Court Opinion

ID: 1036733
Source: CourtListenerOpinion
Date Created: 2013-08-07 17:00:21.214324+00
Date Added: 2024-06-11T15:27:44.884642
License: Public Domain

NOT PRECEDENTIAL

                      UNITED STATES COURT OF APPEALS
                           FOR THE THIRD CIRCUIT
                                ____________

                            Nos. 12-3866, 12-3867, 12-3868
                                    ____________

                            NATALIE LUTZ CARDIELLO,
                                     Plaintiff-Appellant-Cross-Appellee

                                           v.

            THOMAS D. ARBOGAST and MARY CLAIRE ARBOGAST,
                               Defendants-Appellees-Cross-Appellants
                            ____________

                    On Appeal from the United States District Court
                        for the Western District of Pennsylvania
                (D.C. Civil Nos. 2:12-cv-353, 2:12-cv-401, 2:12-cv-402)
                    District Judge: Honorable Terrence F. McVerry
                                     ____________

                              Argued June 17, 2013
              Before: DAVIS, WALKER, JR. and SACK, Circuit Judges. *

                            (Opinion Filed: August 7, 2013)

Neal H. Levin, Esq. (ARGUED)
Freeborn & Peters
311 South Wacker Drive
Suite 3000
Chicago, IL 60606

      *
         Honorable Andre M. Davis, of the United States Court of Appeals for the Fourth
Circuit, Honorable John M. Walker, Jr. and Honorable Robert D. Sack, of the United
States Court of Appeals for the Second Circuit, all sitting by designation following the
recusal of the members of the Court of Appeals for the Third Circuit.
Natalie Lutz Cardiello, Esq.
107 Huron Drive
Carnegie, PA 15106

       Counsel for Plaintiff-Appellant-Cross-Appellee Natalie Lutz Cardiello, Trustee for
       the Bankruptcy Estate of Thomas D. Arbogast

Nicolas D. Krawec, Esq. (ARGUED)
Bernstein-Burkley, P.C.
700 Grant Street
Suite 2200 Gulf Tower
Pittsburgh, PA 15219

       Counsel for Defendant-Appellee-Cross-Appellant Thomas D. Arbogast

Joseph F. McDonough, Esq.
Buchanan Ingersoll & Rooney, P.C.
301 Grant Street, 20th Floor
One Oxford Centre
Pittsburgh, PA 15219

       Counsel for Defendant-Appellee-Cross-Appellant Mary Claire Arbogast

                                      ____________

                               OPINION OF THE COURT
                                    ____________

SACK, Circuit Judge:

       These appeals arise from an adversary proceeding related to the Chapter 7

bankruptcy proceedings of debtor Thomas D. Arbogast ("Thomas") in the United States

Bankruptcy Court for the Western District of Pennsylvania. At issue in the adversary

proceedings were alleged fraudulent transfers made by Thomas to an account that he and

his wife, Mary Claire Arbogast ("Mary Claire"), held as tenants by the entireties (the

                                             2
"Entireties Account" or the "Account"). The Bankruptcy Court (Markovitz, J.) found that

there had been fraudulent transfers in the amount of $143,389.10. The bankruptcy court

entered judgment in that amount in favor of plaintiff Natalie Lutz Cardiello, who is the

Chapter 7 Trustee in Thomas’s bankruptcy action, and against Thomas and Mary Claire

as owners by the entireties. The Trustee appealed that judgment to the United States

District Court for the Western District of Pennsylvania, and the Arbogasts cross-

appealed; the district court (McVerry, J.) affirmed. The Trustee appeals from that

judgment, and the Arbogasts again cross-appeal. We affirm.

                                    BACKGROUND

       A. Proceedings in State Court

       The bankruptcy proceedings that underlie this appeal are part of the fallout from a

landlord-tenant dispute between TrizecHahn Gateway LLC ("Trizec") -- a commercial

landlord -- and Titus & McConomy LLP ("T&M") -- a no-longer-extant Pittsburgh law

firm. In 2000, Trizec brought suit in a Pennsylvania Court of Common Pleas against

T&M and its general partners, including Thomas, in their individual capacities. The

court found in favor of Trizec, and, in 2006, entered final judgment in the amount of

$3.27 million. Thomas was among the partners upon whom the judgment imposed joint

and several liability.

