In re Morris
| Decision Date | 18 February 1993 |
| Docket Number | No. 92-4086.,92-4086. |
| Citation | 151 BR 900 |
| Court | U.S. District Court — Central District of Illinois |
| Parties | In re Doris L. MORRIS, Debtor. Barry M. BARASH, Chapter 7 Trustee for Doris L. Morris, Plaintiff, v. Doris L. MORRIS (Deceased), Marilynne L. McCready, Samuel S. McHard, Katz, McAndrews, Balch, Lefstein & Fieweger, P.C., and First of America Trust Company, formerly First National Bank of the Quad Cities, as Trustee of The Morris Irrevocable Living Trust, Defendants. Marilynne L. McCREADY, and First of America Trust Company, formerly First National Bank of the Quad Cities, as Trustee of the Morris Irrevocable Living Trust, Appellants, v. Barry M. BARASH, Chapter 7 Trustee for Doris L. Morris, Appellee. |
Samuel S. McHard, Dale G. Haake, Katz, McAndrews, Balch, Lefstein & Fieweger PC, Rock Island, IL, for appellants.
Barry M. Barash, Barash Stoerzbach & Henson, Galesburg, IL, for appellee.
This matter is before the Court on appeal from a ruling by United States Bankruptcy Judge William v. Altenberger. The Court has jurisdiction over this appeal pursuant to Bankruptcy Rule 8001(a).
The standard of review of a bankruptcy court ruling is governed by Bankruptcy Court Rule 8013, which states:
On an appeal the district court or bankruptcy appellate panel may affirm, modify or reverse a bankruptcy court\'s judgment, order of decree or remand with instructions for further proceedings. Findings of fact shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witness.
11 U.S.C. Rule 8013. The Seventh Circuit in Matter of Boomgarden, 780 F.2d 657 (7th Cir.1985), states: Id. at 660 (citations omitted).
To properly understand the issues involved in this case, it is necessary to go back to February 26, 1971, when Frances Park McGown executed her last will and testament. Mrs. McGown bequeathed a life estate in her 383 acre farm, located in Mercer County, Illinois, to her only child, Doris Morris, the Debtor. Upon the Debtor's death, the will provided that the estate would go to Mrs. McGown's three grandchildren: Douglas Edmund Morris; Richard Stephen Morris; and Marilynne Louise Morris. These three individuals are also the Debtor's children. The will also contained a "spendthrift" clause, which reads as follows:
I direct that neither the income from said life estate nor the principal fund be liable for the debts, present or future, of any beneficiary, his heirs, devisees and legatees, and shall not be subject to the right on the part of any creditor to seize or reach the same under any writ or any proceeding at law or equity. And no beneficiary shall have any power to give, grant, sell, convey, mortgage, pledge or incumber, or anticipate the income, or any installment thereof, or any shares in the principal thereof, except the residuary beneficiaries may dispose of their interests by Will in case of death.
(Trustee's Ex. # 1).
The first line of the above clause originally referred to a "trust" estate, but the word "trust" was crossed out and the word "life" inserted. The change was initialed by Mrs. McGown. (Id.)
In the fall of 1971, Mrs. McGown died and her daughter, the Debtor, received a life estate in the McGown Farm. Despite the limitations placed on the life estate in the will, Debtor and her children executed a mortgage on the farm to secure a $77,000.00 note from The Mutual Benefit Life Insurance Company. This occurred in September of 1972. In re Morris, 144 B.R. 401, 402 (Bankr.C.D.Ill.1992).
Several years later, in 1981, debtor's husband Edmund and her son Steve became indebted in the amount of nearly $530,000.00 to two Oklahoma banks, the Bank of Custer and the Bank of Thomas. The indebtedness arose from an ill-fated oil scheme and other bad loans for which Steve Morris, Debtor's son, was held responsible. As a result of the financial difficulty in which Debtor's son and husband found themselves, Debtor, her husband, her two sons, Douglas and Steve, and her daughter, Marilynne L. McCready, an Appellant in this action, signed mortgages in January of 1982 giving the Oklahoma Banks mortgage liens on the farm to secure the aforesaid borrowing. Id. Again, the mortgage was on Debtor's life estate, despite the will provision to the contrary. In this appeal, the Court's primary concern is with the mortgages to the Oklahoma Banks and issues arising therefrom.
