McCarthy v. Bierbower et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
CROSSROAD HEALTH MINISTRY,
INC.,
Debtor.
___________________________
KEVIN R. McCARTHY, TRUSTEE,
Plaintiff,
v.
WILLIAM J. BIERBOWER,
TRUSTEE, et. al.,
Defendants.
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Case No. 04-00318
(Chapter 7)
Adversary Proceeding No.
04-10049
DECISION REGARDING TRUSTEE’S MOTION FOR SUMMARY JUDGMENT
The Chapter 7 trustee (“Trustee”) commenced this
adversary proceeding by filing a Complaint to Determine
Ownership of Property. This decision addresses the Trustee’s
motion for summary judgment on the question of whether the
The decision below is signed as a decision of
the court.
Signed: January 13, 2005.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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Margaret Stewart Trust (“Stewart Trust”) (whose trustees the
Trustee has sued as the defendants) is entitled to a return of
its $60,000 grant to the debtor so long as any administrative
expenses or allowable claims against the bankruptcy estate
remain unpaid. The court will grant the Trustee’s motion for
the following reasons.
I
On September 15, 2003, the debtor, Crossroad Health
Ministry, Inc. (“Debtor”), submitted a grant request to
Stewart Trust seeking Stewart Trust’s financial support of the
Debtor’s pediatric early intervention program. On December
18, 2003, Stewart Trust approved a $60,000 grant (hereinafter,
the “Grant Funds”), transmitting a check for that amount to
the Debtor together with a letter stating that “[t]hese funds
must be used in 2004 for the purposes stated in your proposal
unless changed with our written permission.” (emphasis added).
Stewart Trust did not expressly require the Debtor to place
the Grant Funds in a separate account or otherwise segregate
the funds. The Debtor deposited the Grant Funds in its
general operating account from which it paid various general
operating expenses until it filed for bankruptcy on February
27, 2004, under Chapter 7 of the Bankruptcy Code (11 U.S.C.).
The Trustee has collected assets of $137,679, and faces
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1 Stewart Trust has also suggested that the temporal
proximity between the debtor’s solicitation of the Grant Funds
and the filing of bankruptcy demonstrates wrongdoing on the
Debtor’s part. If Stewart Trust’s allegations were true, and
the debtor wrongfully concealed material information in order
to induce Stewart Trust’s donation, imposition of a
constructive trust in Stewart Trust’s favor might be
appropriate. Stewart Trust has failed to provide the court
with any evidence to support such a theory, and the court will
3
scheduled priority withholding tax claims exceeding $90,000,
general unsecured claims totaling $148,080.04, and claims
filed through May 20, 2004, not including any priority tax
claims, total $121,822.31. Accordingly, the Trustee does not
anticipate a surplus of assets after administrative expenses
and allowed claims are paid.
Stewart Trust asserts that because the Debtor was
required to use the Grant Funds in 2004 for the purposes
stated in the Debtor’s proposal, those funds should either be
distributed to another charitable organization or returned to
Stewart Trust.
II
The question before the court is whether, due to the
charitable use restriction placed upon the Grant Funds by
Stewart Trust, those funds should be excluded from the
Debtor’s bankruptcy estate, and either distributed to a
different charitable organization or returned to Stewart
Trust.1 As described in more detail below, under District of
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not impose a constructive trust based solely on unsupported
allegations.
The Trustee has expressed concern that a constructive
trust in favor of Stewart Trust would likely remain
subordinate to the Internal Revenue Service’s $90,000 tax
lien. See Blachy v. Butcher, 221 F.3d 896, 906 (6th Cir.
2000) (holding that “a judicially-created equitable remedy
cannot be applied retroactively to defeat a choate federal tax
lien.”). This, argues the Trustee, could pose a marshaling
problem. It is unnecessary for the court to reach this issue
because the court is not imposing a constructive trust.
4
Columbia law, grant funds subject to a charitable use
limitation remain an asset of the corporation, not an asset
held by the corporation in trust. Accordingly, the Grant
Funds remain an asset of the bankruptcy estate available to
satisfy claims of creditors and to pay administrative expenses
in these proceedings.
