Lewiston v. Kohut (In re Lewiston)

• Decision Date: 13 August 2015
• Docket Number: Case No. 15–10804, Case No. 14–14452
• Citation: Lewiston v. Kohut (In re Lewiston), 539 B.R. 154 (E.D. Mich. 2015)
• Parties: In re: Richard Martin Lewiston, Debtor. Richard Martin Lewiston, Plaintiff-Appellant, v. Gene R. Kohut, Chapter 7 Trustee, Defendant-Appellee.
• Court: U.S. District Court — Eastern District of Michigan

539 B.R. 154

In re: Richard Martin Lewiston, Debtor.

Richard Martin Lewiston, Plaintiff-Appellant

v.Gene R. Kohut, Chapter 7 Trustee, Defendant-Appellee.

Case No. 15–10804

Case No. 14–14452

United States District Court, E.D. Michigan, Southern Division.

Signed August 13, 2015

Michael A. Stevenson, Stevenson and Bullock, Southfield, MI, for Debtor.

Anthony J. Kochis, Scott A. Wolfson, Wolfson Bolton PLLC, Troy, MI, for Defendant-Appellee.

MEMORANDUM AND ORDER

AVERN COHN, UNITED STATES DISTRICT JUDGE

I.INTRODUCTION

These are appeals from orders in a Chapter 7 bankruptcy, holding that the debtor's interest in a living trust, or the debtor's beneficial interest in the living trust is no exempt under the Bankruptcy Code.The trust in question is the Lois and Richard Lewiston Living Trust, dated September 10, 1986(the “Trust”).The Bankruptcy Court ruled from the bench.(SeeB.R. Docs. 477, 574;see alsoB.R. Court Transcripts, B.R. Docs. 493, 595)

Now before the Court are the debtor's (“Lewiston”) appeals from the Bankruptcy Court orders.Because both appeals concern Chapter 7TrusteeGene R. Kohut's objections to Lewiston's claimed exemptions, they are discussed together, below.For the reasons that follow, the orders of the Bankruptcy Court will be affirmed.¹

II.BACKGROUND

A.The Lois and Richard Lewiston Living Trust

The Lois and Richard Lewiston Living Trust, dated September 10, 1986, named Lewiston and his wife as trustees and as beneficiaries of the Trust.(B.R. Doc. 489, Ex. Aat 1, 4).It provided, however, that Lewiston would be the Managing Trustee and that, as such, “he shall have the sole and absolute authority to exercise the rights, powers, and duties ... in connection with the management, investment, and administration of the [T]rust assets; and his signature on any documents relating to any of these matters shall be sufficient to bind the [T]rust.”Only after Richard's death or incapacity, would his wife Lois become Managing Trustee(Id. at 2).Under the terms of the Trust, the Managing Trustee's rights include the ability to “sell, exchange, assign, transfer and convey any security or property, real or personal, held in the [T]rust estate ...”(Id. at 8)

A February 2008 amendment changed this to state that “[e]ither Richard or Lois, acting alone, shall be considered the Managing Trustee of the [T]rust ...” and would have the full “rights, powers, and duties” of a Managing Trustee, described above.(B.R. Doc. 489, Ex. Bat 1)

B.Bankruptcy Court Proceedings

Lewiston filed a voluntary Chapter 7 bankruptcy petition on August 13, 2012.(B.R.Doc. 1)On September 20, 2012, Kohut was elected Chapter 7Trustee.

Lewiston filed his initial Schedule C on August 27, 2012, in which he asserted exemption of the Trust.(B.R. Doc. 40at 9)Kohut filed an objection (B.R.Doc. 385), arguing that the Trust is not among the types of property which can be claimed exempt under M.C.L. §§ 557.151and600.5451(1)(n).Lewiston opposed Kohut's objection.(B.R.Doc. 430)On September 19, 2014, the Bankruptcy Court sustained Kohut's objection, agreeing with Kohut that none of the bases asserted by Lewiston allowed for the exemption.(B.R.Docs.477, 493)Lewiston appealed the Bankruptcy Court's decision in In re Richard Martin Lewiston,Case No. 14–14452(“Lewiston I ”).

Following the filing of the first appeal, Lewiston amended his Schedule C to list additional bases for exemption of the Trust.(B.R. Doc. 518at 9–10)Kohut again objected, arguing that the additional statutory grounds do not support the exemption; Lewiston argued to the contrary.(B.R. Docs. 532, 547).At a hearing on February 13, 2015, the Bankruptcy Court sustained Kohut's objection to the exemptions.(B.R.Doc. 574, 595)Lewiston appealed the Bankruptcy Court's second decision in In re Richard Martin Lewiston,Case No. 15–10804(“Lewiston II ”).

C.Claims on Appeal²

In Lewiston I, Lewiston argues that because the Trust is “owned” jointly by him and his wife, the Trust is held in a tenancy by the entirety, which is exempt under bankruptcy law.

In Lewiston II, Lewiston takes a slightly different approach.He says that he and his wife own the beneficial interest in the Trust as tenants by the entirety, which is similarly exempt.

