Pat J. Herlan, WV Real Estate Broker, Inc.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: 	)
)
PAT J. HERLAN, WV REAL ESTATE 	) 	Case No. 09-2665
BROKER, INC., 	)
)
Debtor. 	) 	Chapter 11
MEMORANDUM OPINION
Timberline Four Seasons Resort, Inc. (“Timberline Four Seasons”), requests an immediate
turnover of 73 vacation home management contracts currently in the possession of Pat J. Herlan, WV
Real Estate Broker, Inc. (the “Debtor”), under 11 U.S.C. § 541(d) on the grounds that Timberline
Four Seasons is the equitable owner of those contracts and the only duty of the Debtor’s bankruptcy
estate, as the legal title holder, is to turnover those contracts to it.
For the reasons stated herein, the court will order that the contracts be immediately turned
over to Timberline Four Seasons.
BACKGROUND
Timberline Four Seasons is a family-owned, four seasons resort. It has a real estate division
that sells and promotes properties, and manages homeowners’ properties that are for rent. In 1991,
it hired Pat Herlan to provide real estate brokerage services. 	Timberline Four Seasons did not
otherwise have a licensed real estate broker as an owner or officer; thus, it could not have engaged
in the business of real estate brokerage without a broker’s assistance.
On January 3, 2007, Timberline Four Seasons terminated Ms. Herlan’s employment, and
demanded that she turnover all of her brokerage business, books and records to another real estate
brokerage, Long Run Realty, that is wholly owned by a principal of Timberline Four Seasons. By
agreement, Ms. Herlan had until June 30, 2007 to vacate Timberline Four Seasons’s place of
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business and turnover all property.1
Upon her departure, Ms. Herlan removed certain business records that Timberline Four
Seasons claims are vital to the continued operation of its real estate division. These records included
sales listing agreements, vacation home rental contracts, future reservation lists, and Ms. Herlan’s
trust accounts.
Concerned about the loss of its property, on June 24, 2007, Timberline Four Seasons filed
a Petition for Injunctive Relief in the Circuit Court of Tucker County, West Virginia. Following a
trial, the Circuit Court entered its Findings of Fact and Conclusions of Law on July 6, 2007, and
denied the petition for injunctive relief.
On June 9, 2009, the Supreme Court of Appeals of West Virginia reversed, determining that
Pat Herlan was an agent of Timberline Four Seasons. Timberline Four Seasons Resort Mgmt. Co.
v. Herlan, 679 S.E.2d 329 (W. Va. 2009). Based on the agency relationship, the Supreme Court of
Appeals reasoned that Pat Herlan is held to the utmost good faith, and would not be allowed to use
Timberline Four Seasons’s property for her own advantage, or to derive secret profits or advantages
to herself by reason of the relation of principal and agent. Because the business records – including
the 2007 vacation home rental contracts – were primarily obtained pursuant to Ms. Herlan’s agency
relationship with Timberline Four Seasons, the Supreme Court of Appeals directed the Circuit Court
to enter an order granting Timberline Four Seasons’s request for injunctive relief, which called for,
among other things, a turnover of the vacation home rental contracts.
The vacation home rental contracts themselves are in the names of the individual
homeowners and the Management Company, “Timberline Resort Realty, a West Virginia
Company.” Ms. Herlan, individually, signed each contract as broker for the Management Company.2
Sometime in 2000, Ms. Herlan had incorporated Timberline Resort Realty, Inc., but she unilaterally
transferred all contracts held by that entity to the Debtor before filing her personal bankruptcy on
Ms. Herlan contends that, initially, problems existed with turning over the business1
records to Timberline Four Seasons, or a related entity, until such time as it employed another
broker.
The individual vacation home rental contracts are filed with the court at Document Nos.2
57-69, and were made exhibits at the evidentiary hearing held on December 17, 2009.
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November 16, 2009. As of October 2009, Timberline Resort Realty, Inc., is a company owned and
controlled by one or more principals of Timberline Four Seasons.
