In re Bright

• Decision Date: 04 November 1999
• Docket Number: BAP No. WW-98-1867-BoRyK. Bankruptcy No. 97-11062. Adversary No. 98-11640.
• Parties: In re Charles D. and Deborah L. BRIGHT, Debtors. Edmund J. Wood, Chapter 7 Trustee, Appellant, v. Kelsey Bright and John Doe Bright; Jessica Leigh Bright and John Doe Bright II; Lindsey Elizabeth Bright and John Doe Bright III; Jenna Louise Bright and John Doe Bright IV, Appellees.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit

241 B.R. 664 (1999)

In re Charles D. and Deborah L. BRIGHT, Debtors.

Edmund J. Wood, Chapter 7 Trustee, Appellant, v. Kelsey Bright and John Doe Bright; Jessica Leigh Bright and John Doe Bright II; Lindsey Elizabeth Bright and John Doe Bright III; Jenna Louise Bright and John Doe Bright IV, Appellees.

BAP No. WW-98-1867-BoRyK. Bankruptcy No. 97-11062. Adversary No. 98-11640.

United States Bankruptcy Appellate Panel of the Ninth Circuit.

Argued and Submitted September 24, 1999.

Decided November 4, 1999.

Ronald W. Gross, Seattle, WA, for Edmund Wood, Trustee.

Michael Klein, Seattle, WA, for Kelsey, Jessica, Lindsey and Jenna Bright.

Before BOWIE¹, RYAN and KLEIN, Bankruptcy Judges.

OPINION

BOWIE, Bankruptcy Judge.

I OVERVIEW

In November of 1996 the debtor's father passed away. The debtor was named as a beneficiary under the will. Three months later, the debtor disclaimed his interest in the bequest. Under the terms of the will the disclaimed property passed to the debtor's children. Five months after disclaiming, the Debtor and his wife filed a petition under Chapter 7.² The Trustee has sued the children to recover the disclaimed property as a fraudulent conveyance.

There are no factual disputes. The only issue is whether the debtor's prepetition disclaimer of an inheritance under the will amounted to a "transfer of an interest of the debtor in property . . ." as that phrase is used in § 548.

The Bankruptcy Court held that because the Washington statute provides that the disclaimer relates back to before the death of the testator, the debtor did not, under Washington law, have an interest in the bequest which could be transferred. Appellant argues that the legal fiction of "relation back" created by the state statute should not be read to trump the Bankruptcy Code.

We AFFIRM.

II FACTS

On November 28, 1996, Aylmer Bright died testate, that is, leaving a valid will ("Will"). Under the Will, one-fourth of his estate, valued at more than $150,000, passed to his son Charles Bright, the debtor herein ("Debtor"). On March 5, 1997, the Debtor filed a "Disclaimer" in the Superior Court of Washington, disclaiming any interest under the Will. The result of the Disclaimer under both Washington state law and the terms of the will was that the Debtor's share passed to his four children.

At the time of the Disclaimer, the Debtor and his wife had judgments and unsecured debts totaling in excess of $149,000, and secured claims in excess of $562,000.

On August 19, 1997, the Debtor and his wife filed a joint petition under Chapter 7 of the Bankruptcy Code. On August 25, 1997, Edmund J. Wood was appointed as trustee of the bankruptcy estate ("Trustee").

On September 14, 1998, the Trustee commenced an adversary proceeding against the Debtor's four children ("Defendants") to recover the amounts they received under the Will due to the Disclaimer. The Trustee's theory is that the Disclaimer amounted to a transfer of an interest in property for less than reasonable value and was thus a fraudulent conveyance. The Defendants moved for a judgment on the pleadings. At the hearing on November 6, 1998, Judge Overstreet, in reliance on In re Simpson, 36 F.3d 450 (5th Cir.1994), ruled that the "relation back" feature of the Washington disclaimer statute "prevents the debtor from ever having acquired any interest under the will; and because he never acquired any interest under the will, he couldn't have transferred anything to his children." Transcript, Nov. 6, 1998, page 15, lines 12-15. The court entered its order on November 23, 1998, and on November 30, 1998, the Trustee filed a notice of appeal.

III STANDARD OF REVIEW

The Panel reviews conclusions of law, including the bankruptcy court's interpretation of the Bankruptcy Code, de novo. In re Pardee, 218 B.R. 916, 919 (9th Cir. BAP 1998) (citing In re Federated Group, Inc., 107 F.3d 730, 732 (9th Cir.1997)).

