In re St. Joseph's Hosp.
| Decision Date | 14 November 1991 |
| Docket Number | Bankruptcy No. BK 89-50583. |
| Citation | 133 BR 453 |
| Parties | In re ST. JOSEPH'S HOSPITAL, Debtor. MARINE BANK OF SPRINGFIELD, Plaintiff, v. ST. JOSEPH'S HOSPITAL, and Steven N. Mottaz, Trustee, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
John L. Schwartz, Springfield, Ill., for plaintiff.
Douglas Hambleton, Chicago, Ill., Emmett Fitzgerald, Alton, Ill., for debtor, defendant.
Steven N. Mottaz, Alton, Ill., trustee.
At issue in this case is whether the debtor's interest under a testamentary trust, which contains a "spendthrift" provision shielding the debtor's beneficial interest from the claims of creditors and restricting alienation, constitutes property of the debtor's bankruptcy estate under 11 U.S.C. § 541. Marine Bank of Springfield, trustee of the testamentary trust, has filed a motion for relief from stay, arguing that the beneficial interest of the debtor, St. Joseph's Hospital, is excluded from property of the estate under § 541(c)(2), which excepts a debtor's interest that is subject to a valid spendthrift trust.1
Steven Mottaz, trustee of the debtor's bankruptcy estate, opposes the Bank's motion on grounds that the spendthrift trust provision is unenforceable against the debtor. Mottaz argues that spendthrift provisions are inapplicable to corporate beneficiaries such as the debtor. He further asserts that the debtor took its interest, not under the testator's will, but under a family settlement agreement signed by the trust beneficiaries, which renders the spendthrift provision invalid as having been created by the beneficiaries themselves. Mottaz contends, therefore, that the debtor's beneficial interest under the trust is property of the debtor's bankruptcy estate and that the Bank's motion for relief from stay should be denied.
The debtor, St. Joseph's Hospital, is a not-for-profit corporation organized pursuant to Illinois statute. See Ill.Rev.Stat., ch. 32, ¶ 101.01 et seq.2 While the debtor still exists as a corporate entity and has not been dissolved, it has ceased operations as a hospital. On September 29, 1989, the debtor filed a Chapter 7 petition for relief under the Bankruptcy Code.
The facts concerning creation of the debtor's interest in the testamentary trust are undisputed. On April 11, 1960, the testator, William Millen Duncan, died, leaving a will which was duly admitted to probate on June 1, 1960. Clause 22 of the will created a trust of the testator's residuary estate. The trust property was to be divided into two equal parts and administered for the benefit of two separate groups of beneficiaries. Clause 22 named the debtor as a beneficiary of Part I of the trust and provided for distribution of the trust income as follows:
Clause 22 further provided that upon the death of any of the individuals named as beneficiaries in Part I, the portion of income that would have been paid him or her be equally divided among the heirs of the deceased beneficiary. Finally, Clause 22 contained the following spendthrift provision:
Neither the principal nor the income of any trust estate herein created shall be liable for the debts of any beneficiary thereof, nor shall the same be subject to seizure by any creditor of any beneficiary under any writ or proceeding at law or in equity, and no beneficiary shall have any power to sell, assign, transfer, encumber or in any other manner dispose of any interest in said trust estate.
Clause 23 of the will provided for termination of the trust at the expiration of twenty years after the death of each of the personal beneficiaries, "at which time the property held by the trustees . . . shall be divided in accordance with the interest of each as set out in said trust, and shall be paid or transferred in kind to the beneficiaries. . . . " (Emphasis added.) In a codicil to the will, the testator attempted to clarify Clause 23 concerning distribution of trust property upon termination, stating that property held by the trustees would be paid or transferred "to the heirs of each of the beneficiaries. . . ." (Emphasis added.)
Following admission of the will to probate, a lawsuit was filed seeking construction of the will and its codicils. In order to settle the litigation, the trust beneficiaries entered into a family settlement agreement. The purpose of the agreement was to determine when the trust would terminate and the interests to be taken by the trust beneficiaries under the will. The parties specifically stated that they wished to resolve these uncertainties in a way "consonant with the true intent of William Millen Duncan" without expensive and time-consuming litigation. The agreement further provided that each party "hereby releases any . . . right he and . . . persons claiming . . . under him might have by virtue of the will and codicils to share in the residuary trust property . . ., except as provided for by this Agreement. . . ."
The family settlement agreement set forth that the residue of the Duncan estate would be held in two separate trusts, designated as the William Millen Duncan Trust No. 1 and the William Millen Duncan Trust No. 2, and specified that the trusts would terminate twenty years after the death of the named individual beneficiaries. The agreement provided that the income from Trust No. 1 would be divided among ten beneficiaries, including the debtor, as set forth in Clause 22 of the will and in the proportions there stated. The agreement further provided that after the death of the individual beneficiaries, the principal would be distributed to the heirs of the personal beneficiaries and to the institutions in the same proportions as the income was distributed. Finally, the agreement contained a spendthrift provision as found in the testator's will:
(Emphasis added.) The court further found that the "rights of any and all parties to take under the Twenty-Second . . . and the Twenty-Third clause of the decedent's Last Will are as set forth in the Family Settlement Agreement." The court directed that the provisions of the family settlement agreement be carried out by the Marine Bank of Springfield, as trustee, under the supervision of the court and specifically retained jurisdiction of the cause for purposes of such supervision.
Following the debtor's bankruptcy, the Bank filed the instant motion for relief from stay so that it might obtain direction in state court under the doctrine of cy pres concerning the proper disposition of the debtor's interest in the trust now that the debtor is no longer operated as a charitable institution.3 The Bank argues that such relief is warranted because the debtor's interest is subject to a valid spendthrift provision restricting transfer and is thus excluded from property of the debtor's bankruptcy estate. 11 U.S.C. § 541(c)(2).
The trustee in bankruptcy counters that the spendthrift limitations of the testator's will are ineffective to exclude the debtor's interest from property of the estate because a corporation cannot be the beneficiary of a traditional spendthrift trust. The trustee points out that spendthrift trusts are normally created with the view of providing a fund for the maintenance and support of another and, at the same time, securing the fund against the beneficiary's own improvidence or incapacity for self-protection. Wagner v. Wagner, 244 Ill. 101, 111, 91 N.E. 66, 69 (1910); Von Kesler v. Scully, 267 Ill.App. 495, 503 (1937). As such, spendthrift provisions are intended to benefit someone for whom the settlor of the trust has a special relationship or affinity. The trustee argues that a settlor would not have the same affection for a corporation and that, if the testator here had wished to put a restriction on his gift to the debtor, he could simply have included a restriction for a particular purpose along with a reverter or forfeiture clause.
The parties cite no authority, and the Court has found none, that specifically...
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