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Gallogly v. Watson

Court of Appeals of Ohio, Third District

September 3, 2013

MYRON GALLOGLY, ET AL., PLAINTIFFS-APPELLEES/ CROSS-APPELLEES,
v.
T. TODD WATSON, ET AL., DEFENDANTS-APPELLANTS/ CROSS-APPELLEES, and PAGE ENGINEERING INC., DEFENDANT-APPELLEE/ CROSS-APPELLANT.

Appeal from Union County Common Pleas Court Trial Court No. 2010-CV-0309

Christopher R. Conrad for Appellants/Cross-Appellees

Terrence Stolly and John D. Bodin for Appellees/Cross-Appellees, Myron and Priscilla Gallogly

Dennis A. Schulze and Nichole M. Williams for Appellee/Cross-Appellant, Page Engineering Co.

OPINION

SHAW, J.

(¶1} Defendant-appellant-cross appellee Timothy Todd Watson ("Todd" or "Todd Watson"), successor trustee of the Roger L. Watson Trust, appeals the March 5, 2012, judgment of the Union County Common Pleas Court imposing a constructive trust upon the Gallogly residence and accompanying .7 acres for the benefit of Plaintiff-appellee Priscilla Gallogly ("Priscilla") following a bench trial. Watson and Defendant-appellant-cross appellant Page Engineering ("Page"), also appeal the same judgment entry designating the priority for distribution of proceeds from the foreclosure sale of the Gallogly residence, and the Gallogly property.

(¶2} For an initial overview of the voluminous record before this court, Myron Gallogly ("Myron") and Roger Watson ("Roger"), who were good friends and had a strong mutual trust in one another, agreed to develop property owned by Myron and Priscilla. The original agreement was that Myron would contribute the Gallogly property, excluding Priscilla Gallogly's residence, and manage the development, and Roger would provide the financing for the project. The idea was that the value of the Gallogly property would be commensurate with the amount of money Roger invested. Subsequently, Roger and Myron formed a corporation together, Oaks Development, Inc., with each owning 50%. Priscilla was not party to this agreement and had no ownership of Oaks Development.

(¶3} As development proceeded on the Gallogly property arrangements were also made with Page engineering for subdivision work on this project. Eventually, in order to move forward with the project, Roger and Myron had to acquire a letter of credit for just over $1, 000, 000. Roger, who had been funding the project per the agreement, was unable to obtain the further financing that he originally thought he would be able to obtain.

(¶4} After discussing the matter, Myron and Priscilla transferred the Gallogly property to the Roger Watson Trust so that Roger could obtain the letter of credit and further financing. Specifically, the bank that Roger and Myron were working with would not extend a letter of credit in the amount sought without Priscilla's residence being transferred to the Roger Watson Trust along with the Gallogly property. As a result, the Gallogly residence was transferred to Roger's trust along with the Gallogly property to be developed. However, at the time of the transfer assurances were made to Priscilla that Roger had no intention of taking Priscilla's residence, that the residence still remained hers, and that the transfer was just for "business purposes." Chief among those business purposes, aside from acquiring the letter of credit, was Roger obtaining the tax benefits from paying the mortgage. As Roger was already loaning money to Myron so that Myron could make the mortgage payments, [1] the plan was for Roger to assume the mortgages, make the mortgage payments and use the accompanying tax deductions, which Myron was unable to use due to his then-current lack of income.

(¶5} Thus the deed recording the transfer of the Gallogly property and Priscilla's residence to the Roger Watson Trust was recorded on June 4, 2007. Unfortunately, Roger died unexpectedly just over a month later. Todd Watson, Roger's son, assumed Roger Watson's position as trustee, and attempted to carry through with his father's wishes to fund the project. However, eventually that became financially impractical so the funding ceased and the Gallogly property and Priscilla's residence went into foreclosure leading to the filing of this action.

(¶6} On June 17, 2010, Myron Gallogly and Priscilla Gallogly filed a complaint against Todd Watson individually, Todd Watson as successor Trustee of the Roger L. Watson Trust, Richwood Bank, Oaks Development, Inc., and Page. (Doc. 2). The complaint was later amended, with leave of the court, on July 29, 2011, alleging eight counts against the same parties, including, inter alia, breach of fiduciary duty against Todd as trustee of the Watson Trust, imposition of a constructive trust, an implied vendor's lien against the subject property, quiet title of the subject property and unjust enrichment of the Watson Trust. (Doc.102). Page Engineering and Todd each filed counterclaims against the appellees and crossclaims against each other.[2] (Docs. 103, 104).

(¶7} On December 20-21, 2011, the case proceeded to a bench trial. Just prior to the beginning of the trial, it was agreed by the parties that Page's claims for engineering work done on the project would be settled for the amount of $220, 000, and that Page waived any defenses and crossclaims other than priority.

(¶8} The trial then commenced, at which Priscilla, Myron, and Mike Karcher of Richwood Banking Company testified in Myron and Priscilla's case-in-chief. At the conclusion of Myron and Priscilla's case, the claims against Todd Watson individually were dismissed. Then Todd presented his case as successor trustee, taking the stand himself, and also calling Justin Moeller, an accountant. Thereafter the case was submitted to the trial court for decision.

(¶9} On March 5, 2012, the trial court filed a 33-page judgment entry on the matter summarizing the extensive record, and making findings of fact and conclusions of law. (Doc. 153). In its entry, the trial court held, inter alia, that a constructive trust would be imposed upon Priscilla's residence and accompanying .7 acres for Priscilla, and that Priscilla was entitled to 21% of the proceeds from the foreclosure sale of the Gallogly property and Priscilla's residence as a result of the constructive trust for her residence. (Id.) The basis of the trial court's holding was the court's finding that the parties never intended Priscilla's residence to be included in the project; rather, Priscilla's residence was transferred purely for the sake of obtaining financing.