IV DISCUSSION

Washington Disclaimer Law

Under Washington law, property passed under a will is deemed to vest in the beneficiary immediately upon the death of the testator. Wash.Rev.Code § 11.04.250 (West 1965). A beneficiary, however, has nine months to disclaim any interest in the testamentary gift. Wash. Rev.Code § 11.86.021(1) (West 1989). Such a disclaimer passes the disclaimed interest as if the disclaimant died immediately prior to the date of transfer of the interest. Wash.Rev.Code § 11.86.041 (West 1997). As explained by the Supreme Court of Washington:

At common law and under our current statute, a properly executed and delivered disclaimer passes the disclaimed interest as if the disclaimant "died immediately prior to the date of the transfer of the interest." Wash.Rev.Code § 11.86.041(1). So long as a disclaimer is properly executed and timely delivered, the legal fiction of "relation back" treats the interest as having never passed to the intended beneficiary or heir at law.

Matter of Estate of Baird, 131 Wash.2d 514, 518, 933 P.2d 1031 (1997) (amended on denial of reconsideration.) The Washington statute provides that the disclaimer relates back to prior to the death of the testator "for all purposes." Wash.Rev. Code § 11.86.041 (West 1997). Thus, under Washington law, a beneficiary who disclaims an interest under a will is deemed never to have held that interest.

Fraudulent Conveyance Under the Bankruptcy Code

Section 548 authorizes a trustee to "avoid any transfer of an interest of the debtor in property." Thus, before a court reaches the elements of fraudulent conveyance, such as "reasonably equivalent value," the court must determine that there was a transfer of property in the first place.³ This is the issue before the Panel — we must decide whether the state law relation back provision should be respected to defeat an avoidance action under § 548. There are divergent lines of cases on this issue.

Courts Holding Disclaimer is Not a Transfer of an Interest in Property under § 548

The view that the relation back should be respected was ably expressed by the Seventh Circuit in In re Atchison, 925 F.2d 209 (7th Cir.1991):

The sole question is whether Anola\'s disclaimer was a "transfer of an interest of the debtor in property" which the trustee may avoid under Section 548(a). The Bankruptcy Code defines the word "transfer" to include "every mode . . . of . . . parting with . . . an interest in property", 11 U.S.C. § 101(50), but it does not define what constitutes an interest in property. Absent a federal provision to the contrary, a debtor\'s interest in property is determined by applicable state law. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); In the Matter of Chicago, Rock Island and Pacific Railroad Co., 772 F.2d 299, 302 (7th Cir.1985), cert. denied, 475 U.S. 1047, 106 S.Ct. 1265, 89 L.Ed.2d 574 (1986); In re Detlefsen, 610 F.2d 512, 515 (8th Cir.1979). The parties agree that Illinois law controls.

Under Illinois law, Anola\'s testamentary gift passed directly to her upon her father\'s death. She chose to exercise her right to reject the property by executing a disclaimer. Once the disclaimer was executed, the property passed as if Anola had predeceased her father and the disclaimer related back to the date of his death "for all purposes." Therefore, the effect of the disclaimer was to prevent Anola from ever acquiring an interest in the property.

925 F.2d at 210-211 (Illinois citations omitted). This same result was reached by the Tenth Circuit in Hoecker v. United Bank of Boulder, 476 F.2d 838 (10th Cir.1973), and the Fifth Circuit in In re Simpson, 36 F.3d 450 (5th Cir.1994) (adopting the reasoning and conclusion of Atchison). The Washington disclaimer statute, Wash.Rev. Code § 11.86.041 (West 1997), is for all relevant purposes identical to the Illinois statute — as discussed above it provides that the disclaimer relates back "for all purposes."⁴

Cases Holding to the Contrary

In In re Brajkovic, 151 B.R. 402, 405 (Bankr.W.D.Tex.1993), the court provided a different approach:

The single issue, then, is whether the debtor had an interest in property to transfer just prior to the execution of the disclaimer. If so, then the disclaimer caused the debtor to part with that interest, a transfer avoidable under section 548. In one sense, the question is its own answer, for there would be no need to execute a disclaimer but for the fact that, absent its execution, the debtor will own some property. Missouri law provides no mechanism (or requirement) for affirmative acceptance of a testamentary gift. Rather, acceptance is presumed unless expressly renounced. Thus, there seems to be some interest in property residing in the debtor at the moment the disclaimer is executed just by virtue of the fact that it takes a written disclaimer to get rid of it.

Id. at 406. (Citations omitted). The court went on to point out "the problems with Atchison":

According to the Seventh Circuit in Atchison, the "interest" disclaimed is only that of a donee, who is simply electing not to accept a gift. One who never takes the gift, goes the analysis, can never be said to have held a property interest in the gift.

The Atchison court recognizes the problem created by the settled law that property vests immediately in the named heirs as of the date of the decedent\'s death, but concludes that the "relation back" feature of the disclaimer statute (the Illinois statute discussed in Atchison is virtually identical to the Missouri statute involved in this case) cures this problem by "erasing" whatever interest the donee might technically have had. The property passes as of the date of death per the terms of the will (or per the laws of intestacy) without the original beneficiary ever showing up in the chain of title. Atchison, 925 F.2d at 211. The disclaimer laws afford the beneficiary a statutory reasonable period of time (nine months) within which to decide not to accept the gift. The relation back doctrine then assures

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