In re Schmidt

• Decision Date: 20 February 2007
• Docket Number: Adversary No. 06-5287-C.,Bankruptcy No. 06-51890-C.
• Citation: 362 B.R. 318
• Parties: In re Debra Boyer SCHMIDT, Debtor. John Patrick Lowe, Trustee, Plaintiff, v. Lynette Sanflippo & Ronald A. Boyer, Jr., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Texas

362 B.R. 318

In re Debra Boyer SCHMIDT, Debtor John Patrick Lowe, Trustee, Plaintiff, v. Lynette Sanflippo & Ronald A. Boyer, Jr., Defendants.

Bankruptcy No. 06-51890-C.

Adversary No. 06-5287-C.

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

February 20, 2007.

John L. Sanders, Sr., San Antonio, TX, for Debtor/Defendants,

John Patrick Lowe, Uvalde, TX, pro se.

Decision on Motion and Cross Motion for Summary Judgment

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for consideration the foregoing matter. The trustee filed a motion for summary judgment in on January 16, 2007. The defendants filed a response and cross motion for summary judgment on February 2, 2007., This order disposes of both motions.

Summary Judgment Facts

The parties do not dispute the essential facts. The debtor's mother died on June 27, 2006. On August 3, 2006, the debtor, acting as independent executrix for her mother's probate estate, filed an application for probate of will and for issuance of letters testamentary. She attached a copy of the will to the application. The will, executed May 1, 1998, indicated that Debra Boyer was a named beneficiary. On August 24, 2006, the presiding probate court judge entered her order granting the foregoing application and authorizing letters testamentary. On September 21, 2006, Debra Schmidt filed an inventory and appraisement of the estate.

On September 29, 2006, Debra Schmidt filed her bankruptcy petition under chapter 7. On November 3, 2006, Debra Schmidt filed with the probate court a "memorandum of disclaimer." The trustee, by this adversary proceeding, now seeks to set aside the purported disclaimer, because it was executed post-petition.

Arguments of the Parties

The trustee argues that a debtor cannot use state law "relation back" principles to ex post render property no longer property of the estate. There is no question but that, as of the date of the filing, the debtor had a testamentary interest in her mother's probate estate, constituting both an equitable interest in property as of the date of filing. Executing a disclaimer post-petition amounts to a transfer (or attempted transfer) of property of the estate, says the trustee, and that transfer can be avoided by virtue of section 549. The trustee also points out that the debtor failed to list in her bankruptcy schedules the existence of her interest in this probate estate, the fact of her mother's death pre-petition, or any stated intention to disclaim any interest in the probate estate either prior to the filing of the petition or in her bankruptcy schedules.¹

The debtor counters that, under applicable Fifth Circuit law, as well as the law" in Texas, the disclaimer executed by the debtor, even though it was signed after the bankruptcy petition was filed, relates back to the debt of the death of the decedent, which was June 27, 2006, well prior to the filing of the case. The debtor explains that Section 37 of the Texas Probate Code authorizes disclaimers, permits them to relate back as a matter of law, and states that they are effective against creditors. She adds that the Fifth Circuit adheres to the rule set out in a Seventh Circuit decision which upheld a pre-petition disclaimer against attack by a trustee, who sought to set it aside as a fraudulent transfer under section 548. The debtor concludes that the fact that this disclaimer was executed post-petition is irrelevant, because it will still relate back to a pre-petition event, such that, as a matter of law, as of the filing of her bankruptcy petition, the debtor did not have an equitable interest in her mother's probate estate. The rule that insulates disclaimers executed pre-petition from avoidance under section 548 should similarly insulate disclaimers executed post-petition from avoidance under section 549, says the debtor.

Analysis

Section 549 of the Bankruptcy Code, in relevant part, provides that "the trustee may avoid a transfer of property of the estate — (1) that occurs after the commencement of the case; and (2) ... (B) that is not authorized under this title or by the court." 11 U.S.C. § 549(a). The term "transfer" in section 549 is not specially defined in that section, so the generic definition of transfer in section 101 is controlling. That definitional section states that the term "transfer," as used in the Bankruptcy Code, means, in relevant part, "each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with (i) property; or (ii) an interest in property." 11 U.S.C. § 101(54). Both the House and Senate Reports state that this definition "is as broad as possible [and] many of the potentially limiting words in current law are deleted, and the language is simplified ... Under this definition, any transfer of an interest in property is a transfer, including a transfer of possession, custody, or control even if there is no transfer of title, because possession, custody and control are interests in property." H.R. REP. No. 595, 95th Cong, 1st Sess 314 (1977); S. REP. No. 989, 95th Cong, 2nd Sess 27 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5813, 5963, 6271.

