Frank Desantis, Personal Representative of the Estate of Helen K. Chum v. William Prothero, Individually and as Administrator of the Estate of Helen Prothero

1 William Prothero, individually and as administrator of the estate of
Helen Prothero, appeals the order entered November 10, 2005 by the
Bradford County Court of Common Pleas granting Appellee Frank DeSantis',
the personal representative of the Estate of Helen Chum, motion for
judgment on the pleadings and directing Appellant to turn over the savings
bonds at issue to Appellee within 30 days. We affirm.

2 In April 1986, Appellant and his mother, Helen Prothero ("Prothero"),
traveled to Hawaii to visit Prothero's aunt, Helen K. Chum. During the visit,
Chum gave Prothero a number of United States Series E and EE savings
bonds registered in the name of Chum and her late husband, Andrew S.
Chum, Jr. Although she was given possession of the bonds, they were not formally signed over to her. Prothero took the bonds, which had a value of
approximately $415,650, home with her to Bradford County, Pennsylvania,
where she kept them in a closet for nearly 14 years. Prothero died on
September 6, 2000. Chum died nearly two years later, in June 2002.

3 In 2003, Appellant filed petitions in the Orphans' Court seeking to
compel Appellee, the administrator of Chum's estate, to sign over ownership
of the savings bonds. On March 18, 2004, the court denied Appellant's
motion on the basis that it was bound by federal law governing bonds and,
therefore, lacked jurisdiction over the matter. On appeal, this Court
affirmed the trial court's order, and our Supreme Court denied Appellant's
subsequent petition for allowance of appeal. In the Matter of the Estate
of Helen Prothero, No. 598 MDA 2004, unpublished memorandum (Pa.
Super. filed February 11, 2005), appeal denied, 584 Pa. 702, 882 A.2d 1006
(2005).

4 On or about June 17, 2005, Appellee filed a replevin action in the
Bradford County Court of Common Pleas seeking the return of the savings
bonds. Appellant filed an answer and new matter, wherein he alleged a
legal and/or equitable ownership right to the bonds by virtue of an inter
vivos gift between Chum and Prothero. Thereafter, Appellee filed an answer
and a motion for judgment on the pleadings, asserting that the doctrine of
federal preemption precluded Appellant's claim of an inter vivos gift of the
legal or equitable ownership of the bonds. On November 10, 2005, the trial court granted Appellee's motion for judgment on the pleadings, and this
appeal followed, wherein Appellant asks this Court to consider the following
issues:

1. Has Pennsylvania's long standing common law rule
announced in the case of In Re: Neglia's Estate permitting
the inter vivos gift of the equitable ownership of the
proceeds associated with U.S. Savings Bonds been
[overruled]?

2. Do United States Treasury Regulations preempt Appellant's
state law rights to rely on an inter vivos gift of the proceeds
of United States savings bonds where the asserted gift does
not impair the survivorship provisions of the Treasury
Regulations?

3. Should the amendment of pleadings under the Pennsylvania
Rules of Civil Procedure [be] liberally allowed in order to
secure determination of the case on the merits in order to
prevent the case from turning on purely technical objections
or points of law?

4. Did the trial court improperly ignore the Principle of Stare
Decisis in ignoring the precedential effect of the long
standing Supreme Court Opinion in In Re: Neglia's Estate?

(Appellant's Brief at 4 (citations omitted).)

5 Our scope and standard of review in an appeal of an order granting a
motion for judgment on the pleadings is well settled: this Court applies the
same standard as the trial court and confines its consideration to the
pleadings and documents properly attached thereto. Lewis v. Erie Ins.
Exch., 753 A.2d 839, 842 (Pa. Super. 2000), aff'd, 568 Pa. 105, 793 A.2d
143 (2002). We must determine whether "the trial court's action respecting
the motion for judgment on the pleadings ‘was based on a clear error of law or whether there were facts disclosed by the pleadings which should properly
go to the jury.'" Id. We will affirm the grant of judgment on the pleadings
only if "the moving party's right to succeed is certain and the case is so free
from doubt that trial would clearly be a fruitless exercise." Id. (internal
quotation marks omitted).