A. There is no “resulting” trust
In its Opposition to the Trustee’s Motion for Summary
Judgment (D.E. No. 18, filed September 20, 2004), Stewart
Trust argues that by placing a charitable use limitation upon
the Grant Funds, a “resulting trust” arose and Stewart Trust
retained an equitable interest in the Grant Funds.
A resulting trust “is a property relationship designed to
effectuate the parties’ intent when one party takes title to
property for which another has furnished consideration.”
Edwards v. Woods, 385 A.2d 780, 783 (D.C. 1978) (holding that
the equitable remedy of a resulting trust must be applied to
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effectuate justice where one individual paid the purchase
price for real property, but another individual took formal
title to that property). Collier on Bankruptcy notes that
although the equitable remedy of a resulting trust is akin to
the constructive trust, “[a] resulting trust, unlike a
constructive trust, seeks to carry out a donative intent
rather than to thwart an unjust scheme. The general rule is
that where a transfer of property is made to one person and
the purchase price is paid by another, a resulting trust
arises in favor of the person by whom the purchase price is
paid.” Collier on Bankruptcy ¶ 541.11[3] at 541-67 (15th ed.
as revised March 2003), quoting United States v. Marx, 844
F.2d 1303, 1309 (7th Cir. 1988) (internal quotations and
citations omitted).
The parties have not identified and the court can find no
support for the proposition that the equitable remedy of a
resulting trust has any application under these facts.
Accordingly, the court must reject Stewart Trust’s assertion
that the restriction placed upon the Grant Funds gave rise to
a resulting trust.
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B. In the District of Columbia, donations subject to
charitable use restrictions are corporate assets and
can be used to pay a liquidating non-profit
corporation’s creditors and dissolution proceeding
expenses
In his motion for summary judgment, the Trustee argues
that D.C. Code § 29-301.56, which governs dissolution of non-
profit corporations in D.C. state court proceedings,
substantively determines the state-derived property rights in
the grant funds for purposes of these bankruptcy proceedings.
In pertinent part, that statute provides for the following
distribution of assets in state court dissolution proceedings:
(c) The assets of the corporation or the proceeds
resulting from a sale, conveyance, or other
disposition thereof shall be applied and distributed
as follows:
(1) All costs and expenses of the court
proceedings and all liabilities and obligations of
the corporation shall be paid, satisfied, and
discharged, or adequate provision shall be made
therefor;
(2) Assets held by the corporation upon condition
requiring return, transfer, or conveyance, which
condition occurs by reason of the dissolution or
liquidation, shall be returned, transferred, or
conveyed in accordance with such requirements;
(3) Assets received and held by the corporation
subject to limitations permitting their use only
for charitable, religious, eleemosynary,
benevolent, educational, or similar purposes, but
not held upon a condition requiring return,
transfer, or conveyance by reason of the
dissolution or liquidation, shall be transferred
or conveyed to 1 or more domestic or foreign
corporations, societies, or organizations engaged
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in activities substantially similar to those of
the dissolving or liquidating corporation as the
court may direct.
According to the Trustee, § 29-301.56 directs that a
corporation fully satisfy each enumerated portion of the
distribution statute before even considering whether
subsequent subsections might apply. Thus, before a
liquidating non-profit corporation can even reach the question
of whether certain corporate assets must be returned or
transferred to a different entity pursuant to D.C. Code §§ 29-
301.56(c)(2)-(3), the statute first requires that “[a]ll costs
and expenses of the court proceedings and all liabilities and
obligations of the corporation [must] be paid, satisfied, and
discharged, or adequate provision [ ] made therefor.” D.C.
Code § 29-301.56(c)(1). Thus, argues the Trustee, under
District of Columbia law, funds held by a non-profit
corporation subject to charitable use limitations are
corporate assets available to creditors upon dissolution or
liquidation, notwithstanding the restriction placed upon such
funds by the donor.
Stewart Trust interprets the statute differently.
According to Stewart Trust, the three enumerated subsections
of D.C. Code §29-301.56(c) can be separately triggered, and
subsection (c)(1), calling for the payment of all creditors
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and expenses, simply does not apply to funds that fall within
subsections (c)(2)-(3). As such, a liquidating non-profit
corporation holding funds subject to a charitable use
restriction would be governed solely by subsection (c)(3), and
such funds would not be available to satisfy creditors or the
payment of expenses under subsection (c)(1), because those
funds would be either returned to the donor or distributed to
a different charitable organization.