On remand to the Circuit Court of Tucker County, the Circuit Court entered an order on
October 6, 2009, that required, among other things, Ms. Herlan to turnover the vacation home rental
contracts “with lessors who were customers of Timberline in June 2007, and that are currently in the
name of Pat J. Herlan, and/or Timberline Realty, Inc., and/or Timberline Resort Realty, Inc., and/or
Almost Heaven West Virginia Realty, and/or any Herlan associate. . . .” Ms. Herlan, however,
refused to turnover any of the current contracts on the grounds that – while Timberline Four Seasons
could have all the expired 2007-08 rental contracts – the individual homeowners had executed “new”
contracts for the 2008-09 and 2009-10 rental periods and these “new” contracts did not belong to
Timberline Four Seasons.
Ms. Herlan filed an individual Chapter 7 bankruptcy petition on November 16, 2009, and3
filed a Chapter 11 bankruptcy petition for the Debtor on November 23, 2009.
DISCUSSION
Timberline Four Seasons contends that Ms. Herlan is conclusively presumed to be its agent
under the Supreme Court of Appeals of West Virginia’s determination; therefore, as its agent, Ms.4
Herlan only has legal title to the vacation home rental contracts. In addition to contesting Timberline
Four Seasons’s equitable title, the Debtor raises a number of defenses: (1) Long Run Realty is the
only party that has the ability to request turnover under 11 U.S.C. § 541(d) and its is not a party to
the turnover motion; (2) contracts for the 2009-10 rental period did not exist in 2007; thus, no
vacation home rental contracts currently exist to turnover; and (3) the vacation home rental contracts
are personal service contracts that cannot be assumed or assigned without the homeowners’ consent.
Several homeowners also testified that they did not consent to have their vacation home rental
Ms. Herlan filed a motion to convert her Chapter 7 case to one under Chapter 11 on3
December 30, 2009.
The court recognizes that Ms. Herlan disputes that she is the agent of Timberline Four4
Seasons. The Supreme Court of Appeals of West Virginia, however, found otherwise, and Ms.
Herlan is precluded from litigating that issue again in this court. E.g., Sartin v. Macik, 535 F.3d
284 (4 	Cir. 2008) (discussing the application of issue preclusion in bankruptcy proceedingsth
initiated after a final state court judgment).
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contracts “transferred” to Timberline Four Seasons and that they wanted the Debtor to continue to
perform services under their respective contracts.
A. 	Amendment of the Turnover Motion to Add Long Run Realty as a Moving Party
The Debtor contends that, under West Virginia law, the vacation home rental contracts can
only be turned over to a licensed real estate broker. Timberline Four Seasons, the named moving
party, has no licensed real estate broker. 	Instead, Tom Blandzy, a principal of Timberline Four
Seasons, incorporated Long Run Realty, Inc., which is associated with Kim Landis, a broker, to hold
the vacation home rental contracts. In the Debtor’s view, Long Run Realty is not a moving party and
therefore no grounds exist for the court to order the turnover of the vacation home rental contracts
to Timberline Four Seasons.
At the close of Timberline Four Seasons’s case-in-chief on December 17, 2009, the Debtor
raised, for the first time, the standing of Timberline Four Seasons to obtain the relief it had
requested. To the extent that there was any defect in the moving party, Timberline Four Seasons
orally moved to amend its turnover motion to add Long Run Realty as a moving party.
In bankruptcy proceedings, motion practice is governed by Fed. R. Bankr. P. 9014. That
Rule incorporates into motion practice many of the Bankruptcy Rules that are applicable to adversary
proceedings, which themselves incorporate many of the Federal Rules of Civil Procedure. Rule 15
of the Civil Rules, Fed. R. Bankr. P. 7015, governing the amendment of pleadings is not specifically
applicable to motion practice; however, Fed. R. Bank. P. 9014(c) states that “[t]he court may at any
stage in a particular matter direct that one or more of the other rules in Part VII shall apply.” Rule
15(b) permits pleadings to be “freely” amended when the amendment “will aid in presenting the
merits and the objecting party fails to satisfy the court that the evidence would prejudice that party’s
action or defense on the merits.”
