptcy code, and the Bankruptcy Court agreed. It permitted his debt to the trust to be discharged.
The Massachusetts Federal District Court next heard the case, and it reversed the Bankruptcy Court determination, thereby denying Mr. Baylis relief from his debt to the trust and its beneficiaries. Mr. Baylis appealed again, and the First Circuit Court of Appeals permitted most of the debt to be discharged.
The appellate court distinguishes between non-dischargeable debts based on bad acts by the debtor (like embezzlement, or injuries from driving while drunk) and those based on public policy (like taxes and student loans). Finding that defalcation as a fiduciary is more like the former category, the court looked for evidence of either specific intent or recklessness on the part of Mr. Baylis. Finding none, it authorized discharge of most of his debt. Mr. Baylis, however, must still repay the $27,000 spent in defending the lawsuit against him. In re: Baylis, December 10, 2002.
Kenneth A. Kaneb, like many northern retirees, spent his winters in Florida. Although he lived alone after his wife’s death, he owned the family home in Massachusetts and a second home, a condominium, in Florida.
In 1993, at the age of eighty five, Mr. Kaneb found that he had insufficient assets and income to maintain his two-state retirement lifestyle. He filed for bankruptcy in Massachusetts, negotiated the sale of his home in that state and paid off secured creditors, and moved to his Florida condominium.
Once a bankruptcy proceeding is initiated, all legal actions against the bankrupt are suspended automatically by bankruptcy court rules. While it is possible to get the court’s permission to proceed against the bankrupt in individual cases, that permission is not easily gained. The automatic stay of proceedings applies even to the holder of the mortgage on the bankrupt’s real estate, so Mr. Kaneb’s actions stopped the mortgage-holder on his Florida property from foreclosing, at least temporarily.
Shawmut Bank was the original mortgagee of Mr. Kaneb’s Florida condominium, and they argued that the bankruptcy stay should be lifted so that they could initiate foreclosure proceedings. The bankruptcy judge refused to lift the stay, and so Shawmut forwarded the collection file to a Florida attorney’s office to initiate negotiations with Mr. Kaneb and his lawyer.
Shawmut’s Florida attorney did not understand that the bankruptcy court had refused to lift the stay. A copy of the court order which Shawmut had hoped to get signed was included in the file, and the attorney assumed that the original had been signed. She filed a foreclosure action, and published notice of the foreclosure in the local newspapers.
Although Mr. Kaneb’s attorney promptly persuaded the bank’s counsel that the foreclosure was improper, no actions were taken to dismiss the proceeding for six weeks. During that time, neighbors learned of the pending bankruptcy, partly because of a huge volume of “colorful” mail offering to help him work out his financial problems. Mr. Kaneb’s condominium was part of a close-knit gated community, but after news of his difficulties became widespread he stopped receiving invitations to social gatherings and his neighbors began to avoid him.
Mr. Kaneb brought legal action against Shawmut (and its successor, Fleet Mortgage Group) for its violation of the federal bankruptcy stay. After a trial, the bankruptcy court awarded him over $18,000 in legal fees and court costs, plus $25,000 for emotional distress.
The First Circuit Court of Appeals reviewed the case. The court pointed out that “emotional damages” qualify as actual damages, and upheld Mr. Kaneb’s award. Fleet Mortgage Group v. Kaneb, November 8, 1999.
Seniors concerned about the high cost of nursing care often transfer assets, sometimes even including their homes, to their children. Such transfers may actually make paying for nursing care more difficult, since Medicaid (ALTCS) eligibility does not count the residence as an asset, but does count the transfer to children as a disqualifying gift. Nonetheless, many elderly homeowners choose to transfer the home.
Elder law attorneys have long been concerned about another aspect of this practice. Every state has some form of a law making it illegal to give away assets to avoid creditors; do such laws prevent transfers to avoid future nursing home claims against the seniors’ assets? The so-called “fraudulent transfer” rules have not been widely tested, but a recent Tennessee case suggests that most such transfers are permissible.
Ruth Bryan, 71, owned a modest home in Tennessee and had a savings account of about $10,000. She had given her daughter a power of attorney to manage her affairs if she became incapacitated. When Ms. Bryan’s condition worsened and she was hospitalized, her daughter used the power of attorney to quit-claim Ms. Bryan’s home to herself and her brother (Ms. Bryan’s son).
Ms. Bryan improved enough to be discharged to Imperial Manor Convalescent Center, where she incurred a bill of $10,000 which she was unable to pay. Upon her release from Imperial Manor, she filed bankruptcy, claiming that she owned no assets.
The Tennessee court, at the bankruptcy trustee’s request, initially ruled that the transfer of Ms. Ryan’s home to her children was fraudulent, and set it aside. On appeal, the Tennessee Court of Appeals disagreed.
According to the appellate court, Ms. Ryan’s transfer of the home was not fraudulent for two reasons. First, it did not render her insolvent (remember that she also had a small bank account). More importantly, perhaps, she did not owe anything to Imperial Manor at the time of transfer (which was made while she was still in the hospital), and the bankruptcy trustee had not shown that Ms. Ryan’s daughter did not act for the express purpose of making her unable to pay her debts. At the time of the transfer, the daughter did not know that her mother’s debts would accrue beyond her ability to pay. Crocker v. Ryan, Tenn. Ct. App. (1995).
Arizona’s fraudulent transfer law is quite similar to Tennessee’s. Arizona Revised Statutes §44-1004 makes a gift fraudulent if the transferor “intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.”
In applying this law to the common practice of gifting one’s home to children, two questions come to mind:
Does the gifting parent have a basis to believe that he or she will soon incur a debt for nursing care?
Does the possibility of qualifying for Medicaid (ALTCS) assistance affect the expectation of the gifting parent?
There are two common circumstances where a senior who has given his or her home to children may qualify for ALTCS. In the first, the parent will have stayed out of the nursing home for three years following the gift. In the second, ALTCS eligibility rules expressly permit gifts of residences to children who have lived with the applicant and provided care for two years. Though there are other, rarer circumstances where transfer of the home is advisable, the fraudulent conveyance law makes it more difficult to recommend that seniors quit-claim the home to children.
