In re Romano, 76 B 2212

• Court: United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
• Writing for the Court: Gesas & Manos, Chicago, Ill., for respondents-appellants
• Citation: 426 F. Supp. 1123
• Parties: In re Lee N. ROMANO and Barbara Jean Romano. CITIZENS BANK AND TRUST COMPANY, Movant-Appellee, v. Lee N. ROMANO and Barbara Jean Romano, Respondents-Appellants.
• Docket Number: 76 B 2213.,No. 76 B 2212,76 B 2212
• Decision Date: 15 February 1977

426 F. Supp. 1123

In re Lee N. ROMANO and Barbara Jean Romano.
CITIZENS BANK AND TRUST COMPANY, Movant-Appellee,
v.
Lee N. ROMANO and Barbara Jean Romano, Respondents-Appellants.

Nos. 76 B 2212, 76 B 2213.

United States District Court, N. D. Illinois, E. D.

February 15, 1977.

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COPYRIGHT MATERIAL OMITTED

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Hubachek, Kelly, Rauch & Kirby, Chicago, Ill., for movant-appellee

Gesas & Manos, Chicago, Ill., for respondents-appellants.

MEMORANDUM OPINION

FLAUM, District Judge.

The sole issue before the court in these bankruptcy appeals is whether a beneficiary of an Illinois land trust is the "legal or equitable owner of real property or a chattel real" within the meaning of Chapter XII of the Bankruptcy Act § 406(6), 11 U.S.C. § 806(6). This is a question of first impression and the bankruptcy courts are in conflict over its resolution. In re Romano, Nos. 76 B 2212 and 76 B 2213 (Bkrcy.Ct.N. D.Ill. Sept. 28, 1976); In re Gordon, No. 76 B 5585 (Bkrcy.Ct.N.D.Ill. Nov. 3, 1976). For the reasons stated infra, this court holds that a beneficiary of an Illinois land trust does not come within the meaning of section 406(6), and therefore the appeals are denied and the bankruptcy court's decision affirmed.

The relevant facts are brief and undisputed. Lee and Barbara Romano, appellants

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herein, are the owners of beneficial interests in Illinois land trusts,¹ and own no other interests in real property.² On March 15, 1976, appellants filed petitions³ seeking arrangements pursuant to Chapter XII of the Bankruptcy Act, 11 U.S.C. §§ 801 et seq. Subsequently, on July 29, 1976, Citizens Bank and Trust Co., a creditor of the Romanos and appellee herein, moved to dismiss the Romanos' reorganization petitions on the ground that appellants were not eligible for such relief. The bankruptcy court thereupon dismissed the proceedings and these appeals followed

Appellee's argument in support of affirming the bankruptcy court's decision is based on the premise that for an individual to be eligible for a Chapter XII real property arrangement, the individual must be a qualified "debtor" within the meaning of section 406(6), 11 U.S.C. § 806(6), of the Bankruptcy Act.⁴ Section 406(6) provides:

"debtor" shall mean a person, other than a corporation as defined in this title, who could become bankrupt under section 22 of this title, who files a petition under this chapter and who is the legal or equitable owner of real property or a chattel real which is security for any debt, but shall not include a person whose only interest in property proposed to be dealt with by the arrangement is a right to redeem such property from a sale had before the filing of such petition.

11 U.S.C. § 806(6) (emphasis supplied). Moreover, section 461(1), 11 U.S.C. § 861(1), provides that the plan of reorganization submitted by the debtor must "include provisions modifying or altering the rights of creditors who hold debts secured by real property or a chattel real of a debtor . . .." Id. (emphasis supplied). Thus, appellee contends "that not all individuals and partnerships may become debtors in a Chapter XII case . . .," Collier, On Bankruptcy ¶ 2.07, at 763 (J. Moore, ed. 1976), but that an individual must the legal or equitable owner of real property or chattel real which is used as security for a debt.

As to the Romanos, appellee argues that they are not qualified debtors for Chapter XII purposes because their sole interests in property are beneficial interests in land trusts which, under Illinois law, are considered personal property and not interests in realty. See, e. g., Chicago Federal Savings & Loan Ass'n v. Cacciatore, 25 Ill.2d 535, 185 N.E.2d 670 (1962). Therefore, since appellants have no interests under Illinois law in real property, they are not legal or equitable owners of real property and are not eligible for Chapter XII relief.

