Grossman v. Sawtelle et al

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Case 06-01227 Doc 59 Filed 04/24/08
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
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IN
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STEWART F. GROSSMAN, CHAPTER 7 TRUSTEE,
Plaintiff
Adv. P. No. 06-1227
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In re
Case No. 05-30233-JNF
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Defendant
as amended,
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MEMORANDUM
The matter before the Court is "Plaintiff's Motion for Partial Summary Judgment"
(the "Motion") filed by Stewart F. Grossman, as Chapter 7 trustee (the "Trustee") cf
Complaint filed by him against Chester M. Sawtelle ("Mr. Sawtelle"), the now deceased Sawtelle Brothers Industries, Inc. (the "Debtor"), on May 31, 2007 in connection with the
AUTHENTICATED
GPO
INFORMATION U.S. GOVERNMENT
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FOR THE
I. INTRODUCTION
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Purchase Agreement dated August 27, 1981, EASTERN BANK, TRUSTEE, under Stock CHESTER M. SAWTELLE and
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Chapter 7
SAWTELLE BROTHERS INDUSTRIES, INC., Debtor

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sole preferred stockholder of the Debtor, and Eastern Bank (“Eastern”) in its capacity as a
successor trustee under a certain Stock Purchase Agreement dated August 27, 1981 and
later amended on May 24, 1991.

The Complaint contains twelve counts as follows: (1) Count I entitled “Turnover
Against Eastern Bank-Bankruptcy Code § 542;” (2) Count II entitled “ Avoidance of Lien
Against Mr. Sawtelle-Bankruptcy Code § 544;” (3) Count III entitled “Determination cf
Secured Status Against Mr. Sawtelle-Bankruptcy Code § 506;” (4) Count IV entitled
“Fraudulent Transfer Against Mr. Sawtelle-Bankruptcy Code § 548;” (5) Count V entitled
“Fraudulent Transfer Against Mr. Sawtelle-Bankruptcy Code § 544(b);” (6) Count VI
entitled “Recovery of Fraudulent Transfers Against Mr. Sawtelle -Bankruptcy Code § 550;”
(7) Count VII entitled “Declaratory Judgment Against Mr. Sawtelle and Eastern Bank-23
U.S.C. § 2201,” (8) Count VIII entitled “Declaratory Judgment Against Mr. Sawtelle and
Eastern Bank-28 U.S.C. § 2201;” (9) Count IX entitled “Declaratory Judgment Against Mi.
Sawtelle-28 U.S.C. § 2201;” (10) Count X entitled “Declaratory Judgment Against Eastern
Bank-28 U.S.C. § 2201;” (11) Count XI entitled “Declaratory Judgment Against Eastern
Bank-28 U.S.C. § 2201,” and (12) Count XII entitled “Declaratory Judgment Against M1.
Sawtelle-28 U.S.C. § 2201.”

Through his Motion, the Trustee seeks summary judgment on Counts I through IV

and VII through XII and on a counterclaim filed by Eastern. In support of his Motion, the

' The relief requested by the Trustee in the identically captioned Counts X and X]
is discussed below.

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Trustee filed a Statement of Undisputed Facts, to which neither defendant filed a
substantive objection, and the affidavits of Craig Jalbert (the “Jalbert Affidavit”), the
Trustee’s accountant, and Pamela A. Harbeson, counsel to the Trustee. Mr. Sawtelle died
on June 16, 2007,’ following the filing of the Complaint,? and his probate estate (the
“Sawtelle Estate”) filed an objection to the Motion, supported by the Affidavit of Stephe1
W. Howe (the “Howe Affidavit”).* The Court heard the Motion and the objection 01
January 15, 2008. Eastern did not file an objection to the Motion. Nevertheless, it appeare:]
at the January 15" hearing. Based upon the pleadings, affidavits, and the Trustee’s
Statement of Undisputed Facts, to which no party substantively objected, the Court now
makes the following findings of fact and rulings of law pursuant to Fed. R. Bankr. P. 7052.
II. FACTS

On August 27, 1981 the Debtor executed a Stock Purchase Agreement with its then
stockholders, Mr. Sawtelle, M. Francis Higgins, and Joel McKoan, as well as EssexBank, a3
trustee, with respect to certain life insurance policies on the lives of the stockholders. The

parties amended the agreement by an “Amendment Agreement” dated May 24, 1991 (the

? See “Motion of Counsel to Defendant, Chester M. Sawtelle, for Extension of
Time to File Response for Motion of Summary Judgment, for Continuance of Hearing
Thereon and Request for Expedited Consideration’ filed on July 11, 2007.

* The Trustee has not amended the Complaint to substitute Mr. Sawtelle’s estate
as a defendant. In all instances where the Trustee requests entry of summary judgment
against Mr. Sawtelle, it is presumed that the correct party in interest is the Sawtelle
Estate.

* Beginning in 1991, Mr. Howe was the personal lawyer to Mr. Sawtelle. He now
serves as a co-executer of the Sawtelle Estate.

