Brown v. Reifler, et a l . 08-CV-272-SM 10/23/08 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

Christina Brown, Individually and as Trustee of the First Fisher Mountain Trust, and David Deaver Brown, Appellants/Cross-Appellees

v. Civil No. 08-CV-272-SM Opinion No.

Bradley C. Reifler and Steven M. Notinqer, Chapter 7 Trustee of Simply Media, Inc. and David Deaver Brown, Appellees/Cross-Appellants

O R D E R

This case arises out of the bankruptcies of David Deaver

Brown and Simply Media, Inc. The parties have filed cross­

appeals, challenging various aspects of the bankruptcy court's

resolution of an adversary proceeding which was tried to the

court in late 2007. In that adversary proceeding, Bradley C.

Reifler, a creditor of Simply Media, and Steven Notinger, Trustee

in Bankruptcy of David Deaver Brown and Simply Media, Inc.

(collectively, the "trustee in bankruptcy"), sought to establish

that two adjoining parcels of land in Thornton, New Hampshire

(the "New Hampshire Property") should be treated as Deaver

Brown's property and, therefore, included as assets of his

bankruptcy estate. Additionally, the trustee sought to establish

that Deaver and his wife, Christina, fraudulently transferred assets of Simply Media, Inc. by diverting them from corporate to

personal use.

Standard of Review

Pursuant to

(a), this court has jurisdiction

to hear appeals from final judgments, orders, and decrees issued

by the bankruptcy court. On appeal, the bankruptcy court's legal

determinations are reviewed de novo. See, e.g.. Dahar v. Jackson

(In re Jackson) ,

(1st Cir. 2006); Askenaizer

v. Seacoast Redimix Concrete. LLC,

,

(D.N.H. March 29, 2007). Findings of fact, however, are accorded

much greater deference and will not be disturbed unless they are

clearly erroneous. Groman v. Watman (In re Watman).

(1st Cir. 2002). A factual finding "is 'clearly erroneous'

when although there is evidence to support it, the reviewing

court on the entire evidence is left with the definite and firm

conviction that a mistake has been committed." Anderson v.

Bessemer City.

(1985) (quoting United States v.

United States Gypsum Co..

(1948)). "This

standard plainly does not entitle a reviewing court to reverse

the finding of the trier of fact simply because it is convinced

that it would have decided the case differently."

2 Background

The adversary proceeding tried before the bankruptcy court

was, in many respects, a companion case to one tried to a jury

earlier this year in this court. Notinqer v. Brown. Civil No.

08-cv-05-SM. The court is, then, familiar with the underlying

facts. The major difference between the two cases was this: in

the adversary proceeding, the trustee sought to recover

fraudulently transferred assets located in New Hampshire (the "NH

case") while, in the case before this court, he sought to recover

fraudulently transferred assets located in Massachusetts (the "MA

case"). Otherwise, the factual background is identical and was

previously described by this court as follows:

This case arises out of a business operation that had all the earmarks of an old-fashioned investment scam. It was run by the defendant, Christina Brown, and her husband, Deaver Brown. The scheme proved to be highly effective, yet it was quite simple.

First, the Browns formed Simply Media, Inc. Then, armed with apparently bogus profit and loss statements prepared by Deaver, a few sample products, and a compelling yarn of historical success woven by Deaver, the couple approached well-to-do friends and acquaintances and offered them the "opportunity" to own a portion of the company.

Seduced by the fictitious profit and loss reports, and comforted by Denver's personal charm and his tales of enormous sales through substantial retailers like Target, Walgreens, and Best Buy, investors parted with more than $1.6 million. The Browns used that money to pay for all manner of personal expenses including, for example, personal dry cleaning bills, individual memberships at an athletic club, and payments on the mortgage loan on their home. See generally Exhibit A

3 to plaintiff's amended complaint. Not surprisingly, the capital was soon spent and the supply of gullible investors dried up. Simply Media was put into bankruptcy.

The trustee in bankruptcy proceeded to inventory the corporation's assets and liabilities. That effort was, however, exceedingly difficult, as he soon discovered that the Browns deliberately and systematically destroyed nearly every relevant corporate document they ever received or generated - from checking account statements, to a list of investors, to the company's (claimed) inventory of products, to a statement of its (claimed) retail sales channels. Not surprisingly, the Browns provided no help. Eventually, however, the trustee was able to uncover a trail of checks written on the corporation's accounts — a trail that led to discovery of the Browns' use of company bank accounts as their own personal funds. This litigation to recover assets belonging to the company that Christina Brown used for personal expenses ensued.

