In re Armstrong, CASE NO. 12-30175 HCD
| Decision Date | 30 November 2012 |
| Docket Number | CASE NO. 12-30175 HCD |
| Parties | IN THE MATTER OF DEBRA ANN ARMSTRONG, DEBTOR. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
Appearances:
Rebecca H. Fischer, Esq., Laderer & Fischer, P.C., 112 West Jefferson Boulevard,
Bradley J. Adamsky, Esq., counsel for debtor, Newby, Lewis, Kaminski & Jones, LLP.
At South Bend, Indiana, on November 15, 2012.
Before the court is the Trustee's Objection to Second Amended Claimed Exemptions, filed by the Chapter 7 Trustee Rebecca Hoyt Fischer ("Trustee"). Chapter 7 debtor Debra Ann Armstrong ("debtor") claimed an exemption in all of her portion of the "Biehl Living Trust Agreement" established by her parents, now deceased, pursuant to Indiana Code § 30-4-3-2, as a spendthrift trust. After a hearing on the Trustee's Objection, the court directed the parties to file briefs on the issues presented. Once the briefs were filed and the briefing schedule had passed, the court took the matter under advisement.1
BACKGROUND
The underlying facts in this case are not contested. James J. Biehl and Rita W. Biehl, the debtor's parents, created and funded the "Biehl Living Trust Agreement" ("Trust") as a revocable inter vivos trust on May 13, 1998, and amended it on October 31, 2000, to specify that each of the Biehls' five children wasa Designated Beneficiary entitled to receive a 20% interest in the Trust upon the death of the surviving spouse. See R. 36, Ex. A, at 34-35. The Trust contained a spendthrift provision:
The beneficiaries' interests under this Trust Agreement shall not be subject to the claims of creditors, whether by levy, writ, attachment or otherwise, and may not be voluntarily or involuntarily alienated, assigned, anticipated, pledged, encumbered, sold or otherwise transferred prior to receipt by a beneficiary, except pursuant to the exercise of a power expressly granted in this Trust Agreement to disclaim, appoint or release. . . .
Id., Article Eleven, § B, at 19.
Rita W. Biehl passed away on April 14, 2008, and James J. Biehl died on April 11, 2010. According to the Trust, at the death of the surviving spouse, the Trustees "shall divide the remaining assets into separate shares" and "shall distribute each share created for a Designated Beneficiary . . . directly to that Designated Beneficiary." Id., § C(1), (2). At that time, the sole remaining asset of the Trust was a piece of real estate.
On January 27, 2012, twenty-one months after her father's death and almost three months before the distribution of the Trust proceeds, the debtor (one of the Designated Beneficiaries) filed a chapter 7 bankruptcy petition. The real property was sold thereafter, and the Trustee received the debtor's share of the proceeds on or about April 16, 2012.2 On May 4, 2012, the debtor filed a Second Amended Schedule C, claiming an exemption in all of her 20% interest in the Trust proceeds pursuant to Indiana Code § 30-4-3-2, the statute which provides the power "to restrain transfer of a beneficiary's interest." R. 27.
On June 4, 2012, the Trustee filed an objection to the claimed exemption. She stated:
Although it is alleged that the sole asset of the trust is real estate, the nature of the asset is an interest in the family trust, which is an intangible. The real estate has been sold and the Trustee has received the Debtor's share of the proceeds, rather than a distribution of a fractional share of ownership in the real estate. The Debtor has already used her exemption for intangibles under Ind. Code. § 34-55-10-2(c)(3) for other assets.
R. 30, ¶ 1. The Trustee's position was that, when the debtor filed her bankruptcy petition, she had a present right to her interest under the Trust, because the Trust terminated at the time James J. Biehl, the surviving spouse, passed away on April 11, 2010. See R. 36 at 1-2. That vested interest, she asserted, was part of the bankruptcy estate. See id. at 4.
The debtor disagreed. She pointed out that the property in which she held an interest was held in the Trust on the date she filed bankruptcy and was neither sold nor distributed until post-petition. See R. 37 at 1. As a result, she argued, at the time she filed her petition, the real estate in question was controlled and maintained by the successor trustee, not by herself. Moreover, she said, the Trust's spendthrift provision protected her interest from the claims of creditors.
Since the Debtor did not have any present dominion or control over the trust corpus at the time she filed her petition, and since the trust contained a valid anti-alienation spendthrift clause, the Debtor's distribution from the eventual sale of the real estate is protected in the bankruptcy proceedings by operation of § 541(c)(2).
