McGarry v. Chew

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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