In Texas, as a general matter, title to property of a decedent passes as of date of the date of death to the beneficiaries, subject to the claims of creditors of the decedent. TEX. PROB. CODE, § 37 (West 2003); Dyer v. Eckols, 808 S.W.2d 531, 532 (Tex. App.-Houston [14th Dist] 1991); Welder v. Hitchcock, 617 S.W.2d 294, 297 (Tex.Civ. App.-Corpus Christi 1981, writ ref'd n.r.e.). Thus, as a matter of state law, on the date of the bankruptcy petition in this case, the property of the bankruptcy estate included the debtor's testamentary interest as an heir and named beneficiary under the will of her deceased mother. Id.

Outside bankruptcy, a beneficiary can disclaim his or her interest in a probate estate. If done properly, the disclaimer relates back to the date of death of the decedent. See TEX. PROB. CODE, § 37A. Here's what that statute says:

A disclaimer ... shall be effective as of the death of decedent and relates back for all purposes to the death of the decedent and is not subject to the claims of any creditor of the disclaimant. Unless the decedent's will provides otherwise, the property subject to the disclaimer shall pass as if the person disclaiming ... had predeceased the decedent.

TEX. PROB. CODE, § 37A (West 2003). Texas courts give legal effect to this relation-back doctrine, ruling that, as a result of its operation, the beneficiary never gains possession of the disclaimed property. A judgment creditor's judgment will thus never attach to an interest so disclaimed, on the theory that, as a result of the relation back doctrine, the debtor is deemed to have predeceased the decedent. See Dyer v. Eckols, 808 S.W.2d, at 535 (upholding effect of disclaimer against an intervening judgment creditor); see also Welder v. Hitchcock, 617 S.W.2d, at 297.

The Fifth Circuit has ruled that disclaimers executed prior to the filing of a bankruptcy petition are effectively insulated from avoidance as fraudulent transfers under section 548. Simpson v. Penner, 36 F.3d 450, 452 (5th Cir.1994); see also In re Atchison, 925 F.2d 209 (7th Cir.), cert. denied sub nom. Jones v. Atchison, 502 U.S. 860, 112 S.Ct. 178, 116 L.Ed.2d 140 (1991). Simpson expressly disapproved of this court's ruling in In re Brajkovic, 151 B.R. 402 (Bankr.W.D.Tex.1993), and that decision can no longer be cited as good law, insofar as it is applied to the application of section 548 to pre-petition disclaimers.

None of the foregoing authorities speak to the situation presented by the facts of this case — a disclaimer executed post-petition. A closer examination of the logic in Simpson sheds light on why the outcome might be different post-petition. In Simpson, the Fifth Circuit said that a pre-petition disclaimer did not constitute a fraudulent under section 548 because the debtor never had an interest to "transfer," thanks to the operation of the disclaimer, such that no fraudulent transfer could be said to have occurred (one cannot transfer what one does not have). The Fifth Circuit expressly adopted the logic and holding of the Seventh Circuit's decision in Atchison. Simpson, 36 F.3d, at 452-53. The court rejected the logic of Brajkovic, which had argued that, immediately prior to the execution of the disclaimer, the debtor did have an interest in property. Brajkovic had concluded that the disclaimer itself functioned to eliminate an interest otherwise conferred under the laws of devise and descent, and so should be vulnerable as a fraudulent transfer. Responded Fifth Circuit,

We decline to follow the reasoning in Brajkovic. The Brajkovic court, unlike the Atchison court, does not give state law its full effect. Under Texas law, the beneficiary never possesses the disclaimed property. Dyer v. Eckols, 808 S.W.2d 531, 534 (Tex.Ct.App.1991). Thus, the Brajkovic court erred in concluding that under Texas law, the property of the decedent shifts to the first beneficiary and then to the next beneficiaries.

Simpson, 36 F.3d, at 453. Both circuit court decisions, then, expressly declined to consider whether a disclaimer might count as a "transfer" within the meaning of federal law, instead choosing to construe the disclaimer statutes as a species of property law, defining what interest, if any, the debtor has in property (here, property granted via the laws of devise and descent).

Both Simpson and Atchison cited to the holding and logic of a Tenth Circuit decision that dealt with the same issue under section 67(d)(2) of the Bankruptcy Act. See Hoecker v. United Bank of Boulder, 476 F.2d 838 (10th Cir.1973). One judge dissented in that decision, noting that, in his view, because the term "transfer" is de fined exclusively by federal law, the majority holding impermissibly permits, state disclaimer laws to revise the meaning of the term transfer. Said the dissent,

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