Id. at 5. Consequently, the debtor insisted, her interest under the Trust was exempted under 11 U.S.C. § 541(c)(2)3 and under Indiana Code § 30-4-3-2. See R. 37 at 2.
DISCUSSION
The issue before the court is whether the debtor's claimed exemption in her 20% portion of the Trust is allowed. Under Federal Rule of Bankruptcy Procedure 4003, the objecting party has the burden of proving that the exemption was not properly claimed. See Fed. R. Bankr. P. 4003(c); see also In re Yonikus, 996 F.2d 866, 873 (7th Cir. 1993); In re Fink, 417 B.R. 786, 789 (Bankr. E.D. Wis. 2009). The objecting Trustee asserts that the Trust asset claimed by the debtor is property of the debtor's bankruptcy estate and is neither exempted nor excluded from that estate. The debtor, by listing the Trust property in her schedules, appears to agree that the property is property of her bankruptcy estate but argues that it is exempt property.
Under the Bankruptcy Code, "property of the estate" is broadly comprised of "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). One exception to the inclusive definition of "property of the estate" is § 541(c)(2), which is designed to apply to traditional spendthrift trusts. See In re Jones, 43 B.R. 1002, 1005 (N.D. Ind. 1984). The Bankruptcy Code excludes from the bankruptcy estate any property of the debtor that is subject to "a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under 'applicable nonbankruptcy law.'" 11 U.S.C. § 541(c)(2); see Patterson v. Shumate, 504 U.S. 753, 758, 112 S. Ct. 2242, 119 L.Ed.2d 519 (1992) (). It is noteworthy that this provision excludes property which falls within its definition. The distinction between an exclusion and an exemption is an important one: Property that is excluded never becomes "property of the estate," whereas property that is exempted is "property of the estate" when the debtor files a bankruptcy petition but is removed from the list of property by state or federal law. See In re Yonikus, 996 F.2d at 869 (); see also Matter of VanMeter, 137 B.R. 908, 910 (Bankr. N.D. Ind. 1992) ().4 The court first considers, therefore, whether the debtor's interest in the Trust is excluded altogether from becoming property of the estate under § 541(c)(2).
Under § 541(c)(2), Congress intended to exclude qualified spendthrift trusts from property of a debtor's estate. See In re Yonikus, 996 F.2d at 870; Lunkes v. Gecker, 427 B.R. 425, 428 n.1 (N.D. Ill. 2010). Whether a trust qualifies as a spendthrift trust is resolved under "applicable nonbankruptcy law," state or federal. The parties agree that, in this case, the law of Indiana governs the characterization of the trust. See Morter v. Farm Credit Servs., 937 F.2d 354, 356 (7th Cir. 1991) (). In Morter, the Seventh Circuit Court of Appeals relied upon the classic Black's Law Dictionary definition of spendthrift trust:
A spendthrift trust is "one created to provide a fund for the maintenance of a beneficiary and at the same time to secure the fund against his improvidence or incapacity." Black's Law Dictionary 1400 (6th ed. 1990).
Id. In Indiana, a grantor's power to create a spendthrift provision is codified at Indiana Code § 30-4-3-2.5 See Sisters of Mercy Health Corp. v. First Bank of Whiting, 624 N.E.2d 520, 522 (Ind. App. 1993). A trust is recognized as a valid spendthrift trust in Indiana when these requirements are met:
There are three requirements for a trust to be a spendthrift trust. First, the settlor may not be a beneficiary of the trust. Second, the beneficiary must not have any present dominion or control over the plan corpus. Third, the trust must contain an anti-alienation clause which prevents the beneficiary from voluntarily or involuntarily transferring his interest in the trust.
United States v. Grimm, 865 F. Supp. 1303, 1311 (N.D. Ind. 1994) (citing Matter of Jones, 43 B.R. 1102 (N.D. Ind. 1984)); see also Walro v. Striegel, 131 B.R. 697, 701 (S.D. Ind. 1991); Matter of VanMeter, 137 B.R. at 912; 28 Ind. Law Encyc. Trusts § 41 (2012). Indiana's statutory provision comports with thecommon law of trusts and follows the Restatement (Second) of Trusts, particularly §§ 152, 153, and 156. See Ind. Code § 30-4-3-2 (Study Commission Comment).
The Trust before this court appears to comport with the spendthrift trust requirements. The settlors, James J. and Rita W. Biehl, were not beneficiaries of the Trust, and the debtor-beneficiary was not a settlor. The Trust instrument contains an anti-alienation clause barring the transfer of a beneficial interest...
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