In re Rogove

• Decision Date: 17 September 2010
• Docket Number: No. 09–24622.,09–24622.
• Citation: 22 Fla. L. Weekly Fed. B 598,443 B.R. 182
• Parties: In re Steven Allen ROGOVE, Debtor(s).
• Court: U.S. Bankruptcy Court — Southern District of Florida

443 B.R. 182

22 Fla. L. Weekly Fed. B 598

In re Steven Allen ROGOVE, Debtor(s).

No. 09–24622.

United States Bankruptcy Court, S.D. Florida,West Palm Beach Division.

Sept. 17, 2010.

Craig I. Kelley, West Palm Beach, FL, for Debtor.

ORDER DENYING TRUSTEE'S AMENDED APPLICATION FOR TURNOVER

ERIK P. KIMBALL, Bankruptcy Judge.

This matter came before the Court for an evidentiary hearing on June 17, 2010 upon the Trustee's Amended Application for Turnover [DE 76] (the “Motion”) filed by Michael R. Bakst (the “Trustee”). In the Motion, the Trustee requests turnover of funds received by Steven Allen Rogove (the “Debtor”) as distributions from the Roslyn Rogove Special Needs Trust in the aggregate amount of $40,500.00. This sum represents $18,000.00 received by the Debtor prior to the petition date, and $22,500.00 received by the Debtor within 180 days after the petition date.

Upon consideration of the Motion, the Trustee's Memorandum of Law in Support of the Trustee's Amended Application for Turnover [DE 77], the testimony of the Debtor at the June 17, 2010 evidentiary hearing, the documentary evidence admitted in connection with the Trustee's Motion, and for the reasons stated below, the Court denies the Trustee's Motion. The Court delivered an oral ruling on the Motion at a hearing held on July 15, 2010. This order incorporates the Court's findings at the June 17, 2010 evidentiary hearing and at the July 15, 2010 oral ruling.

I. Background and Facts

On July 17, 2009, the Debtor filed a voluntary chapter 7 petition commencing this case. The Debtor received $18,000.00 in distributions from the Roslyn Rogove Special Needs Trust prior to the filing of his petition and $22,500.00 in distributions from the trust during the 180 days after the filing of his petition.

The Roslyn Rogove Special Needs Trust agreement is dated December 24, 2008. ¹ It states that Cynthia Dallow is the grantor and trustee of the trust. Cynthia Dallow is the Debtor's sister. According to Article I, Section 1 of the trust agreement, Ms. Dallow initially funded the trust with a deposit of $100.00. Article I, Section 2 of the trust agreement provides that other property may be transferred to the trust by anyone, with the consent of Ms. Dallow as trustee. Thus, Ms. Dallow retained complete control over which property could be added to the trust. It is undisputed that Ms. Dallow is alive and remains trustee of the trust.

As its title suggests, the primary beneficiary of the trust was Roslyn Rogove, the Debtor's mother. The trust agreement provides that the trust was set up as a fully discretionary trust for the primary benefit of Roslyn Rogove.

Section 5 of the trust agreement includes a spendthrift provision for the benefit of Roslyn Rogove and also for the benefit of any remainder beneficiaries. The Debtor and his sister were remainder beneficiaries. This section provides that the spendthrift provisions are to be construed and enforced under the laws of the State of Florida. As the Trustee conceded, under Florida law the subject spendthrift provision is enforceable with regard to creditors of the Debtor.

Roslyn Rogove died prior to the petition date in this case. Article III, section 1, of the trust agreement provides that upon the death of Roslyn Rogove, Ms. Dallow, as trustee, had complete and absolute discretion not to terminate the trust, but instead to hold the trust property subject to the provisions of the agreement. Based on the evidence presented at the evidentiary hearing, Ms. Dallow exercised this discretion, maintained the trust, and made distributions pursuant to the terms of the trust agreement for a period of years after Roslyn Rogove's death. Pursuant to Article III, Section 2, the Debtor had a 50% beneficial interest in the trust after Roslyn Rogove's death. Under the same section, the trust property remained subject to the spendthrift provisions and Ms. Dallow, as trustee, retained complete discretion with regard to distributions of income and principal.

The trust agreement does not contain a general choice of law provision. However, both the spendthrift provision, at Article I, section 5, and the trustee powers provision, at Article VI, section 3, incorporate Florida law. In any case, at the evidentiary hearing the trustee and the Debtor agreed that Florida substantive law applies to interpretation of the trust agreement.

