Baum, In re

• Decision Date: 26 April 1994
• Docket Number: No. 92-1365,92-1365
• Citation: 22 F.3d 1014
• Parties: In re Jerome S. BAUM, Debtor. Tom H. CONNOLLY, Trustee, Plaintiff-Appellant, v. Jerome S. BAUM, Garrett Adam Baum, Courtney Jill Baum, Tom W. Lamm, Defendants-Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 1014

22 F.3d 1014

In re Jerome S. BAUM, Debtor Tom H. CONNOLLY, Trustee, Plaintiff-Appellant, v. Jerome S. BAUM, Garrett Adam Baum, Courtney Jill Baum, Tom W. Lamm, Defendants-Appellees.

No. 92-1365.

United States Court of Appeals Tenth Circuit.

April 26, 1994.

Curt P. Kriksciun of The Connell Law Firm, Denver, CO, for plaintiff-appellant.

Harry M. Sterling (David M. Tenner, also of Gelt, Fleishman & Sterling, with him on the brief), Denver, CO, for defendants-appellees.

Before LOGAN and BRORBY, Circuit Judges, and SEAY, Chief District Judge. ^*

LOGAN, Circuit Judge.

Plaintiff Tom H. Connolly, Trustee in Bankruptcy, appeals the district court's grant of summary judgment denying him relief and upholding the validity of two trusts the assets of which plaintiff sued to include in Jerome S. Baum's bankruptcy estate. On appeal, plaintiff argues that the trusts are void as shams or because of merger of legal and equitable interests.

I

In October 1983, Baum (debtor or settlor) established and filed of record a trust instrument entitled the Baum Children Trusts, creating two irrevocable trusts denoted as the Garrett Adam Baum Trust and the Courtney Jill Baum Trust and naming Tom W. Lamm as trustee. Garrett Adam Baum and Courtney Jill Baum are debtor's children. Debtor transferred into the trusts his residence some furniture and fixtures, and a collection of antique clocks. Debtor reserved the right to live in the residence under the following terms:

For so long as the Settlor shall be living, he shall [have] the right to occupy [the] residence free of rental so long as the Settlor timely services all encumbrances against such residence, and pays all taxes, insurance and utilities on such residence or associated with its occupancy by the Settlor. Further, in the event of the death of the Settlor, and if Rachael Elizabeth shall then be the spouse of the Settlor as contemplated in paragraph 10.4 below, and if the said Rachael Elizabeth Baum survives the Settlor, then, until the earlier to occur of the death of Rachael Elizabeth Baum or the second anniversary of the date of her remarriage, the said Rachael Elizabeth Baum shall have the right to occupy such property as her principal residence free of rental so long as she shall timely service all encumbrances against such residence, and pays all taxes, insurance and utilities on such residence or associated with her occupancy.

Appellant's App. 98-99. Debtor also reserved to himself and his wife the right to require the trustee to sell the residence and purchase another home as substitute trust property

so long as the expenditures required by the trusts herein created in order to secure a new residence together with any contributions by the occupant, shall not be in excess of the net proceeds of sale of the old residence, and so long as the trusts herein created are exposed to no greater liabilities or risks of loss than those to which the trusts are exposed prior to the sale of the old residence.

Id. at 99.

When debtor created the trusts he and his wife were experiencing marital difficulties and wanted to preserve certain separate property for their children from their prior marriages. The trusts authorized the trustee to distribute income or principal based on the "best interests" of the children beneficiaries as determined by the trustee. Id. at 96, 97, 101-02. The trusts contemplated distributions for the "support," "comfort and convenience" of those beneficiaries. Id. at 102. At the time the trusts were created, debtor had a net worth of over $1,000,000; he had total debts of less than $115,000, consisting of about $19,000 owed to his ex-wife and $90,000 to $95,000 on a mortgage on the residence. Appellant's App. 83-84.

About six years later, in 1989, debtor filed for Chapter 7 bankruptcy. Plaintiff was appointed trustee and filed this action to recover the trust property for the bankruptcy estate, asserting: (1) the creation of the trusts constituted transfers in trust for the benefit of the debtor and thus were void under Colorado law; and (2) debtor used trust property as his own, effecting a merger of legal and equitable interest in the property of the trusts. ¹ The bankruptcy court referred the case to the district court, whose grant of summary judgment upholding the validity of the trusts was appealed to this court.

