In re Medallion Realty Trust

• Decision Date: 11 July 1989
• Docket Number: Bankruptcy No. 89-40203-JFQ.
• Parties: In re MEDALLION REALTY TRUST Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

103 B.R. 8 (1989)

In re MEDALLION REALTY TRUST Debtor.

Bankruptcy No. 89-40203-JFQ.

United States Bankruptcy Court, D. Massachusetts.

July 11, 1989.

Jeffrey L. Jonas, Brown, Rudnick, Freed & Gesmer, Boston, Mass., for First Service Bank for Sav.

Louis S. Robin, Hendel, Collins & Newton, Springfield, Mass., for Medallion Realty Trust/debtor.

OPINION

JAMES F. QUEENAN, Jr., Bankruptcy Judge.

First Service Bank for Savings (the "Bank"), through Federal Deposit Insurance Corporation as its receiver, moves to dismiss this Chapter 11 case on the ground that Medallion Realty Trust (the "Debtor") is not a "business trust" eligible for relief under Chapter 11. For the reasons set forth below, the motion is denied. But it is a Pyrrhic victory for the Debtor, because I hold that the Debtor is a partnership, with all the consequences that flow therefrom.

I. FACTS

The facts are undisputed. The instrument creating the Debtor is a "nominee" trust, a form of trust which has become a popular vehicle for real estate investment in order to obtain income tax deductions for investors and simplicity of documentation in sales and financing. See Birnbaum & Monahan, The Nominee Trust in Massachusetts Real Estate Practice, 60 Mass. L.Q. 364 (1976); Apahouser Lock & Sec. Corp. v. Carvelli, 26 Mass.App.Ct. 385, 528 N.E.2d 133 (1988); Penta v. Concord Auto Auction, Inc., 24 Mass.App.Ct. 635, 511 N.E.2d 642 (1987). The Debtor's 1984 Declaration of Trust contains these features: the trustee is given power to deal with the trust property "When, as sic if and to the extent specifically directed by a majority of the beneficial interests . . ."; beneficial interests are to be listed on a schedule filed with the trustee rather than being represented by certificates issued to the beneficiaries; assignment of beneficial interests is subject to a right of first refusal held by the other beneficiaries; the trustee is to immediately pay over income to the beneficiaries; the trustee may be removed, or the trust may be amended, by the holders of fifty-one percent of the trust's beneficial interest; and the trust instrument provides that "No Trustee or beneficiary of this Trust shall be held personally or individually liable for any of the obligations incurred or entered into on behalf of the Trust and each person who deals with the Trustees shall look solely to the Trust Estate for satisfaction of any claims which such person may have against the Trust."

The Debtor was created in order to combine the talents and resources of Michael R. Little ("Little") and Alan M. Belanger ("Belanger") in the purchase of house lots and the installation and sale of modular homes thereon. Either Little or Belanger has acted as trustee of the Debtor since its inception. Little contributed $25,000 and holds a fifty-one percent beneficial interest. Belanger provided his expertise as a real estate broker, and holds the remaining forty-nine percent interest. No schedule of beneficial interest was ever filed with the trustee. The Debtor has purchased and excavated lots, poured foundations, installed modular homes on sites, and provided the plumbing and other trade work necessary to complete the homes. It has sold over 200 lots and homes since 1984, at its peak employing twenty persons. On March 7, 1989 the Debtor filed a Chapter 11 petition with this Court, scheduling almost $4 million of secured debts owed to a number of creditors and about $300,000 in unsecured debts owed to some 100 creditors. The Bank has been its principal mortgage lender and is its largest secured creditor.

II. DEBTOR'S ELIGIBILITY

A "person" (with exceptions not material here) may be a debtor under Chapter 11. 11 U.S.C. § 109(d). Included within the definition of "person" is an individual, a partnership and a corporation. 11 U.S.C. § 101(35).

A corporation is defined as follows:

"corporation" —

(A) includes —

(i) association having a power or privilege that a private corporation, but not an individual or a partnership, possesses;

(ii) partnership association organized under a law that makes only the capital subscribed responsible for the debts of such association;

(iii) joint-stock company;

(iv) unincorporated company or association; or

(v) business trust emphasis supplied; but

(B) does not include limited partnership. 11 U.S.C. § 101(8).

