In re Treasure Island Land Trust
| Decision Date | 29 January 1980 |
| Docket Number | Bankruptcy No. 79-841-ORL-BK-GP. |
| Citation | 2 BR 332 |
| Parties | In re TREASURE ISLAND LAND TRUST, Debtor. |
| Court | U.S. Bankruptcy Court — Middle District of Florida |
Denis L. Durkin, Baker & Hostetler, Orlando, Fla., for debtor.
William L. Eagan, Arnold, Matheny & Eagan, Orlando, Fla., for movants.
The petition in this cause was filed in the name of Treasure Island Land Trust (the "Trust") on November 28, 1979. On November 30, 1979, R.E. Carrigan, Jr., and Lester E. Larson (the "Movants"), secured creditors, moved to dismiss the petition on the basis that the Trust is not entitled to be a debtor under the Bankruptcy Code. A hearing on the motion was held on January 9, 1980.
The Trust was created by contractual document entitled "Land Trust Agreement," dated March 26, 1971, between the trustee and various named beneficiaries. There have been certain modifications to the contract, but none that change the nature of the agreement or that are otherwise pertinent to the arguments here.
Section 109(a) of the Bankruptcy Code (the "Code") (11 U.S.C. Section 109) states that "only a person that resides in the United States, or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title." Section 109(d) then states that "only a person that may be a debtor under chapter 7 of this title, except a stockbroker or a commodity broker, and a railroad may be a debtor under chapter 11 of this title." Section 101(30) of the Code defines "person" to include individuals, partnerships, and corporations. Section 101(8)(A)(v) defines "corporation" to include business trusts.
Under prior law, section 1(8) of the Bankruptcy Act defined "corporation" substantially the same as section 101(8) of the Code, with the exception that the new Code includes all business trusts, while section 1(8) of the old Bankruptcy Act only included "any business conducted by a trustee or trustees wherein beneficial interest or ownership is evidenced by certificate or other written instrument." This last requirement had been strictly construed by the courts. See, e.g., Associated Cemetery Management, Inc. v. Barnes, 268 F.2d 97 (8th Cir. 1959); Walker v. Federal Land Bank of Columbia, 468 F.Supp. 831 (M.D.Fla.1979). In eliminating the requirement of written instruments, Congress has presumably made it possible for a broader variety of trusts to obtain relief in the bankruptcy courts. See, Collier on Bankruptcy (15th Ed.), Section 101.08. It is under such a broader definition that the Trust seeks to qualify as a debtor.
In two excellently written memoranda, the debtor contends that it is a business trust. In their also able briefs, movants point to the language in the trust instrument specifically stating that the Trust is not a business trust. Debtors invoke the maxim of "substance over form," and urge the Court to look at the true nature of the Trust.
The debtor asserts that it is an "Illinois Land Trust" organized under the laws of Illinois. As a base of argument, it cites Ill.Ann.Stat. ch. 29, sec. 8.31 to show that the definition of a land trust under Illinois law is consistent with the general characteristics of a business trust. However, nowhere in the trust instrument is the debtor identified as an "Illinois Land Trust" or does even the word "Illinois" appear. To the contrary, paragraph 19 of the instrument states in its entirety: "FLORIDA LAW GOVERNS CONSTRUCTION: this Agreement shall be construed in accordance with the Laws of the State of Florida." Thus, the law of Illinois is of no weight in the construction of the instrument. "Illinois Land Trust" is a generic label, not a statement of legal existence.
The focus then shifts from the definition of a land trust under Illinois law to the question of whether this particular trust has the characteristics of a business trust.
The basic distinction between business trusts and nonbusiness trusts is that business trusts are created for the purpose of carrying on some kind of business or commercial activity for profit; the object of a nonbusiness trust is to protect and preserve the trust res. The powers granted in a traditional trust are incidental to the principal purpose of holding and conserving particular property, whereas the powers within a business trust are central to its purpose. It is the business trust's similarity to a corporation that permits it to be a debtor in bankruptcy.
The debtor points to, and the Court notes, that the Trust shares several characteristics with a corporation. The Trust was not created by a grant of a settlor, but was formed through the voluntary association of unrelated persons and subscriptions sold through a prospectus. The "beneficial interests" are very much like shares in that they are equal in value, held by a large number of people in varying amounts, and are transferrable. However, the interests are not reified in written instruments.
The trust instrument itself rejects any construction of it as a business trust. Paragraph 5 states, in its entirety:
The debtor urges the Court to look beyond the terminology of the instrument at what it insists are the economic realities of the situation.
In its brief, the debtor claims that the Trust was created to enable the participants to carry on a business and divide the gains and that the Trust in fact operates as a business enterprise. Support for this contention is based on a ruling in the United States District Court for the Middle District of Florida that the Trust's sale of subscriptions to purchasers constitutes a sale of securities under applicable securities law, SEC v. Hermil, Inc., Case No. 71-141-Orl-Civ-Y. Sale of securities, debtor asserts, is a clear indicium of a business purpose.
Were there nothing else before it, the Court might find this argument persuasive. However, not only is the debtor unable to point to any business activity in which it was actively engaged, the Court is faced with continuous conduct and assertions to the contrary.
In August, 1979, the trustee of Treasure Island Land Trust filed a motion in the SEC v. Hermil case to clarify her position as trustee. The ruling she sought, and which she obtained, was that the collection of assessments was necessary to preserve and protect assets and properties of the Trust. No mention was made of carrying on a business enterprise.
In its schedules and statement of affairs filed in this Chapter 11 proceeding, in response to question 1b, "In what business are you engaged?", the debtor answered, "Purchase of land and holding for resale at a profit." The Court notes that the debtor lists no trade creditors or other debts that customarily result from the conduct of business; the unsecured creditors are principally the accountants and the lawyers.
As the debtor suggests, the Court cannot close its eyes to the economic realities of the situation. The Trust sought, at all costs, to avoid the registration requirements of the securities laws. Now that its form has proven inadequate for its intended purposes, the debtor seeks to abandon it and escape its consequences altogether.
On the one hand, it can be argued that the creators of the trust were free to select the form and language, and that by gambling as to its future construction they assumed whatever risks may ultimately befall them. On the other hand, the...
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