Within a few months, in September of 1982, the Oklahoma Banks filed a complaint to foreclose the mortgages. The Debtor and her daughter, Marilynne McCready raised a variety of defenses to the action, the most notable being that the spendthrift clause in the will prevented the Debtor from mortgaging the farm. Id.
In February of 1983, pursuant to a receivership provision in the mortgages, the Oklahoma Banks had a receiver appointed to:
Take possession of the farm during the pendency of this litigation with full power and authority to operate, manage and conserve the property, to secure tenants therefor and lease the same, to collect rents, issues of profits thereof . . . to pay taxes which have been levied against the property."
(Vol. VIII, Def. Ex. # 6).
The receiver followed these directives from 1983 to 1987 (Appellants' brief p. 10), and leased the farm to third parties. Over the course of the years, the receiver received $150,960.00 in rent. In re Morris, 144 B.R. at 402. After paying taxes and other expenses, the receivership account contained $120,147.02. Id.
Eventually, the parties settled the matter, with the Oklahoma Banks agreeing to pay the Debtor $80,000.00. (BR. Ex. # 23). The Oklahoma Banks' attorney stated in a letter to Debtor's attorney that the "$80,000.00 would be paid to Doris Morris, the Debtor." (Id.) Debtor's attorney responded to the letter by stating that "the $80,000.00 was to be placed in a spendthrift trust for Doris Morris the Debtor with the remainder at her death payable to Marilynne McCready. . . ." (BR. Ex. # 22). Subsequently, the state court approved the following settlement agreement:
The Oklahoma Banks shall pay the sum of $80,000.00 into an irrevocable spendthrift trust of usual form with Doris L. Morris the Debtor as the beneficiary. . . . Upon the death of Doris L. Morris, the remaining principal balance and accrued interest shall be paid as a lump sum to Marilynne McCready or per stirpes to her descendants who survive her in the event she predeceases Doris L. Morris. Once the principal falls below $10,000.00, this trust shall terminate and all funds held by the trustee shall be paid to the persons then entitled to the income therefrom.
The money to fund the trust came from the receivership which, when closed, had a final balance of $121,538.73. (BR. Ex. # 51). An attorney for the Oklahoma Banks then sent two checks to the Oklahoma Banks, one for $80,000.00 and one for $41,538.73. (BR. Ex. # 14). The check for $80,000.00 was specified as the "money that will eventually be distributed to the Doris Morris Trust." (Id.) On June 15, 1988, the attorney for the Oklahoma Banks drew a trust account check payable to the First National Bank of the Quad Cities as Trustee of the Morris Irrevocable Trust. (BR. Ex. # 55). That Bank is now known as the First of America Trust Company, an Appellant in this action. The check was in the amount of $80,622.65, and reflected the interest the money had earned while in a separate account with the Oklahoma Banks. (BR. Ex. # 12). The evidence shows that the money to fund the Morris Irrevocable Trust originated from the receivership account which drew its funds from the rents of the McGown farm. The money was then transferred to the Oklahoma Banks where it was kept in a separate account before being sent to First National Bank of The Quad Cities where it was deposited in the Morris Irrevocable Trust.
The trust, now funded, had the following purpose:
(Vol. VII Def. # 10). Jack Dickey, President of the Oklahoma Banks signed the document as settlor of the trust. (Id.)
Thus, the Morris Irrevocable Trust was funded in June of 1988. Meanwhile, in 1987, the Bank of Viola, now Farmers State Bank of Western Illinois, had obtained a deficiency judgment against Debtor, Doris Morris, in the amount of $355,290.22. This resulted from a mortgage foreclosure on a second farm, the Morris Farm which...
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