In re Knight
| Decision Date | 22 February 1994 |
| Docket Number | Bankruptcy No. 91-30264-BKC-RAM. |
| Citation | 164 BR 372 |
| Parties | In re James Edwards KNIGHT, Debtor. |
| Court | U.S. Bankruptcy Court — Southern District of Florida |
Leslie G. Cloyd, Ackerman, Bakst, Cloyd, & Scherer, West Palm Beach, FL, for debtor.
Robert L. Young, Carlton, Fields, Ward, Emmanuel, Smith & Cutler, P.A., Orlando, FL, for GIAC Leasing.
Soneet Kapila, Trustee, West Palm Beach, FL.
SUPPLEMENTAL MEMORANDUM OPINION DETERMINING ESTATE'S INTEREST IN TRUSTS
The Debtor in this Chapter 7 case scheduled certain property described as contingent unvested interests in various trusts. These trust interests were scheduled as exempt. GIAC Leasing Corporation ("Creditor") filed an objection to the claim of exemption. Although framed as an objection to exemptions because of the form in which the Debtor listed these interests, the issue is whether the trust interests are property of the estate.
After consideration of the arguments presented in written memoranda and in oral argument and after review of the trust documents, the Court scheduled a hearing on October 20, 1993, to announce its ruling. This Supplemental Memorandum Opinion incorporates and supersedes the findings and conclusions stated on the record on that day.
The Court concludes that the Debtor's interests in the Dorothy E. Knight Trust and Part B of the Charles E. Knight Trust are property of the estate; the Debtor's interest in Part A of the Charles E. Knight Trust is not estate property.
The Debtor, James Edwards Knight, is the son of Charles E. Knight and Dorothy E. Knight. The interests at issue are the Debtor's interest in the Dorothy E. Knight Trust (the "Dorothy Trust") established on October 1, 1937 and the Debtor's interest in the Charles E. Knight Trust (the "Charles Trust") established on January 2, 1946. Upon the death of Charles, the Charles Trust was divided into Part A and Part B as described below.
The Dorothy Trust terminates upon the death of Dorothy who was 90 years old as of the petition date. At her death, under Section 4 of the trust, the principal will be distributed equally to the Debtor and his sister, if they are alive. If the Debtor predeceases his mother, his share will be distributed to his children.
Since 1965, the Debtor's sister and Dorothy have served as co-trustees of the trust. Prior to the filing of his Chapter 7 case, the Debtor had been receiving some income distributions from this trust pursuant to Section 3, which provides that income "may be paid from time to time in equal or unequal proportions" to Dorothy, the Debtor or his sister.
Two other provisions of the trust are relevant to the Court's analysis. First, the trust may be amended only by the consent of all three trustees. Second, Section 12 of the trust grants the trustees the right to invade principal during Dorothy's lifetime "in the discretion of the trustees." According to a supplemental letter submitted by Debtor's counsel on May 19, 1992, the Dorothy Trust has a value of approximately $885,000.00.
The Charles Trust, created in 1946 and amended in 1965, was divided, by its terms, into two parts when Charles died. The Debtor, his sister and Dorothy are also co-trustees of this trust.
Dorothy is entitled to receive all of the income from the Part A Trust during her life. At her death, the principal of the Part A Trust will be distributed pursuant to a power of appointment exercisable by Dorothy in her will. The Creditor concedes that the Debtor has no present or future interest in Part A of the Charles Trust, since Dorothy has absolute discretion as to naming him as a beneficiary.
Part B of the Charles Trust is at issue. The Charles Part B Trust provides for Dorothy to receive income during her lifetime with the principal to be distributed equally to the Debtor and his sister if they are alive, just like the principal of the Dorothy Trust. Also like the Dorothy Trust, Section 12 of the Charles Part B Trust provides for invasion of the principal during Dorothy's lifetime. Unlike the invasion of principal provision in the Dorothy Trust, the provisions in the Charles Part B Trust are both more specific and mandatory as follows:
Section 12. Payments By the Trustees.
During the lifetime of CHARLES E. KNIGHT the Trustees shall pay and distribute any portion of this Trust as CHARLES E. KNIGHT may direct by notice in writing to the Trustees. Further, the Trustees shall pay and distribute unto CHARLES E. KNIGHT and/or DOROTHY E. KNIGHT at any time during the duration of this Trust so much of the principal thereof as shall be necessary to keep and maintain CHARLES E. KNIGHT and/or DOROTHY E. KNIGHT in the standard of living to which he and/or she may be accustomed, and/or to provide for his and/or her medical care.