We review a district court's order granting summary judgment de novo, applying the same legal standard used by the district court under Fed.R.Civ.P. 56(c). Anaconda Minerals Co. v. Stoller Chem. Co., 990 F.2d 1175, 1177 & n. 3 (10th Cir.1993). We view the record "in a light most favorable to the parties opposing the motion for summary judgment." Deepwater Invs., Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir.1991). "Summary judgment is appropriate when there is no genuine dispute over a material fact and the moving party is entitled to judgment as a matter of law." Russillo v. Scarborough, 935 F.2d 1167, 1170 (10th Cir.1991). Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate a genuine issue for trial on a material matter. Bacchus Indus., Inc. v. Arvin Indus., Inc., 939 F.2d 887, 891 (10th Cir.1991). "[T]he nonmoving party may not rest on its pleadings but must set forth specific facts showing that there is a genuine issue for trial as to those dispositive matters for which it carries the burden of proof." Applied Genetics Int'l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986)).

The bankruptcy estate includes, "[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1). For purposes of Sec. 541, the nature of a debtor's interest in property generally is determined by state law. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-918, 59 L.Ed.2d 136 (1979). Thus, if the trusts are shams or otherwise void under Colorado law the trust property is includable in the bankruptcy estate.

II

Plaintiff's arguments fall into two categories: The trusts were void at their inception, or at least voidable if necessary for the benefit of creditors, regardless of how they may have been operated; or, alternatively, the trusts are shams because of the way they were operated. ² We consider the void or voidable argument first.

A Colorado statute voids "[a]ll deeds of gifts, all conveyances ... of goods, chattels, or things in action, or real property, made in trust for the use of the person making the same shall be void as against the creditors existing of such person." Colo.Rev.Stat. Sec. 38-10-111. Plaintiff was not an existing creditor at the time the trusts were created in 1983. He became entitled to stand in the shoes of all creditors existing at the time bankruptcy was filed in 1989; but there is no showing that debtor's ex-wife was a creditor in 1989, or that the mortgage holder in 1983 is claiming to share the bankruptcy estate.

Colorado courts would also hold void in a suit on behalf of creditors a trust in which the settlor is the sole beneficiary or has the sole power to reach the trust property. Kaladic v. Kaladic, 41 Colo.App. 419, 589 P.2d 502, 505 (1978) (holding illusory and fraudulent a spendthrift trust that ex-wife attempted to create with marital assets shortly before divorce, naming herself as sole beneficiary). The trusts at issue before us are irrevocable. By their terms settlor is not the sole beneficiary, and he does not have the power to revest the trust property in himself.

Debtor is a beneficiary in that he has the right to occupy the residence during his life and use the furnishings, subject to a duty to keep up payments on any mortgage and to pay all taxes, insurance and utilities. The trust does not have spendthrift provisions--which would be ineffective in any event--to prevent current creditors from reaching settlor's interest. See id. Therefore, regardless of the success of plaintiff's other arguments, the value of debtor's life estate can be reached for the benefit of his creditors unless it is protected by Colorado's homestead exemption. See Colo.Rev.Stat. Sec. 38-41-201 (limiting homestead exemption to $30,000). However, debtor presented factual support for his assertion that his own beneficial interest in the trusts was minimal; he paid $1652 per month for debt service, taxes and insurance, Appellant's App. 83, 98, while the rental value of the property was between $1250 and $1500 per month. Id. at 93.

Arguably debtor's right to occupy the residence gives him the right to use and enjoy the furnishings and clocks transferred to the trusts. There are cases holding that a life estate in consumable personal property is the equivalent to full fee simple title. See, e.g., Seabrook v. Grimes, 107 Md. 410, 68 A. 883 (1908). It is unlikely, however, that the furnishings and clocks transferred to the trust would be regarded as consumable. In any event debtor presented evidence that all but four of the clocks had been sold and the proceeds turned over to the children beneficiaries to pay their educational expenses and that all furniture except one desk and mirror had been given to the children some years ago.

Colorado law provides the following elements are required to establish an express private trust: "(1) the settlor's capacity to create a trust; (2) his intention to create a trust; (3) a declaration of trust or a present disposition of the res; (4) an identifiable trust res; (5) a trustee; and (6) identifiable beneficiaries." In re Estate of Granberry, 30 Colo.App. 590, 498 P.2d 960, 963 (1972) (citing Restatement (Second) of Trusts Sec. 17, et seq.; G. Bogert, Trusts and Trustees Sec. 41, et seq. (2d ed.)); see also Estate of Brenner, 37 Colo.App. 271, 547 P.2d 938, 941 (1976). Settlor...