       In 2007, as part of its effort to recover on that judgment, Trizec brought a

fraudulent transfer action against Thomas and Mary Claire in the Court of Common

Pleas. Trizec alleged that Thomas had been depositing his salary from his new employer,

                                             3
Schnader Harrison Segal & Lewis LLP, into a bank account that he and Mary Claire held

as tenants by the entireties. Trizec contended that these deposits constituted fraudulent

transfers under the Pennsylvania Uniform Fraudulent Transfer Statute ("PUFTA"), 12 Pa.

Cons. Stat. §§ 5101-10.

       Before the parties could litigate the fraudulent transfer action, however, the

Pennsylvania Superior Court reversed the Court of Common Pleas' judgment against

Thomas in the lease litigation, holding that he could not be held liable in his individual

capacity. TrizecHahn Gateway LLC v. Titus, 930 A.2d 524, 539, 2007 Pa. Super. 196

(Pa. Super. Ct. 2007). Trizec appealed this decision to the Pennsylvania Supreme Court,

but it also discontinued the fraudulent transfer action against Thomas and Mary Claire.

In July of 2009, the Pennsylvania Supreme Court reversed the Superior Court in the lease

litigation, reinstating Thomas's individual liability. TrizecHahn Gateway LLC v. Titus,

601 Pa. 637, 646-50, 976 A.2d 474, 479-81 (2009). The Court of Common Pleas in the

fraudulent transfer action thereafter granted Trizec's motion to strike its discontinuance of

that action.

       B. Proceedings in Bankruptcy Court

       Thomas filed a Chapter 7 bankruptcy petition on January 15, 2010, in the United

States Bankruptcy Court for the Western District of Pennsylvania. He then removed the

fraudulent transfer action to federal court, where it was docketed as an adversary

proceeding in the bankruptcy court, see 28 U.S.C. § 1452; 28 U.S.C. § 157; Fed. R.

                                              4
Bankr. P. 7001, and assigned to Bankruptcy Judge M. Bruce McCullough. The

bankruptcy court entered an order substituting Cardiello, the Chapter 7 Trustee, for

Trizec, thus enabling the Trustee to pursue its right under 11 U.S.C. § 544(b) to "avoid

any transfer of an interest of the debtor in property . . . that is voidable under applicable

law by a creditor."

       One of the fraudulent transfer theories the Trustee sought to prosecute in the

bankruptcy court, and the only one at issue here, was constructive fraud. In general, a

transfer is constructively fraudulent as to a creditor if it is "made . . . without receiving a

reasonably equivalent value in exchange for the transfer . . . and the debtor was insolvent

at that time or the debtor became insolvent as a result of the transfer." 12 Pa. Cons. Stat.

§ 5105; see also id. § 5104.

       The Trustee's position as to how the law of constructive fraudulent transfer applied

to Thomas's deposits was, and continues to be, based on the premise that "under

Pennsylvania law, . . . property held as tenants by the entireties is exempt from process

by a creditor of only one spouse," In re Houck, 184 B.R. 21, 23 (Bankr. E.D. Pa. 1995).

So if a debtor spouse deposits his own funds into an entireties bank account and thus out

of reach of his creditors, and receives nothing in return for that deposit from the non-

debtor spouse, he has "transfer[red]" funds without receiving "reasonably equivalent

value" within the meaning of the PUFTA, and that transfer is therefore constructively

fraudulent. Plaintiff's Pretrial Statement, Sept. 15, 2010, at 3-4, Joint App'x at 158-59.

       This rule, as the Trustee seems to have understood it, was subject to the single

qualification that such deposits into an entireties account "are not fraudulent as

                                               5
to . . . creditors to the extent th[e] funds are then used to satisfy reasonable and necessary

expenses for the maintenance of said debtor's family." See Plaintiff''s Post-Trial

Memorandum, Nov. 29, 2010, Cardiello v. Arbogast, No. 10-2092-MBM, ECF #64, at 5

(quoting In re Meinen, 232 B.R. 827, 842 (Bankr. W.D. Pa. 1999)). To make out its case,

the Trustee planned to adduce evidence of all of Thomas's deposits of his salary into the

Account as the universe of constructively fraudulent transfers, the amount of which could

be reduced only through proof of later expenditures from the Account for "reasonable and

necessary expenses."

       This view of the applicable law was largely drawn from an opinion Judge

McCullough himself had previously handed down, In re Meinen, supra. But Judge

McCullough apparently did not think In re Meinen governed the Trustee’s claims in this

case. Instead, he seems to have been persuaded, or perhaps thought himself bound, by

the Pennsylvania state court’s approach in a fraudulent transfer action concerning one of

Thomas's former partners. The rule established there was that the debtor spouse's

deposits into an entireties account were constructively fraudulent against creditors only if

spent on luxury items for the exclusive benefit of the non-debtor spouse. Apparently

poised to apply this rule after trial, Judge McCullough entered a case management order

directing the Trustee to specify which expenditures of funds from the Entireties Account

it thought were spent on luxuries, undermining the Trustee’s desire to enter evidence of

Thomas’s initial deposits into the Account.

