In re Hayes

• Citation: 407 F.2d 1031
• Decision Date: 06 March 1969
• Docket Number: 18317.,No. 18316,18316
• Parties: In the Matter of Grace HAYES, Bankrupt. The KENTUCKY COMPANY, Inc., Appellant, v. Grace HAYES, Appellee. In the Matter of Grace HAYES, Bankrupt. Portia F. SCHAEFER, Trustee, Plaintiff-Appellant, v. Grace HAYES, Bankrupt, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (6th Circuit)

407 F.2d 1031 (1969)

In the Matter of Grace HAYES, Bankrupt.

The KENTUCKY COMPANY, Inc., Appellant, v. Grace HAYES, Appellee.

In the Matter of Grace HAYES, Bankrupt.

Portia F. SCHAEFER, Trustee, Plaintiff-Appellant, v. Grace HAYES, Bankrupt, Defendant-Appellee.

Nos. 18316, 18317.

United States Court of Appeals Sixth Circuit.

March 6, 1969.

John Swinford, Cynthiana, Ky., for the Kentucky Co., Inc.

Frank D. Emerson, Cleveland, Ohio, for Portia F. Schaefer.

Arthur L. Brooks, Jr., Lexington, Ky., for appellee; Meade & Brooks, Lexington, Ky., on brief.

Before EDWARDS and COFFIN,^* Circuit Judges, and CECIL, Senior Circuit Judge.

EDWARDS, Circuit Judge.

The Trustee in Bankruptcy and the sole creditor appeal from the dismissal by the United States District Court for the Eastern District of Kentucky of their petitions to review an opinion and order of the Referee in Bankruptcy and from the court's affirmance of same. The referee's order had denied appellant trustee's motion for turnover orders which would have required Grace Hayes, the bankrupt, to pay over $30,000 which represented the proceeds of a number of United States Savings Bonds.

The facts, which are not in dispute, were stated thus in the referee's opinion:

"The petition in bankruptcy was filed herein on July 1, 1964. On that date the bankrupt, Grace Hayes, was married to Joe E. Hayes. On March 7, 1965, approximately seven months subsequent to the filing of the petition in bankruptcy by his wife, Joe E. Hayes committed suicide.

"Mr. Hayes was a man of considerable means. His estate consisted of a 400 acre farm valued at $110,000.00 and personal property valued at $58,912.79, exclusive of insurance and the United States Savings bonds to which the trustee lays claim.

"Sometime after her husband\'s death, and after the completion of the appraisal of his estate for the probate court, Mrs. Hayes discovered the three bonds in the pocket of an overcoat which had belonged to her husband.

"The bonds were all payable to Joe E. Hayes `or\' Grace Hayes. Mrs. Hayes knew of the existence of the bonds. She and her husband had received semi-annual dividend checks on two of the bonds over a period of years. Also, her husband had told her the bonds would be hers `without anything,\' apparently meaning upon his death.

"Two of the bonds were Series H bonds with a face value of $10,000.00 each. It\'s established that one of these Series H bonds was purchased in June, 1954. The other Series H bond may have been purchased before that date.

"The remaining bond, of a denomination of $7,500.00, had accumulated interest and had a value of approximately $13,000.00 at the time it was cashed by the bankrupt.

"The bankrupt cashed one of the Series H bonds on August 30, 1965, and apparently cashed the other bonds at about the same time. She used the proceeds of the bonds in the construction of a 12-unit apartment building in Cynthiana, Kentucky. She lives in one of the apartments and rents the remainder.

"The bankrupt did not list any interest in the bonds as an asset in the schedules to her petition in bankruptcy. She denies having any interest in the bonds at the time the petition in bankruptcy was filed and asserts the bonds were the property of her husband.

"There was no evidence the bankrupt contributed any funds toward the purchase of the bonds. She testified her husband had possession of the bonds; that she had never seen the bonds until she discovered them in her husband\'s overcoat pocket after his death; that her husband kept the bonds in his safety deposit box, from which he apparently removed them sometime shortly prior to his death. The bankrupt never had access to the box."

Appellant-trustee in this appeal relies primarily upon the proposition that Treasury Regulations and other legal authority support the right of trustees in bankruptcy to reach a bankrupt's interests in United States Savings Bonds.

This principle seems to us to be thoroughly established by the explicit language of the Treasury Regulations which we quote hereafter — and in particular by 31 C.F.R. § 315.21 (1968).

And the authorities relied upon by appellants amply illustrate (directly or by implication) the right of a trustee in bankruptcy to reach a bankrupt's interest in United States Savings Bonds registered in coownership form. Simon v. Schaetzel, 189 F.2d 597 (10th Cir. 1951); Guldager v. United States, 204 F.2d 487 (6th Cir. 1953).