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“1991 Amendment”) by and among the Debtor, Sawtelle Brothers, Inc., the Debtor s
subsidiary (“Brothers”), the surviving stockholders of the Debtor, Mr. Sawtelle and ML.
Francis Higgins,’ as well as Eastern which replaced EssexBank as trustee (as amended, the
“ Agreement”). The Agreement imposed certain restrictions on the transfer of shares of the
Debtor’s stock and provided for disposition of the shares upon the death of a stockholde:.
The Agreement created a trust under which Eastern, as trustee, nominally ownecl,
maintained and administered certain life insurance policies on the lives of the stockholder s,
the premiums of which were to be paid by the Debtor.® The cash surrender or death benef t
value of the policies was to be used to fund the Debtor’s redemption of the stockholder:;’
equity in the event a stockholder died or, pursuant to a right of first refusal, wished to
transfer his shares to a third party during his lifetime. No separate trust document exisis
regarding Eastern’s rights and duties as a trustee with respect to the life insurance policies,
and the Agreement, as amended, represents the entire understanding among the parties

regarding the subject matter. The pertinent provisions of the Agreement are as follows.

Section 4. Purchase of Stock in Event of Death

In the event of the death of a Stockholder during the term of this
Agreement, the [Debtor] shall be obligated to purchase and the legal
representatives of the estate of such deceased Stockholder shall be obligated
to sell, all of the Stock owned by such Decedent on the Applicable Date. The
purchase price for each share of Stock so purchased shall be determined as

> Joel McKoan died some time between 1981 and 1991 and was not a party to the
1991 Amendment.

° As discussed below, the Debtor did not directly fund the premium payments.

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provided in Article 5 of this Agreement.’

Section 5. Purchase Price

(b) [T]he purchase price of each share of preferred stock so purchased shall
be its par value.

Section 7. Payment of Purchase Price

(a) The payment of the purchase price due to the Selling Stockholder shall be
made as follows: ... (ii) If the sale is pursuant to Article 4 [a purchase in the
event of the death of the Stockholder] of this Agreement, an aggregate
amount equal to the sum of (A) the proceeds of any Life Insurance [as
defined in Article 8] received by [Eastern] by reasons of the Decedant's [sic]
death and (B) the Side Fund [as defined in Article 8] principal balance
respecting such Stockholder, or an amount equal to the total purchase price,
whichever is smaller shall be paid by [Eastern] at the closing ... The [Debtor]
shall be discharged from its obligations hereunder to the extent of said
payment made by [Eastern].

Section 8. Insurance

(a) In order to fund its obligations hereunder, the Corporation shall, to the extent
such obligations exceed $10,000.00 respecting any Stockholder, enable
[Eastern] to acquire and maintain in force a policy or policies of life insurance
(the “Life Insurance”) on each such Stockholder ... Such policies shall be
maintained in such amounts that the net death benefits payable upon the
death of the insured Stockh older when combined with the Side Fund
principal balance respecting such Stockholder, shall equal or exceed the then
purchase price hereunder applicable to his shares. (emphasis supplied).

(i) Additional policies of Life Insurance at the direction of the [Debtor,] shall be
applied for by [Eastern] when required hereunder on the Stockholders.

(ii) As to each policy of Life Insurance, the [Debtor] and [Eastern] shall take
necessary steps to:

’ The provisions of Section 4 of the Agreement were amended by the 1991
Amendment such that a death-time redemption would only be applicable to shares of
the Debtor’s preferred stock issued and outstanding as of the date of the 1991
Amendment, and would not apply to shares of the Debtor’s common stock.

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Vest all right, title and interest therein in [Eastern]; and
Designate [Eastern] as the sole payee of any benefits
thereunder; and

C. Make the policy irrevocably non-assignable and non-
transferable to any person, firm or corporation other than the
insured.

w >

(c) The [Debtor] agrees to pay when due all premiums on Life Insurance
policies taken out pursuant to this Agreement and interest on all outstanding
policy loans....

(d) In the event that the [Debtor] directs [Eastern] to purchase additional Life
Insurance on any Stockholder, each Stockholder hereby agrees to co-operate
fully by performing all the requirements of the insurer which are necessary
conditions preceding the issuance of the insurance policies. . . .

(e) [I]f this Agreement terminates before the death of a Stockholder, then
such Stockholder shall have the option to purchase any policy or policies of
Life Insurance owned by [Eastern], from [Eastern], for the price and upon the
terms and conditions hereinafter set forth.

(i) The option to purchase such policy or policies shall be exercisable
within a period of thirty (30) days following the termination of this
Agreement, but not later than any closing at which such Stockholder is to sell
or dispose of all of his shares in the [Debtor].

(ii) If such Stockholder desires to exercise his option to purchase the
Life Insurance, he shall give written notice to the [Debtor], prior to the
expiration of the option period, of his intention to exercise the option.