Here, Long Run Realty was a movant before the Supreme Court of Appeals of West Virginia
when the Court remanded the case for entry of an injunction granting turnover of the vacation home
rental contracts, the principals of the two companies overlap, and this court finds that no unfair
surprise would result to the Debtor by amending the turnover motion to include Long Run Realty
as a moving party. Finding no prejudice to the Debtor by adding Long Run Realty as a party plaintiff,
the court will order that Fed. R. Bankr. P. 7015 be made applicable to this contested matter under
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Fed. R. Bankr. P. 9014, and will grant the oral motion of Timberline Four Seasons to add Long Run
Realty as a moving party in its motion for turnover under 11 U.S.C. § 541(d). See, e.g., HOH Co.
v. Travelers Indem. Co., 903 F.2d 8, 14 n.8 (D.C. Cir. 1990) (allowing the pleadings to be amended
to add a party plaintiff).
B. 	Equitable and Legal Title to the 2007-08 Vacation Home Rental Contracts
As its employee/agent, Timberline Four Seasons states that Ms. Herlan only had legal title
to the 2007-08 vacation home rental contracts and that legal title is all that the Debtor was capable
of obtaining. To the extent that the 2007-08 contracts have any viability after their expiration, the
Debtor contends that its bankruptcy estate, by way of the powers granted to it by the Bankruptcy
Code, acquired greater rights in the vacation home rental contracts than Ms. Herlan possessed such
that it is more than a mere legal title holder.
As a matter of West Virginia law, an agent holding property belonging to the agent’s
principal only holds legal title to that property and equitable title is held by the principal. E.g.,
Cleavenger v. Felton, 33 S.E. 117 (W. Va. 1899) (stating that an agent holding title to real property
for the principal has no equitable ownership rights in the real property). When an agent wrongfully
retains the principal’s property, a constructive trust is imposed such that the property must be
returned to its rightful owner. E.g., Annon v. Lucas, 185 S.E.2d 343, 352-53 (W. Va. 1971)
(“[W]henever the legal title to property . . . has been obtained through . . . circumstances which
render it unconscientious for the holder of the legal title to retain and enjoy the beneficial interest,
equity impresses a constructive trust on the property thus acquired in favor of the one who is truly
and equitably entitled to the same . . . .”); Johnson's Ex'rs v. Johnson's Heirs, 98 S.E. 812 (W. Va.
1919) (“[A] principal who furnishes money to an agent with which to buy land for him, and the agent
invests it in land and takes title to himself. There a constructive trust arises in favor of the
principal.”). Likewise, constructive trusts can be imposed to prevent unjust enrichment of an agent
at the expense of a principal. E.g., St. Clair v. St. Clair, 273 S.E.2d 352, 355 (W. Va. 1980) (“To
invoke the law of restitution or unjust enrichment to impose a constructive trust upon property of
another, it is necessary that it be shown that one party has been unjustly enriched.”); Restatement
(First) of Restitution § 160 (1937) (“Where a person holding title to property is subject to an
equitable duty to convey it to another on the ground that he would be unjustly enriched if he were
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permitted to retain it, a constructive trust arises.”).
In this case, Ms. Herlan, an agent/employee of Timberline Four Seasons, owed Timberline
Four Seasons a fiduciary duty to hold the vacation home rental contracts for its benefit. Allowing
Ms. Herlan to profit from a breach of her fiduciary duty as an agent of Timberline Four Seasons
would result in her unjust enrichment. Therefore, under West Virginia law, as recognized by the
Supreme Court of Appeals of West Virginia in this case, Ms. Herlan is obligated to turnover the
2007-08 vacation home rental contracts to Timberline Four Seasons and/or Long Run Realty.5
Of course, Ms. Herlan asserts that she no longer has title to the 73 vacation home rental
contracts at issue because – to the extent those contracts still exist – she transferred them to the
Debtor before it filed bankruptcy. The contracts, therefore, are not in her possession, but constitute
property of the Debtor’s bankruptcy estate.
