In Re James

• Decision Date: 30 August 1995
• Docket Number: Bankruptcy No. 95-10424-7. Adv. No. 95/00048.
• Parties: In re Tammy Lee JAMES, d/b/a Just Flowers, Debtor. Craig D. MARTINSON, Trustee, Plaintiff, v. Tammy Lee JAMES, individually, and Tammy Lee James, Trustee, Defendants.
• Court: U.S. Bankruptcy Court — District of Montana

186 B.R. 262 (1995)

In re Tammy Lee JAMES, d/b/a Just Flowers, Debtor Craig D. MARTINSON, Trustee, Plaintiff, v. Tammy Lee JAMES, individually, and Tammy Lee James, Trustee, Defendants.

Bankruptcy No. 95-10424-7. Adv. No. 95/00048.

United States Bankruptcy Court, D. Montana.

August 30, 1995.

COPYRIGHT MATERIAL OMITTED

Jerrold L. Nye, Billings, MT, for debtor/defendants.

Neal Jensen, Asst. U.S. Trustee, Great Falls, MT.

Craig Martinson, Trustee/plaintiff, Billings, MT.

ORDER

JOHN L. PETERSON, Chief Judge.

In this adversary proceeding, the Chapter 7 bankruptcy Trustee seeks turnover of certain real property held by the Debtor/Defendant, Tammy Lee James d/b/a Just Flowers ("Debtor") on grounds that the asset is property of the bankruptcy estate under 11 U.S.C. § 541. Debtor resists the Trustee's allegation, contending that, under a marriage dissolution decree entered by a Montana court on April 18, 1994, Debtor holds the property in trust for the sole benefit of Debtor's children, and therefore, under 11 U.S.C. § 541(b), the property does not belong to the bankruptcy estate. The Court finds that since Debtor lacks any power to benefit from the trust, absent its revocation or modification by a Montana court, neither the corpus nor the income of the trust may become part of the bankruptcy estate. Therefore, judgment on the merits shall be entered in favor of the Debtor dismissing the Complaint in its entirety.

Debtor filed a voluntary Chapter 7 petition on March 14, 1995. The Trustee filed the Complaint initiating the instant adversarial proceeding May 23, 1995. Trial of the cause was held on July 11, 1995, with all parties present. Exhibits were introduced and the Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(E), over which this Court has jurisdiction pursuant to 28 U.S.C. § 1334 and F.R.B.P. 7001, and the matter is ready for decision.

The dispositive question presented is whether a trust for the sole benefit of the children of a Chapter 7 debtor, which was created in the property disposition provisions of the debtor's marriage dissolution decree, and in which the debtor serves as trustee, is property of the Chapter 7 bankruptcy estate.

I.

Debtor obtained a divorce from Dennis W. James ("Dennis") with the Final Decree of Dissolution of Marriage for the couple being entered in the Montana Thirteenth Judicial District Court, Yellowstone County, Montana, on April 18, 1994. The decree, among other matters, resolved property interests of Debtor, the Petitioner therein, and Dennis.

At the time of the dissolution, the couple owned real estate in Weston County, Wyoming, described as follows:

Lots 3 and 4, Block One, (1) Rural Acres Subdivision, Weston County, Wyoming

Prior to the dissolution, the James sold the property under a Contract for Deed. Under the decree of dissolution, the contract remained in effect.

The couple had two minor children born of their marriage. The decree specifically resolved child support issues by requiring Dennis to pay $250.00 per month per child for the care, support, and maintenance of the minor children. As a separate and distinct part of that proceeding, in the property disposition portion of the decree, the above-described real estate and the proceeds from the Contract for Deed were set over to the Debtor, in the words of the decree:

To be held in trust for the support and care of the minor children of the parties until the youngest child of the parties reaches the age of 25. Any funds remaining after the youngest child reaches the age of 25 years shall be distributed in equal shares to the children of the parties.

(Exh. 7 at p. 5).

Subsequently, Dennis' interest in this property was deeded to Debtor individually in Debtor's name. Debtor has not formally transferred ownership of this real estate to any trust or to the two minor children. Currently, the Contract for Deed has been terminated and the property has reverted back to the Debtor.

II.

Under 11 U.S.C. § 541(a), all legal and equitable interests of the Debtor at the date of the bankruptcy petition became property of the estate. However, it is well-settled that property in the debtor's hands that belongs to another does not become property of the estate under § 541(a). In re Golden Triangle Capital, Inc., (Golden Mortgage Fund # 14 v. Trustee), 171 B.R. 79, 81 (9th Cir. BAP 1994). The Supreme Court stated in U.S. v. Whiting Pools, Inc., 462 U.S. 198, 205, n. 10, 103 S.Ct. 2309, 2313-2314, 76 L.Ed.2d 515 (1983) that, " Congress plainly excluded property of others held by the debtor in trust at the time of the filing of the petition. See, § 541(b)¹; H.R.Rep. No. 95-595, p. 368 (1977); S.Rep. No. 95-989 p. 82 (1978)." Furthermore the Court must look to state law to determine the nature of a debtor's property interests and resolve whether property in debtor's hands belongs to another. In re Sierra Steel, Inc., 96 B.R. 271, 273 (9th Cir. BAP 1989) (the existence and nature of the debtor's interest in property is determined by state law applied in a manner consistent with federal bankruptcy law). If Montana state law provides that the real property held in trust by Debtor benefits the children solely, the trust property does not become property of the bankruptcy estate under § 541(a).