The Charles Part B Trust had a value of $1,545,000 as of May 19, 1992.
Section 541(a)(1) of the Bankruptcy Code defines property of the estate broadly to include "all legal and equitable interests of the debtor in property as of the commencement of the case." Unlike the Bankruptcy Act, the Code has eliminated a requirement that the debtor be able to transfer the interest or that his creditors by some means must be able to reach it. In re Ryerson, 739 F.2d 1423 (9th Cir.1984). By including all legal interests without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time. Id. at 1425, citing H.R.Rep. No. 595, 95th Cong., 1st Sess. 175-76 (1977), reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6136.
The Debtor argues that he has no vested right to any portion of the principal of the Dorothy Trust unless three contingencies occur: (1) The Debtor survives Dorothy; (2) Dorothy does not amend the trust interest so as to exclude the Debtor as a beneficiary; and (3) the trustees do not consume the entire principal by paying it to Dorothy or other beneficiaries as they may in their discretion do under Section 12 of the trust instrument. The Debtor similarly argues that he has no right to the principal of the Charles Part B Trust unless he survives his mother and the corpus is not consumed by distributions to Dorothy during her lifetime.
The Debtor is wrong as to Dorothy's unilateral ability to amend the Dorothy Trust to eliminate his interest. Dorothy certainly has absolute discretion as to the Charles Part A Trust, but she may not amend the Dorothy Trust to exclude the Debtor without the consent of the other trustees. The Debtor's consent to his exclusion post-petition would constitute an unlawful post-petition transfer of property of the estate under § 549 of the Code. Moreover, for purposes of valuing a beneficiary's future interest in the corpus of a trust, the Court assumes that a beneficiary would not elect to terminate his or her own interest.
The trustees in their discretion could distribute principal and consume some or all of the trust principal in both the Dorothy Trust and the Charles Part B Trust prior to Dorothy's death. This discretionary right to invade principal affects the value of the interests but it does not render them worthless. Similarly, the fact that the Debtor must outlive Dorothy in order to obtain his share of the trust principal also does not immunize the interest from becoming property of the estate. See In re Kreiss, 72 B.R. 933 (Bankr. E.D.N.Y.1987) (). In short, the Debtor's interests in the Dorothy Trust and the Charles Part B Trust had value as of the petition date and are therefore property of the estate.
Three well reasoned bankruptcy cases support the Court's conclusion. In re Newman, 88 B.R. 191 (Bankr.C.D.Ill.1987); In re Kreiss, 72 B.R. 933 (Bankr.E.D.N.Y.1987); In re Dias, 37 B.R. 584 (Bankr.D.Idaho 1984).
In Kreiss, the debtor held a 50% remainder interest in a trust subject to a life tenancy. The court held that this equitable interest, a contingent remainder, is an interest that is alienable and subject to seizure under applicable New York law. The same reasoning would apply to both trust interests in this case. Absent any spendthrift provisions which would exclude the interests under § 541(c)(2), the Debtor's interests in both the Dorothy Trust and Charles Part B Trust are alienable interests that passed to the bankruptcy trustee upon the filing of this bankruptcy case.
In Newman, the Debtor trust beneficiary was entitled to distribution of the trust principal at the age of 50. The court observed that the broad definition of property of the estate in § 541 includes interests that are strictly contingent. 88 B.R. at 192, citing In re Brown, 734 F.2d 119, 123 (2d Cir.1984). The court held that the debtor's interest in the trust was property of the estate. As in this case, the contingency merely affects the value of the property interest; it does not prevent the property from becoming property of the estate. Newman, 88 B.R. at 192.
In Dias, the court had to determine whether the debtor's one-third equitable interest in the corpus of a trust was property of the estate. The debtor, who was 23 when the petition was filed, was entitled to her share when she reached age 25. The court noted that the debtor's interest, though contingent or subject to divestment, was alienable by her on the petition date. The court found that the contingency reduced the value of the interest but that "the interest was not so remote or speculative as to have no value," 37 B.R. at 587, and was thus property of the estate.
The cases and arguments relied upon by the Debtor either interpret the more restrictive definition of property under the Bankruptcy Act or are old state court decisions finding certain property interests to be beyond the reach of creditors under state law. See e.g., In re Martin, 47 F.2d 498 (7th Cir.1931); ...
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