In re Sung Soo Rim Irrevocable Intervivos Trust
| Decision Date | 18 January 1995 |
| Docket Number | Bankruptcy No. LA-94-31034-LF. |
| Parties | In re SUNG SOO RIM IRREVOCABLE INTERVIVOS TRUST, Debtor. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California |
Adam J. Bass, William P. Fong, Buchalter, Nemer, Fields & Younger, Los Angeles, CA, for Long Beach Bank, F.S.B.
Lawrence R. Young, Law Offices of Lawrence Young, Downey, CA, for debtor.
The sole issue before this Court is whether a spendthrift trust qualifies as an eligible debtor under 11 U.S.C. § 109(d).1 Because the trust in question was not created for business purposes and does not constitute a "business trust" under California law, this Court holds that it is not eligible to file a bankruptcy case. Therefore, dismissal of the debtor's bankruptcy petition is appropriate.
In June 1994, the Sung Soo Rim Irrevocable Intervivos Trust (the "Trust") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Trust was created in November 1993 under California law by Hyun Young Rim and his wife as settlors for the benefit of Sung Soo Rim, a minor, under the control of an appointed trustee, Charles Rim. Intended to provide for Sung Soo Rim's health care, education, maintenance and support, the Trust terminates upon the beneficiary's death. Upon termination, any remaining assets are to be distributed to specified individuals and heirs. The Trust Agreement leaves decisions about the use of principal assets to the discretion of the trustee, who is granted all the powers authorized under the Uniform Trustees' Powers Act or similar laws enacted in California. See Cal.Prob.Code §§ 16200-16249 (West Supp.1994) (). The Trust's terms forbid any transfer or encumbrance of any interest in the principal or income before its actual receipt by the sole beneficiary. In other words, this trust has all of the traditional elements of a spendthrift trust.
The Trust's only asset was a multi-unit retail complex that was facing imminent fore-closure when the Rims transferred it to the Trust.
This came before this Court on an Order to Show Cause entered on June 22, 1994, which the United States Trustee supported, a secured creditor joined, and the debtor did not oppose. Because eligibility of trusts to file bankruptcy is a reoccurring issue before this Court, clarification of the appropriate standards is warranted.
Section 109 of the Bankruptcy Code sets forth the limitations on who may be a debtor. Section 109(a) establishes the threshold requirement that:
only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.
(Emphasis supplied). "Person" is defined in § 101(41) to include any "individual, partnership, and corporation, but does not include governmental units. . . ." Nor does it include trusts. Trusts and governmental units are expressly encompassed within the broader term, "entity," defined in § 101(15). By limiting eligibility to "persons," rather than "entities," Congress intentionally excluded trusts as a category from filing bankruptcies. See H.R.Rep. No. 595, 95th Cong., 1st Sess. 313 (1977), S.Rep. No. 989, 95th Cong., 2d Sess. 25 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5811, 6270.
"Business trusts," however, may file bankruptcy petitions, because they are expressly included within the statutory definition of "corporation" set forth in § 101(9)(A)(v). They are therefore "persons" eligible to be debtors. The Bankruptcy Code, however, does not define the term "business trust."
How, then, can one tell whether a particular trust is a "business trust," as opposed to some other kind of trust, for purposes of eligibility under the Bankruptcy Code? Analysis of existing case law reveals no controlling precedent that provides a definitive answer to this question. The Ninth Circuit has not addressed this issue. Indeed, only one circuit has ruled on this question. See In re Secured Equipment Trust of Eastern Air Lines, Inc., 38 F.3d 86 (2d Cir.1994). That case involved a fleet of commercial aircraft placed into a trust to secure the repayment of lenders. After canvassing many of the reported bankruptcy decisions on "business trusts," the Second Circuit held that a trust established for this purpose, and not to generate a profit, is not an eligible debtor, regardless of whether the trust was engaged in a business. The Second Circuit's subjective analysis, however, yields no rule of decision that provides any guidance for other courts. Indeed, as noted by the dissent, the trust in question qualified as a business trust under New York corporations law, and should therefore qualify as a debtor under the Bankruptcy Code. Id. at 92 (Kearse, C.J., dissenting). Finding the majority opinion unpersuasive, this Court declines to follow it.
