Detlefsen, In re
| Decision Date | 04 December 1979 |
| Docket Number | No. 79-1168,79-1168 |
| Citation | 610 F.2d 512 |
| Parties | Bankr. L. Rep. P 67,262 In re Guy Robert DETLEFSEN, Bankrupt. J. J. MICKELSON, Trustee, Plaintiff-Appellee, v. Guy Robert DETLEFSEN and Paine, Webber, Jackson and Curtis, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Melvin I. Orenstein, Lindquist & Vennum, Minneapolis, Minn., for defendants-appellants; Robert J. Hartman, Minneapolis, Minn., on the brief.
Steven B. Nosek, Wagner, Johnston & Falconer, Minneapolis, Minn., for plaintiff-appellee.
Before STEPHENSON and McMILLIAN, Circuit Judges, and HANSON *, Senior District Judge.
This puzzling case, which the world will little note nor long remember because the new Bankruptcy Act almost certainly obviates the problem it presents, was brought by a bankruptcy trustee against the bankrupt and the custodian of certain assets, seeking the turnover of the assets to the trustee. The assets, cash and securities worth all together some $85,000 to $90,000, comprise the remaining principal of a personal property trust created by the will of the bankrupt's father. The will named the bankrupt's mother as life beneficiary in income from the trust, with the benefit of invasion of the corpus if needed, and provided that the remaining principal be distributed on the mother's death to the testator's then living descendants per stirpes. By a spendthrift provision both the principal and interest of the trust were excluded from the claims of creditors of the beneficiaries or others and were made immune to transfer or encumbrance. The testator died in 1974, and his will was probated in Chicago according to Illinois law.
The bankrupt filed a voluntary petition in bankruptcy in the District of Minnesota on November 8, 1976; the appointment of the trustee is effective from that date. The bankrupt's mother was then living; and because of the spendthrift provision governing the trust, the bankrupt's contingent remainder interest in it did not vest in the trustee when the petition was filed. 1 However, the mother died only a month and a half later, on December 24, 1976, leaving the bankrupt as the person entitled to the trust principal under his father's will.
Illinois law, like that of many other states, permits a legatee to renounce or disclaim the gift, provided certain requirements are met, and provides that "the disclaimer shall relate back for all purposes" to the time when the gift would otherwise be considered to have vested in the legatee. 2 This rule was first adopted and its effect specified by judicial decision. See People v. Flanagin, 331 Ill. 203, 162 N.E. 848 (1928), where, after quoting from Kent's Commentaries and Washburn on Real Property and citing cases from seven other states, the Supreme Court of Illinois summed up as follows:
In these cases the rule is announced that the renunciation relates back to the moment when the gift was made, so that the estate does not vest, but remains in the original owner, precisely the same as if the will or deed had never been executed, or passes under the instrument according to its terms, to another, and that a renunciation is not a voluntary conveyance and is not subject to attack by creditors.
162 N.E. at 850 (citations omitted). The rule was later embodied in the Illinois Probate Act and given the same interpretation and effect as before by the courts: The right to disclaim is founded on the principle that a party does not have to accept an estate against his will; the motive of the disclaimant is immaterial provided he does not fraudulently receive a benefit for his action; the right is not limited even where the rights of judgment creditors against the disclaimant with execution returned unsatisfied are involved; and the disclaimer prevents passage of title to the disclaimant and is not a conveyance. See In Re Estate of Hansen, 109 Ill.App.2d 283, 248 N.E.2d 709 (1969); Cook v. Dove, 32 Ill.2d 109, 203 N.E.2d 892 (1965). 3
Seeking to take advantage of this aspect of Illinois law, on June 14, 1977 the bankrupt filed a disclaimer of the assets here in question in the Illinois court wherein his father's will was probated. No question is raised in this appeal as to the validity or effectiveness of the disclaimer under Illinois law considered by itself. 4 Evidently the Illinois court gave effect to it and determined that the assets should pass under the will to the bankrupt's three children. The record discloses that the assets have been transferred to Paine, Webber, Jackson and Curtis, Inc., the co-defendant, which now holds them on behalf and in the names of the children as tenants in common.