As a general matter, property of a debtor’s bankruptcy estate includes “all legal or equitable
interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1).
What constitutes property of the estate is to be interpreted broadly. United States v. Whiting Pools,
462 U.S. 198, 204-05 (1983). 	“In the absence of any controlling federal law, ‘property’ and
‘interests in property’ are creatures of state law.” Barnhill v. Johnson, 503 U.S. 393, 398 (1992).
Thus, unless some federal interest requires a different result, property interests in bankruptcy are to
be analyzed under applicable state law to “reduce uncertainty, discourage forum shopping, and to
prevent a party from receiving a windfall merely by reasons of the happenstance of bankruptcy.”
Butner v. United States, 440 U.S. 48, 55 (1979); see also Nobelman v. Am. Sav. Bank, 508 U.S. 324,
329 (1993) (“In the absence of a controlling federal rule, we generally assume that Congress has left
the determination of property rights in the assets of a bankrupt’s estate to state law, since such
The Debtor asserted at the hearing that Timberline Four Seasons has a remedy at law for5
damages and therefore no basis exists to employ an unjust enrichment theory for recovery of the
contracts. In Annon v. Lucas, 185 S.E.2d 343, 352 (W. Va. 1971), however, the Court stated that
“[t]he availability of a constructive trust as a mode of relief against unjust enrichment is not, in
general, affected by the fact that the plaintiff has a cause of action at law, as distinguished from
equity, for damages or other relief.” Therefore, even assuming that Timberline Four Seasons has
an adequate remedy at law, that is not a bar from asserting a constructive trust / unjust
enrichment theory to compel turnover of the vacation home rental contracts under 11 U.S.C. §
541(d).
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property interests are created and defined by state law.”). 	Consequently, once a property interest
has passed to the estate, it is generally subject to the same limitations imposed by applicable non-
bankruptcy law. In re FCX, Inc., 853 F.2d 1149, 1153 (4 	Cir. 1988) (“The estate under § 541(a)th
succeeds only to those interests that the debtor had in property prior to commencement of the
bankruptcy case.”). In short, in the absence of a contrary federal interest, if a debtor’s rights to
certain property are limited by applicable state law, so too are the rights of the debtor’s bankruptcy
estate.
In this case, based on the analysis of the Supreme Court of Appeals of West Virginia, Ms.
Herlan only had legal title to the 2007-08 vacation home rental contracts as Timberline Four
Seasons’s agent. 	The Debtor never acquired any other right to those contracts other than that
enjoyed by Ms. Herlan. For instance, there is no evidence that any consideration was paid by the
Debtor to Ms. Herlan for the benefit of the contrats. As such, the Debtor only acquired Ms. Herlan’s
legal title – not equitable title – to the contracts and the Debtor is in no way an actual, bona fide
purchaser for value of the 2007-08 vacation home rental contracts. 	In short, nothing about the
acquisition of the vacation home rental contracts by the Debtor’s bankruptcy estate gave the Debtor
a greater right, title, or interest in the contracts than that enjoyed by Ms. Herlan.
Notwithstanding the result of applicable non-bankruptcy law, the Debtor asserts that the
bankruptcy estate is a different entity, with different powers from Ms. Herlan as an individual.
Namely, under 11 U.S.C. § 544(a), the Debtor has the powers of a judicial lien creditor and a bona6
That subsection provides:6
(a) The trustee shall have, as of the commencement of the case, and without
regard to any knowledge of the trustee or of any creditor, the rights and powers of,
or may avoid any transfer of property of the debtor or any obligation incurred by
the debtor that is voidable by--
(1) a creditor that extends credit to the debtor at the time of the
commencement of the case, and that obtains, at such time and with respect to such
credit, a judicial lien on all property on which a creditor on a simple contract
could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the
commencement of the case, and obtains, at such time and with respect to such
credit, an execution against the debtor that is returned unsatisfied at such time,
whether or not such a creditor exists; or
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fide purchaser of real property as of the petition date. The Debtor asserts that these powers trump
the equitable rights of Timberline Four Seasons to the vacation home rental contracts.