Notinqer v. Brown.

at 1-2 (D.N.H. Oct. 6, 2008).

The jury in the MA case returned a verdict in favor of the

bankruptcy trustee, Notinger, and awarded total damages in the

amount of approximately $2.9 million.1

1 The jury awarded the bankruptcy trustee damages of slightly more than $1.1 million on his claim that Christina Brown fraudulently diverted assets of Simply Media to personal use. And, it awarded the trustee approximately $2.9 million on his claim that Christina conspired with Deaver and others to transfer money of Simply Media in order to hinder, delay, and/or defraud its creditors. As to the latter award, the court concluded that it was not supported by the evidence introduced at trial and offered plaintiff the option of having a new trial, limited exclusively to damages on that count, or a remitted award of $1.6 million. Plaintiff accepted the remitted award.

4 In the NH case, the bankruptcy trustee sought to "recover

the New Hampshire Property and avoid Simply Media's transfers of

monies on account of the New Hampshire Property, all for the

benefit of creditors of both Deaver Brown's and Simply Media's

bankruptcy estates." Notinqer v. Brown. B k . Adv. No. 06-1450-

JMD, slip op. at 6 (Bankr. D.N.H. May 19, 2008) (the "Bankruptcy

Decision"). The New Hampshire Property is comprised of two

adjoining lots of land. Parcel 67 consists of land and a house,

title to which is held by Christina Brown, as trustee of the

Fisher Mountain Trust. Parcel 68 is a vacant lot, on which the

septic system for the house on Parcel 67 is located. Title to

Parcel 68 is held by Christina Brown in her individual capacity.

As to the bankruptcy trustee's claim that both parcels of

land comprising the New Hampshire Property should be treated as

Deaver Brown's own property and, therefore, included as assets of

his bankruptcy estate, the bankruptcy court ruled that: (1)

Deaver Brown did not have a beneficial interest in Parcel 67 of

the New Hampshire Property arising from the Fisher Mountain Trust

and, instead, his interest was simply that of a tenant-at-will;

and (2) Christina Brown holds Parcel 68 for Deaver Brown in both

a resulting trust and a constructive trust and, therefore,

Denver's beneficial interest in Parcel 68 is part of his

bankruptcy estate. Bankruptcy Decision at 13, 16.

5 Finally, as to the bankruptcy trustee's efforts to avoid

transfers of Simply Media's funds that were used to pay expenses

associated with the New Hampshire Property, the court held that

the trustee had proved that Simply Media paid at least $56,585.00

for such expenses and was entitled to recover that amount from

Deaver Brown and Christina Brown, both individually and as

trustee of the Fisher Mountain Trust. Bankruptcy Decision at 28.

Discussion

I. Appellants/Cross-Appellees Assertions of Error.

Appellants/Cross-Appellees (collectively, the "Browns")

raise 18 challenges to the bankruptcy court's decision. None has

merit. Particularly telling is the following: in criticizing the

bankruptcy court's decision, the Browns repeatedly assert that

"This cannot be the law," see Appellants' brief (documents no. 14

and 15) at 20, 26, 27, 29, 30, yet their appellate brief (which

spans more than 42 pages and 80 footnotes) contains only two

citations to legal precedent.2 From a legal standpoint, the

Browns' appellate brief is not persuasive.

2 This tally does not include the Browns' periodic references to the "Mode[l] Corporation Act" or their repeated invocation of the allegedly applicable statute of limitations - statutory citations to neither of which are provided. Nor does it include the cases cited in the "standard of review" section of the brief, since that portion of their brief was copied from the appellate brief filed earlier by the trustee in bankruptcy.

6 Nearly half of the challenges the Browns raise relate to the

bankruptcy court's factual determination that they purposefully

and systematically destroyed all relevant personal and corporate

financial records despite knowing that they had an obligation to

retain such records, thereby prejudicing the trustee in

bankruptcy's efforts to locate both assets and creditors of the

bankrupt estates. Based upon the Browns' spoliation and non­

production of relevant evidence, the bankruptcy court drew the

permissible inference that the contents of those missing

documents would be unfavorable to the Browns' defense.

Bankruptcy Decision at 26-27 (concluding, among other things,

that "the Defendants' nonproduction and destruction of documents

constitutes spoliation of evidence. The Plaintiffs have

satisfied the necessary foundational requirement by demonstrating

that Deaver Brown and Christina Brown were aware that financial

records should be retained, but, in utter disregard of the rights

and interests of their creditors and governmental agencies, . . .

they decided to discard such records, affording no one the

opportunity to retrieve their personal records or those of Simply

Media in order to check or verify anything."). See generally

Testa v. Wal-Mart Stores. Inc..