This case, seeking turnover of the assets to the trustee, was filed in the bankruptcy court on February 23, 1978, pursuant to Rule 701(1), Rules of Bankruptcy Procedure. The trustee's claim to the assets is founded on the second paragraph of Section 70a of the Bankruptcy Act of 1898 as amended in 1938 and again in 1952, 11 U.S.C. § 110(a) P 2 (1976), which provides that
All property, wherever located, except insofar as it is property which is held to be exempt, which vests in the bankrupt within six months after bankruptcy by bequest, devise or inheritance shall vest in the trustee and his successor or successors, if any, upon his or their appointment and qualification, as of the date when it vested in the bankrupt, and shall be free and discharged from any transfer made or suffered by the bankrupt after bankruptcy.
The trustee's theory is that, the bankrupt's disclaimer and Illinois law notwithstanding, the trust assets, or at least sufficient interest in them for § 70a P 2 to get a grip on, so to speak, vested in the bankrupt within the meaning of § 70a P 2 immediately upon the death of his mother, and therefore vested in the trustee by operation of the statute, and that the later disclaimer was therefore barred, either under the Illinois disclaimer statute itself, 5 or under the last clause of P 2, or both. The bankrupt and the custodian of the assets, on the other hand, point to the cases holding that (p)roperty interests are created and defined by state law (, and u)nless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. 6
Arguing that no federal interest requires a different result, they conclude that the bankrupt's disclaimer should be held to have prevented the vesting in him of the assets or any interest in them falling within the scope of § 70a P 2, and therefore to have prevented the vesting of the assets or any interest in them in the trustee by operation of § 70a P 2.
Both the bankruptcy court, 7 and the district court 8 on appeal by defendants from the judgment of the bankruptcy court, held for the trustee. For the reasons set forth below, however, we conclude that the courts below were in error, and that their judgments must be reversed. Our analysis proceeds as follows. We first determine the extent of the bankrupt's interest in the trust assets, under Illinois law, between the time his mother died and the time he filed his disclaimer. We then address the question whether the interest so defined amounts to "property . . . which vest(ed) in the bankrupt within six months after bankruptcy by bequest, devise or inheritance" within the meaning of § 70a P 2. We see no reason to depart from the usual rule, that state law determines the extent of a bankrupt's interest in property, by looking beyond Illinois law for a characterization of the bankrupt's interest in the assets from the time his mother died until he disclaimed. Although we grant that analysis might proceed on this alternative basis, we have found that nothing is gained thereby in the way of clarity, added insight, or relevant considerations.
The Illinois cases already cited make it clear that, from the time his mother died until he disclaimed, the bankrupt had at least the following "interest" in the trust assets: he had the right or power to either accept or disclaim the gift of the assets made to him under his father's will. It is also clear that had the bankrupt accepted the gift, it would have been considered to have vested in him the moment his mother died, and to have been assignable by him from that moment. Minimally, then, the bankrupt's contingent remainder interest in the assets must be held to have given rise, within six months after bankruptcy, to a power in him To acquire an assignable interest in the assets. 9 As the district court pointed out, this power or interest was "fixed and determined" at the time of the mother's death; and it put it within the bankrupt's power to choose, under the circumstances, "whether the windfall of (the) bequest should devolve to (his) creditors or the beneficiaries of his disclaimer."
The bankruptcy court went farther than this, holding that the bankrupt actually acquired an Assignable interest in the assets the moment his mother died. To reach this result the court reasoned that the spendthrift provision governing the trust expired the moment the mother died; and that since this provision was all that had previously rendered the bankrupt's interest in the assets non-assignable, his interest must have become assignable at that moment.
We think the bankruptcy court's analysis overlooks the extent of the change in the bankrupt's position vis-a-vis the assets worked by the death of his mother. Thus, it is certainly wrong to say that when the mother died, the bankrupt's Contingent remainder interest in the assets became assignable. Rather, when the mother died, the nature of the bankrupt's interest in the assets itself changed; his remainder interest then ripened, as we have said, into the power to either accept or disclaim the outright gift of the assets. This power was certainly not assignable by the bankrupt under Illinois...
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