6 In granting Appellee's motion for judgment on the pleadings, the trial
court concluded that pursuant to Title 31 of the Code of Federal Regulations
("CFR"), the savings bonds are the property of the Estate of Helen Chum,
and that under Section 315.20(a) of that title, any judicial determination
giving effect to an attempted voluntary inter vivos transfer of such bonds to
Prothero or her estate would not be recognized by the Treasury Department.
In addition, the trial court rejected Appellant's argument that such a transfer
is permitted by virtue of the Pennsylvania Supreme Court's decision in In re
Neglia's Estate, 403 Pa. 464, 170 A.2d 357 (1961), noting: (1) that
Neglia dealt with proceeds of savings bonds or the monetary value
represented by the bonds; (2) that Appellant had failed to assert a
counterclaim for the proceeds or monetary value of the bonds1; and (3) that
because Neglia was in conflict with federal law regarding attempted inter vivos transfers of savings bonds, the United States Supremacy Clause2
precluded the Court from following Neglia, even if applicable to the facts of
this case. As we discern no error of law by the trial court, nor the existence
of any facts which should have been determined by a jury, we conclude that
the trial court properly granted Appellee's motion for judgment on the
pleadings.

7 Preliminarily, we note that Appellant's first, second, and fourth issues
are so intertwined that we address them as one issue. Essentially, Appellant
argues that, pursuant to Neglia, an inter vivos gift of equitable ownership of
the proceeds associated with United States savings bonds is permissible;
that the Supremacy Clause does not preclude the trial court's reliance on
Neglia because there is no conflict between Neglia and federal law; and, as
a result, that the trial court violated the principles of stare decisis3 in refusing to follow Neglia. For the following reasons, we reject all of
Appellant's arguments.

8 In Neglia, the personal representative of the Estate of Mary Neglia
filed a petition for declaratory judgment to determine the ownership of 13
United States Series E savings bonds as between the decedent's husband
and her brother. The bonds had been purchased by the decedent and were
issued to the decedent and her brother as co-owners. Before she died, the
decedent, intending to gift the bonds to her husband, endorsed them and
gave possession of them to her husband. She did not, however, appear
before an officer authorized to certify requests for payment, and she did not
execute the Treasury Department forms required for re-issuance or transfer
of the bonds. The trial court held that the bonds belonged to the decedent's
brother. On direct appeal, our Supreme Court explained:

‘When the Treasury Department, acting under Congressional fiat,
sold these [United States Series E savings] bonds to the
decedent it did so under an agreement, upon which decedent, at
least presumptively, relied, that in the event the bonds were not
surrendered and payment received prior to the decedent's death,
the surviving co-owners named in such bonds would be
recognized as the sole and absolute owners of such bonds. The
issuer of the bonds, i.e., the United States Government,
covenanted with the decedent through the medium of the
Treasury regulations, that, upon the registration of the bonds in
co-owner form, such registration would be conclusive of the
ownership and interest in the bonds. Upon the basis of that
contract and agreement between the Government and the
decedent the named surviving co-owners of these bonds, as
third party beneficiaries, seek to establish their rights to the
bonds. The rights of the surviving co-owners in these bonds
arise not from a sale, a gift or a devise: they arise exclusively
from the contract between decedent and the Government.

‘The design of the Treasury regulations is two fold: (1) ‘to
prevent [the] Government from being involved in suits between
claimants to Government bonds' and (2) ‘to protect the interests
of the bondholders of these ‘thrift' securities by preventing
transfers'. Regardless of the purpose or purposes of these
regulations it is manifest that they enunciate a rule as to the
ownership of this particular species of property in reliance upon
which thousands upon thousands of individuals have purchased
these bonds; to substitute a nebulous for a certain rule would
create a condition which could conceivably interfere with the
borrowing power of the Government.'