Contrary to the Debtor’s argument, § 544(a)(3) is not applicable to this case because it only
applies in cases of real property – not personal property such as the contracts at issue in this case.
Also, under § 544(a)(1) and (2), West Virginia law already provides that the rights of a subsequent
judgment lien creditor do not trump the rights of a constructive trust beneficiary such that the
judgment lien creditor may claim equitable title to the disputed property. E.g., Cleavenger v. Felton,
33 S.E. 117 (W. Va. 1899) (“When statute enactments do not interfere, a judgment creditor can
acquire no better right to the estate of a debtor that the debtor himself has when the judgment is
recovered. He takes it subject to every liability under which the debtor held it, and subject to all the
equities which exist in favor of third parties; and a court of equity will limit the lien of the judgment
to the actual interest which the debtor has in the estate . . . .”); accord, In re DVI, Inc., 306 B.R. 496,
503 (Bankr. D. Del. 2004) (“The rights of a hypothetical judicial lienholder do not prevail over an
equitable interest holder . . . the rights of a judicial lien holder are not equivalent to those of an
innocent purchaser for value.”); Enter. Leasing Co. of Norfolk/Richmond v. Mepco, Inc. (In re
Mepco, Inc.), 276 B.R. 94, 104 (Bankr. W.D. Va. 2001) (holding that under Virginia law, a
beneficiary of a constructive trust would have priority over the trustee’s status as a judgment creditor
when the wrong occurred before the petition date); In re Storage Technology Corp., 55 B.R. 479,
484 (Bankr. D. Colo. 1985) (“The law is clear in Colorado that, with regard to [personal property],
a beneficiary of a constructive trust or other equitable lien prevails over a judicial lien creditor.”);
see also Mid-Atlantic Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121 (4 	Cir. 1986)th
(recognizing that the rights of a constructive trust beneficiary under § 541(d) takes priority over a
(3) a bona fide purchaser of real property, other than fixtures, from the
debtor, against whom applicable law permits such transfer to be perfected, that
obtains the status of a bona fide purchaser and has perfected such transfer at the
time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544.
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bank’s security interest in personal property under Virginia law).7
Consequently, the court concludes that all the Debtor’s bankruptcy estate obtained from the
Debtor is the legal title to the 2007-08 vacation home rental contracts. Those contracts are subject
to a constructive trust in favor of Timberline because, as recognized by the Supreme Court of
Appeals of West Virginia, they were primarily obtained by Ms. Herlan while she was an
agent/employee of Timberline Four Seasons. Because the trust property is now in the hands of the
Debtor, Timberline Four Seasons may follow the property into the Debtor’s hands; this “‘trust
pursuit rule’ permits a true owner of wrongfully converted property to follow it into a subsequent
possessor’s hands.” 76 Am. Jur. 2d Trusts § 275 (2008). 	Under 11 U.S.C. § 541(d), the Debtor’s
only duty with regard to the contracts is to turn them over to Timberline Four Seasons as the
constructive trust beneficiary.
C. 	Imposition of Constructive Trust on 2009-10 Contracts
The Debtor asserts that it is willing, and has, turned over all contracts from the 2007-08 rental
period that the Supreme Court of Appeals of West Virginia recognized to be the property of
Timberline Four Seasons. In the Debtor’s view, the current 2009-10 rental period contracts are new
contracts not subject to the Supreme Court of Appeals’s determination. Timberline Four Seasons
contends that the current contracts are the “fruit of the poisonous tree” such that they too should be
returned to it as equitable owner.
