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In re Smith

United States Bankruptcy Appellate Panel For the First Circuit

September 6, 2017

MARY L. SMITH, Debtor.
MARY L. SMITH, Defendant-Appellant. KATHLEEN WHITCOMB and SCOTT WHITCOMB, Plaintiffs-Appellees, Bankruptcy No. 15-10891-MSH Adversary Proceeding No. 15-01079-MSH

         Appeal from the United States Bankruptcy Court for the District of Massachusetts (Hon. Melvin S. Hoffman, U.S. Bankruptcy Judge)

          Daniel K. Webster, Esq., on brief for Defendant-Appellant.

          Kathleen Whitcomb and Scott Whitcomb, pro se, on brief for Plaintiffs-Appellees.

          Before Deasy, Cary, and Fagone, United States Bankruptcy Appellate Panel Judges.

          Cary, U.S. Bankruptcy Appellate Panel Judge.

         Mary L. Smith ("Ms. Smith") appeals from a bankruptcy court judgment in favor of Kathleen Whitcomb and Scott Whitcomb (collectively, the "Whitcombs"), wherein the bankruptcy court: (1) determined that the state court judgment debt Ms. Smith owes the Whitcombs is excepted from discharge pursuant to § 523(a)(6) and § 523(a)(2)(A);[1] and (2) granted the Whitcombs relief from the automatic stay in order to return to the state court to enforce that judgment, as amended (the "Amended State Court Judgment"). For the reasons set forth below, the bankruptcy court's judgment is AFFIRMED.


         I. Pre-Litigation Events

         This appeal arises out of a dispute concerning ownership of certain property located in Hanover, Massachusetts (the "Property"). Ms. Smith and her late husband, William Smith ("Mr. Smith"), acquired the Property in the 1960s, and their daughter, Kathleen Whitcomb ("Kathleen"), grew up there. After she married, Kathleen moved to Rockland, Massachusetts, where she lived with her husband, Scott Whitcomb ("Scott"), and their children for 13 years.

         In 1999, concerns about Mr. Smith's health and his long-term care surfaced, as Mr. Smith displayed memory difficulties. This development prompted the Smiths to suggest that the Whitcomb family move into the home on the Property. More specifically, the Smiths proposed to build a new in-law addition for themselves, while the Whitcombs would occupy the main house. The Whitcombs would pay for the construction of the addition (including making the monthly payments on any mortgage loan obtained by the Smiths to build the addition), pay a portion of the real estate taxes, utilities, maintenance costs, and other expenses associated with the Property, and eventually receive title to the Property from the Smiths.

         Although they had been considering the purchase of a new-construction home in Rockland, the Whitcombs agreed to the Smiths' proposal. In order to memorialize the families' joint understanding, Mr. Smith prepared a handwritten, two-page agreement, captioned "Agreement between William H. and Mary L. Smith and Scott H. and Kathleen A. Whitcomb relative to [the Property]" (the "Agreement"). Neither the Whitcombs nor the Smiths signed the Agreement.

         The first paragraph of that document expressed the reason for the Agreement as follows: "Because of a strong desire to keep the [Property] in the family due to its excellent location, we have entered into an agreement with our daughter, Kathleen A. Whitcomb and her husband, Scott H. Whitcomb . . . ." The Agreement was silent regarding any concerns pertaining to Mr. Smith's health that might have inspired the new living arrangement.

         With respect to the Whitcombs' responsibilities, the Agreement provided that, "[insofar] as possible, " the Whitcombs would "pay for the cost of th[e] addition in toto including any costs associated with additions to the [P]roperty as required by state or municipalities because of the addition." Additionally, the Agreement provided:

Transfer of the entire property from William H. and Mary L. Smith to Scott and Kathleen Whitcomb will be made by legal means that will minimize the tax exposure to Scott and Kathleen Whitcomb.
[ ] Regardless of circumstances, the rights of William H. and Mary L. Smith to abide in the addition as the[ir] home will not be denied or restricted until either
(i) Both are deceased [or]
(ii) Each decides to leave on their own volition . . . .

(emphasis added). The Agreement did not specify exactly when the Smiths would "transfer . . . the entire [P]roperty" to the Whitcombs.

         The Agreement went on to summarize the "Approximate Financial Details" of the parties' arrangement, including estimates for the cost of the addition ($150, 000) and the Smiths' expected resulting mortgage balance ($120, 000). Lastly, the Agreement contained a provision titled "Gift Tax Exposure, " which stated, in relevant part, that the "estimated gift amount from William H. and Mary L. Smith to Scott H. and Kathleen L. Whitcomb is $423, 000 less $150, 000 or $273, 000." This provision further stated that a "method of transfer of this asset amount that will minimize the net tax exposure to Scott and Kathleen Whitcomb will be sought."