                                               6
       After discovery, Judge McCullough held a trial at which the parties litigated, as

relevant here, four categories of alleged disbursements from the Entireties Account,

totaling about $900,000.00: (1) checks drawn and deposited into an account owned solely

by Mary Claire; (2) payments related to the Arbogasts' purchase and maintenance of a

house in Florida; (3) membership fees for three different country clubs; and (4) premium

payments towards various life insurance policies.

       Before he could render a final decision, Judge McCullough died. The case was

reassigned to Western District Bankruptcy Judge Bernard Markovitz. Judge Markovitz

decided, pursuant to Fed. R. Civ. P. 63, to retry the case, and the retrial again focused on

the four categories of expenditures listed above. On February 7, 2012, Judge Markovitz

issued a Memorandum Opinion and Judgment resolving the Trustee's claims. Cardiello

v. Arbogast, 466 B.R. 287 (Bankr. W.D. Pa. 2012). Adopting, by and large, In re

Meinen's and the Trustee's understanding of the law governing the case, but applying it to

the evidence as limited by Judge McCullough's case management order, Judge Markovitz

determined that there were $143,389.10 in constructively fraudulent transfers, based on

disbursements related to the Florida residence and the country club memberships. Id. at

296, 302-04, 320. Both parties appealed to the district court, that court affirmed, and the

parties now renew their appeals here.

                                              7
                                        DISCUSSION

       In bankruptcy cases, we "exercise the same standard of review as the District

Court when it reviewed the original appeal from the Bankruptcy Court." In re Handel,

570 F.3d 140, 141 (3d Cir. 2009). "Thus, we review the Bankruptcy Court's findings of

fact for clear error and exercise plenary review over the Bankruptcy Court's legal

determinations." Id.

       I. The Trustee's Appeal

       A. Exclusion of Evidence of Deposits into the Entireties Account

       We address at the threshold the principal theme of the Trustee's counsel's

presentation at oral argument before us: that the bankruptcy court's judgment is

fundamentally flawed because the Trustee was precluded from introducing evidence of

Thomas's deposits into the Entireties Account, and instead limited to proof of

disbursements from the Account. This limitation of the Trustee's proofs, counsel

maintained, is so at odds with the law Judge Markovitz ultimately applied to resolve the

fraudulent transfer claims that we must vacate the judgment and remand for retrial.

       We have no reason to doubt the accuracy of the Trustee's understanding of the

law. But we decline to reach the merits of this argument because we conclude that it was

waived. "An issue is waived unless a party raises it in its opening brief, and for those

purposes 'a passing reference to an issue . . . will not suffice to bring that issue before this

court.'" Laborers' Int'l Union of North Am., AFL-CIO v. Foster Wheeler Energy Corp.,

26 F.3d 375, 398 (3d Cir. 1994) (quoting Simmons v. City of Philadelphia, 947 F.2d

1042, 1066 (3d Cir. 1991) (opinion of Becker, J., announcing the judgment)); Fed. R.

                                               8
App. P. 28; 3d Cir. R. 28. Despite its centrality at oral argument, and although it is

referenced elliptically in the Trustee's briefs, the issue of the evidentiary limitations the

bankruptcy court allegedly imposed upon the Trustee does not appear as a ground for

appeal in the "Statement of Issues" or "Argument" sections of the Trustee's brief; nor

does the Trustee's brief mention the argument in its conclusion, which seeks only a

"remand for a recalculation [of fraudulent transfer amounts]," not a new trial. Appellant's

Br. at 28. We therefore conclude that this argument is not properly before us.

       B. Recovery Period

       The first argument properly raised in the Trustee's briefing is that the bankruptcy

court erred by limiting its recovery to transfers made between April 23, 2003, and April

23, 2007. The basis upon which the bankruptcy court did so is the PUFTA's four-year

statute of repose, 12 Pa. Cons. Stat. § 5109. The bankruptcy court interpreted this

provision to limit the Trustee’s potential recovery to transfers during a four-year "look-

back period" stretching backwards from April 23, 2007, the date Trizec first filed the

fraudulent transfer action in Pennsylvania state court. See Arbogast, 466 B.R. 287, 300-

02. The Trustee argues that the court erred insofar as it interpreted the PUFTA's statute

of repose to preclude it from seeking relief for allegedly fraudulent transfers that took

place after Trizec's April 23, 2007, filing.