Although all the contracts existing in 2007 – when Ms. Herlan was Timberline Four
Seasons’s agent – have expired, the purpose of the imposition of a constructive trust is to prevent
unjust enrichment. Restatement (First) of Restitution § 160 cmt. (a) (1937) (“A constructive trust
. . . is imposed as a remedy to prevent unjust enrichment.”). That is, the purpose “is to restore to the
The court recognizes authority such as XL/Datacomp v. Wilson (In re Omegas Group),7
16 F.3d 1443 (6 	Cir. 1994), that is critical of the application of constructive trusts in bankruptcyth
proceedings. In the Fourth Circuit, however, constructive trusts in bankruptcy under 11 U.S.C. §
541(d) are accepted, Mid-Atlantic Supply, Inc. v. Three Rivers Aluminum Co., 790 F.2d 1121 (4th
Cir. 1986), and until such time as the law in this Circuit changes, the court will continue to apply
the constructive trust doctrine in bankruptcy cases. E.g., Old Republic Nat'l Title Ins. Co. v.
Tyler (in Re Dameron), 206 B.R. 394 (Bankr. E.D. Va. 1997) (finding no reason to abrogate the
constructive trust doctrine under § 541(d) after Omegas), aff’d on other grounds, 155 F.3d 718
(4 	Cir. 1998).th
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plaintiff property of which he has been unjustly deprived and to take from the defendant property the
retention of which by him would result in a corresponding unjust enrichment of the defendant; in
other words the effect is to prevent a loss to the plaintiff and a corresponding gain to the defendant,
and to put each of them in the position in which he was before the defendant acquired the property.”
Id. at cmt. (d). 	Thus, not only the property, but profits from the property are subject to being
surrendered. Id.
In this case, Ms. Herlan’s practice was to have the homeowner sign a renewal contract before
the previous contract had expired. As additional incentive to quickly sign a renewal contract, Ms.
Herlan told the homeowner that she could delay final payment to the homeowner on the
homeowner’s vacation rental for up to 60 days, but the homeowner would receive immediate
payment once the renewal contract was signed.
In addition, W. Va. Code § 30-40-19(a)(15) explicitly prohibits a licensee under the West
Virginia Real Estate License Act to induce “any person to a contract to break the contract for the
purpose of substituting a new contract with a third party.” 	Under this statute, Timberline Four
Seasons and/or Long Run Realty believed that they were prohibited from independently contacting
the homeowners and soliciting their business following the 2007-08 rental period unless they had
learned that the homeowner had voluntarily terminated the contract with Ms. Herlan, or refused to
renew for the following rental year period. Neither Timberline Four Seasons nor Long Run Realty
had any independent method of obtaining this information.
Under these conditions, the court finds that the vacation home rental contracts never became
competitive such that Timberline Four Seasons could independently solicit business from the
homeowners. Additionally, the court finds that all 73 vacation rental contracts at issue were first
executed when Ms. Herlan was an agent of Timberline Four Seasons, and the annual renewal of
those contracts with Ms. Herlan would not likely have happened in the absence of the original
agency. As such, the court finds that the annual renewal contracts are profits from the contracts
existing in 2007, allowing the Debtor to keep these contracts would result in its unjust enrichment
from the original wrongful act of Ms. Herlan, and to prevent further unjust enrichment, the 2009-10
vacation home rental contracts must be turned over to Timberline Four Seasons and/or Long Run
Realty.
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In sum, turnover of the 2009-10 vacation home rental contracts is the most effective method
of restoring to Timberline Four Seasons and/or Long Run Realty the property that they were deprived
of in 2007, and to put Ms. Herlan, the Debtor, Timberline Four Seasons, and/or Long Run Realty
in the same position as the parties were in before Ms. Herlan wrongfully took the 2007 contracts.
See, e.g., Bank of America v. Ryan, 207 Cal. App. 2d 698 (Cal Ct. App. 1962) (stating that if a
constructive trust is to be imposed on money and other property, the beneficiary thereof is entitled
to recover rents, income, and profits on such property); Ryan v. Plath, 140 P.2d 968 (Wash. 1943)
(stating that a constructive trustee may be compelled to convey or assign corpus of trust property and
to account for and pay over rents, profits, issues, and income which constructive trustee has actually
received or, in general, which he might by exercise of reasonable care and diligence have received);
76 Am. Jur. 2d Trusts § 275 (2008) (“Once a constructive trust is imposed the trust property or funds
will be followed into the proceeds or product of the trust property in order that the beneficiary might
recover such proceeds or product, including any profit or increase in value of such proceeds or
product over the original trust property.”).