(¶10} In its entry, the court also determined that the proceeds of the foreclosure sale of the Gallogly property and Priscilla's residence would be distributed first to the balance due to the Richwood Banking Company for the mortgages, then Priscilla's 21% representing the constructive trust for her residence, then Page's agreed upon $220, 000, then the next $1, 003, 729.00 to Todd Watson, Trustee of the Roger Watson Living Trust representing the amount the Roger Watson Trust invested over Myron in the project, and any remaining balance paid to the Watson Trust and Myron Gallogly in a 50/50 ratio per their original agreement as investors in the Oaks. (Doc. 153).

(¶11} It is from this judgment that Todd Watson[3] and Page appeal, asserting the following assignments of error for our review.

TODD WATSON'S FIRST ASSIGNMENT OF ERROR THE TRIAL COURT ERRED BY IMPOSING A CONSTRUCTIVE TRUST IN PRISCILLA'S FAVOR, ESSENTIALLY RESCINDING THE DEED AS TO THE HOUSE, IN DIRECT CONFLICT WITH THE DEED'S UNAMBIGUOUS CONSIDERATION CLAUSE AND THE UNDISPUTED EVIDENCE IN THE RECORD.
TODD WATSON'S SECOND ASSIGNMENT OF ERROR THE TRIAL COURT ERRED BY IMPOSING A CONSTRUCTIVE TRUST IN PRISCILLA'S FAVOR BECAUSE THE REAL ESTATE MARKET CRASH, NOT INEQUITABLE CONDUCT, CAUSED HER HARM.
TODD WATSON'S THIRD ASSIGNMENT OF ERROR THE TRIAL COURT ERRED BY GIVING PRISCILLA'S AND PAGE'S INTERESTS PRIORITY WHEN THE TRUST HAS THE ONLY SECURED INTEREST AMONG THEM.
TODD WATSON'S FOURTH ASSIGNMENT OF ERROR IF A CONSTRUCTIVE TRUST WAS AN APPROPRIATE REMEDY, THE TRIAL COURT ERRED IN HOW IT IMPLEMENTED THAT REMEDY.
PAGE'S ASSIGNMENT OF ERROR THE TRIAL COURT ERRED IN CONCLUDING THAT PRISCILLA GALLOGLY'S 21% INTEREST IN THE SUBJECT PROPERTY IS SUPERIOR TO THE INTEREST OF PAGE ENGINEERING, INC.

(¶12} For the sake of clarity, we elect to address some of the assignments of error together, and out of the order in which they were raised.

Watson's First and Second Assignments of Error

(¶13} In Todd's first and second assignments of error, Todd makes various arguments that the trial court's imposition of a constructive trust in Priscilla's favor was improper. Specifically, Todd argues that the deed to Priscilla's residence contained language that was unambiguous in stating that the property had been transferred for consideration making a constructive trust inappropriate, that there was no fraud or unjust enrichment on behalf of the Watson Trust, and that Priscilla knowingly, intelligently, and voluntarily transferred her residence making a constructive trust inappropriate.

(¶14} In its judgment entry, the trial court set forth the following factual findings, which were stipulated to by the parties at trial, and which provide a more detailed summary of the evidence relied upon by the court in reaching its decision to impose the constructive trust in this case.[4]

1. The real estate at issue consists of land totaling approximately 64.4 acres, and is more particularly described in the Quit Claim Deed dated June 12, 2006. Joint Trial Exhibit J-1-A.
2. The aforementioned real estate was owned in fee simple by the Gallogly Qualified Personal Residence Trust dated January 1, 2001, Priscilla Gallogly, Trustee, and is referred to as the "Gallogly Property".
3. In 2005, Myron Gallogly (Priscilla's husband, "Myron") and Mr. Roger L. Watson of Bellefontaine, Ohio ("Roger" or "Roger Watson") had general discussions concerning the development of the Gallogly Property as a single-family residential development.
4. On January 10, 2006, Myron Gallogly and Roger Watson executed an agreement which outlined the general terms of the project (the "Agreement"), the general terms of which included the following:
A. single-family home lots would be developed and sold in phases, except that the Galloglys' residence and an approximate 0.7 acre lot upon which it sat would be retained by Priscilla Gallogly remain [sic] with the Priscilla Gallogly Residential Trust, Priscilla Gallogly Trustee;
B. income expenses of the development would be shared equally by Myron Gallogly and Roger Watson, and should they decide to form a legal entity for the development, the two men would each own 50% of such entity;
C. Galloglys would contribute the land and management services, while Roger Watson would facilitate financing for the project; and
D. The then-existing mortgages to Defendant Richwood Banking Co. on the Gallogly Property would remain the liability of Myron Gallogly.
5. On or about May 16, 2006, Myron Gallogly and Roger Watson filed Articles of Incorporation to form Defendant The Oaks Development, Inc. ("ODI"), an Ohio for-profit corporation, with Myron and Roger each owning 50% of that corporation.
6. Myron and Roger Watson, through ODI, began the development process for The Oaks subdivision, including seeking subdivision approval from the City of Marysville, Ohio and retaining various professional services, including among others, the engineering services of Defendant Page Engineering, Inc.
7. On May 16, 2007, Defendant Richwood Banking Co. obtained an appraisal for the Gallogly Property, as developed, based upon 43.981 acres of development land, 20 developed lots, and existing Gallogly residence and lot, at an estimated value of $2.6 million ($2, 600, 000).
8. With this information, Roger and Myron reached a more detailed, revised agreement for the project, which included, ...

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