(iii) The price which the Stockholder exercising the option shall pay
to purchase the Life Insurance policy or policies shall be the difference
between:

A. The sum of:

(I) the cash surrender value thereof, if any, on the date of the
closing..., plus

(II) The pro rata portion of any premium paid prior to such
date which covers a period extending beyond such date; plus
(III) Any dividend or dividend accumulations.

B. Less the amount of any policy loan and interest thereon then

accrued.

(iv) Upon payment of the purchase price to [Eastern], [Eastern] shall
deliver to the Stockholder the Life Insurance policy or policies with
instruments of assignment...sufficient to transfer ownership of the said
policy or policies to the Stockholder, and pay to the [Debtor] the proceeds

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received from the Stockholder. (emphasis added).

Section 9. Powers and Duties of [Eastern]

[Eastern] shall:

(a) Be entitled to reasonable compensation for its services, which shall be
paid for by the [Debtor].

(b) Use its best efforts to collect any sums due or owing under the policies of
Life Insurance.

(c) Have no responsibility as to payment of the premiums on the Life
Insurance Policies and interest on policy loans, other than furnishing the
[Debtor] with notice of premiums....

(d) Not be required to take any steps or institute any proceedings unless and
until properly reimbursed and protected against liability. . . .

(h) Be reimbursed for all reasonable expenses, disbursements and advances,
including attorney fees, incurred or made by it in performance of its duties
hereunder. ...

Section 10. Removal or Resignation of [Eastern]

The [Debtor], acting though its Board of Directors, shall have the right and
authority to remove [Eastern] and appoint a successor Trustee.®

Section 20. Termination of Agreement

This agreement shall terminate upon the first to occur or any of the following
events:

(a) The adjudication of the [Debtor] as a bankrupt ... .

(b) The voluntary or involuntary complete liquidation or dissolution of the
[Debtor].

(c) This Agreement shall terminate and be void and of no effect ninety-nine
(99) days after there shall remain only one surviving Stockholder hereunder.

The Agreement contains no specific provisions directing Eastern to deliver the

Policies to the Debtor or any other party or to otherwise wind up the affairs of the trust

* This provision was added by Section 5(f) of the 1991 Amendment and replaced
the previous Section 10 of the original 1981 agreement which allowed removal of the
trustee by a majority in interest of the Debtor’s stockholders.

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upon termination of the Agreement. Pursuant to Section 8(c) above, the Debtor wis
obligated to pay all premiums for the life insurance policies. In practice, however, tke
premiums were paid by Brothers directly with the liability recorded as loans against tre
Debtor, or loans were made by Brothers to the Debtor who then made the paymenis
directly. Sometimes premiums were paid by automatic loans taken by the issuing
insurance companies against the cash value of the life insurance policies. As set forth in
the Jalbert Affidavit, the Debtor was insolvent on and after October 31, 2001, and t
experienced increased levels of insolvency from 2001 through 2003 primarily because cf
the payment of premiums by Brothers on the Debtor’s behalf. Jalbert Affidavit at §10.

On October 4, 2005, Brothers filed a voluntary petition under Chapter 7 of the
Bankruptcy Code, and Stewart F. Grossman was appointed the Chapter 7 trustee. In his
capacity as Chapter 7 trustee of Brothers, Mr. Grossman filed an involuntary petition under
Chapter 7 of the Bankruptcy Code against the Debtor on December 16, 2005.° On th>
Debtor’s petition date, Mr. Sawtelle was the sole preferred stockholder of the Debto1,
holding 881,999 shares of preferred stock with a per share par value of $0.55. The Court
entered an order for relief in the Debtor's case on February 9, 2006, and Mr. Grossman wa:
appointed the Chapter 7 trustee of the Debtor on February 14, 2006.

Pursuant to Section 20(a) of the Agreement, the “adjudication of the [Debtor] as a

” Mr. Grossman, as the Chapter 7 trustee of Brothers, timely filed a proof of claim
in the Debtor’s case asserting an unsecured nonpriority claim of $1.8 million for
intercompany debt, which includes premiums paid by Brothers for the life insurance
policies.

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bankrupt” effected a termination of the Agreement.’® On February 14, 2006, the Trustee
notified Mr. Sawtelle by letter of the purported termination of the Agreement, and of hs
option to purchase the insurance policies on his life under Section 8(e)(i) of the Agreemerit
during the thirty day period following termination." On the same day, the Trustee also
notified Eastern of the termination of the Agreement. Mr. Sawtelle declined to exercise any
right to purchase the policies. Thereafter, the Trustee requested Eastern to close a1
accounts maintained for the Debtor and turn the proceeds over to him which Easter 2
refused to do.

The Trustee filed the Complaint against Mr. Sawtelle and Eastern on April 13, 2005
seeking, among other things, turnover of the insurance policies from Eastern as propert/
of the Debtor's estate. Mr. Sawtelle filed an answer on May 15, 2006, and, on the same day,
Eastern filed an answer and a counterclaim (the “Counterclaim”) seeking a declarator’7
judgment stating its view of the proper liquidation and distribution of the insurance
policies after payment of its reasonable costs. The Trustee filed the instant Motion on Mav
31, 2007. Mr. Sawtelle filed a proof of claim on June 9, 2006 asserting an unsecure |
nonpriority claim in the amount of $485,099.45 for “funds due pursuant to Stock Purchase
Agreement.” One week later, Mr. Sawtelle died. According to the Trustee, the net cash:

surrender value of the insurance policies on Mr. Sawtelle’s life, as of the filing of the

° The effect of that provision is discussed below.