Thus, the issue before the Court is whether the Trust and/or Lewiston's beneficial interest in the Trust is exempt as claimed by Lewiston

III.STANDARD OF REVIEW

The district court reviews factual findings made by a bankruptcy court for clear error, which requires the appellant to demonstrate “the most cogent evidence of mistake of justice.”WesBanco Bank Barnesville v. Rafoth(In re Baker & Getty Fin. Servs.),106 F.3d 1255, 1259(6th Cir.1997);see alsoFed. R. Bankr.P. 8013.Conclusions of law are reviewed de novo.Simon v. Chase Manhattan Bank(In re Zaptocky ), 250 F.3d 1020, 1023(6th Cir.2001);see alsoLopez v. Donaldson(In re Lopez),292 B.R. 570, 573(E.D.Mich.2003).

IV.LEWISTON I

Under the Bankruptcy Code, a debtor is required to list the assets that he or she claims as exempt.11 U.S.C. § 522(1).The list must be filed on the appropriate form as required by Fed. R. Bankr.P. 1007.SeeFed. R. Bankr.P. 4003(a).The Bankruptcy Code permits a debtor to list exempt assets by electing either the federal exemptions or state-law exemptions.11 U.S.C. § 522.Lewiston has elected the state-law exemptions by checking the “11 U.S.C. § 522(b)(3) ” box on his Schedule C. (B.R.Doc. 40, p. 9)Schedule C further requires a debtor to “specify [the] law providing each exemption” next to the description of the asset sought to be exempt.(Id. )

Lewiston bases exemption on the three citations listed in his original Schedule C: (1)M.C.L. § 557.151, (2)M.C.L. § 600.5451(1)(n)³ , and (3)Zavradinos v. JTRB, Inc.,482 Mich. 858, 753 N.W.2d 60(2008).

In Lewiston I,the Bankruptcy Court held that (1) the Trust is not among the types of properties listed in M.C.L. §§ 557.151 or 600.5451(1)(o), and (2)Zavradinos does apply because it is not a bankruptcy case; it involves security accounts, rather than an interest in a living trust.(SeeTranscript of Bankruptcy Court, Case No. 15–10804, Doc.12 Ex. 1)The Bankruptcy Court's reasoning is correct; Lewiston's arguments lack merit.

A. M.C.L. §§ 557.151and600.5451(1)(n)

Under Michigan law, certain forms of personal property held jointly by husband and wife are afforded protection in bankruptcy.The protections are described in M.C.L. § 600.5451(1)(n), which exempts “[p]roperty described in ... M.C.L. 557.151, or real property, held jointly by a husband and wife as a tenancy by the entirety ...”M.C.L. § 557.151 defines the forms of property that can be held by husband and wife in a joint tenancy:

557.151.Evidence of indebtedness payable to husband and wife; ownership in joint tenancy

Sec. 1.All bonds, certificates of stock, mortgages, promissory notes, debentures, or other evidences of indebtedness hereafter made payable to persons who are husband and wife, or made payable to them as endorsees or assignees, or otherwise, shall be held by such husband and wife in joint tenancy unless otherwise therein expressly provided, in the same manner and subject to the same restrictions, consequences and conditions as are incident to the ownership of real estate held jointly by husband and wife under the laws of this state, with full right of ownership by survivorship in case of the death of either.

M.C.L. § 557.151.Further, there is a statutory presumption that the types of personal property listed in § 557.151 are held by spouses as tenants by the entirety.DeYoung v. Mesler,373 Mich. 499, 504, 130 N.W.2d 38(1964).Thus, by claiming that the Trust is exempt under M.C.L. §§ 600.5451(1)(n)and557.151, Lewiston asserts that the Trust and/or or his beneficial interest in the Trust is held with his wife as tenants by the entirety.This argument is without merit.

B.Living Trusts and Tenancies by the Entirety

1.

Michigan case law is clear that a tenancy by the entirety is created only when property is transferred directly to a husband and wife.SeeBudwit v. Herr,339 Mich. 265, 272, 63 N.W.2d 841(1954)(emphasis added).A consequence of a tenancy by the entirety is that one spouse cannot unilaterally convey, alienate, or encumber entireties property without the consent of the other spouse.M.C.L. § 600.6023a;Budwit,339 Mich. at 278, 63 N.W.2d 841.

The creation of a tenancy by the entirety requires a written instrument of conveyance that creates unities of time, title, interest, possession, and person (marriage of husband and wife).Id.However, tenancies by the entirety are statutorily limited to certain kinds of property.SeeM.C.L. § 557.151.Further, there is a common law presumption—as well as a statutory presumption—that a conveyance of an estate to husband and wife creates a tenancy by entirety.DeYoung,373 Mich. at 504, 130 N.W.2d 38;see generallyJason L. Honigman, Tenancy by Entirety in Michigan,5 Mich. St. B.J. 196, 204(1925–1926).To overcome this presumption requires express language to the contrary.M.C.L. § 557.151(recognizing tenancy by the entirety “unless otherwise therein expressly provided”);DeYoung,373 Mich. at 503–04, 130 N.W.2d 38.

Trusts, by contrast, are considered a distinct “legal ‘entity,’ consisting of the trust estate and the associated fiduciary relation between the trustee and the beneficiaries.”Restatement (Third) of Trusts§ 2 cmt a.(2003).A “living” trust is one created during the lifetime of the settlor (the person creating the trust).Id.§ 2 cmt.1, illus.5.Unlike tenancies by the entirety, any property, real or personal, can be held in trust.Id.§ 8.Within the legal framework of a trust, trustees and beneficiaries have distinct relationships with respect to trust property: although the trustee holds “bare” legal title to the property, beneficiaries hold the beneficial interests, or “equitable title,” in the trust property.Id.§ 42 cmt a.

2.

Here, there is no question that when the...