In re Bishop College
| Decision Date | 26 January 1993 |
| Docket Number | Bankruptcy No. 387-32332-RCM-7,Adv. No. 392-3400. |
| Citation | 151 BR 394 |
| Parties | In re BISHOP COLLEGE, Debtor. Duke SALISBURY, Trustee, Plaintiff, v. AMERITRUST TEXAS, N.A., Defendant. Dan Morales, Attorney General of the State of Texas, Intervenor. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Ruth L. Rickard, Dallas, TX, for plaintiff.
Hank Rugeley, Wichita Falls, TX, for defendant.
Rose Ann Reeser, Office of the Attorney General, Austin, TX, for intervenor.
The following are the Court's Findings of Fact and Conclusions of Law under Bankruptcy Rule 7052 with respect to whether the assets of two charitable trusts established for the benefit of Bishop College ("Bishop College" or the "Debtor") constitute property of the Debtor's Chapter 7 bankruptcy estate, and are therefore subject to turnover pursuant to Sections 542 and 543 of the Bankruptcy Code. This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. ?? 1334(a), (b), and (d), and ? 157(a).1
Debtor, Bishop College, was the beneficiary of two testamentary trusts (collectively, the "Trusts") created by two black alumni of the school, A.E. Holland ("Holland") and Ethel O. King ("King"). Both Trusts were subject to two life estates created in favor of family members. Holland died in 1969, leaving a will which was admitted to probate in Wichita County, Texas by Order dated May 19, 1969. King died in 1974. Her last will was admitted to probate in Wichita County by Order dated March 16, 1979. Both wills named First Wichita National Bank, Wichita Falls, Texas as trustee. Later, Ameritrust Texas, N.A. ("Ameritrust") was substituted as trustee in its place.2 Pursuant to the wills' terms, Ameritrust was directed to liquidate the estates, invest the proceeds in stocks and bonds for the benefit of the beneficiaries, and pay the annual income to Bishop College.3
Bishop College filed a voluntary petition under Chapter 11 on April 30, 1987. In August, 1988 the case was converted to a Chapter 7 proceeding. Until the case's conversion, Bishop College was a private college serving predominantly black students, and located in Dallas, Texas. It ceased to operate as an educational institution on August 15, 1988.
It is apparent from the wills, neither Holland nor King anticipated the possibility that Bishop College might cease operating. The wills provided for no gifts over to remaindermen following the bequest to Bishop College. The Debtor is the sole named beneficiary of the wills' residuary bequest. Neither will provided for the Trusts' termination and distribution of assets upon Bishop College's failure. Instead, the wills contemplated annual payments to the Debtor from income trusts, in perpetuity.
Moreover, the wills contain no language earmarking the funds. There are no restrictions placed on the bequest to the Debtor requiring its continued maintenance of a physical campus. While not required by the Trusts' wording, the trusts' resources were used to provide scholarships to minority students. (Plaintiff's trial brief filed December 2, 1992, p. 15 n. 6).
Ameritrust distributed income from the Trusts to Bishop College until August, 1988 when the school ceased functioning as an educational institution, and the case was converted to a Chapter 7 proceeding. At that time Ameritrust refused to make further distributions to the estate on the grounds that the charitable intent of the donors could no longer be fulfilled. The Chapter 7 Trustee at that time made demand that the Trusts be liquidated, and their entire corpus and income be turned over to the estate for the payment of creditors, in accordance with the Bankruptcy Code's priority scheme.
As of June 30, 1992, the corpus of King Bishop College Foundation Trust had a market value of $69,130.24, and a book value of $68,329.73. The undistributed net income after taxes for 1988 was $629.07, 1989 was $2,827.00, 1990 was $2,708.60, and 1991 was $3,570.00. .
As of that same date, the corpus of the Holland Bishop College Foundation Trust had a market value of $63,962.45, and a book value of $63,479.31. The undistributed net income after taxes for 1988 was $549.27, 1989 was $2,488.00, 1990 was $2,354.00, and 1991 was $3,228.00. .