D. 	Personal Service Contracts
According to the Debtor, the vacation home rental contracts are a type of personal service
contract, which cannot be assumed or assigned under 11 U.S.C. § 365(c)(1) absent the consent of
the homeowner. The Debtor contends that the homeowners do not consent to any of the vacation
home rental contracts being “transferred” to Timberline Four Seasons or Long Run Realty, and
several of the homeowners appeared at the December 17, 2009 hearing to voice their opposition to
any anticipated “transfer.”8
A personal services contract has been defined as “[a] contract which contemplates the
performance of personal services involving the exercise of special knowledge, judgment, taste, skill,
or ability.” In re Compass Van & Storage Co., 65 B.R. 1007, 1011 (Bankr. E.D.N.Y. 1986); see also
Escandar v. S. Mgmt. and Inv. Corp., 534 So. 2d 1203, 1205 n.2 (Fla. Ct. App. 1988) (“[C]orporate
responsibility which can be performed by anyone within the corporation” is not a personal service
The court also notes that it is the individual homeowners that have the right to assert8
that the vacation home rental contracts are personal service contracts that cannot be assigned –
not the Debtor – inasmuch as they are the recipients of the alleged personal services.
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contract and may be assigned); see also W. Va. Code § 46-2-210 (delegation of duties); Restatement
(Second) Contracts, § 318 (1981) (same). Typical personal services contracts include “a contract
to paint a portrait, write a novel, or perform other work requiring ‘rare genius’ and ‘extraordinary
skill.’” Mehul’s Inv. Corp. v. ABC Advisors, Inc., 130 F. Supp. 2d 700, 705 (D. Md. 2001).
In this case, the vacation home rental contracts are in the name of Timberline Resort Realty
– not in the name of Ms. Herlan, who only signed the contract as a broker. Nothing in the vacation
home rental contract makes the personal services of Ms. Herlan a condition of performance. Much
of the actual work done under the contract is performed by Ms. Herlan’s staff, at least one of whom,
Allison Maddox, currently works for Long Run Realty. While the court recognizes that many
homeowners are particularly impressed with Ms. Herlan’s marketing, service, and ability to find
“quality” renters for their units, exceptional service and marketing do not turn an ordinary business
contract into a personal service contract. The vacation home rental contracts in this case are simply
devoid of language that specifically contemplates the special knowledge, judgment, taste, skill, or
ability of Ms. Herlan as a condition of performance. 	The court is not convinced that managing9
vacation home rentals requires “rare genius” or “extraordinary skill.” No case cited by Ms. Herlan
demonstrates that the particular nature of a vacation home rental contract classifies it as a personal
services contract. 	See Del. CWC Liquidation Corp. v. Martin, 584 S.E.2d 473 (W. Va. 2003)
(attorney malpractice claims are personal and not assignable under West Virginia law); Kelley v.
Thompson Land Co., 164 S.E. 667 (W. Va. 1932) (formation of a going corporation “is essentially
a personal matter requiring personal experience, ability, skill and judgment of the promoter. . . .
[T]he parties relied wholly on Thompson to form and finance the intended corporation and upon his
continued cooperation and supervision to make it a success. The consideration at the foundation of
the contracts in question was distinctly personal. There is nothing whatever to indicate that a proxy
or a ‘substitute service’ for that of Thompson was ever thought of.”); MNC Credit Corp. v. Sickels,
497 S.E.2d 331 (Va. 1998) (“The common law of this Commonwealth did not permit the assignment
of legal malpractice claims. At common law, contracts for legal services were not assignable because
The Debtor did state that only 12% of the renters for the vacation homes are repeat9
customers; thus, obtaining renters for the vacation homes requires constant, extensive marketing.