As a threshold matter, the trustee argues that while the Montana court ordered the creation of a trust in Debtor's dissolution decree, the Debtor took no affirmative steps to create the trust such as registering the entity with the state of Montana, or transferring the property in question into the formal ownership of the trust. Therefore the trust never came into existence, and can have no effect on the bankruptcy estate. The Court disagrees.

Montana adopted a new Trust Code in 1989, patterned generally after the California Probate Code Ann. (1987), Section 15200, which in turn is drawn from Section 17 of the Restatement (Second) of Trusts (1957). Mont.Code Ann. Annotations, § 72-33-201, Methods of Creating Trust, Official Comments, p. 376. Mont.Code Ann. § 72-33-201 to 209. Under California law, the elements of an express trust include "a competent trustor, an intention on the part of the trustor to create a trust, a trustee, an estate conveyed to the trustee, an acceptance of the trust by the trustee, a beneficiary, a legal purpose and a legal term." In re Teichman, 774 F.2d 1395, 1399 (9th Cir.1985) (citing Reagh v. Kelley, 10 Cal.App.3d 1082, 1089, 89 Cal.Rptr. 425, 430 (1970)); see also, Nicholas v. Nicholas, 110 Cal.App.2d 349, 242 P.2d 679 (1952) (court held that income property given to custodial parent in divorce decree in lieu of child support was trust for benefit of children). Montana's elements of an express trust under the Montana Code and prior law are the same. McCaffrey v. Laursen, 215 Mont. 305, 697 P.2d 103 (1985); Eckart v. Hubbard, 184 Mont. 320, 602 P.2d 988, 990-991 (1979).²

As a final element, an valid express trust must satisfy the statute of frauds. To do so, creation of the trust must occur either (1) through a written trust document, signed by the trustee or the trustor, or (2) by operation of law. Mont.Code Ann. § 72-33-208; Eckart v. Hubbard, supra, 602 P.2d at 991; Lynch v. Herrig, 32 Mont. 267, 80 P. 240 (1905); Platts v. Platts, 134 Mont. 474, 334 P.2d 722 (1959). The Court notes that to create a non-business trust, no formal trust entity need be established if the non-business trust satisfies the foregoing elements. Compare, In re Pederson, 11 Mont.B.R. 396 (1992) (a business trust created for the benefit of the trustors should be included in the trustor's bankruptcy estate because business trust formalities were not observed by the trustee/beneficiaries).

The trust in question clearly meets Montana's trust criteria. The Chapter 7 Trustee's contentions concerning transfers not made to a formal trust entity do not apply to this case. As the Court has shown, the only transfer the law requires to create a nonbusiness trust for the benefit of one other than the trustor is a transfer of an estate to a trustee. The Chapter 7 Trustee does not dispute that this transfer occurred. (Br. of Trustee at p. 2.) Furthermore, although neither the trustor nor the trustee signed the dissolution decree creating the trust, the document satisfies the statute of frauds because the trust was created by operation of Montana family law. Mont.Code Ann. §§ 40-2-202; XX-XX-XXX(c).

Regardless, the Chapter 7 Trustee might still attack the validity of the express trust, and bring the property into the bankruptcy estate. In re Towe, 173 B.R. 197 (Bankr.D.Mont.1994). As the Court previously noted:

A factor commonly recognized as negating the presence of an express trust is the commingling of monies or assets purportedly comprising the res (citing cases). . . . In the absence of a finding of a trust relationship, a debtor-creditor relationship is often said to exist. Penn Central I (In re Penn Central Transp. Co.), supra, 486 F.2d at 519 524 (3rd Cir.1973); In re Delaware, supra, 127 B.R. 756 at 75 757 (D.Del.1991); and In re Shervin, supra, 112 B.R. 724 at 734 (Bankr.E.D. Pa.1990).

The incompatibility of commingling of funds and a trust relationship flows from the general precept that a trustee, though its legal owner, administers the trust res according to the terms of the trust for the benefit of another and, hence, does not use the res for the trustee\'s own purposes. Sherwin II Sherwin v. Oil City National Bank, supra, 229 F.2d 835 at 838 (3rd Cir.1956); Penn Central II (In re Penn Central Transportation Co.), supra, 392 F.Supp. 960 at 962 (E.D.Pa.1975); and Shervin, supra, 112 B.R. at 734.

Id. (quoting In re Kulzer Roofing, Inc., 139 B.R. 132, 140, 26 C.B.C.2d 1828 (Bankr. E.D.Pa.1992), aff'd, 150 B.R. 134 (E.D.Pa. 1992)).

However, in the case at bar, the Court can readily identify or trace the res of the trust as the real property described in Part I., supra. Given this,...