Kaesler v. Schulz, No. 880-03 CnC (Katz, J., Dec. 23, 2003)

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STATE OF VERMONT SUPERIOR COURT Chittenden County, ss.: Docket No. 880-03 CnCv

KAESLER and

DeKEERSGIETER

v.

SCHULZ

FINDINGS OF FACT

CONCLUSIONS OF LAW AND

NOTICE OF DECISIONThis matter was tried to the court November 17 and 19, 2003. On

the basis of the evidence presented, the following decision is announced.

FINDINGS OF FACT 1. Plaintiffs Kaesler and DeKeersgieter are marri ed, with three children, although currently separated. They moved to Vermont approximately 1998, from Florida. Kaesler started an acupuncture practice, self-employed. DeKeersgieter had been in the moving and storage business in Florida, and kept that Florida business running, while residing here.

2. The two of them became friendly with defendant Schulz. As the friendship ripened, it appears that Schulz desired to enter into some sort of business, as he did not want to spend the rest of h is career working for others. DeKeersgieter had experience in the moving and storage business, but no capital. They eventually formed a partnersh ip, which DeKeersgieter would run, Schulz would put up capita l, and a third partner, Goldsmith, would supply warehouse space. The busin ess was soon up and running and apparently succeeding.

3. Plaintiffs then began to desire owning their o wn home, close to their respective businesses. They began to look ar ound Burlington’s South End, with a real estate broker, Gintoff. As partner and friends with Schulz, plaintiffs mentioned their search to him. Being relatively new to town, and both self-employed, it soon became appare nt to plaintiffs that they lacked the credit rating to obtain a mortgage. Mentioning this fact to Schulz, he responded that he would “do anything” to assist them, which appeared to mean that he would co-sign or guaranty a mortgage note and application.4. Plaintiffs learned of a duplex dwelling at 59- 61 Catherine Street,

drove past it, and were very interested. It seemed to meet their personal needs, particularly location within the school dist ricts where their children were then enrolled. To see the interior, plaintiff s contacted Broker Gintoff, who could not immediately gain entrance. But Plaintiff Kaesler knew that one tenant was a patient of hers, and the reby obtained an entrée. Plaintiffs viewed the house with Gintoff, and deter mined to make an offer

on it.

5. Plaintiffs did all this selecting, and viewing , and making of an offer without any input from defendant.

6. Defendant had almost no interaction with the b roker, Gintoff.

The broker had looked at a number of houses with th e plaintiffs, and had discussed with them their family considerations reg arding location. The broker met with defendant only once, at defendant’s office. The broker understood that defendant would guarantee the mortg age instrument, although this ultimately turned out to take a diffe rent turn.

7. Plaintiffs paid the original $2,000 deposit on the house, to secure the purchase and sale agreement. When that deposit was returned, apparently at the closing, it was returned to plain tiffs.

8. At some point, it came to be understood that t he mortgage company would not accept a transaction with defenda nt as a guarantor, but that it could go through if structured with def endant as purchaser, title holder, mortgagee and sole maker of the mortgage no te. That is how it was done at the closing, and in the applications to the mortgage company.Plaintiffs did not know they would not receive titl e, prior to it actually

passing at closing.

9. Although the original Purchase and Sale Agreem ent with the sellers was made out in the names of both plaintiff s and defendant, it was quickly, perhaps even the same day, rewritten in de fendant’s name alone.

10. The actual cash paid down for the house, at c losing, was paid entirely by plaintiffs. The closing statement from the August 9, 2000 indicates that “Cash from Borrower” totaled $22,569 .21. It all came from plaintiffs and represented the inheritance plaintif f Keasler received from her father’s estate. In addition to the down payme nt on the real estate, plaintiffs paid all closing costs.

11. Neither party retained an attorney for the pu rchase of the house, in any traditional sense. An attorney did search the title and handle the closing, George Faris. Neither plaintiffs nor defe ndant ever consulted with Faris about the plan to place title in defenda nt, although all the money was coming from plaintiffs.

12. At the closing sellers “congratulated” plaint iffs for their purchase

of the house.

13. In terms of anything communicated, 59 Catheri ne Street was plaintiffs’ new home.

14. Plaintiffs moved in with their children. The ir family has inhabited the house at all times since; defendant never once.15. Plaintiffs paid all mortgage, tax and insuran ce payments.