(1st Cir. 1998)

(discussing the concept of spoliation and the inferences that a

trier-of-fact may draw when it has been shown that a party

opponent has purposefully destroyed evidence known to be relevant

7 to ongoing or potential litigation); Blinzler v. Marriott Int'l,

81 F .3d 1148, 1158-59 (1st Cir. 1996) (same).

Despite their admitted practice of destroying all relevant

personal and corporate records, the Browns actually assert that

"[n]o spoliation occurred in this case," Appellants' brief at 3 -

a claim that is entirely without legal or factual support. They

go on to vigorously advance the misguided notion that, in

essence, they cannot be found to have engaged in fraudulent

conduct if they routinely (and thoroughly) destroyed nearly all

relevant business and personal documents. Finally, they assert

that Christina Brown's use of funds from Simply Media's corporate

bank accounts to discharge personal debts was neither unlawful

nor fraudulent since the corporation's board of directors never

specifically prohibited her from using corporate assets in that

manner.

The Browns' arguments are not based upon even a plausible

interpretation of applicable law. The bankruptcy court

thoroughly discussed the improper conduct in which the Browns

engaged, carefully examined the governing precedent on the issues

of spoliation and fraudulent diversion of corporate funds, and

applied that law to the facts found in a way that was entirely appropriate. See Notinqer v. Brown.B k . Adv. No. 06-1450-JMD,

slip op. at 23-27 (Bankr. D.N.H. May 19,2008).

The remaining issues pressed by the Browns are without merit

or, at a minimum, are insufficiently compelling to warrant

reversal of any factual findings or legal rulings made by the

bankruptcy court. For that reason, as well as those set forth in

the trustee in bankruptcy's brief (document no. 16), the Browns'

requests for relief are denied.

II. Appellees/Cross Appellants.

The trustee in bankruptcy raises four challenges to the

Bankruptcy Decision, asserting that the bankruptcy court erred:

(1) by relying upon inadmissible hearsay concerning the ownership

of Parcel 67; (2) by crediting the testimony of Christina and

Deaver Brown in determining the beneficiary(s ) of the Fisher

Mountain Trust; (3) by refusing to subject Parcel 67 to a

constructive and/or resulting trust in favor of the trustee; and

(4) by failing to add pre-judgment interest to its final award of

damages.

A. Evidentiary and Credibility Issues.

As to the first two issues advanced by the trustee in

bankruptcy, this court's standard of review is quite deferential.

9 On appeal, a bankruptcy court's credibility findings and

evidentiary rulings are reviewed for abuse of discretion. See,

e.g.. Alexander v. Hardeman (In re Alexander).

(10th Cir. 2007); Greener v. Cadle Co..

(N.D.

Tex. 2003). See also United States v. Washington.

(1st Cir. 2006). Having carefully reviewed the bankruptcy

court's credibility findings and its evidentiary rulings, and

applying the deferential standard of review, the court cannot

conclude that the trustee has prevailed with respect to either of

his first two claims. See Pimentel v. Jacobsen Fishing Co..

(1st Cir. 1996) ("As a general rule, credibility

determinations are rather well insulated from appellate

challenge.").

B. Constructive and Resulting Trusts.

Under New Hampshire law, imposition of a constructive trust

is only appropriate under limited and very specific

circumstances:

A constructive trust may only be imposed when clear and convincing evidence demonstrates a confidential relationship existed between two people, that one of them transferred property to the other, and that the person receiving the property would be unjustly enriched by retaining the property, regardless of whether the person obtained the property honestly. A confidential relationship exists if there is evidence of a family or other personal relationship in which one person justifiably believes that the other will act in his or her interest. A person may be unjustly enriched

10 if he or she obtains title to property by fraud, duress, or undue influence, or violates a duty that arises out of a fiduciary relation to another.

Cadle Co. v. Bourgeois.

(2003) (emphasis

supplied) (citations omitted). See also In re Estate of

McIntosh.

(2001). A resulting trust, on the

other hand, "arises where a person makes or causes to be made a

disposition of property under circumstances which raise an

inference that he does not intend that the person taking or

holding the property should have the beneficial interest therein

and where the inference is not rebutted. Such a trust is

presumed to arise when one pays the consideration for a transfer

of real property but has the title taken in the name of another."

Chamberlin v. Chamberlin.

(1976) (emphasis

supplied) (citations omitted).