'! The letter, although referenced as an exhibit to the Complaint, was not
attached thereto.

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Motion, was $428,789.21 and the net death benefit value was $606,472.26. Additionally, ¢s
of December 2006, there was approximately $45,460 in a “Side Fund,” as defined in the
Section 8 of Agreement, and other associated bank and brokerage accounts maintained in
connection the life insurance policies (collectively, the “Policies”).

Due to Mr. Sawtelle’s death, the Motion was not heard by the Court until January
15, 2008. Only the Sawtelle Estate filed a written objection to the Motion, supported by th e
Howe Affidavit, although Eastern did appear at the hearing to contest the Motion. At the
hearing, the Court inquired of the parties whether the Trustee’s attempted termination cf
the Agreement on February 14, 2006 violated 11 U.S.C. § 365(e) which invalidates
contractual provisions that purport to terminate contract rights in the event of 3

bankruptcy. No party responded with a position with respect to that issue, and no part

’ The statute provides, in relevant part:

(e)(1) Notwithstanding a provision in an executory contract or unexpired
lease, or in applicable law, an executory contract or unexpired lease of the
debtor may not be terminated or modified, and any right or obligation under
such contract or lease may not be terminated or modified, at any time after
the commencement of the case solely because of a provision in such contract
or lease that is conditioned on--

(A) the insolvency or financial condition of the debtor at any time

before the closing of the case;

(B) the commencement of a case under this title; or

(C) the appointment of or taking possession by a trustee in a case

under this title or a custodian before such commencement.

11 U.S.C. § 365(e)(1).

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filed any subsequent memoranda to address it. Nevertheless, counsel to the Sawtelle Estate
agreed at the hearing that the Agreement had terminated by its terms.”
III. POSITIONS OF THE PARTIES

The Trustee contends that he validly terminated the Agreement pursuant to Section
20 upon the Court’s entry of the order for relief in the Debtor’s case and that he duly
notified Mr. Sawtelle of his option to purchase the Policies for their adjusted cash surrender
value pursuant to Section 8(e) which he declined to exercise. The language of Section 8(e;,
the Trustee argues, “clearly demonstrates the intent of the parties that, upon terminatio1
of the [Agreement], the trust was to terminate and the cash surrender value of the [Policies]
was to be paid to the Debtor, either by [Mr. Sawtelle’s] exercise of his option to purchas2
or by the Debtor terminating the policies itself.” | Trustee’s brief at p. 7. The Truste2
further asserts that the Policies inure to the benefit of the Debtor's estate and are not subject
to any claims by either Eastern or the Sawtelle Estate.

The Sawtelle Estate and Eastern argue that the nature of the Agreement, with the
Policies titled in the name of a third party and the absence of any specific instructions in

the Agreement directing Eastern to deliver the Policies to the Debtor upon termination,

© Presumably, this position is based upon Section 20(c) of the Agreement which
provides for termination of the Agreement “ninety-nine (99) days after there shall
remain only one surviving Stockholder hereunder.” Assuming that the Trustee’s
purported termination on February 14, 2006 was invalid under § 365(e), that Mr.
Higgins was alive throughout 2007, and that there was no intervening rejection of the
Agreement as an executory contract under 11 U.S.C. § 365(d)(1), as discussed below, the
Agreement would have terminated by its terms on September 23, 2007, 99 days after
Mr. Sawtelle’s death.

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reflects the parties' original intention that the Sawtelle Estate was to be the true beneficiary
of the trust and that the Debtor was to have only remainder interest in the Policies. Howe,
in his Affidavit, states:

It is my belief that the intent of the ... Agreement was in order to protect the
value of [Mr. Sawtelle’s] shares of preferred stock, as of the date of the
Agreement . . . to provide for a fund from which payments would be made
and to insulate and secure that fund from creditors of the Debtor or any third
party prior to the date of his death. I further understand after the payment
to Mr. Sawtelle of the value of his stock that any remaining funds should be
paid to the Debtor.

Howe Affidavit at paragraph 5.
Counsel for Eastern stated his view of the Agreement’s purpose at the hearing:

[W]hen you see a corporation and its shareholders set up a trusteed [sic] stock
purchase agreement, taking the assets off the balance sheet of the corporation
- - taking the insurance policies and putting them in a separate trust, they
don’t intend to have the res of that trust subject to the claims of creditors of
that corporation. The whole purpose [was] to avoid that result... .

