United States Court of Appeals
For the First Circuit
No. 06-2123
IN RE: STEPHEN H. CHEW, DEBTOR
MARCIA McGARRY, CYNTHIA WYROCKI, EDWARD CHEW,
CAROL COLBURN,
Appellants,
v.
STEPHEN H. CHEW,
Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Nancy Gertner, U.S. District Judge]
Before
Torruella, Lynch, and Lipez,
Circuit Judges.
Michael B. Feinman, for appellants.
Jon H. Kurland, for appellee.
July 30, 2007
LIPEZ, Circuit Judge. This case arises from a family
dispute about an inheritance. In the course of a bankruptcy
proceeding initiated by Stephen Chew, the appellants – Chew's
siblings – opposed his claim to a homestead exemption for a
residence that was partially financed with funds that the siblings'
mother intended all five of her children to share after her death.
The bankruptcy court ruled in favor of Chew, denying the siblings'
objection to the claimed exemption. On intermediate appeal, the
district court ruled that the siblings' opposition to the exemption
was barred by claim preclusion. We agree, and therefore affirm
without reaching appellants' other contentions.
I.
A. Factual and Early Procedural Background
In 1984, Stephen Chew and his mother, Eleanor, orally
agreed that Eleanor would provide Chew and his wife, Christine,
approximately $140,000 toward the construction of a residence on
the understanding that Eleanor would live in an attached apartment
and retain an interest in the property that would be distributed
among all of her children upon its eventual disposition. Eleanor
lived in the apartment until her death in 1998. The Chews sold the
house for $625,000 in 2001; however, instead of distributing
Eleanor's portion of the proceeds in accordance with the agreement,
they used the entire amount to purchase another property. This
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appeal concerns the efforts of Chew's siblings1 – to whom we shall
refer collectively as “the creditors” – to recoup their
proportionate share of the sale proceeds.
Three months after the sale, in November 2001, the
creditors filed suit in Massachusetts Superior Court. Although the
parties' submissions before the state court are not in the record
before us and the state court's opinion is not entirely clear on
some points, it appears that the creditors brought claims on
Eleanor's behalf and in their own capacities as third party
beneficiaries to the agreement between Eleanor and Chew alleging a
variety of wrongs done to Eleanor. These included breach of
contract, misrepresentation and deceit, unjust enrichment,
conversion and breach of fiduciary duty. They sought a one-third
interest in the property, based on the terms of the oral agreement;
the state court calculated the value of this interest as
"approximately $206,250."
Ruling on the Chews’ motion to dismiss under
Massachusetts Rule of Civil Procedure 12(b)(6), the state court
concluded that Eleanor's "dissatisfied children" were not permitted
to bring a claim for breach of contract on her behalf because,
while her contractual rights "endure[] beyond her life," they must
be enforced by her estate. However, it found that "where the
1
The four, all appellants, are Marcia McGarry, Cynthia
Wyrocki, Edward Chew and Carol Colburn.
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children are suing in their own capacities as third party
beneficiaries," they had standing to continue with the contract
claim on that basis. It is not clear from the court's decision
whether Eleanor's children brought the tort-based claims only on
her behalf or also in their capacity as third party beneficiaries.
In any event, the court dismissed the remaining claims, ruling that
the misrepresentation and conversion claims "do not survive
Eleanor's death." It also dismissed the claims for unjust
enrichment and breach of fiduciary duty for lack of standing,
finding that the siblings could neither bring these claims on
Eleanor's behalf nor under a third party beneficiary theory. After
further proceedings, the court issued a judgment against Chew on
the contract claim and dismissed the claims against Christine Chew.
On appeal, the Massachusetts Appeals Court upheld the
contract claim and reversed the dismissal of the claims against
Christine Chew. Based on this judgment, the creditors obtained a
lien against the Chews' home, thus creating a legally enforceable
claim against the Chews' equity in the house.
Before the Superior Court's ruling, in October 2003,
Christine Chew filed a declaration of homestead with the
Massachusetts Registry of Deeds. Under Massachusetts law, an
estate of homestead valued at up to $500,000 "shall be exempt from
the laws of conveyance, descent, devise, attachment, levy on
execution and sale for payment of debts or legacies," Mass. Gen.