Section 1(8) of the Bankruptcy Act of 1898 (30 Stat. 544), as amended in 1926 (44 Stat. 662), contained essentially the same definition of a corporation, except that instead of using the term "business trust" it employed this language:

any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument

The unadorned term "business trust" first appeared in a proposed new bankruptcy act which was part of the Report of the Commission on the Bankruptcy Laws of the United States, H.R.Doc. No. 93-137, 93d Cong., 1st Sess. Part II at 27, (1973). The Commission subsequently filed its proposal as a bill in both houses of Congress, thus commencing the legislative process which culminated in the Bankruptcy Reform Act of 1978, P.L. 95-598, 92 Stat. 2549. The Commission's report contains these statements:

The reference at the end of the definition to a "business trust" eliminates the requirement of the present Act that beneficial interest or ownership "be evidenced by certificate or other written instrument." The requirement gives undue significance to an evidentiary formality. In construing the term "business trust" the courts may be expected to give heed to the canon of ejusdem generis. Cf. Pope & Cottle Co. v. Fairbanks Realty Trust, 124 F.2d 132 (1st Cir.1941).

This explanation does not appear in any later legislative history. It is clear from the later history, however, that except for a "business trust" a trust is not a "person" eligible for relief. Both the House and Senate Committee Reports state: "The definition of "person" does not include an estate or a trust . . ." H.R.Rep. No. 95-595, 95th Cong., 1st Sess. 313 (1977); S.Rep. No. 95-989, 95th Cong., 2d Sess. 25 (1978), U.S. Code Cong. & Admin.News 1978, pp. 5787, 5810, 6270.

The decisions are sharply, and perhaps hopelessly, divided on the meaning of "business trust." Some, following the pattern established under the prior Act, hold that it means a trust which is deemed a corporation for federal income tax purposes under the test enunciated in Morrissey v. Commissioner, 296 U.S. 344, 359, 56 S.Ct. 289, 296, 80 L.Ed. 263 (1935), namely a trust having (i) business functions, (ii) transferable certificates of beneficial interest, (iii) centralized management, (iv) continuity of life and (v) limited liability. E.g., Mosby v. Boatmen's Bank of St. Louis County (In re Mosby), 61 B.R. 636 (E.D. Mo.1985), aff'd per curiam 791 F.2d 628 (8th Cir.1986); In re Vivian A. Skaife Irrevocable Trust Agreement # 1, 90 B.R. 325 (Bankr.E.D.Tenn.1988); In re Betty L. Hays Trust, 65 B.R. 665 (Bankr.D.Neb. 1986); In re L & V Realty Trust, 61 B.R. 423 (Bankr.D.Mass.1986). Others look to the trust's operations to determine whether they include substantial business activities, disregarding the terms of the creating document. E.g., In re Arehart, 52 B.R. 308 (Bankr.M.D.Fla.1985) (land trust with some business activities deemed eligible); In re Gonic Realty Trust, 50 B.R. 710 (Bankr.D. N.H.1985) (trust created for benefit of trustee and his wife which owned and leased a mill complex deemed eligible); In re Dolton Lodge Trust No. 35188, 22 B.R. 918 (Bankr.N.D.Ill.1982) (land trust with no business activities ineligible); In re Dreske Greenway Trust, 14 B.R. 618 (E.D.Wis. 1981) (trust created to conduct business which in fact did so deemed eligible); In re Cohen, 4 B.R. 201 (Bankr.S.D.Fla.1980) (land trust held ineligible where it conducted minimal zoning and filling activities); In re Treasure Island Land Trust, 2 B.R. 332 (M.D.Fla.1980) (land trust ineligible where declaration of trust prohibited business activities and trust was then engaging in none).

History sheds some light. The bankruptcy law of this country, unlike that of England, has always barred estates from relief in bankruptcy. 1 Collier on Bankruptcy, § 4 at 200 (13th ed. 1923). Under both the Bankruptcy Act of 1867 (14 Stat. 517) and the Bankruptcy Act of 1898 (30 Stat. 544) the courts construed the word "person" in the eligibility provision to exclude estates. In re Fackelman, 248 F. 565 (D.C.S.D.Cal. 1918); Adams v. Terrell, 4 F. 796 (D.C.W. D.Tex.1880). As explained in Adams v. Terrell, a principal reason for doing so was the view that state probate law provides an adequate framework for the administration of insolvent estates. The continued use by Congress of the word "person" in the law's eligibility provision indicates Congressional agreement with this reasoning. In denying general eligibility to trusts, Congress presumably viewed trusts, even those of the intervivos variety, as being much like estates in that they are typically enmeshed in an estate plan and are under the control of state probate courts.

A trust which is not part of a settlor's estate plan presents different considerations. A probate court is not its traditional forum. Its beneficiaries are investors in a business enterprise rather than recipients of a settlor's largess. Congress obviously recognized these differences when in 1926 it amended what was then § 1(8) of the prior Act to allow bankruptcy relief for "any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument." This opened the door to the traditional Massachusetts business trust. Because of the restrictive language, eligibility continued to be denied to a trust whose creating instrument was the only document evidencing beneficial ownership. E.g., Pope & Cottle Co. v. Fairbanks Realty Trust, 124 F.2d 132 (1st Cir.1941). The Commission's Report previously quoted makes...