       Once again, the Trustee's argument may have theoretical merit. But also once

again, we ultimately do not reach it. In a pre-trial conference held before Judge

McCullough in this case, the court asked counsel for all parties, "While we're talking

                                               9
about time frames, does anybody disagree that we've got four years we're dealing with

here?" Tr. of Hr'g, Oct. 14, 2010, at 42, Joint App'x at 194. Counsel for the Trustee

responded, "No, sir. We don't." Id.

       "The chief purposes of the pre-trial conferences are to define and simplify the

issues, to lessen surprise at trial and the risk of judicial error, to conclude stipulations on

matters of evidence, and to promote settlements." Price v. Inland Oil Co., 646 F.2d 90,

96 (3d Cir. 1981) (internal quotation marks omitted). To these ends, "this court

has . . . been willing to hold the parties bound by pre-trial representations." Id. at 95. We

conclude here, as did the district court on appeal from the bankruptcy court's order, that

the Trustee is bound by counsel’s unambiguous statement before Judge McCullough. We

therefore reject this ground for appeal.

       C. Burden of Proof

Finally, the Trustee contends that the bankruptcy court erred in its allocation of the

burden of proof with respect to whether the Arbogasts' expenditures from the Entireties

Account were for "reasonable and necessary expenses for the maintenance of [the]

debtor's family," Meinen, 232 B.R. at 842. The bankruptcy court concluded that the

burden of persuasion on this issue remained at all times with the Trustee, but did assign

to the Arbogasts "the burden of producing at least some useful evidence regarding what

the funds deposited into an entireties account are ultimately spent on." Arbogast, 466

B.R. at 308. The Trustee argues that the law's exemption for constructive fraud purposes

of funds later used for "reasonable and necessary expenses" constitutes an affirmative

defense, and that the burden of persuasion should therefore have rested with the

                                               10
Arbogasts.

       Pennsylvania law appears to us to be silent as to whether the demonstration that

funds were used for "reasonable and necessary expenses" is an affirmative defense or

instead, a negation of the plaintiff's prima facie case. See, e.g., Watters v. DeMilio, 16

Pa. D. & C.2d 747, 752-53 (Ct. Com. Pl. 1957) (recognizing the rule, but offering no hint

as to its nature). Cases from other jurisdictions arising in similar legal contexts, however,

have treated the subsequent use of transferred funds as going to the question of

"reasonably equivalent value," that is, as negating that element of a plaintiff's prima facie

case. See United States v. Goforth, 465 F.3d 730, 736 (6th Cir. 2006) (collecting cases).

And, as the bankruptcy court recognized, Arbogast, 466 B.R. at 307-08, Committee Note

6 of section 5102 of the PUFTA specifically rejects the notion that the burden of proof

with respect to whether "the transferor received reasonably equivalent value" should ever

shift to the defendant. 12 Pa. Cons. Stat. § 5102 cmt.6. *

       In any event, because the Arbogasts did indeed produce evidence at trial as to the

uses to which funds from the Entireties Account were put, it seems to us highly unlikely

that the bankruptcy court's allocation of the burden of persuasion made any difference in

this case. Cf. Ridley School Dist. v. M.R., 680 F.3d 260, 271 (3d Cir. 2012) ("In a non-

       *
         The Pennsylvania Supreme Court has instructed that "[o]fficial comments are to
be given weight in the construction of statutes," Lessner v. Rubinson, 527 Pa. 393, 398
n.4, 592 A.2d 678, 680 n.4 (1991), a principle that is derived from Pennsylvania statutory
law, 1 Pa. Cons. Stat. § 1939. See also McGowan v. University of Scranton, 759 F.2d
287, 298 & n.14 (3d Cir. 1985) (recognizing and applying the principle contained in 1 Pa.
Cons. Stat. § 1939).
                                             11
criminal case, an error regarding the placement of the burden of persuasion will

frequently be harmless."). We therefore reject this ground for the appeal.

       II. The Arbogasts' Cross-Appeal

       A. Scope of "Reasonable and Necessary Expenses"

       We read the Arbogasts' first ground for their cross-appeal to be that the bankruptcy

court adopted an unduly narrow conception of what sorts of expenses are "reasonable and

necessary . . . for the maintenance of [the] debtor's family." Meinen, 232 B.R. at 842.

They argue that this category of expenses should be understood to embrace expenses for

anything other than luxuries. So understood, the Arbogasts posit, the category of

"reasonable and necessary expenses" should embrace the expenditures on the Florida

residence and the country club memberships, and hence exempt them from the

constructive fraudulent transfer calculation.