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Laws ch. 188, § 1. In October 2005 – after the Superior Court’s
ruling, but before the Massachusetts Appeals Court's decision –
Stephen Chew filed for Chapter 7 bankruptcy protection. Based on
his wife's earlier declaration, Chew listed his homestead on
schedule "C" of his bankruptcy petition, which lists "property
claimed as exempt."2 Under 11 U.S.C. § 522(b), a debtor may exempt
from property of the bankruptcy estate a homestead recognized as
exempt under State law.3 Thus, by claiming a homestead exemption
under Massachusetts law, Chew sought to remove the property from
the bankruptcy estate and thereby protect it from distribution to
his creditors in the bankruptcy process.
In January 2006, the creditors filed an objection in
bankruptcy court to Chew’s homestead exemption, arguing that, while
Chew held legal title to his home, the portion of the equity
financed by their mother should be held in trust for them as its
2
The Massachusetts homestead statute specifies that "only one
owner may acquire an estate of homestead in any such home for the
benefit of his family," Mass. Gen. Laws ch. 188, § 1. It further
defines "family" to include "a husband and wife," id.
3
Section 522(b) of the Bankruptcy Code allows states to limit
debtors to either federal or state exemptions in bankruptcy. In
states like Massachusetts that have not imposed such a limitation,
debtors may choose between the federal exemptions, listed in
§ 522(d), and state exemptions. See In re Weinstein, 164 F.3d 677,
679 & n.1 (1st Cir. 1999). The federal homestead exemption allows
the debtor to claim an exemption up to $20,200 for a homestead. 11
U.S.C. § 522(d)(i). Not surprisingly, Chew chose the much more
generous state homestead exemption.
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true equitable owners. They relied on Massachusetts law allowing
a "constructive trust" as an equitable remedy
in the absence of any intention of the parties
to create a trust, in order to avoid the
unjust enrichment of one party at the expense
of the other where the legal title to the
property was obtained by fraud or in violation
of a fiduciary relation . . . .
Mass. Wholesalers of Malt Beverages, Inc. v. Att'y Gen., 567 N.E.2d
183, 186 (Mass. 1991) (quoting Barry v. Covich, 124 N.E.2d 921, 924
(Mass. 1955) (internal quotation marks omitted)). Asserting that
property held in trust is not eligible for the homestead exemption,
see Ass't Recorder of the N. Registry Dist. v. Spinelli, 651 N.E.2d
411, 413 (Mass. App. Ct. 1995) ("[T]he homestead statute does not
provide for the application of the statute to property held in
trust."), the creditors urged the bankruptcy court to deny the
exemption.4
4
We note that Spinelli was recently criticized. See In re
Szwyd, 346 B.R. 290, 292-93 (Bankr. D. Mass. 2006). In that case,
the bankruptcy court noted that Spinelli had interpreted the
language of the Massachusetts Homestead Statute strictly – finding
"that because there is no explicit statutory reference to trusts in
the statute, the beneficial owners of trusts do not enjoy the
exemption in a residence owned by the trust." Id. at 291. It
contrasted this approach with a subsequent decision in Dwyer v.
Cempellin, 673 N.E.2d 863, 866 (Mass. 1996), which interpreted the
homestead statute broadly, based on its purpose of protecting the
family home. The bankruptcy court in In re Szwyd opted for the
latter interpretation of the homestead statute, stating in dicta
that "the Spinelli court was wrong in its approach." 346 B.R. at
292.
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If the creditors had been successful in establishing
their right to a constructive trust on the property,5 Chew would
not have been able to exempt their equity in the home from the
bankruptcy estate, and the creditors, subject to the automatic stay
provisions of the bankruptcy code, 11 U.S.C. § 362, could seek to
enforce their lien against the Chews' home in the state courts.
However, if Chew succeeded in claiming the exemption, Chew could
then avoid the creditors' judicial lien in bankruptcy under 11
U.S.C. § 522(f)(1)(A), which provides that a "debtor may avoid the
fixing of a lien on an interest of the debtor in property to the
extent that such lien impairs an exemption . . . if such lien is a
judicial lien." Thus, § 522(f) "permits a debtor to wipe out the
interest that a creditor has in particular property if the debtor's
interest in that property would be exempt but for the existence of
the creditor's lien or interest." 4-522 Collier on Bankruptcy
P 522.11[1](15th ed. rev . 2006). In short, the prize in this
5
Although we refer to a "constructive trust on the property,"
the constructive trust encumbers the property only to the extent of
the funds traceable from the alleged fraud. See Boston Safe
Deposit & Trust Co. v. Seifert, 1997 Mass. Super. LEXIS 566, *23
(Mass. Super. Jan. 29, 1997) ("When trust property has been mingled
with the trustee's personal property, a constructive trust may be
enforced on the mingled property 'in such proportion as the trust
property so mingled bears to the whole of the mingled property.'"