Tr. at p. 24. Additionally, in its Counterclaim, Eastern states:

The evident purpose of the [Agreement] was to provide [Mr. Sawtelle] with

a market and fixed price for his preferred stock upon his death; . . . to

insulate and secure that fund from creditors of the Debtor or any third party

prior to his death, or subject it to the possibility of diversion from that

purpose for any reason; and after the payment of such amounts to reimburse

the Debtor from any surplus remaining . ...
Consistent with this understanding, the defendants argue that the Sawtelle Estate is
entitled to payment $485,099.45 from the Policies’ proceeds, representing a purchase price
of $.55 per share for Mr. Sawtelle’s 881,999 shares of preferred stock, with any remainder
to be paid to the Debtor’s estate.

The defendants requested an evidentiary hearing to resolve what they perceive tc

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be factual issues, including the competing interpretations of the Agreement.
IV. DISCUSSION

As noted above, the Trustee seeks summary judgment on Counts I through IV and
VIL through XII of his Complaint and with respect to the Counterclaim of Eastern.
Summary judgment should be granted “if the pleadings, the discovery and disclosure
materials on file, and any affidavits show that there is no genuine issue as to any materiz1

fact and that the movant is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(c’,

made applicable to this proceeding by Fed.R.Bankr.P. 7056. See also Desmond v. Varrass:

(In re Varrasso), 37 F.3d 760, 763 (1st Cir.1994)(“It is apodictic that summary judgment

should be bestowed only when no genuine issue of material fact exists and the movant ha;
successfully demonstrated an entitlement to judgment as a matter of law.”).

In Count I of the Complaint, entitled “Turnover Against Eastern Bank-Bankruptev
Code § 542,” the Trustee seeks turnover of the Policies pursuant to 11 U.S.C. § 542 because:
they are property of the Debtor’s estate under 11 U.S.C. § 541. The Trustee contends that
“by operation of the termination of the [Agreement], the [Policies] are now property of the
estate and Eastern Bank is obligated to turn them over to the Trustee pursuant to... § 542.”
Count I is premised upon the termination of the Agreement as of February 9, 2006
pursuant to Section 20(a), the propriety of which the Court called into question because o:'
the ipso facto nature of that termination clause. Both the Trustee and the Sawtelle Estate
however, agree that the Agreement has been terminated, and Eastern Bank also appears

to agree, subject to receiving instructions from the Court regarding distribution of the

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Policies. No party addressed the issue of whether the Agreement was an executory
contract or whether it was deemed rejected by the Trustee sixty days following the Court’ s
entry of the order for relief pursuant to 11 U.S.C. § 365(d)(1)."* Regardless of whether th»
Agreement was terminated pursuant to some provision of Section 20 or deemed rejected
under § 365(d), there can be no dispute that it is no longer enforceable by its terms. Th?
issue is simply whether the Policies are property of the Debtor's estate and, if so, whether
the Sawtelle Estate has any claim to them or against the bankruptcy estate.

The agreed facts establish that the parties intended to create an express trust
through the Agreement in which the corpus, the Policies, were held in the name of on»

party, Eastern, as trustee on behalf of another. See Russell v. Meyers, 316 Mass. 669, 672,

56 N.E.2d 604 (1944)(“[W]hether a trust is created depends primarily upon th?

manifestation by the parties of an intention to create a trust.”); see also Cooney v. Montanz,

347 Mass. 29, 35, 196 N.E.2d 202 (1964)(an express trust must “unequivocally show a1
intention that the legal estate be vested in one person to be held in some manner or for

some purpose on behalf of another.”). There can be little dispute that the Debtor was th2

'‘ The statute provides:

(d)(1) In a case under chapter 7 of this title, if the trustee does not assume or
reject an executory contract or unexpired lease of residential real property or
of personal property of the debtor within 60 days after the order for relief, or
within such additional time as the court, for cause, within such 60-day period,
fixes, then such contract or lease is deemed rejected.

11 U.S.C. § 365(d)(1).

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settlor of that trust, with the ultimate power to control the res. See Agreement at Sectior.
7(a)(ii)(discharging the Debtor from its obligations to a deceased stockholder to the exten:
of payments made to his estate by Eastern); Section 8(a)(“In order to fund its obligations
hereunder, the [Debtor] shall, .. . enable [Eastern] to acquire and maintain . . .[the Policies.]’

(emphasis added); Section 8(c)(requiring the Debtor to pay all premiums for the Policies):
Section 8(d)(permitting the Debtor to direct Eastern to purchase additional life insurance:
policies); Section 8(e)(granting a stockholder the option to purchase the Policies from the
Trustee for their adjusted cash surrender value with such payment to be remitted to the
Debtor by Eastern); and Section 10 (permitting the Debtor to remove Eastern as trustee anc!

appoint a successor trustee).

As the court noted in Aylward v. Landry (In re Landry), 226 B.R. 507, 510 (Bankr.