403 Pa. at 468, 170 A.2d at 358-59 (quoting In re Cochran's Estate, 398
Pa. 506, 515-516, 159 A.2d 514, 519 (Pa. 1960) (citations omitted)).

9 Notwithstanding the above, our Supreme Court went on to state that

[a]s between the Government and the co-owner designated on
the bond, by reason of the contract of purchase, payment must
be made by the Government to such bond-designated co-owner.
That is all that the federal regulations require and we so
determined in [In re Cochran's Estate.] Once the Government
has made payment of the bond, the impact of the federal
regulations terminates: the federal regulations do not purport to
control nor do they control the eventual disposition of the
proceeds of the bond.

Neglia, 403 Pa. at 468-69, 170 A.2d at 359 (emphasis original). The Court
in Neglia concluded that the decedent had made a valid inter vivos gift of
the savings bonds to her husband, and, therefore, that her husband, not her
brother, was the owner of the proceeds of the bonds.4 It is this language on which Appellant herein relies for his claim that he is entitled to the proceeds
of the bonds.

10 Subsequent to the Pennsylvania Supreme Court's decision in Neglia,
however, the United States Supreme Court held, in Free v. Bland, 369 U.S.
663 (1962), that, absent fraud, the regulations creating a right of
survivorship in United States savings bonds issued in co-ownership form
overrides and/or pre-empts any inconsistent state property law. Mary Ida
Free and her husband, J.W. Free, were domiciled in Texas, a community
property state. During their marriage, Mary Ida purchased Series E and F
United States Savings Bonds with community property. The bonds were
issued to "Mr. or Mrs. Free." Upon Mary Ida's death, a controversy arose
between her husband, who claimed exclusive ownership by operation of the
Treasury Regulations providing that when the co-owner of the bonds dies,
the survivor will be recognized as the sole and absolute owner, and the
decedent's son from a prior marriage, who was the principal beneficiary
under the decedent's will and who claimed an interest in the bonds by virtue
of the state community property laws. The decedent's son sought one-half
of the bonds or, alternatively, reimbursement for the loss of his mother's
community half interest in the bonds. The decedent's husband filed suit
against the decedent's son individually and as executor of the decedent's
estate, and the decedent's son filed a counterclaim.

11 On his motion for summary judgment, the trial court awarded full title
to the bonds to the husband on the basis of the federal regulations, but
awarded reimbursement to the son on the basis of the state community
property laws, making the bonds security for payment. The appellate court
affirmed the trial court's award of full title to the husband, but reversed the
award of reimbursement to the son. While an appeal was pending with the
Supreme Court of Texas, that same Court decided the case of Hilley v.
Hilley, 342 S.W.2d 565 (Tex. 1961), wherein it held that married couples in
Texas would not be permitted to agree to any survivorship provision with
regard to community property, and dismissed the argument that the
Supremacy Clause would compel recognition of the survivorship provision in
United States savings bonds, stating "[i]t is clear that the Federal
regulations do not override our local laws in matters of purely private
ownership where the interests of the United States are not involved." Id. at
570. Thereafter, the Texas Supreme Court reversed the order of the
appeals court in Free based on its holding in Hilley, and reinstated the
judgment of the trial court.

12 On appeal, the United States Supreme Court reversed the Texas
Supreme Court's decision, and in doing so stated:

The Supreme Court of Texas' interpretation of the Supremacy
Clause is not in accord with controlling doctrine. The relative
importance to the State of its own law is not material when there
is a conflict with a valid federal law, for the Framers of our
Constitution provided that the federal law must prevail. Article
VI, Clause 2. This principle was made clear by Chief Justice Marshall when he stated for the Court that any state law,
however clearly within a State's acknowledged power, which
interferes with or is contrary to federal law, must yield. Thus
our inquiry is directed toward whether there is a valid federal
law, and if so, whether there is a conflict with state law.