While recognizing Illinois' characterization of their interests as personal property, appellants contend that they still are qualified "debtors" within the meaning of section 406(6). Thus, the Romanos argue that the "label" Illinois places on their interests is not dispositive of whether, under a federal standard, they are the legal or equitable owners of real property. Therefore, because they have the right to control and receive the income from the properties in which they hold beneficial interests,⁵ appellants argue that in reality they are the owners of the land itself and qualify as

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section 406(6) debtors for purposes of Chapter XII relief

Initially, this court must agree with appellants that it is federal law that determines eligibility under Chapter XII, and that the states cannot merely place "labels" on property interests to thwart the purposes of the federal statutes. See Segal v. Rochelle, 382 U.S. 375, 379-81, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966); Board of Trade of City of Chicago v. Johnson, 264 U.S. 1, 10, 44 S.Ct. 232, 68 L.Ed. 533 (1924); Page v. Edmunds, 187 U.S. 596, 23 S.Ct. 200, 47 L.Ed. 318 (1903); Barutha v. Prentice, 189 F.2d 29, 31 (7th Cir.), cert. denied, 342 U.S. 841, 72 S.Ct. 69, 96 L.Ed. 635 (1951); In re Lake's Laundry, Inc., 79 F.2d 326, 328-29 (2d Cir.) (Hand, J., dissenting), cert. denied, 296 U.S. 622, 56 S.Ct. 144, 80 L.Ed. 442 (1935); Fisher v. Cushman, 103 F. 860 (1st Cir. 1900); In re Quaker Room, 90 F.Supp. 758, 760-61 (S.D.Cal.1950); Countryman, The Use of State Law in Bankruptcy Cases, 47 N.Y.U.L.Rev. 407, 438 (1972); but see In re Spanish Language Television of Arizona, Inc., 456 F.2d 159 (9th Cir. 1972). Federal standards determine the meaning of terms used in federal statutes. Thus, in Board of Trade of City of Chicago v. Johnson, supra, the Supreme Court held that a seat on the Chicago Board of Trade was "property" within the meaning of the Bankruptcy Act for purposes of inclusion in the bankrupt's estate even though state law did not recognize the holder of the seat as having any "property" interest. As the Court stated:

When the language of Congress indicates a policy requiring a broader construction of the statute than the state decisions would give it, federal courts cannot be concluded by them.

264 U.S. at 10, 44 S.Ct. at 234.

But, recognizing that federal standards apply, Illinois law is not irrelevant to a consideration of whether the holder of a beneficial interest in an Illinois land trust is the "legal or equitable owner of real property or a chattel real." Illinois law supplies the factual matter concerning the nature of appellants' interests; it delineates what a beneficial interest is and what rights and obligations an owner of such an interest has. It is upon these facts, defined by state law, that the federal standard is applied. To paraphrase the court in In re Quaker Room, 90 F.Supp. 758 (S.D.Cal.1950):

It is necessary to examine the rights which flow under state law from ownership of a beneficial interest in a land trust in determining whether it possesses the characteristics of real property within the Bankruptcy Act.

Id. at 761. Thus, a two-pronged analysis is required in resolving the issue before the court. First, the court must analyze Illinois law to determine the nature of the ownership interest one has as a beneficiary of an Illinois land trust. And second, the purpose and language of section 406(6) must be analyzed to determine what types of debtors Congress intended to be eligible for Chapter XII reorganization relief.

1. Beneficial Interests in Illinois Land Trusts

Perhaps the most fundamental purpose of an Illinois land trust is the separation of the benefits accruing to real estate (i. e., income and possession rights), and the legal and equitable title to the property. Under the express terms of the trust agreement, the beneficiary's interest is defined as personal property and the trustee holds "the full, complete and exclusive title to the real estate, both legal and equitable." Chicago Federal Savings & Loan Ass'n v. Cacciatore, 25 Ill.2d 535, 543, 185 N.E.2d 670, 674 (1962). Ownership of a beneficial interest in a certain piece of real property can be hidden from the public since the existence of the interest need not be recorded in the real property's chain of title. Thus, large interests can be held by individuals in secret with the general public free to rely on the trustee's title in dealing with the property itself. Id.

As to the legal aspects of a beneficial interest, except for two exceptions,⁶ a

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beneficial interest in an Illinois land trust is treated as personal property separate and distinct from the land itself. Thus, pursuant to the trust agreement and law, upon the death of the beneficiary his interest passes to his executor or administrator as does personal property in Illinois, and not to his heirs at law like all real property. See Conley v. Petersen, 25 Ill.2d 271, 184 N.E.2d 888 (1962). Instead of real estate law governing the transfer of beneficial interests, the Uniform Commercial Code applies. Cf. Levine v. Pascal, 94 Ill.App.2d 43, 236 N.E.2d 425 (1968). The beneficiary of a land trust need not be notified of a tax deed proceeding on the land, In re Application of County Treasurer, 113 Ill.App.2d 50, 251 N.E.2d 757 (1969), and a beneficiary of a land trust is not a necessary party in a foreclosure or condemnation proceeding on the property. Marshall v. Solomon, 335 Ill. App. 302, 81 N.E.2d 777 (1948); Chicago North Shore & Milwaukee R.R. v. Chicago Title & Trust Co., 328 Ill. 610, 160 N.E. 226 (1928). Unlike real property, a beneficial interest is not encumbered by homestead or dower rights. Sterling Savings & Loan Association v. Schultz, 71 Ill.App.2d 94, 218 N.E.2d 53 (1966); Stoxen v. Stoxen, 6 Ill. App.3d 445, 285 N.E.2d 198 (1972). A judgment lien which attaches to a debtor's "real property" does not attach thereby to a debtor's beneficial interests under Illinois law. Sterling Savings & Loan Association...