D. Mass.1998), the starting point for any analysis of whether a debtor's bankruptcy estate:
has an interest in a trust that can be reached by a trustee is section 541(a) of the Bankruptcy
Code which provides that, except as provided in subsections 541(b) and (c)(2), a debtor's
bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property

as of the commencement of the case...” 11 U.S.C. § 541(a)(1). The Supreme Court has

determined that the scope of section 541(a) is broad. See United States v. Whiting Pools,
Inc., 462 U.S. 198, 204-05 & n. 9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). In ascertaining the

existence and scope of a debtor's legal and equitable interest in property, the Court must

look to state law. Riley v. Tougas (In re Tougas), 338 B.R. 164, 173 (Bankr. D.

Mass.2006)(citing, inter alia, Butner v. United States, 440 U.S. 48, 54, 99S.Ct. 914, 59 L.Ed.2cl

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136 (1979), and Braunstein v. Beatrice (In re Beatrice), 277 B.R. 439 (Bankr. D. Mass.2002).

aff d, 296 B.R. 576 (B.A.P. 1st Cir. 2003)). Pursuant to Massachusetts law, “Tw]hen a trus:
instrument addresses only the transfer of income, and makes no provision for the principal.

the disposition of the principal must be determined, if at all possible, from the intent of the

settlor.” Ventura v. Ventura, 407 Mass. 724, 730, 555 N.E.2d 872 (Mass. 1990)(quoting;

Goodwin v. New England Trust Co., 321 Mass. 502, 504, 73 N.E.2d 890 (1947)). Thus, the
Court must examine the provisions of the Agreement to determine if that intent is readilw
apparent or if an evidentiary hearing is required.

While the Agreement contains no specific directive for Eastern to return the Policies
to the Debtor upon termination, the absence of such a directive does not undermine the
existing language of the Agreement which sufficiently manifests the parties’ original
intention that the value of the Policies was to inure to the Debtor. Despite the fact that the
Policies were owned in the name of Eastern and that Eastern was designated as the sol
payee of the benefits under the Policies, the powers and obligations vested in the Debtor
under the Agreement compel the conclusion that Debtor retained traditional incidents of
ownership and beneficial interests in them. First, the Debtor had the contractual obligation
to pay all premiums. Indeed, the unrebutted Jalbert Affidavit establishes that the Debtor’ s
liability to Brothers for its payment of the Policies’ premiums was a primary cause of th2
increase in the Debtor’s levels of insolvency in the years 2001 through 2003. Jalbert
Affidavit at § 10. Second, the Debtor had the obligation to pay Eastern for its services, had

the ability to direct Eastern to purchase additional insurance policies and had the unilateré |

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right to remove and replace Eastern as trustee under the Agreement. The Debtor expendec.
substantial sums to fund this arrangement which it could effectively recoup either through:
its receipt of the Policies’ adjusted cash surrender value from Mr. Sawtelle during his life.
see Section 8(e), or through receipt of his shareholder equity upon his death, see Sections 4,
6, 7 and 8. Because the Debtor was the ultimate beneficiary of the Policies, the Cour:

concludes that they are property of its estate. See also In re Cooperativa Cafeteros de P.R.,

37 B.R. 952, 955 (D.P.R. 1984)(“A life insurance policy carried by the bankrupt corporation

upon the life of . . . [a] large stockholder, at the expense of a corporation, passes to the

trustee as an asset of the estate.”); In re McCulloch & Son, Inc., 30 B.R. 7, 8 (Bankr. D. Or.
1983)(“Where the bankrupt, by virtue of paying premiums, is both the owner of a lifv
insurance policy on another and is the beneficiary of the policy, the insurance policy i:
property of the estate even though the policy has not matured, has no cash surrende:

value, and is otherwise contingent.”)(citing Mutual Trust Life Ins. Co. v. Wemyss, 30”

F.Supp. 1221, 1228 (D. Me, 1970)). For the above reasons, the Court finds that the Policies
are property of the Debtor’s estate under 11 U.S.C. § 541(a).

Eastern’s argument that it was the parties’ intention to insulate the Policies from th2
Debtor's creditors for the benefit of Mr. Sawtelle does not affect the bankruptcy estate’s
property interest. While the Agreement reflects an intention of the parties that the Sawtell 2
Estate would receive a fixed sum from the Policies’ proceeds upon Mr. Sawtelle’s deatt,
such an intention would have to have been conditioned upon the solvency of the Debtor

at the time of transfer. The intervening bankruptcy of the Debtor, applicable state law and

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the unambiguous terms of the Agreement prevent Mr. Sawtelle’s Estate from receiving
over $485,000 for his stock in a bankrupt and defunct corporation at the fixed price he
originally bargained for in the Agreement. Any such arrangement in the current contex:
of a bankruptcy proceeding would be invalid as a fraudulent transfer, see 11 US.C. § 548,
potentially subordinated under 11 U.S.C. § 510(b) and impermissible under Massachusett:s
state law.!® See Mass. Gen. Laws ch. 156B §§ 45'° and 61 (imposing liability upon
stockholders and directors for redemptions made when a corporation is insolvent or which
render a corporation insolvent).