(quoting Restatement (Second) of Trusts § 202, comment h (1959)));
see also Chiu v. Wong, 16 F.3d 306, 310 (8th Cir. 1994) (imposing
a constructive trust where a debtor commingled wrongfully converted
money with other funds to purchase a homestead, and explaining
"[o]nly to the extent that [the debtor] can differentiate her funds
. . . from those wrongfully converted and commingled is the house
free from the constructive trust").
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dispute is the judicial lien on the Chews' home – whether it will
survive as security for the indebtedness incurred by Chew as a
result of the state court judgment against him, or whether it will
be avoided by the bankruptcy court.
B. Later Procedural Background
In a non-evidentiary hearing on the creditors' opposition
to the homestead exemption, the bankruptcy court probed the trust
claim, asking whether they had “already ha[d] the opportunity in
the state court litigation to argue that the debtor held funds in
a fiduciary capacity,” suggesting that claim preclusion might bar
such an argument here. Without clearly explaining the role that
preclusion principles played in its decision, the bankruptcy court
ruled against the creditors from the bench:
With respect to the request for exemptions,
however, I think that the debtor has the
better argument here. I’m familiar with the
cases that you have cited in support of your
contention, but I think the Homestead
Exemption under Chapter 188 tends to be, but
for its stated exceptions, inviolate; and I
think the status of title which I must take as
is, as of the date of the filing of the
petition, indicates that these spouses indeed
have legal title, nothing having been done to
disturb that legal title. There has been no
contention that the Declaration of Homestead
was itself defective in any way, and
accordingly, I’m going to deny the objection
to the exemption . . . .
The creditors appealed the bankruptcy court’s decision to
the district court, arguing in relevant part that the bankruptcy
court committed reversible error by: (1) holding a non-evidentiary
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hearing rather than an evidentiary hearing; (2) failing to set
forth particularized findings of fact and rulings of law, as
required by Federal Rule of Civil Procedure 52(a);6 and (3) failing
to find a constructive trust on the property, and, consequently, in
denying the creditors' opposition to the exemption.7
The district court rejected the creditors’ arguments,
ruling that, where the underlying facts are not in dispute, it is
not error for a judge to conduct a non-evidentiary hearing. It
also held that the creditors were barred from raising this issue on
appeal because they failed to request an evidentiary hearing before
the bankruptcy court.
While it agreed that Rule 52 applied to the bankruptcy
proceeding and that the bankruptcy court “should have provided
particularized findings of fact and rulings of law,” the district
6
The rule provides, in pertinent part: "In all actions tried
upon the facts without a jury or with an advisory jury, the court
shall find the facts specially and state separately its conclusions
of law thereon . . . ." Fed. R. Civ. P. 52(a). The creditors
argue, and the district court agreed, that Rule 52(a) applies
because Rule 7052 of the Federal Rules of Bankruptcy Procedure
states that Rule 52 applies in adversary proceedings within the
bankruptcy process. "A proceeding to determine the validity,
priority, or extent of a lien or other interest in property" is
listed as an adversary proceeding under Federal Rule of Bankruptcy
Procedure 7001(2).
7
They also argued that the bankruptcy court erred in relying
on the Massachusetts Homestead Act in its analysis rather than on
§ 522 of the Bankruptcy Code, which they claim preempts it. The
district court rejected that argument, finding that, to the limited
extent that the Bankruptcy Code preempts the Massachusetts
Homestead Act, it hurts the creditors’ case. The creditors do not
renew this argument before this court.
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court ultimately determined that “the court’s failure to provide
such findings in this case is not reversible error” because the
undisputed facts of the case demonstrated that the bankruptcy
court’s ruling should be affirmed.