Basic principles of statutory construction support the
Trustee’s reading of the statute. The terminology “as
follows” suggests that distributions are to proceed in a
sequential fashion, with expenses of dissolution and claims of
creditors to be paid first as listed first. Moreover, a
dissolution will require paying compensation to professionals
who are employed to facilitate the dissolution, otherwise such
professionals will not be attracted to handle the dissolution.
The legislature would not have envisioned such professionals
being put to the risk that distributions would be made under
paragraphs (2) and (3) before paying such professionals under
paragraph (1). It is thus evident that distributions under
paragraph (1) were intended to be made first. Accordingly,
the court agrees with the Trustee that District of Columbia
law treats donations held by non-profit corporations subject
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2 In the alternative, D.C. Code § 301.56 may reflect a
legislative determination consistent with Boston Regional
Medical Center, Inc., 298 B.R. 1 (D. Mass. 2003), that
although funds subject to charitable use limitations may, in
fact, be held by a non-profit corporation in trust, paying a
non-profit corporation’s creditors for services previously
rendered in furtherance of that organization’s charitable
purpose is deemed consistent with such limitations. Thus,
even if Stewart Trust could demonstrate that imposition of the
limitation gave rise to a trust relationship between the
Debtor and Stewart Trust, District of Columbia law has
determined that a non-profit corporation does not breach that
trust when it uses such funds to pay creditors and dissolution
expenses.
3 This case does not present an issue of whether the
marshaling doctrine will apply to require exhaustion first of
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to charitable use limitations as corporate assets, at least to
the extent that such funds are needed to pay creditors and
administrative expenses associated with liquidation
proceedings.
Distribution of estate assets in a bankruptcy case is
governed by federal law. Although the bankruptcy court is
thus not bound by the distribution scheme set forth in D.C.
Code § 29-301.56, the statute reflects a legislative
determination that funds subject to such restrictions are a
legitimate source of payment to creditors and of liquidation
expenses, thus constituting to at least that extent property
of the estate, and that only the residue is to be treated
differently than unrestricted corporate funds.2 Accordingly,
the assets at issue here are to be treated as estate assets.3
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funds other than those subject to charitable use limitations
when more estate assets are available than are necessary to
satisfy all claims against the estate. Here, the claims
against the estate exceed the estate funds.
4 Although neither party has used the term “charitable
trust,” that seems to be the only form of trust that could
have resulted from the transaction at issue.
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C. Applicability of the D.C. Uniform Trust Code
It is surprising that neither party has addressed the
question of whether the D.C. Uniform Trust Code, which
governs, inter alia, express and charitable trusts,4 is
relevant to this dispute. See D.C. Code § 10-13.01, et seq.
If the court did not have the benefit of D.C. Code § 29-
301.56, it would be appropriate to analyze the facts of this
case under the D.C. Uniform Trust Code. As such, it would be
the task of this court to determine, inter alia, whether
Stewart Trust intended that the Grant Funds be held by the
Debtor in trust rather than outright. Here, however, D.C.
Code § 29-301.56 obviates the need for such inquiry, because
in the District of Columbia, as a matter of law, funds subject
to a charitable use limitation are considered assets of the
estate, and not funds held in trust, to the extent necessary
to satisfy claims against the estate.
III
For the foregoing reasons, the court will grant the
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11	O:\Laura\Opinions\Crossroad Health Ministry - SJ on Stewart Trust's charitable use restriction v4.wpd
trustee’s motion for summary judgment.
[signature appears above]
S. Martin Teel, Jr.
United States Bankruptcy Judge
Copies to:
Kevin R. McCarthy
McCarthy & White, PLLC
8180 Greensboro Drive
Suite 875
McLean, VA 22102
William J. Bierbower
888 17th Street, NW
Suite 210
Washington, DC 20006
Michael R. Murphey
1320 19th Street, NW
Suite 202
Washington, DC 20036
Howard H. Williams
888 17th Street, NW
Suite 210
Washington, DC 20006
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