The Sawtelle Estate has provided no basis to assert a secured claim against th»
Policies as it did not produce any evidence of a perfected security interest in them. Indeed,
Mr. Sawtelle filed a proof of claim asserting a nonpriority unsecured claim which, to date,

has not been amended. The Sawtelle Estate has not articulated any basis for the imposition

'S The Complaint contains a count for fraudulent transfer but does not contain
one for subordination under § 510(b), although the Trustee did raise the issue in his
brief and at the January 15, 2008 hearing.

'6 The statute provides, in relevant part:

Stockholders to whom a corporation makes any distribution, whether by
way of dividend, repurchase or redemption of stock, or otherwise, except a
distribution of stock of the corporation, if the corporation is, or is thereby
rendered, insolvent shall be liable to the corporation for the amount of such
distribution made, or for the amount of such distribution which exceeds that
which could have been made without rendering the corporation insolvent,
but in either event, only to the extent of the amount paid or distributed to
them respectively ....

Mass. Gen Laws ch. 156B § 45. (emphasis added).

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of an equitable lien on the Policies. In short, the Sawtelle Estate has, at most, a rejectior.
claim under 11 U.S.C. § 502(g) or a general unsecured claim against the Debtor's estate, é.

claim which may be subject to mandatory subordination under 11 US.C. § 510(b)."” Sev

generally Baroda Hill Investments, Ltd. v. Telegroup, Inc. (In re Telegroup, Inc.), 281 F.3cl

133, 138 (3rd Cir. 2002)(a claim “arises from” the purchase or sale of a security if there is
a nexus or causal relationship between the claim and the sale of the security); In re Enron
Corp., 341 B.R. 141, 163 (Bankr. S.D.N.Y. 2006)(subordinating claims arising front
ownership of employee stock options; concluding “the broad applica[tion] of section 510(b)
is now quite settled.”).

The Court finds that the language of the Agreement is unambiguous, there are no
genuine issues of material fact concerning the parties’ intent thereunder and that th»
Trustee is entitled to judgment as a matter of law. The Policies are property of the Debtor’
estate and, as such, they are required to be turned over by Eastern to the Trustee. Th:

Court grants the Motion with respect to Count I of the Complaint. The Court also notes

'’ The statute provides, in relevant part:

(b) For the purpose of distribution under this title, a claim arising from
rescission of a purchase or sale of a security of the debtor or of an affiliate of
the debtor, for damages arising from the purchase or sale of such a security,
or for reimbursement or contribution allowed under section 502 on account
of such a claim, shall be subordinated to all claims or interests that are senior
to or equal the claim or interest represented by such security, except that if
such security is common stock, such claim has the same priority as common
stock.

11 U.S.C. § 510(b). (emphasis added).

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that, notwithstanding the above analysis, the Motion is also properly allowed in light o
Eastern’s failure to submit any written objection to the Motion or any counter-affidavits tc
create genuine issues of material fact required by Fed. R. Civ. P. 56(e), made applicable tc
this proceeding by Fed. R. Bankr. P. 7056. Moreover, the Howe Affidavit, which was
introduced by the Sawtelle Estate,” is not based on Howe's personal knowledge of the
parties’ original intent regarding the Agreement and is not otherwise sufficient to establist:
the existence of a genuine issue of material fact with respect to Count I.

In Count II of the Complaint, entitled “ Avoidance of Lien Against Mr. Sawtelle -
Bankruptcy Code § 544,” the Trustee alleges that Mr. Sawtelle asserts a lien on the Policie
but has failed to provide the Trustee with any evidence of such lien’s validity, amount o:
perfection. The Trustee contends that any such lien is voidable under 11 US.C. § 544(a}.
As discussed above, neither Mr. Sawtelle nor his estate filed a secured proof of claim in this
case, and they have presented no evidence of secured status. Moreover, the Sawtelle Estat
asserts no opposition to the entry of summary judgment on this Count in its Memorandum.
of Law. Accordingly, the Trustee’s Motion with respect to Count II is allowed.

In Count III of the Complaint entitled “Determination of Secured Status Against M1.
Sawtelle-Bankruptcy Code § 506,” the Trustee asserts that the value of any secured clair
of Mr. Sawtelle in the Policies is zero. For the reasons stated above with respect to Counts

land II, the Trustee’s Motion with respect to Count III is allowed.

'’ Through Count I, the Trustee seeks relief against Eastern, not the Sawtelle
Estate.

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In Count IV of the Complaint entitled “Fraudulent Transfer Against Mr. Sawtelle.
Bankruptcy Code § 548,” the Trustee alleges that the Debtor has been insolvent since:
December 16, 2001,” and that he may avoid the transfer of premium payments for the:

‘benefit of Mr. Sawtell while the Debtor was insolvent. This Count is now moot in light
the Court's finding on Count I.

In Count VII of the Complaint entitled “Declaratory Judgment Against Mr. Sawtelle
and Eastern Bank-28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that om
February 9, 2006, the date the Court entered the order for relief in the Debtor's case, the
trust terminated. As discussed above regarding Count I, a legal issue exists concerning;
whether the purported termination of the Agreement by the Trustee by letter date:
February 14, 2006 pursuant to Section 20(a) of the Agreement violated 11 U.S.C. § 365(e)(1).
The Trustee did not seek leave to brief the matter. Accordingly, the Trustee has not
demonstrated entitlement to summary judgment on Count VII as a matter of law. The
Motion is denied with respect to Count VII.