Finally, in ruling on the creditors' constructive trust
argument, the district court determined that their claim was barred
by principles of claim preclusion "[s]ince appellants pursued a
breach of contract theory, and not a constructive trust theory in
the state court." Nevertheless, the district court went on to
conclude – without an evidentiary hearing – that the creditors
could not establish the necessary prerequisites for a constructive
trust under Massachusetts law: either that Chew had engaged in
“sufficient wrongdoing . . . in acquiring the property” or that a
fiduciary relationship existed between Chew and the creditors.8
On appeal to this court, the creditors raise three
issues. First, they argue that claim preclusion does not bar their
constructive trust claim because the Supreme Court's decision in
Brown v. Felsen, 442 U.S. 127 (1979), precludes the application of
claim preclusion in federal bankruptcy proceedings.9 Second, they
8
In addition, to establish a constructive trust, the
creditors would have to be able to trace the wrongfully held
property to the fraud or breach of fiduciary duty. In re Linsey,
296 B.R. 582, 586 (Bankr. D. Mass. 2003). There is no dispute
about the traceability of the proceeds from the sale of the Chews'
original home to their use in the purchase of the new home.
9
Appellants also contend that Chew waived the affirmative
defense of claim preclusion. That argument is made so
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contend that the bankruptcy court and the district court committed
clear error in rejecting their constructive trust claim because
they ignored relevant law and did not afford the creditors an
opportunity to present evidence. Finally, they argue that the
bankruptcy court and the district court committed reversible error
by not setting forth sufficient findings of fact and rulings of law
under Rule 52(a).
II.
Under 28 U.S.C. § 158, Congress granted district courts
(and bankruptcy appellate panels) intermediate review of bankruptcy
proceedings; further review is available in the courts of appeal.
In considering a bankruptcy case that has been appealed to the
district court, we review the bankruptcy court's findings of fact
for clear error and its rulings of law de novo, affording no
special deference to the district court's decision. In re Healthco
Int'l, 132 F.3d 104, 107 (1st Cir. 1997).
A. Claim Preclusion
We begin – and end – our analysis by considering whether
claim preclusion bars the creditors' constructive trust argument
before the bankruptcy court. Under Massachusetts law,10 claim
perfunctorily that we could easily deem it waived. See Am.
Cyanamid Co. v. Capuano, 381 F.3d 6, 18 (1st Cir. 2004). However,
having evaluated the claim, we reject it.
10
In evaluating the claim preclusive effect of a prior state
proceeding, federal courts are required to give full faith and
credit to state judicial proceedings, pursuant to 28 U.S.C. § 1738.
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preclusion "prevents relitigation of all matters that were or could
have been adjudicated in the [prior state] action," Blanchette v.
School Comm., 692 N.E.2d 21, 25 n.3 (Mass. 1998). Claim preclusion
is applicable where, as here, the prior and current actions share
the same parties and the same cause of action and where the prior
final judgment was "on the merits." Kobrin v. Bd. of Registration
in Med., 832 N.E.2d 628, 634 (Mass. 2005).
The creditors' principal argument is that claim
preclusion does not apply to their claim because the Supreme Court
has ruled that state court determinations do not have their
ordinary preclusive effect in the bankruptcy court. They rely for
this proposition on Brown v. Felsen, 442 U.S. at 133-34. Brown
does not establish so broad a proposition. In that case, a
creditor had alleged in state court pre-bankruptcy proceedings that
the contested debt arose through debtor's fraud, deceit and
malicious conversion. The suit was settled by a stipulated
judgment. The Supreme Court determined that the debtor could not
use claim preclusion to prevent the creditor from contesting the
dischargeability of the debt in the subsequent bankruptcy
proceedings. See id. (finding that, where the creditor "is
attempting to meet . . . the new defense of bankruptcy which the
In Migra v. Warren City Sch. Dist., 465 U.S. 75, 81 (1984), the
Supreme Court interpreted this principle to require federal courts
to give state court judgments the same preclusive effect they would
receive in that state. Accordingly, Massachusetts law governs the
claim preclusive effect of the prior state court proceedings.
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[debtor] has interposed between [the creditor] and the sum
determined to be due him. . . . [The debtor] has upset the repose
that would justify treating the prior state-court proceeding as
final").
However, Brown is readily distinguishable from the
instant case. In Brown, the debtor invoked claim preclusion to bar
creditors' arguments against dischargeability – that is, the
cancellation of a debtor's obligation in the final stage of a
bankruptcy proceeding – rather than in opposition to a state
homestead exemption, which is considered in the initial
determination of which assets comprise the bankruptcy estate.
These two phases of the bankruptcy process are distinguished by
more than mere sequencing. The final dischargeability analysis is
explicitly controlled by federal law. See 11 U.S.C. § 523(c)(1);
4-523 Collier on Bankruptcy P 523.08[7] ("The effect of section
523(c)(1) is to give the bankruptcy court exclusive jurisdiction
over actions to determine the dischargeability of a debt . . . .").