         In May 1999, an appraiser estimated the fair market value of the Property to be $270, 000. The Smiths retained a general contractor who agreed to build the addition for an estimated price of $138, 000. The final cost of construction, however, exceeded $170, 000. Most of the work was financed with the proceeds of a $120, 000 mortgage loan that the Smiths obtained from South Shore Savings Bank in June 1999. In July 2000, the Whitcombs paid the Smiths $33, 000 (from the sale of their Rockland home) to help cover the remaining costs of construction. The Whitcombs also agreed to pay an additional $10, 615 in improvements from their own savings. The remaining funds came from a new $80, 000 line of credit obtained by the Smiths.

         Although title to the Property remained in the Smiths' names, the Whitcombs agreed to assume full responsibility for the monthly payments on the Smiths' $120, 000 mortgage loan with South Shore Savings Bank. The intention was that when the Whitcombs received title to the Property in accordance with the Agreement, they would refinance the mortgage loan in their own names.

         In 2000, construction was completed, and the Smiths moved into the addition and the Whitcombs-having sold their Rockland home- moved into the main house. For the first few years, the parties lived together harmoniously, with the Whitcombs making the monthly mortgage payments and paying their share of taxes and utilities. Meanwhile, however, the Smiths had not conveyed title to them. The Whitcombs did not press the matter, believing that the Smiths would eventually deliver the deed as agreed.

         After several years, the relationship between the Whitcombs and the Smiths soured. Although the record is unclear precisely when or why, it reveals a number of stressors. According to Kathleen, at some point, Ms. Smith complained that "things were getting expensive, and she wanted [the Whitcombs] to give her more money [per] month and that she would then just pay everything that way."[3] "So she came up with a calculation and raised the amount" of the Whitcombs' payments. When Ms. Smith demanded that the Whitcombs, who had been paying the banks and utility companies directly, pay her $600 weekly, they complied.

         In 2004 or 2005, the children of one of the Smiths' sons came to live in the house on the Property-one child with the Whitcombs and one child with the Smiths-when their parents died unexpectedly. This development put additional stress on the two families. Additionally, during this period, Mr. Smith, who had been diagnosed with symptoms of cognitive deterioration in 1995, began presenting symptoms of Alzheimer's disease which would eventually lead to his death in 2011. Ms. Smith became concerned about her financial future.

         Meanwhile, the debt on the Property steadily increased, through the Smiths' repeated refinancings or home equity loans. The Whitcombs were unaware of all of the details concerning each of these transactions. But when the Smiths did inform them, the Whitcombs would suggest to the Smiths that it would be an opportune time for the Smiths to transfer title to the Property as they had agreed years earlier.

         The Smiths' additional loans increased the financial burden on the Whitcombs. As the financial demands upon the Whitcombs increased and the Smiths (primarily Ms. Smith) continued to avoid their obligation to transfer title to the Property, the discord between the families mounted. Their relationship suffered an irreparable breakdown in mid-to-late 2008 and early 2009. Matters seemed to come to a head in the fall of 2008 during a heated family argument. Following that argument, Ms. Smith declared "that the house was getting too expensive and that it was time to sell it." A letter from the Smiths' attorney and a six-month occupancy agreement followed, effectively notifying the Whitcombs that they would have to vacate the Property on or before June 30, 2009. Apprehensive that they could be evicted at any moment, the Whitcombs moved out of the Property in February or March 2009-approximately nine years after they had moved in.

         II. State Court Proceedings

         Later in 2009, the Whitcombs sued the Smiths in state court to enforce their rights under the Agreement.[4] After all efforts to resolve the families' dispute failed, a three-day bench trial ensued. This trial resulted in the entry of the State Court Judgment in August 2014. There, the state court ruled in favor of the Whitcombs, concluding that a "binding, enforceable contract" existed between the parties, as "the evidence demonstrate[d] that they agreed on the material terms . . . and that they had the present intention to be bound by those terms." The state court further found the parties contemplated that "a transfer would be made, if not immediately, then certainly within a reasonable time after the Whitcombs moved onto the Property." The state court based this finding on the fundamental principle of contract law permitting a court to "imply a reasonable time" when "no time for performance is set out in the contract . . . ." In addition, the state court reasoned that this finding was "consistent with, and [ ] supported by, Mr. Smith's contemporaneous notes concerning the transaction, " in which he queried: "Ownership - do they [(i.e., the Whitcombs)] understand gradual ownership?" Indeed, the state court opined that in selling their Rockland home and moving onto the Property, the Whitcombs "reasonably relied upon the terms" of the Agreement, "including the Smiths' explicit promise ultimately to transfer ownership of the Property to the Whitcombs."