In Count VIII of the Complaint entitled “Declaratory Judgment Against Mr. Sawtell >
and Eastern Bank-28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that, as cf
the petition date, the owner and beneficiary of the Policies was the Trustee. For the reasons
stated regarding Count I above, the Motion is allowed with respect to Count VIII.

In Count IX of the Complaint entitled “ Declaratory Judgment Against Mr. Sawtelle -

28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that Mr. Sawtelle has n>

') According to the Jalbert Affidavit, the date of insolvency was October 31, 2001

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interest in the Policies. For the reasons stated regarding Count I and II above, the Motior
is allowed with respect to Count IX.

In Count X of the Complaint entitled “Declaratory Judgment Against Eastern Bank:
28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that Eastern has no interest ir
the Policies or their proceeds. For the reasons stated above regarding Count I, the Motion:
is allowed with respect to Count X insofar as Eastern seeks an interest in the Policies
pursuant to the terms of the Agreement.”

In Count XI of the Complaint entitled “Declaratory Judgment Against Eastern Bank-
28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that: (i) at all relevant times,
Eastern held the Policies in a resulting trust for the benefit of the Debtor; and (ii) as of
February 9, 2006, the Policies became property of the Debtor's estate. Having determined
that the Policies are property of the Debtor's estate, the latter request for declarator’
judgment is allowed for the reasons stated above. The Motion is also allowed with respect
to the first request. “Generally speaking, it is presumed that when one party pays th?
purchase price of property, but title is placed in the name of another, the latter holds th2
property in a resulting trust for the payor. That is, the payor intended the benefit of th2

property to inure to him or her, not the title holder.” Feinman v. Lombardo, 214 B.R. 26(,

267 (D. Mass. 1997)(citing Robinson v. Robinson, 366 Mass. 582, 585, 321 N.E.2d 637 (1974 ;

Frank v. Frank, 335 Mass. 130, 135, 138 N.E.2d 586 (1956); Ross v. Ross, 2 Mass. App. C..

20 Rastern may have general claims against the Debtor's estate for fees owed to it
under the Agreement.

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502, 508, 314 N.E.2d 888 (1974)). In this case, the Agreement unambiguously required the:
Debtor to pay the premiums on the Policies and pay Eastern reasonable compensation for
its services as trustee. Further, Eastern was “not... required to take any steps or institute:
any proceedings unless and until properly reimbursed and protected against liability.“ See
Agreement at Section 9(d). Eastern’s role was administrative and subordinate to the will
and direction of the Debtor regarding all material issues concerning the Policies. As such,
Eastern was a mere title holder, holding the Policies for the benefit of the Debtor. The
Motion is allowed with respect to Count XI.

In Count XII of the Complaint entitled “Declaratory Judgment Against Mr. Sawtelle-
28 U.S.C. § 2201,” the Trustee seeks a declaratory judgment that Mr. Sawtelle holds no
claim against the Debtor's estate but solely holds an equity interest in the Debtor which ha
no value. The Motion is denied with respect to Count XII as the Sawtelle Estate may hav
a claim against the Debtor's estate for rejection of the Agreement under 11 U.S.C. § 502(g),7
or a general unsecured claim derivative of his stock ownership.

The Trustee also seeks summary judgment on Eastern’s Counterclaim throug]

*! The statute provides, in relevant part:

(g)(1) A claim arising from the rejection, under section 365 of this title or
under a plan under chapter 9, 11, 12, or 13 of this title, of an executory
contract or unexpired lease of the debtor that has not been assumed shall be
determined, and shall be allowed under subsection (a), (b), or (c) of this
section or disallowed under subsection (d) or (e) of this section, the same as
if such claim had arisen before the date of the filing of the petition.

11 US.C. § 502(g)(1).

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which it requests:

[A] declaratory judgment stating the proper liquidation and distribution of
the Trust corpus, after payment of the reasonable costs of termination,
among Chester M. Sawtelle preserving his interest as beneficiary of the Trust,
and thereafter of the remainder to the Debtor’s estate, in accordance with the
terms of the Trust and applicable provisions of Massachusetts law, leading
to the discharge of Eastern Bank’s fiduciary duties under the Trust as a result
thereof.”

Because the Court has determined that the Policies are property of the Debtor's estate anc!
that turnover of the Policies by Eastern to the Trustee is required under 11 U.S.C. § 542, the
Court denies the relief requested in the Counterclaim. For that reason, and due to Eastern’
failure to object to the Motion and otherwise file its own cross motion for summary
judgment on the Counterclaim, the Motion is allowed regarding the Counterclaim. /.
separate order shall enter.

By the Court,

GW, Bares —

Dated: April 24 , 2008 Joan N. Feeney
United States Bankruptcy Judge

24