Free, 369 U.S. at 666 (citation omitted).

13 The Court then noted that, in accordance with authority provided by
Congress,

the Secretary of the Treasury issued savings bonds under
regulations which provided, inter alia, that the co-owner of a
savings bond issued in the ‘or' form who survives the other coowner
‘will be recognized as the sole and absolute owner' of the
bond, 31 CFR [§] 315.61, and that ‘(n)o judicial determination
will be recognized which would * * * defeat or impair the rights
of survivorship conferred by these regulations,' 31 CFR [§]
315.20. The Treasury has consistently maintained that the
purpose of these regulations is to establish the right of
survivorship regardless of local state law, and a majority of the
States which have considered the problem have recognized this
right. The respondent, however, contends that the purpose of
the regulations is simply to provide a convenient method of
payment. This argument depends primarily on the distinction
between stating that the surviving co-owner will ‘be recognized
as' the sole owner and stating that the surviving co-owner will
‘be' the sole owner. This distinction is insubstantial. The clear
purpose of the regulations is to confer the right of survivorship
on the surviving co-owner. Thus, the survivorship provision is a
federal law which must prevail if it conflicts with state law.

Id. at 667-68 (footnotes omitted).

14 Finally, the United States Supreme Court condemned the Texas
Supreme Court's attempt to circumvent the federal regulations by ordering
the decedent's husband to reimburse the decedent's estate for one-half of
the value of the bonds:

The success of the management of the national debt depends to
a significant measure upon the success of the sales of the
savings bonds. The Treasury is authorized to make the bonds
attractive to savers and investors. One of the inducements
selected by the Treasury is the survivorship provision, a
convenient method of avoiding complicated probate proceedings.
Notwithstanding this provision, the State awarded full title to the
co-owner but required him to account for half of the value of the
bonds to the decedent's estate. Viewed realistically, the State
had rendered the award of title meaningless. Making the bonds
security for the payment confirms the accuracy of this view. If
the State can frustrate the parties' attempt to use the bonds'
survivorship provision through the simple expedient of requiring
the survivor to reimburse the estate of the deceased co-owner
as a matter of law, the State has interfered directly with a
legitimate exercise of the power of the Federal Government to
borrow money.

Id. at 1093 (footnote omitted).

15 Almost ten years after its decision in Free, the United States Supreme
Court again had occasion to consider the impact of the federal regulations on
the transferability of Series E savings bonds in United States v. Chandler,
410 U.S. 257 (1973). In Chandler, the decedent had purchased several
Series E savings bonds, which were issued in co-ownership form, in the
name of the decedent and one of her two granddaughters. In 1961, the
decedent delivered the bonds to the respective granddaughters, with the
intention of making complete, irrevocable inter vivos gifts. At the time of
the decedent's death in 1962, the bonds were still in the original coownership
form, had not been redeemed, and had not been reissued solely
in the granddaughters' names. The executors of the decedent's will
disclosed the bonds in the federal estate tax return filed for the decedent's estate, but did not include them in the gross estate.5 Following an audit, the
Internal Revenue Service ruled that the bonds were includable, and an
estate tax deficiency was assessed on and paid for by the executors of the
will. The executors then filed suit seeking a refund of the tax attributable to
the inclusion of the bonds in the decedent's gross estate.

16 In its opinion, the Supreme Court noted that under 31 CFR
§ 315.20(a), "[n]o judicial determination will be recognized which would give
effect to an attempted voluntary transfer inter vivos of a bond" and that
Section 315.60 provided that

a savings bond registered in co-ownership form will be paid,
during the lives of both co-owners, ‘to either upon his separate
request,' in which case the other ‘shall cease to have any
interest in the bond,' or will be reissued, during the lives of both
co-owners, upon the request of both, in the ‘name of either,
alone or with a new co-owner or beneficiary,' if, in the case of
reissuance, the co-owners possessed one of a number of
specifically enumerated relationships, including ‘grandparent and
grandchild.'