16. Plaintiffs began substantial renovation to th e house. It had been a duplex, rented to two tenants. Plaintiffs began to convert it to a singlefamily dwelling, knocking down walls and obviously altering its physical appearance, its utility and its ability to be rente d out.

17. Defendant visited plaintiffs frequently at th e house, as they remained friends and partners for a substantial per iod of time after purchase of the house. He saw and understood all t he changes they were making, but neither objected nor played any role re garding those changes which would be consonant with what might be expecte d of an owner whose property was being seriously altered in ways that probably affect its value. The effect on value is perhaps best pro ved by defendant’s disapproval or distrust of what plaintiffs were doi ng, voiced during his testimony at trial–“disrepair,” bringing a contract or friend to view the

house.

18. In October, 2001, plaintiffs separated, and t he husband moved back to Florida, to run his ongoing moving and stor age business there. That left the Burlington partnership with defendant with no one to manage it. It was an ongoing business at the time.

19. In the Fall of 2001, plaintiffs bounced a che ck for a monthly mortgage payment. That may have briefly put them i n default, but the check was quickly made good. When plaintiff Keasle r told defendant about the bounced check, he said “no problem.” A f ew other monthly payments were probably late.20. By April, 2002, defendant retained attorney D ennis Hill and

appointed him an escrow agent to receive mortgage p ayments from defendants. Plaintiffs thereafter made their payme nts to Hill.

21. Later on, in the course of this unfortunately descending relationship, settlement negotiations occurred betw een Hill and one Beals, a Florida attorney representing plaintiffs. We are persuaded that a settlement document was exchanged between the attor neys, but an addendum was confusing to Hill, and was never agree d to. The agreement was never signed, there was never a meeting of the minds, or agreement as

to all terms.

22. In March, 2002, defendant refinanced the hous e, to which he held sole legal title. (PL EX 7) The new mortgage was i n the amount of $171,000. At that time, the balance on the origina l mortgage should have been $142,134. (PL EX 15) Hence, the loss of equi ty through refinancing is apparently $28,866. Defendant apparently took t he funds released by the refinancing, and paid off his personal credit c ard debt. Since the refinancing, defendant has been paying the property taxes. Plaintiffs have been making approximately the same payments. It ma y be that, with a lower interest rate, each such payment reduces prin cipal more than it would have previously, but of course the outstandin g principal is $28,866 greater, because of the funds paid over to defendan t. Finally, because the entire payment now goes to the mortgage, with defen dant paying the taxes, an accounting will be needed actually to det ermine what the financial effect of refinancing has turned out to b e.

23. Defendant never told either plaintiff about h is refinancing. They learned of it only after it was accomplished.24. The house has probably appreciated in value, rising with the

Burlington real estate market, probably twelve to f ifteen per cent each year. (Gintoff testimony) If the house has increa sed in value, twelve per cent per year, compounded for three years, the $160 ,000 price would suggest a current value of $225,000.

25. Defendant justified his later actions by sayi ng his “credit rating had dropped.” Although his testimony on this point was admitted without objection, it is obviously hearsay, as any rating i s the conclusory statement of some credit reporting agency, about wh ich defendant may have been told, and without which statement he woul d not know of the issue. What one’s “credit rating” is at any point, how it comes to be created, what causes it to rise or fall and what ha rm may flow from one or another decline in that rating are all subtle quest ions. The gnomes of consumer credit may understand these issues, but th e court is not persuaded that the rest of us are particularly know ledgeable on the subject. For these reasons, the court is not persuaded that defendant actually suffered any harm by reason of plaintiffs having be en late one month in making a mortgage payment. At the same time, defen dant may well have become a somewhat greater credit risk merely by und ertaking the mortgage obligation of the original transaction.

CONCLUSIONS OF LAW

26. Where a transfer of property of property is m ade to one person and the purchase price is paid by another, a result ing trust arises in favor of the person by whom the purchase price is paid. Restatement (Second)

of Trusts §440 (1959). “As a general rule, when a ‘conveyan ce of land ismade to one person, and the purchase money is paid by another, a

resulting trust is thereby created ... for the use and benefit of the person paying the money.’” Tokarski v. Gates , 138 Vt. 220, 222 (1980), quoting Dewey v. Long , 25 Vt. 564, 568 (1853).