II. Analysis

With regard to the pre-petition distributions, the question is whether the Debtor held those sums at the time he filed his petition, in which case such sums would be property of the estate under 11 U.S.C. § 541(a)(1). With regard to the post-petition distributions, the question is whether they satisfy the requirements of 11 U.S.C. § 541(a)(5)(A) and thus should be included in property of the estate.

Section 542(a) of the Bankruptcy Code provides that “an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title, or that the debtor may exempt under section 522 of this title, shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.” 11 U.S.C. § 542(a). Section 363(b) authorizes the trustee to use, sell, or lease “property of the estate,” which is defined by section 541(a). U.S. v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Therefore, pursuant to section 542(a) the Debtor must deliver to the Trustee any property of the estate, as defined in section 541(a), within his possession, custody, or control during the case. Id. at 205, 103 S.Ct. 2309.

The Trustee carries the burden of proof in a motion for turnover of estate property. Maggio v. Zeitz, 333 U.S. 56, 64, 68 S.Ct. 401, 92 L.Ed. 476 (1948). The Trustee must prove that the subject property constitutes property of the estate and that the defendant is in possession of that property. Id. While older case law suggests that the burden of proof is by clear and convincing evidence, the correct standard is by a preponderance of the evidence. E.g., In re Santaella, 298 B.R. 793 (Bankr.S.D.Fla.2002).

(a) Pre-petition distributions from the Roslyn Rogove Special Needs Trust are not property of the estate under section 541(a)(1)

Section 541(a)(1) defines property of the estate as property “wherever located and by whomever held” and includes “all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The scope of estate property included under section 541(a)(1) is broad and may include property made available to the estate by other provisions of the Bankruptcy Code, including section 542(a). Whiting Pools, Inc., 462 U.S. at 205, 103 S.Ct. 2309.

As an exception to the broad scope of section 541(a)(1), section 541(c)(2) provides that a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under title 11. 11 U.S.C. § 541(c)(2). This provision is commonly interpreted to protect a debtor's beneficial interest in a spendthrift trust from becoming property of the estate. Menotte v. Brown (In re Brown), 303 F.3d 1261, 1265 (11th Cir.2002). However, this provision does not protect funds actually received by a debtor from a spendthrift trust prior to a bankruptcy petition from becoming property of the estate, assuming the debtor still holds such funds on the petition date. In re Schauer, 246 B.R. 384, 387 (Bankr.D.N.D.2000).²

The Debtor testified credibly that he received $18,000.00 from the trust over a period of months prior to the petition date, spent that amount on his living expenses and debt repayment, and did not have any of that amount in his possession at the time he filed the petition commencing this case. Because the Debtor was not in possession, custody, or control of any of the pre-petition distributions from the trust on the date he filed the petition, such funds are not property of the estate under section 541(a) and the Trustee may not recover those funds under section 542(a). To the extent the Trustee's Motion requests turnover of the value of such pre-petition distributions, the Motion is denied.

(b) Post-petition distributions from the Roslyn Rogove Special Needs Trust are not property of the estate under section 541(a)(5)(A)

Pursuant to section 541(a)(5)(A), property of the estate includes “[a]ny interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date ... by bequest, devise, or inheritance.” 11 U.S.C. § 541(a)(5)(A).

The focus of section 541(a)(5)(A) is on the terms “bequest,” “devise,” and “inheritance.” In the absence of controlling federal law, interests in property are created and defined by state law. Butner v. U.S., 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). Neither the Bankruptcy Code nor other controlling federal law defines the terms “bequest,” “devise,” or “inheritance” in the context of section 541(a)(5)(A). The Court must analyze whether the post-petition distributions from the Roslyn Rogove Special Needs Trust constitute a “bequest,” “devise,” or “inheritance” under applicable state law. E.g., In re Roth, 289 B.R. 161, 166 (Bankr.D.Kan.2003); Magill v. Newman (In re Newman), 903 F.2d 1150, 1153 (7th Cir.1990). As noted above, the parties agreed at the evidentiary hearing that Florida law governs interpretation of the trust agreement.

In Florida, the terms “bequest” and “devise,” when used as nouns, are synonyms meaning “a testamentary disposition of real or personal property.” Fla. Stat. § 731.201(10); see Mosgrove v. Mach, 133 Fla. 459, 182 So. 786, 791 (1938). A testamentary disposition is the...