Id. at 260 (quoting 31 CFR §§ 315.20(a) and 315.60). Thus, the Court
noted that the regulation made jointly issued bonds nontransferable in
themselves, and permitted a change in ownership, so long as both co-owners were alive, only through re-issuance at the request of both coowners.
Id.

17 The Court then concluded that the decedent's delivery of the bonds to
her granddaughters, even where accompanied by donative intent, was not
sufficient to remove the bonds from her gross estate:

We have no reason to rule against the integrity and effect
of the regulations. The issuance of the bonds by the Secretary,
subject to such ‘restrictions on their transfer' as the Secretary
may prescribe, was clearly authorized by the Congress in 31
U.S.C. § 757c(a). And the restrictions on their transfer were
just as clearly spelled out by the Secretary in his regulations. No
claim is made – and none could be made – that the regulations
are unclear or inapplicable to [the decedent's] purported
transfers. Nor can we view the regulations as an undue or
improper restriction of the transfer rights the decedent would
otherwise have. The bonds were issued subject to transfer
restriction, and those restrictions, in the eyes of the law at least,
were known to her. She could have had the bonds issued
originally in the sole names of the grandchildren, but she chose
the co-ownership form and, as her later attempts at transfer
reveal, she chose to retain possession of them. Having done so,
she was obligated to play the game according to the rules.

The decisions below also overlook the facts that until her
death, the decedent retained the right to redeem each of the
bonds in question, the right to succeed to the proceeds if she
survived the putative donee, and the right to join or to veto any
attempt to have the bond reissued.

* * *

Our conclusion, we feel, is required by the holding in Free
v. Bland, [supra.] There the Court held that, absent fraud, the
regulations creating a right of survivorship in United States
Savings Bonds issued in co-ownership form overrode or preempted
any inconsistent state property law. We stressed there,
as we do here, that a contrary result would fail ‘to give effect to
a term or condition under which a federal bond is issued.'

18 Pursuant to the United States Supreme Court's decision in Free, it is
clear that, under the Supremacy Clause, the federal regulations regarding
the right of survivorship in United States savings bonds preempt any
conflicting state law regarding the same. Furthermore, under the United
States Supreme Court's holding in Chandler, delivery of savings bonds by
the sole owner to another individual with the intent of making a gift of the
bonds is insufficient to divest the owner and/or his estate from ownership of
the bonds. Thus, to the extent that the Pennsylvania Supreme Court's
decision in Neglia suggests that the federal regulations do not bar
Appellant's recovery of the proceeds of the bonds, provided he can establish
a valid inter vivos gift between Chum and Helen Prothero, we conclude that
there is indeed a conflict with the federal law, and that the federal law must
prevail. Accordingly, we conclude that Neglia has, effectively, been
overruled by the United States Supreme Court in this regard.6

19 Finally, to the extent Appellant asks this Court to make a distinction
between ownership of the actual bonds versus the proceeds of the bonds,
we believe Appellant seeks relief similar to that provided by the trial court in
Free − namely, awarding full title to the co-owner identified on the bonds,
but requiring him to reimburse the decedent's estate for a portion of the value thereof − which was condemned by the United States Supreme Court.
Were this Court to hold, as Appellant herein requests, that he is entitled to
the proceeds associated with the bonds, we would, as the United States
Supreme Court stated, "render[] the award of title meaningless." Free, 369
U.S. at 669. As was the case in Chandler, the bonds were issued to Chum
subject to transfer restrictions which, in the eyes of the law, were known to
her; she could have had the bonds reissued in the name of Prothero, but she
did not. Regardless of her intent, her failure "to play the game according to
the rules," Chandler, 410 U.S. at 261, precludes any grant of relief to
Appellant.

20 For all of the foregoing reasons, we find that the trial court properly
granted Appellee's motion for judgment on the pleadings, and affirm the trial
court's order of November 10, 2005.