27. The essential elements of this rule are the p ayment of consideration and the parties’ intent at the time o f the conveyance.

Tokarski , 138 Vt. at 222. Here, the facts shown at trial c ommand the single conclusion that these parties shared no inte ntion, at the time of the conveyance, other than that the home would belong t o plaintiffs. There was absolutely no communication suggesting anything else; there was affirmative communication that it would belong to p laintiffs. All the circumstances suggest the same conclusion, even beyond communications between the parties. The considerat ion given was Keasler’s entire inheritance. The property was sel ected solely by plaintiffs for their particular needs. The propert y was substantially altered subsequent to the closing to meet plaintiffs’ needs , with defendant’s complete knowledge and without any complaint by him or any suggestion that his input or consent was required regarding al terations. Other significant conduct subsequent to the conveyance, s upporting this conclusion, is that all mortgage and tax payments w ere made by plaintiffs up through the time of unilateral refinancing by de fendant. It is therefore inconceivable that plaintiffs inte nded anything other than that they would be the property’s beneficial o wners, and beyond any doubt that defendant understood that expectation an d worked along with it in receiving title in his sole name.

28. There are several exceptions to Restatement § 440, but none apply.

This is not a situation of title taken in the name of a relative. §442. It wasnot done in order to accomplish an illegal purpose. §444. Although there

may have been some misstatement of facts to the mor tgage lender, that

does not render the entire transaction one for an i llegal purpose. See

Monahan v. Monahan , 77 Vt. 133 (1904) (enforcing a resulting trust where the transaction was legal but whose main purp ose was to avoid tax payments). Moreover, to this point, no lender has actually been harmed. The first lender has been paid off. The second is receiving its payments and has the benefit of a valid recorded mortgage. Section 441 indicates that a “resulting trust does not arise where a transfer of property is made to one person and the purchase price is paid by another, if the person by whom the purchase pric e is paid manifests an intention that no resulting trust should arise.” R estatement (Second of

Trusts § 441 (1959). We specifically decline to find tha t any such

manifestation here occurred.

29. We are not unmindful of the fact that defenda nt undertook a risk in making the mortgage note. As previously stated, as a question of fact, we are not persuaded by his testimony about diminis hed credit rating. It may well be that his credit “point score” is lower merely because he has this substantial debt, to be measured against incom e, assets and payment history, without regard to whether plaintiffs may h ave been late in two or three payments. As a matter of law, we appreciate that he has provided something of value to plaintiffs—he is effectively guaranteeing their payment of substantial debt, under circumstances of some risk. But this is not a contract action, in which the issue of consid eration governs. Compare Dunn v. Williams , 107 Vt. 447, 452–54 (1935) (imposing a resulting trust because of understanding between pa rties rather than any exact consideration), with Webster v. Hildreth , 33 Vt. 457 (1860) (finding no resulting trust because of a lack of an agreemen t despite contributionsto the property). Furthermore, a purchase-money re sulting trust stems

from the inference that the expectation of those wh o pay for property is

not being met and not from trustee issues that would a ttach to the formation of an explicit trust. See 5 A.W. Scott & W.F. Fratcher, The

Law of Trusts § 404.1, at 6–8 (1989).

30. We therefore conclude that the imposition of a resulting trust is both appropriate and necessary to avoid the unfores een loss of equity by plaintiffs and the unjust and fortuitous enrichment of defendant. G.G. Bogert & G.T. Bogert, The Law of Trusts & Trustees § 455, at 266 (1991) (“There can be no question that such a payment is a proper basis for a resulting trust of this type . . .”). The question remains what remedy is appropriate to the situation as it has evolved?

31. The problem of remedy is one of several parts . First, to ensure that plaintiffs end up with the real estate which i s rightfully theirs; second, to consider whether conditions should be placed on that basic remedy; and third, to secure all the benefits for which plainti ffs are rightfully entitled.

32. The first remedy issue seems clear. The cour t must declare that

defendant holds the real estate on Catherine Street in trust for plaintiffs, and not otherwise. At this point, we presume that such a declaration will suffice. Furthermore, for the reasons which follow we are reluctant to go beyond the declaratory in the initial formulation o f an equitable remedy.