On July 1, 1992, the Chapter 7 Trustee brought this adversary proceeding seeking the following: (i) turnover of the trust income and corpus under Sections 542 and 543 of the Bankruptcy Code; (ii) an accounting; (iii) damages relating to Ameritrust's alleged breach of fiduciary duty for failure to distribute trust assets; (iv) declaratory relief; (v) and an avoidance of administrative fees. As reflected in the Agreed Order signed on December 4, 1992, the causes of action have been significantly narrowed. The causes of action now being asserted are for turnover, and a claim for the return of allegedly improper fiduciary fees under the Texas Trust Code.4
Pursuant to the Texas Property Code, the Attorney General of the State of Texas has intervened as a Defendant in this proceeding as is required in all disputes involving charitable trusts.
Both Ameritrust and the Attorney General contend that the assets of the Trusts, both corpus and accrued income, are not property of the estate, and that the turnover counts should be denied. Defendants contend that upon Bishop College's ceasing to operate as an educational institution, the rights of the estate to receive distributions from the Trusts ceased. Pursuant to the doctrine of cy pres,5 the Defendants assert the Trusts should be modified to designate a similar beneficiary to fulfill the charitable intent of the respective settlors of the Trusts. Ameritrust recognizes that this Court is not the appropriate forum to reform the trusts pursuant to the cy pres doctrine. In the event the Court determines that the Trusts are not property of the estate, Ameritrust intends to petition the Probate Court in Wichita County, Texas to reform the Trusts to establish a minority student scholarship fund at Midwestern State University in Wichita Falls, Texas. Alternatively, in the event the Court determines that cy pres is not applicable, Defendants contend that the assets are subject to a resulting trust for the estate of the settlors, and are not to be distributed to the Chapter 7 Trustee in this case.
The Chapter 7 Trustee asserts that interpretation of the wills requires the Court to find that the settlors intended to benefit Bishop College, irrespective of its terminated status as an educational institution. Despite the fact Bishop College no longer functions, the Chapter 7 Trustee contends that its continued existence as a legal entity makes the doctrine of cy pres inapplicable. The Chapter 7 Trustee asserts that as a practical matter, the general charitable purpose of the trust has not failed, because the settlors' general intent can be met by making the trust resources available to the estate for the payment of creditors. He urges the Court, instead of modifying the Trusts, to terminate them for the benefit of the sole named beneficiary of the residuary estate, Bishop College. Termination of the Trusts, he asserts, comports with ? 112.054(a)(2) of the Texas Trust Code6 and art. 1396-6.05, Tex. Non-Profit Corp. Act (Vernon 1990).7
At its heart, this adversary proceeding requires a determination of the extent of the estate's interest in the charitable trusts. Simply stated, "What property interest did the Debtor possess which can be distributed to its creditors?" The scope of the Debtor's estate is defined by 11 U.S.C. ? 541, which limits the estate to property interests held by the Debtor at the time the bankruptcy petition was filed. The Bankruptcy Code does not create property interests. Typically the nature and extent of a debtor's property rights existing as of the petition date are defined by non-bankruptcy law. In re Steven Smith Home for the Aged, Inc., 80 B.R. 678 (Bankr.E.D.Pa. 1987) (); In re Farmer's Mkt., Inc., 792 F.2d 1400 (9th Cir.1986) (); see generally 4 Collier on Bankruptcy ? 541.01, at 541-10 to 541-13 (). The bankruptcy estate, insofar as it includes the Trusts' assets, takes them subject to all limitations and conditions that existed on the property, pre-petition. It is that limited value, if any, to which any claims against the estate attach. In re Schauer, 62 B.R. 526 (Bankr.D.Minn.1986), aff'd 835 F.2d 1222 (8th Cir.1987); In re Farmer's Mkt., Inc., supra, at 1402-1403; 4 Collier on Bankruptcy ? 541.01 at 541-6 (). The filing of the bankruptcy petition did not expand the Debtor's rights with regard to the trust property. The estate received the trust assets subject to any restrictions imposed by state law, pre-petition.
Implicit in the Chapter 7 Trustee's turnover request is the assumption that federal bankruptcy law grants the Trustee greater rights to dispose of property of the bankruptcy estate than the Debtor held under state law. That argument is incorrect. There is no conflict between 11 U.S.C. ?? 542, 543, 704 and state law, which defines the Debtor's rights in the charitable trusts. The Bankruptcy Code does not expressly authorize the Trustee to collect property contrary to the restrictions imposed by state law. Those sections are merely "enabling statutes" that give the Trustee the authority to dispose of property if the Debtor would have had the same rights under state law. In re Schauer, supra ...
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