The trustee asserts that, although the bankruptcy court

properly subjected Parcel 68 to both a resulting and a

constructive trust in his favor (that is, in his capacity as

trustee of the estate of Deaver Brown), it erred by refusing to

do the same with respect to Parcel 67. But, as the bankruptcy

court pointed out, there are substantial differences in the

manner by which title to those lots was acquired.

11 Deaver Brown originally held title to both lots and used the

New Hampshire property as his primary residence, while Christina

Brown used the Massachusetts property as her primary residence.

In 1991, Deaver transferred title to Parcel 68 to Christina, for

nominal consideration. The bankruptcy court found that the

transfer to Christina was for the purpose of securing ownership

of the parcel for Deaver's benefit and the parties understood

that he would continue to use the property as his own. Although

Christina testified that the transfer was done for estate

planning purposes, the bankruptcy court disregarded that

testimony, finding it not credible. And, given the timing of the

transfer, it was reasonable to infer that it was effected to

shelter/hide Deaver's assets from his creditors.3 It was, then,

entirely supportable for the bankruptcy court to subject Parcel

68 to both a resulting and a constructive trust for the benefit

of Deaver (or, more accurately, his bankruptcy estate).

Transfer of Parcel 67 to the Fisher Mountain Trust involved

quite different circumstances. In 1991, Deaver Brown's mortgagee

foreclosed and the property was purchased at auction by the

Fisher Mountain Trust. That trust was created by George Warshaw,

3 Just four months prior to the transfer, Deaver had been sued. That suit eventually settled when, after the transfer of Parcel 68 to Christina had been completed, Deaver agreed to the entry of a $200,000 judgment against him.

12 an attorney for Christina, and he acted as the original trustee.

The only evidence introduced at trial on the issue established

that Christina is a beneficiary of that trust. The trust

purchased Parcel 67 with funds provided by Christina Brown and

her mother. Approximately ten months later, Deaver Brown

replaced Attorney Warshaw as trustee of the Fisher Mountain

Trust. And, approximately four months after Deaver filed his

bankruptcy petition, he was replaced by Christina as trustee.

In its ruling, the bankruptcy court noted that the "major

difference between [Christina's] acquisition of the two parcels

is the evidence of consideration paid to a third party in

connection with the acquisition of Parcel 67 at foreclosure in

contrast to a complete absence of evidence of any consideration

for either the 1988 or 1991 transfers to her of Parcel 68."

Bankruptcy Decision at 15 (emphasis supplied). The fact that

consideration was paid for the acquisition of Parcel 67, combined

with the lack of evidence indicating that the Fisher Mountain

Trust was void or a sham, support the bankruptcy court's

conclusion that the trustee failed to prove, by clear and

convincing evidence, that a resulting or constructive trust

should be imposed on that property. So, too, does the fact that

there was not a confidential relationship between the seller of

the property (the bank/mortgagee) and the purchaser at

13 foreclosure (Fisher Mountain Trust). See, e.g.. In re Estate of

McIntosh.

(refusing to impose a constructive

trust on an IRA account because, among other things, there was no

confidential relationship between the relevant parties).

C. Pre-judgment Interest.

Finally, the trustee asserts that the bankruptcy court erred

in failing to include pre-judgment interest in the final judgment

entered on May 19, 2008 (Bankr. document no. 139). The Browns do

not argue otherwise. Pre-judgment interest is to be added by the

clerk in a case like this and such an award is understood to be

part of the judgment by operation of law. See N.H. Rev. Stat.

Ann. ch. 524. The amount is easily calculated and should not be

a matter of mathematical dispute.

Conclusion

The trustee in bankruptcy's motion to dismiss the Browns'

appeal based upon the untimely filing of their appellate brief

(document no. 13) is denied. However, the court has not

considered the Browns' untimely reply brief (documents no. 17 and

18). See generally Bankruptcy Rule 8009(a).

For the reasons set forth above, the decision of the

bankruptcy court dated May 19, 2008, is affirmed in all

14 substantive respects. The matter is remanded to the bankruptcy

court in one respect, however. The final judgment should be

conformed to the applicable statute providing for the addition of

pre-judgment interest, in the amount allowed by law, to the

damages award.

SO ORDERED.

Smeven J/ McAuliffe Chief Judge

October 23, 2008

cc: James V. Tabner, Esq. Douglas A. Grauel, Esq. Bruce A. Harwood, Esq. Stephen F. Gordon, Esq. Todd B. Gordon, Esq. Geraldine L. Karonis, Esq.

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