The court fails to see, however, how the need for marketing of vacation homes to consumers
turns the vacation home rental contracts with the homeowner into a personal service contract.
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of the fiduciary duties inherent in the attorney-client relationship.”).
Consequently, the court does not believe that the vacation home rental contracts at issue in
this case are personal service contracts, and it finds no impediment to recognizing the imposition of
a constructive trust on the contracts in favor of Timberline Four Seasons. Moreover, the court notes
that under 11 U.S.C. § 365(c)(1) it is not assuming or assigning any contract, and is not transferring
any contract. 	The court is merely recognizing that the vacation home rental contracts were the
property of Timberline Four Seasons when Ms. Herlan took those contracts and when they came into
the possession of the Debtor. By recognizing Timberline Four Seasons’s equitable ownership rights
in the contracts, it is merely unwinding an unlawful transfer and returning the contracts to the rightful
owner.
E. 	Desire of Homeowners to Have the Debtor Continue to Service their Contracts
Several homeowner parties to the vacation home rental contracts appeared at the December
17, 2009 hearing to protest the possibility that someone other than Pat Herlan or her related company
may be servicing their individual contracts. 	In their view, they have trust in Ms. Herlan, her10
judgment, her staff, and in her ability to solicit quality renters for their homes through her extensive
marketing campaigns. They do not similarly trust Timberline Four Seasons / Long Run Realty and
worry that those entities have a lesser ability to perform under their vacation home rental contracts.
The court recognizes the desires of certain homeowners to retain the services of Ms. Herlan
and her staff, though whatever entity Ms. Herlan is associated with. To that end, the court notes that
each of the 73 contracts in this case have an identical termination provision whereby the contract
“may be cancelled by either party 90 DAYS after written letter of cancellation is received in the
Timberline Resort Realty office . . . .” The court also notes that it is not forcing any homeowner to
contract with Timberline Four Seasons or Long Run Realty, and it is not interfering with the
individual homeowners’ freedom of contract. The court is merely recognizing that for the 2007-08
rental period, the homeowners were doing business with Timberline Four Seasons as the principal
of Ms. Herlan, that Ms. Herlan breached her fiduciary, agency obligations to her principal, and that
Homeowners Timothy McClain, Stephen Halfill, and Charles Barnes testified that they10
wanted no business dealings with Timberline Four Seasons / Long Run Realty and that it was
important to them that Pat Herlan, or her associated businesses, continue to service their vacation
home rental contracts.
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the profits of that wrongdoing – the 2009-10 vacation rental contracts – must be returned to their
rightful owner.
CONCLUSION
Under 11 U.S.C. § 541(a), the bankruptcy consists of “all legal or equitable interests of the
debtor in property as of the commencement of the case.” Section 541(d), however, clarifies that this
language of subsection (a) does not include property that the debtor does not hold in his own right:
“property in which the debtor holds . . . only legal title and not an equitable interest . . . becomes
property of the estate . . . only to the extent of the debtor's legal title to such property, but not to the
extent of any equitable interest in such property that the debtor does not hold.” As recognized in the
Senate Report, this means that a bankruptcy trustee “could take no greater rights than the debtor
himself had [in the trust property].” S. Rep. No. 989, 95th Cong., 2d Sess. 82, reprinted in 1978 U.S.
Code Cong. & Ad. News, 5787, 5868. Accordingly, when a debtor’s wrongful conduct gives rise
to a constructive trust, the debtor holds only bare legal title to the disputed property, subject to a duty
to reconvey it to the rightful owner, and the bankruptcy estate holds the property subject to the same
restrictions.
Because the court has found the 2009-10 vacation home rental contracts in this case are
subject to a constructive trust in favor of Timberline Four Seasons and/or Long Run Realty, the court
will enter a separate order pursuant to Fed. R. Bankr. P. 9021 that grants Timberline Four Seasons’s
motion for their turnover under 11 U.S.C. § 541(d) of the Bankruptcy Code.
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