In re Smith, 95 C 2858. Bankruptcy No. 93 B 23665. Adv. No. 94 A 01392.

• Decision Date: 27 November 1995
• Docket Number: No. 95 C 2858. Bankruptcy No. 93 B 23665. Adv. No. 94 A 01392.,95 C 2858. Bankruptcy No. 93 B 23665. Adv. No. 94 A 01392.
• Parties: In re Colin S. SMITH, Debtor. Nathan YORKE, Trustee, Plaintiff/Appellee, v. BANK ONE WISCONSIN TRUST COMPANY N.A., as Trustee of the Elizabeth A. Steffen Revocable Trust of 1993 and Colin S. Smith, Defendant/Appellant.
• Court: U.S. District Court — Northern District of Illinois

189 B.R. 8 (1995)

In re Colin S. SMITH, Debtor Nathan YORKE, Trustee, Plaintiff/Appellee, v. BANK ONE WISCONSIN TRUST COMPANY N.A., as Trustee of the Elizabeth A. Steffen Revocable Trust of 1993 and Colin S. Smith, Defendant/Appellant.

No. 95 C 2858. Bankruptcy No. 93 B 23665. Adv. No. 94 A 01392.

United States District Court, N.D. Illinois, Eastern Division.

November 27, 1995.

Robert D. Nachman, Schwartz, Cooper, Greenberg & Krauss, Chicago, IL, for Colin S. Smith.

Louis W. Levit, Ira Phil Goldberg, Ross & Hardies, P.C., Chicago, IL, for Nathan Yorke.

MEMORANDUM ORDER AND OPINION

GETTLEMAN, District Judge.

This appeal poses the timeless question whether, in the context of modern bankruptcy law, a person can insulate from his creditors an expected transfer of wealth from an aged and generous relative. The Bankruptcy Court ruled against the debtor, Collin S. Smith ("Smith"), who appeals that decision to this court pursuant to 28 U.S.C. § 158(a). The material facts are undisputed.

FACTS

In 1979, Smith's aunt, Dr. Elizabeth A. Steffen ("Steffen"), established a trust. On August 9, 1993, Steffen a Wisconsin resident, simultaneously executed her will (the "Will") and "The Elizabeth A. Steffen Revocable Trust of 1993" (the "Trust"), revoking her 1979 trust. The Will provides that upon Steffen's death, substantially all of her property passes to the Trust. Further, from the Trust's inception, the trustee of the Trust (the "Trustee") was named as the beneficiary of: (1) Steffen's profit sharing trust (that contained $1,100,000); and (2) four Northwestern Mutual Life Insurance policies (having an aggregate face value of approximately $220,000). On September 15, 1993, Steffen amended the Trust. The Trust states that Steffen delivered $1 to the Trustee as the initial principal of the Trust. Accordingly, the beneficiaries of the Trust, through the Will and the Trustee, held an interest in Steffen's Profit Sharing Trust and life insurance policies.

The Trust provides that during Steffen's lifetime, Steffen is to be the Trustee, during which time the income and principal from the Trust will be available to her. Following Steffen's death, "all property that is, or becomes subject to the terms of this trust instrument at the time of Steffen's death or that passes to the Trustee as a result of Steffen's death shall be distributed and/or administered" according to several specified gifts and priorities. The Trust directs the following cash gifts: (a) the first $550,000 to a separate spendthrift trust for the benefit of Smith's mother (Steffen's sister); (2) $500,000 to one of Steffen's friends; and, (3) $300,000 to Smith.

On October 28, 1993, Steffen suffered a cerebral hemorrhage and was taken to a hospital, where she remained until her death on December 13, 1993. On November 9, 1993, Smith filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. The parties have stipulated that on that date the trust had assets having a value of not less than $550,000 and not more than $590,000.

Nathan Yorke ("Yorke") was appointed trustee of Smith's bankruptcy estate. On November 15, 1993, based on Steffen's condition, Bank One Wisconsin Trust Company N.A. ("Bank One"), under a valid power of attorney, elected to succeed Steffen as Trustee. Between November 22, 1993, and December 13, 1993, Bank One, as Trustee, deposited cash and securities worth $652,922.81 into the Trust. Subsequent to Steffen's death, the proceeds from her Profit Sharing Trust ($1,104,470), Steffen's investment income ($68,411.45), and the proceeds of Steffen's four insurance policies ($221,688), totalling approximately $1,394,570, were deposited into the Trust. As of December 13, 1993, the trust held an aggregate total of more than $2 million.

Smith did not mention the provisions of Steffen's Will and Trust in his original petition or the attached schedule. At a meeting of creditors on December 23, 1993, ten days after Steffen's death, Smith stated under oath that he had no assets other than those listed on the schedule attached to his petition. On March 28, 1994, Smith filed an amendment to his petition schedules admitting that as of the date of his bankruptcy petition, Smith held an "Interest in decedent's estate of an aunt who died after the petition was filed." On July 12, 1994, Yorke received a letter from Smith's attorney requesting that Yorke execute a written disclaimer of interest in the $300,000 at issue. Yorke refused to sign the disclaimer.

DISCUSSION

In an opinion dated March 31, 1995, the Bankruptcy Court held that the $300,000 Smith is to receive as a beneficiary of Steffen's Trust is part of Smith's bankruptcy estate under either 11 U.S.C. § 541(a)(1) or § 541(a)(5). Smith filed a timely appeal of that decision. This court reviews the bankruptcy court's legal conclusions de novo. In re Yonikus, 996 F.2d 866, 868 (7th Cir.1993).

The commencement of a voluntary petition for relief under Chapter 7 of the Bankruptcy Code automatically creates an estate. Section 541(a) provides in part:

Such estate is comprised of all of the following property, wherever located and by whomever held:

(1) . . . all legal or equitable interests of the Debtor in property as of the commencement of this case.

* * * * * *

(5) Any 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 — (A) by bequest, devise, or inheritance or . . . (C) as a beneficiary of a life insurance policy or of a death benefit plan.

Whether a debtor has a legal or equitable interest in property is a question of state law, in this case the law of Wisconsin. In re Yonikus, 996 F.2d at 869. "The beneficiary of a trust can transfer his interest whether it is a present or future interest, and whether it is a vested or contingent interest." In re McCoy, 142 Wis.2d 750, 761 n. 9, 419 N.W.2d 301 (Ct.App.Wis.1987) (quoting, IIA Scott, The Law of Trusts § 132, p. 8 (4th Ed.1987)). Therefore, as a Trust beneficiary, under Wisconsin law, Smith held a transferable interest in Steffen's Trust at the time he filed the bankruptcy petition. The next issue, whether the interest is considered "property of the estate" under § 541(a), is a question to be decided under federal law. In re Yonikus, 996 F.2d at 869.

The Supreme Court has held that the term `property,' as used in the Bankruptcy Code, must be "construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed." Segal v. Rochelle, 382 U.S. 375, 379, 86 S.Ct. 511, 514, 15 L.Ed.2d 428 (1966). "Every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative, is within the reach of § 541." In re Yonikus, 996 F.2d at 869.

At the time of his petition, Smith had a contingent interest in Steffen's Trust. This interest was created by instruments that were in place at the time Smith filed his bankruptcy petition, including: (1) Steffen's Trust; (2) Steffen's life...