In declining to confine the bankruptcy court's dischargeability
analysis to the judgment and record in prior state court
proceedings, the Supreme Court in Brown emphasized that Congress
amended the Bankruptcy Code in 1970 to eliminate state court
involvement in dischargeability questions and instead committed
those issues to the federal bankruptcy courts. Brown, 442 U.S. at
135-36. These same concerns are not implicated in this case, which
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involves a state law objection (constructive trust) to a state law
exemption.
As a result of the particularity with which Congress has
spoken on the exclusive jurisdiction of federal courts to
adjudicate dischargeability, Brown is generally recognized as a
"narrow" "exception to the general rule that claim preclusion does
apply to bankruptcy proceedings," 18 J.W. Moore et al., Moore's
Federal Practice § 131.23[5][d] (3d ed. rev. 2007). Accordingly,
several circuits have recognized that Brown applies to the federal
dischargeability issue, but not to issues of definition of property
in the estate, in which Congress has given the states a key role.
See, e.g., In re Comer, 723 F.2d 737, 740 (9th Cir. 1984) (applying
claim preclusion to state court determination of the amount of an
obligation where this determination would have no effect on the
bankruptcy court's exclusive determination of the debt's
dischargeability); Goss v. Goss, 722 F.2d 599, 603 (10th Cir. 1983)
(finding that Brown did not prohibit giving preclusive effect to a
state court determination that a particular obligation was in the
nature of alimony or support, where Congress had granted concurrent
jurisdiction to state courts to decide the question); In re
Covington Grain Co., 638 F.2d 1357, 1360-61 (5th Cir. Mar. 1981)
(accepting a state court's finding that an agency relationship
existed outside the context of dischargeability on the basis that,
in this context, "there is no overriding federal policy preventing
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the bankruptcy court from accepting the findings of the state
court").
Relatedly, the Court noted in Brown its policy concerns
that applying claim preclusion under the circumstances of Brown
would create perverse incentives for creditors to: (1) raise
dischargeability defenses in anticipation of a bankruptcy filing
"when they are not directly in issue and neither party has a full
incentive to litigate them," 442 U.S. at 134; and (2) raise those
defenses before a state court, which has no authority to determine
dischargeability, id. at 135-36. These concerns are not present
here. Applying claim preclusion on the facts of this case would
encourage creditors to raise constructive trust claims in the
earlier state proceedings involving disputes over promises and
property when the issues are ripe and where - because they relate
to causes of action created by state law - state courts would be in
the best position to adjudicate them.
Finally, the creditors argue that because claim
preclusion is based on considerations of fairness and efficient
judicial administration, it should not be applied rigidly where
such interests would not be served. See, e.g., Int'l Harvester Co.
v. Occupational Safety & Health Review Comm'n, 628 F.2d 982, 986
(7th Cir. 1980) ("[E]ven where the technical requirements of res
judicata have been established, a court may nonetheless refuse to
apply the doctrine."). The creditors contend that the interests of
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fairness and the finality of judgments are not served by allowing
Chew to use bankruptcy protection to impede their ability to
collect on the state court judgment through enforcement of their
judicial lien. However, we find nothing unfair in requiring these
creditors to be held to the litigation choices they made before the
state court. The creditors, having brought suit in state court,
had the opportunity to present explicitly to the state court their
arguments that they were entitled to a constructive trust, or that
the debtor had breached a fiduciary duty to them.
B. Other Issues
The creditors also contend that the bankruptcy court (and
the district court) erred in finding that they could establish no
set of facts upon which their request for a constructive trust on
the Chews' property could be predicated, particularly since they
were not granted an evidentiary hearing. In addition, the
creditors claim that they are entitled to new proceedings before
the bankruptcy court because both the bankruptcy court and the
district court failed to sufficiently set forth findings of fact
and rulings of law under Rule 52(a). While we are troubled by the
district court's decision to reach the merits of the creditors'
constructive trust claim without an evidentiary hearing, we need
not address either of these final two arguments. Any error on
these grounds is harmless because of our determination that
principles of claim preclusion bar consideration of the creditors'
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constructive trust claim. We therefore affirm the district court's
decision, which affirmed the bankruptcy court's order denying the
creditors' objection to Chew's homestead exemption.
So ordered.
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