         The state court additionally found that the Whitcombs had "substantially performed their obligations" under the Agreement, and that Ms. Smith, on the other hand, had "materially breached" the Agreement by, among other things, "steadfastly refusing to transfer title to the Property to the Whitcombs and by effectively evicting" them. Moreover, the state court determined that the Whitcombs' version of events giving rise to the dispute was "decidedly more persuasive, " and that Ms. Smith's testimony that the Whitcombs failed to make mortgage and utility payments was "inconsistent with the documentary evidence and otherwise not credible." Additionally, the state court rejected Ms. Smith's assertion at trial that she did not see the Agreement until 2009 and that she never agreed to be bound by its terms. In support, the state court pointed to Ms. Smith's original counterclaim, where she alleged: "The intention of the parties in July of 1999 and thereafter was that if the Whitcombs fulfilled their obligation to pay for the addition of the in-law apartment and paid their share of costs associated with their portion of the house then and only then would the Smiths deed them an interest in the [P]roperty."

         The state court additionally found that the Whitcombs established by a preponderance of the evidence that from approximately June 2000 to late 2008, they paid to the Smiths $149, 729.54, consisting of the following: (a) a $33, 000.00 cash contribution for addition construction; (b) $10, 615.00 in direct payments to the general contractor; (c) $14, 560.00 for other improvements to the Property; (d) $36, 675.00 in direct mortgage payments by check; (e) $11, 784.54 in mortgage and expense payments to Ms. Smith; (f) $23, 400.00 in mortgage and expense payments to Mr. Smith; and (g) $3, 413.00 in direct payments to utilities. The state court concluded, "[w]hile their performance may not have been perfect in every respect, the Whitcombs, by and large, made the payments called for in the [ ] Agreement from 2000 through 2008 . . . in accordance with the varying wishes and instructions of the Smiths." The state court elaborated: "To the extent that the Whitcombs may have failed to make some small percentage of the payments owed, or may have failed to make some small percentage of the payments owed in a timely manner, such failures were not material in the circumstances."

         Although the state court made no finding as to whether Ms. Smith acted with fraudulent intent or with willful and malicious intent to injure the Whitcombs, it did find that Ms. Smith's "continuing failure to transfer the Property to the Whitcombs [was] driven, in significant part, by her interest in extracting the available equity from the Property for her own use through a series of mortgage refinancings and new home equity loans." According to the state court, these transactions "netted Mrs. Smith more than $175, 000[ ] since 2003, and . . . increased the outstanding mortgage balance on the Property from approximately $120, 000 in 2000 to approximately $410, 000 . . . ."

         The state court ordered Ms. Smith to perform her obligation under the Agreement to convey title to the Property to the Whitcombs. The Whitcombs subsequently moved for limited relief from the State Court Judgment, due to difficulties they encountered in attempting to implement that judgment. The court granted their motion in part, reasoning that the State Court Judgment:

f[ell] short of its stated goal on at least two counts, those being that: (1) it is not reasonably possible for the Whitcombs to obtain a mortgage loan and acquire title to the Property following the procedures prescribed in the current Judgment; and (2) the current Judgment unfairly imposes on the Whitcombs, and correspondingly unfairly relieves Mrs. Smith of, the significant additional financial burden placed on the Property by Mrs. Smith's numerous home equity loan refinancings.

         Accordingly, on January 20, 2015, the state court entered the Amended State Court Judgment, thereby modifying the procedures for transferring title to the Property. Although it recognized that "no court order . . . [could] make either side whole, " the state court sought "to achieve a resolution that more closely and equitably approximate[d] the intended result . . . ." Thus, the Amended State Court Judgment specifically provided, in pertinent part, that:

(a) Ms. Smith would "cause a quitclaim deed to be recorded . . . that add[ed] both of the Whitcombs to the title to the" Property "as co-owners in fee simple for no consideration";
(b) "Prior to adding the Whitcombs to the title to the Property, " Ms. Smith would "take all steps reasonably necessary to obtain the consent of any and all lenders" to the change in title;
(c) Ms. Smith would be permitted to reside in the addition;
(d) Ms. Smith would be responsible for all payments due on her current first mortgage regardless of whether she continued to reside on the Property;
(e) So long as Ms. Smith lives on the Property, she shall pay the Whitcombs 27% of the non-loan occupancy costs (e.g., utilities, home owners insurance, and taxes) in addition to the mortgage loan payments;
(f) Within 365 days of the recording of the quitclaim deed, the Whitcombs would apply for and close on a refinance loan in an amount sufficient to pay off both of the existing mortgage loans; and
(g) After Ms. Smith conveyed her right, title, and interest in the Property to the Whitcombs and so long as Ms. Smith continues thereafter to reside on the Property, Ms. Smith shall pay to the Whitcombs a specified amount in monthly rent in addition to her share of the non-loan occupancy costs.

         As an alternative to the specific performance remedy, the state court ordered that the Whitcombs could, within 435 days from the date of the Amended State Court Judgment, elect an award of money damages against Ms. Smith in the amount of $270, 000. In that case, they would be required to vacate the Property and divest themselves of any interest in the Property in favor of Ms. Smith.

         Neither party appealed the Amended State Court Judgment and the Whitcombs received assurances that Ms. Smith would comply with it.

         III. Bankruptcy Court Proceedings

         Instead, fewer than three months later, on March 12, 2015, Ms. Smith filed a petition for chapter 7 relief. She continues to ...

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