Case Information
*1 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
*2 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 ____________
S ACK , 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 *3 "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, *4 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
,
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. *5 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
,
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
*6
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
,
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.
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
,
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
,
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.
,
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
,
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 *10 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.
,
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
,
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
,
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.
,
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
,
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
,
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
*14
creditors’ reach, and therefore, at the least, hinders or delays creditors seeking
satisfaction of debts owed them.
Cf. Nostalgia Network, Inc. v. Lockwood
,
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.
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.
Notes
[*] 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.
[*] The Pennsylvania Supreme Court has instructed that "[o]fficial comments are to
be given weight in the construction of statutes,"
Lessner v. Rubinson
,