       The Arbogasts cite no authority, nor have we found any ourselves, that suggests

that "reasonable and necessary expenses" in this context means "expenses for anything

other than luxuries." Whatever the category's outermost perimeters, moreover, we can

find no case extending it so far as to cover such non-essential expenses as vacation

residences or country club memberships -- even if either is used from time to time for

business purposes. Cf. Watters, 16 Pa. D. & C.2d at 752 (referencing "food, clothing,

medical expenses, taxes on . . . real estate . . . and interest paid on [a] mortgage" as

reasonable and necessary); Goforth, 465 F.3d at 736 (approving use of funds on "food,

clothing, utilities, gasoline, property taxes, and travel expenses" as reasonable and

necessary). And we see no reason that the law of fraudulent transfer should permit an

                                                12
insolvent debtor to transfer his own funds out of the reach of his creditors -- frustrating or

delaying attempts to recover a debt -- while still directing the use of those funds towards

amenities of his choice. We therefore affirm the bankruptcy court's decision that the

payments towards the Florida residence and the country club memberships were not

"reasonable and necessary expenses" within the meaning of Pennsylvania law.

B. Reasonably Equivalent Value Through Satisfaction of Thomas's Debts

The Arbogasts next argue that those funds deposited into the Entireties Account that were

later used for membership fees at Thomas’s country clubs should not be treated as

fraudulent transfers inasmuch as such payments were put towards satisfaction of

Thomas’s debts to the clubs. Payment in satisfaction of "antecedent debts," they point

out, is included in section 5103 of the PUFTA’s definition of "value." 12 Pa. Cons. Stat.

§ 5103. And the question of "reasonably equivalent value," they continue, is generally

one to be considered under the "totality of the circumstances." In re R.M.L., Inc., 92 F.3d

139, 153 (3d Cir. 1996). The Arbogasts maintain that in circumstances in which

transferred funds are initially deposited into an entireties account, but eventually used

towards satisfaction of a debt owed by the debtor that is of similar value to the funds

transferred, the debtor receives "reasonably equivalent value" from the initial transfer,

and such transfer would therefore not constitute constructive fraud.

       The problem with this argument as applied to the facts of this case -- an initial

transfer to an entireties account, followed by a transfer from that account towards

satisfaction of a debt -- is that it treats the initial transfer to the entireties account as

legally irrelevant. It is not, inasmuch as that initial transfer places the funds out of all

                                                 13
creditors’ reach, and therefore, at the least, hinders or delays creditors seeking

satisfaction of debts owed them. Cf. Nostalgia Network, Inc. v. Lockwood, 315 F.3d 717,

720 (7th Cir. 2002) (addressing a similar argument in a related context, and explaining

panel’s view that "the inquiry should stop at the first stage of the analysis, that is, should

stop after it is determined that the [initial] transfer was not supported by consideration").

It is true, of course, that the uses to which the funds are later put may also be relevant --

for example, through the exemption for funds spent on "reasonable and necessary

expenses" addressed supra. Similarly, insofar as a later received benefit, either direct or

indirect, can be seen as being "as a result of" the initial transfer, it may confer

"reasonably equivalent value." Mellon Bank, N.A. v. Metro Commc'ns, Inc., 945 F.2d

635, 647 (3d Cir. 1991). But we are aware of no authority suggesting that any later

expenditure from a transferee that happens to confer some value upon the transferor

sanitizes, for constructive fraud purposes, a transfer that was fraudulent when made. We

therefore reject this argument.

       C. Additional Post-Trial Hearing

       Finally, the Arbogasts argue that the bankruptcy court erred by not holding an

additional hearing after the trial at which they would have had an opportunity to

demonstrate that funds from the Entireties Account that were used for expenses the court

found not to be "reasonable and necessary" came from Mary Claire, and not Thomas, and

therefore could not be counted as constructively fraudulent transfers. They argue that the

parties stipulated to such a hearing before Judge McCullough, and that Judge Markovitz

was bound by this stipulation.

                                               14
       Even if the parties did agree on such a hearing before Judge McCullough, we find

nothing in the record to establish that the Arbogasts brought this to Judge Markovitz’s

attention. We conclude, considering the circumstances, that it was incumbent upon them

to do so before they can assert that such a hearing was wrongly withheld. We therefore

reject this ground for appeal also.

                                      CONCLUSION

       For the foregoing reasons, the judgment of the district court is AFFIRMED.

                                            15