All of this authority, however, is largely beside the point in this case. For the dispute here is really whether or not the bankrupt, Grace Hayes, had any interest — or, more appropriately, any interest of value — as of July 1, 1964, the date of the petition in bankruptcy. The burden of proof on this issue is on the trustee in bankruptcy. See Maggio v. Zeitz, 333 U.S. 56, 64, 68 S.Ct. 401, 92 L.Ed. 476 (1948); Sheinman v. Chalmers, 33 F.2d 902 (3d Cir. 1929); In re Scranton Knitting Mills, Inc., 23 F.Supp. 803 (M.D.Pa. 1938).

In the Stock Yards Bank case, this court also pointed out:

"This court has held that coownership by husband and wife of Series E Bonds is not the equivalent of tenancy by the entirety under state law, but rather is an estate the limitations and conditions of which are delineated by the terms of the contract and by federal law. Guldager v. United States, 6 Cir., 1953, 204 F.2d 487. See Clearfield Trust Co. v. United States, 1943, 318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838; Bank of America National Trust & Savings Ass\'n v. Rocco, 3 Cir., 1955, 226 F.2d 297, 299." United States v. Stock Yards Bank of Louisville, 231 F.2d 628, 630 (6th Cir. 1956).

See also Marcum v. Marcum, 377 S.W. 2d 62 (Ky. 1964).

Thus, we look first (and primarily) to federal law for answers to the questions posed by this appeal.

The regulations pertaining to federal savings bonds authorize three forms of registration — single owner, coownership, and beneficiary or payable on death. 31 C.F.R. § 315.7 (1968). The regulations also provide that the registration "must express the actual ownership of and interest in" the bonds, except as otherwise provided in Subpart E, 31 C.F.R. § 315.5 (1968).¹

Subpart E of the regulations, 31 C.F.R. § 315.21, specifically provides as follows:

"Subpart E — Limitation on Judicial Proceedings — No Stoppage or Caveats Permitted

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"§ 315.21 Payment to judgment creditors.

"(a) Creditors. Payment (but not reissue) of a savings bond registered in single ownership, coownership, or beneficiary form will be made to the purchaser at a sale under a levy or to the officer authorized to levy upon the property of the registered owner or coowner under appropriate process to satisfy a money judgment. Payment will be made to such purchaser or officer only to the extent necessary to satisfy the judgment and will be limited to the redemption value current sixty days after the termination of judicial proceedings. Payment of a bond registered in coownership form pursuant to a judgment or levy against only one of the coowner will be limited to the extent of that coowner\'s interest in the bond; this interest may be established by an agreement between the coowners or by a judgment, decree, or order of court entered in a proceeding to which both coowners are parties.

"(b) Trustees in bankruptcy and receivers. Payment of a savings bond will be made to a trustee in bankruptcy, a receiver of an insolvent\'s estate, a receiver in equity, or a similar officer of the court, under the applicable provisions of paragraph (a) of this section, except that payment will be made at the redemption value current on the date of payment." 31 C.F.R. § 315.21 (1968) (emphasis added).

31 C.F.R. § 315.20 further provides:

"§ 315.20 General.

"(a) No judicial determination will be recognized which would give effect to an attempted voluntary transfer inter vivos of a bond or would defeat or impair the rights of survivorship conferred by these regulations upon a surviving coowner or beneficiary, and all other provisions of this subpart are subject to this restriction. Otherwise, a claim against an owner or coowner of a savings bond and conflicting claims as to ownership of, or interest in, such bond as between coowners or between the registered owner and beneficiary will be recognized, when established by valid judicial proceedings, upon presentation and surrender of the bond, but only as specifically provided in this subpart.

"(b) Neither the Treasury Department nor any agency for the issue, reissue, or redemption of savings bonds will accept notices of adverse claims or of pending judicial proceedings or undertake to protect the interests of litigants who do not have possession of a bond." 31 C.F.R. § 315.20 (1968) (emphasis added).

Thus it appears clear that provision is made for judicial determination of the "extent" of interest of a registered coowner. And, likewise, it seems apparent that voluntary transfers inter vivos are ruled out.

Two other regulations, however, are essential to determination of the case. 31 C.F.R. §§ 315.39 and 315.60 provide in part:

"§ 315.60 Payment during the lives of both coowners.

"A savings bond registered in coownership form, for example, `John A. Jones or Mrs. Mary C. Jones,\' will be paid to either upon his separate request, and upon payment to him the other shall cease to have any interest in the bond." 31 C.F.R. § 315.60 (1968).

"§ 315.39 Presentation and surrender.

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"A natural person whose name is inscribed on the face of a bond of Series A, B, C, D, or E, either as owner or coowner in his own right, may present such bond for redemption to an authorized paying agent.

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"If the bond is in order for payment, the paying agent will make immediate payment at the appropriate redemption value without charge to the owner or coowner." 31 C.F.R. § 315.39 (1968).

Thus a coowner in possession of a bond can cash the same without the knowledge or consent of the other registered coowner. By making these bonds readily...