33. We halt at the declaratory, and for now decli ne to order the conveying of the property to plaintiffs. For defen dant is still obligated under the mortgage note for a very substantial sum. At least conceivably, plaintiffs have diminished the value of the propert y by their unilateralrenovations. Although we state this in analyzing t he appropriate use of

discretion, we make clear that it is not a finding of fact that such diminution in value has occurred. At present, defe ndant is liable on a mortgage note which may well have a present indebte dness of $170,000. Until this obligation is lifted from his shoulders, he should not be ordered to yield legal title. G.G. Bogert & G.T. Bogert, The Law of Trusts &

Trustees § 543(V), at 444, § 465, at 411–14 (1993). Although the present mortgage indebtedness is $170 ,000, the indebtedness which plaintiffs undertook is probably much closer to $140,000.

34. Having come to the conclusion that defendant holds the property as mere trustee for plaintiffs, we must inevitably move to the further conclusions that his unilateral refinancing was in his sole interest; was actually contrary to the interest of plaintiffs; an d is therefore not something for which they are responsible. Shelly v . Landry , 79 A.2d 626, 628–29 (N.H. 1951) cited in Sparks Farm, Inc. v. C. I.R. , T.C. Memo 1988-492 (“In a resulting trust, the legal owner ho lds the property for the beneficial owner but cannot properly exercise any c ontrol or dominion over the property in his own right.”). Instead, we conclude that the defendant is in breach of the resulting trust and l iable for the equity removed from the Catherine Street property through refinancing. Restatement (Second) of Trusts § 206 cmt. j (1959).

35. The proper and equitable remedy is therefore to direct that at such time as plaintiffs shall deliver up the extent of t he original mortgage indebtedness, they shall be entitled to conveyance by him of all his legal title to the Catherine Street property. Restatemen t (Second) of Trusts § 410 cmt. b (1959); see also Little v. Watson , 2002 WL 31467471 (Tenn.Ct. App.) (Ordering titleholders to convey to benef iciaries as soon as the latter obtains refinancing to release titleholders’ mortgage); 5 A.W. Scott & W.F. Fratcher, The Law of Trusts § 410 (1989).

36. This, however, will still not make plaintiffs whole. They bought the property, defendant held it for them as mere tr ustee. They are

therefore entitled to the increase in value which t he market has afforded. He has no right to reach into the equity developing on the property and help himself to some portion. Sparks Farm, Inc. v. C.I.R. , T.C. Memo 1988-492; Restatement (Second) of Trusts § 206 (1959). For having done so, defendant has been unjustly enriched through hi s fiduciary position. See Restatement (Second) of Trusts § 206 (1959); 5 A.W. Scott & W.F. Fratcher, The Law of Trusts § 501, at 523 (1989). The law imposes a constructive trust on the equity removed from the h ouse at refinancing, which makes defendant liable to disgorge the value so obtained. Legault v. Legault , 142 Vt. 525, 529 (1983).

37. The conclusions here reached do not compensat e defendant for the risk he undertook, the real service he performe d. But he never sought or bargained for any such compensation. He did not contract for compensation and may not therefore obtain it unilat erally.

38. The record presently before the court does no t permit precise

calculation of the amount of such restitution. We cannot yet enter a judgment. The matter is therefore appropriate for an accounting, to arrive at a present sum representing appropriate restituti on for the misappropriated equity in the property.

39. To sum up, the plaintiffs are entitled to a d eclaratory judgment that they are the beneficial owners of 59-61 Cather ine Street and are entitled to all sums wrongfully taken from their eq uity by defendantmeasured by the original amortization schedule, at such time as plaintiffs

proffer the principal amount still due plus actual costs of conveyance, defendant shall be obliged to convey good legal tit le and discharge the present mortgage. By so discharging, he will presu mably make full restitution of the equity wrongfully taken. Until such events occur, defendant should continue to make tax payments, whe n due.

If the parties cannot come to an agreed accounting, within 21 days hereof, they shall each submit their proffer thereof. Dated at Burlington, Vermont, _________________, 2 00__.

__________________________ Judge