A recent decision of the Bankruptcy Appellate Panel reiterated the basic premise that a non-business trust cannot be a debtor. In re Hunt, 160 B.R. 131 (9th Cir. BAP 1993) (Rossmeissl, J.). That case involved an intervivos trust established to avoid probate following the death of the settlor. Having successfully avoided probate but facing foreclosure, the trustee/heir put the trust into Chapter 11. The Bankruptcy Appellate Panel affirmed the dismissal of the case on the grounds that the trust did not qualify as a "business trust" and was therefore not an eligible debtor. This Court agrees with Hunt. However, the Hunt opinion provides no guidance on the key question of what is a "business trust," as the Bankruptcy Appellate Panel simply assumed without analysis that the Hunt trust was a non-business trust.
Given the absence of a Bankruptcy Code definition, this Court must look to applicable state law relating to the formation of legal entities for guidance. The first step is to determine whether state law recognizes a separate type of entity called a "business trust." As set forth below, California does recognize such an entity. The second step is to determine whether the trust in question formally qualifies as a "business trust" under the relevant state law requirements. In this case, the Rim Trust does not satisfy the formal requirements of California law governing business trusts.
The inquiry could stop here. That would be appropriate if the determination of formal compliance with state law requirements were to be given conclusive effect on the issue of eligibility, as would be the case if the issue were the creation or definition of enforceable property rights. On substantive rights, state law governs and binds federal bankruptcy courts. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). But the availability of access to the federal bankruptcy courts and the availability of bankruptcy relief itself are ultimately questions of federal, not state, law. Standing to file a bankruptcy case — which is what "eligibility" really means — is a procedural question, not a substantive one. Cf. Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). The states have no right to open or close the door to federal bankruptcy relief. U.S. Const. art. I, § 8, cl. 4; see Int'l Shoe Co. v. Pinkus, 278 U.S. 261, 265, 49 S.Ct. 108, 110, 73 L.Ed. 318 (1929) (). Therefore, this Court must examine the nature and function, as well as the form, of the entity at issue. In effect, the determination of whether a debtor is a "business trust" under state law is given the status of a rebuttable presumption which must be tested against the fundamental federal purpose of the restrictions on eligibility to file a bankruptcy petition.
The Rim Trust was created under California law. California law recognizes "business trusts" as a type of profit-oriented, limited liability business entity, regulated under the California Business and Professions Code. Cal.Bus. & Prof.Code § 14001 (West 1987). Trustees of business trusts hold legal title with complete power of management. The creators of the trust share in the profits.2Goldwater v. Oltman, 210 Cal. 408, 416, 292 P. 624 (1930). California tax law taxes business trusts as corporations. Cal.Rev. & Tax. Code § 23038 (West 1992). Business trusts must comply with the fictitious name statutes. See Kadota Fig Ass'n v. Case-Swayne Co., 73 Cal.App.2d 796, 804, 167 P.2d 518 (3rd Dist.1946) (). Trustees of business trusts enjoy limited liability. See Engineering Serv. Corp. v. Longridge Inv. Co., 153 Cal.App.2d 404, 409, 314 P.2d 563 (2nd Dist.1957).
Under California law, "business trusts" are by definition entirely distinct from "trusts" created under the California Probate Code. The Probate Code expressly excludes from its scope trusts that are "taxed as partnerships or corporations." Cal.Prob.Code § 82(b)(6) (West 1991). Traditional trusts established to protect or preserve property are usually created as part of estate planning and are subject to state probate law and probate court supervision.
In this case, the Trust Agreement incorporates by reference the Uniform Trustees' Powers Act and the California Probate Code. Cal.Prob.Code §§ 16200-16249 (West Supp. 1994). By contrast, there is no evidence that the Rim Trust was taxed as a partnership or a corporation under California law; that it was authorized to, or actually was, doing business; or that it had complied with California's fictitious name statutes, as would be required of a "business trust." Under the circumstances, the...
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