Matter of Langley
| Decision Date | 28 April 1983 |
| Docket Number | Adv. No. 82-1187.,Bankruptcy No. 82-10694 |
| Citation | 30 BR 595 |
| Parties | In the Matter of Robert Carl LANGLEY, and Shirley Ann Langley, Debtors. ALBION PRODUCTION CREDIT ASSOCIATION, Plaintiff, v. Robert Carl LANGLEY, and Shirley Ann Langley, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Indiana |
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Patrick E. Hoog, Barrett, Barrett & McNagny, Fort Wayne, Ind., for plaintiff.
C. David Peebles, Peebles, Rogers, Hamilton & Skekloff, Fort Wayne, Ind., for defendants/debtors.
This matter is before the Court on the amended complaint of Albion Production Credit Association. Count I of the complaint requests that the Court determine that certain real estate held in a land trust is not property of the estate of the debtors, or, in the alternative, grant relief from stay so that plaintiff can proceed with a state court foreclosure action. Count II asks the Court to require the debtors to provide adequate protection payments for the use of farm machinery, equipment, tools, and other equipment in which the plaintiff has a security, and requests that the Court grant relief from stay so that plaintiff can recover certain equipment not necessary to debtors' effective reorganization.
As to Count I the parties submitted a stipulation of facts. Further, a trial was held regarding valuation of property and equipment.
The Court hereby adopts as its own findings the facts set out in the stipulation filed on December 16, 1982. The stipulation shows that the debtors executed a promissory note in the amount of $962,584 in favor of the plaintiff. Further, the debtors gave plaintiff mortgages on real estate in LaGrange and Steuben Counties to secure the above indebtedness. These mortgages were recorded. Thereafter the debtors, by warranty deed, conveyed certain of their real estate on which plaintiff held mortgages, to McGaughey & Morell, Lawyers' Professional Corporation, as trustee, under a trust agreement known as the Langley Land Trust, Trust Number 143. This deed was recorded.
In addition to the stipulated facts, the Court also finds that the debtors are the settlors of the land trust and the only beneficiaries. Further, under the trust agreement, the debtors have reserved all power to direct the trustee to deal with the property, the power to manage, possess, use and control the property, and the right to receive the earnings, avails and proceeds from leases and other uses and from mortgages, sales and other dispositions of the property. The trustee may not deal with the property without the written direction of the beneficiaries.
By their contract, on the date they filed their petition, the debtors owed approximately $875,344 plus interest at 13% since that date, if allowed, on their note to plaintiff. (Pl.Exh. F) Further, the debtors owed approximately $211,820 to the Federal Land Bank of Louisville. This debt is secured by a first mortgage, prior to plaintiff's mortgages; and interest on this obligation is approximately 12% per year.
Prior to bankruptcy, the plaintiff initiated a foreclosure action in state court naming the debtors as defendants. This suit has been stayed by debtors' filing of their petition under Chapter 11 of Title 11. Debtors are attempting to reorganize their farming business.
COUNT I
The plaintiff contends, as to Count I, that the debtors have no interest in the land that is held by the land trust, since in such a trust the trustee holds the legal and equitable title to the land. Further, the debtors, as beneficiaries have an interest in the earnings, avails and proceeds of the res; but this interest is personal property not a real property interest. Thus the plaintiff argues that since the debtors do not have an interest in the real property, the real estate is not property of the estate. Therefore, plaintiff believes that it is entitled to relief from stay to proceed with the state court foreclosure.
Plaintiff also contends that if the realty is found to be property of the estate, Albion Production Credit is nevertheless entitled to relief from stay since the debtors have no equity in the property and it is not necessary to debtors' efforts to reorganize.
The debtors, as to Count I, argue that (1) the real estate is the primary asset of the debtors, (2) the Court, as a court of equity, can look through the form to the substance of a transaction and in so doing the Court should conclude that the debtors are the owners of the land and it is included in the bankruptcy estate; (3) Indiana Land Trust Practice, a book on land trusts, is support for the proposition that the bankruptcy court has jurisdiction over property of the trust when a beneficiary files bankruptcy; and (4) under Indiana Code 30-1-9-141 the land is property of the estate, because this section provides that where a grantor of lands reserves an absolute power of revocation, he shall be deemed an absolute owner as regards creditors and purchasers.
Bankruptcy Code Section 5412 provides that the commencement of a bankruptcy case creates an estate comprised of all legal or equitable interests of the debtor in property as of the commencement of the case, with certain exceptions that do not apply here. The scope of this section is broad. House Report No. 95-595, 95th Cong., 1st Sess. 367 (1977), U.S.Code Cong. & Admin. News 1978, p. 5787. Further, the scope of what is property of the estate is broader under the Bankruptcy Code than it was under the former Bankruptcy Act. In re Boyd, 11 B.R. 690, 692 (Bkrtcy.W.D.Va. 1981).
Section 541 brings all the interests of debtors in property into the estate, including their equitable interests and their beneficial interest in the trust involved herein. In re Dawson, 13 B.R. 107, 109 (Bkrtcy.M.D.Ala.1981); In re Klayer, 20 B.R. 270, 272 (Bkrtcy.W.D.Ky.1981). In determining what interests the debtors have at the time of filing their bankruptcy petition the Court looks to state law. However, the question of whether the interest is property of the estate is a federal question to be decided by federal law. In re State of Missouri, 7 B.R. 974, 980 (E.D.Ark.1980); In re Haynes, 9 B.R. 418 (Bkrtcy.N.D.IN.1981).
There is a sparsity of Indiana law on land trusts. However, in enacting the Indiana Trust Code of 1971 it is clear that the Legislature has provided for the availability of this trust device. See, e.g., Indiana Code Section 30-4-2-13 and the Study Commission Comment; Indiana Land Practice at 1-6 (Indiana Continuing Legal Education Forum 1977). Clearly, however, because of the wide experience with such trusts in the state of Illinois and because Indiana's land trust law follows and leans heavily upon the Illinois experience, the Court will look to Illinois cases and Indiana statutes to determine what interests Indiana courts would likely find in this set of circumstances. See, Indiana Land Trust Practice, supra at 2-8 and 9, 3-2. (No Indiana case law on the issues herein has been cited, nor has the Court found any upon its own search.)
The Seventh Circuit Court of Appeals in a bankruptcy case, quoting from an Illinois Supreme Court case, said that:
a land trust is typically created by execution of a deed in trust transferring all legal and equitable title to a trustee. The deed specifically provides that one dealing with the trustee need not inquire about the trust agreement and stipulates that the interest of the beneficiary is personal property. The deed is recorded. A second document, the trust agreement, is simultaneously executed, though not recorded. That agreement recites that all legal and equitable title remains with the trustee with an assignable personal property interest in the beneficiary. The beneficiary retains absolute control of the management and receives all the proceeds of the property. Under the agreement, all money advanced by the trustee must be paid by the beneficiary, and the trustee is not required to pay any taxes or assessments. The beneficiary may order the land sold at any time, and the trustee may not act except on written authorization of the beneficiary.
In the Matter of Gladstone Glen, 628 F.2d 1015, 1017 (7th Cir.1980) quoting People v. Chicago Title & Trust Co., 75 Ill.2d 479, 27 Ill.Dec. 476, 389 N.E.2d 540, 542 (Ill.1979). Thus, generally, in a land trust arrangement the trustee holds the legal and equitable title to the res and the beneficiaries hold a personal property interest in the earnings, avails and proceeds from leases and the other uses and from mortgages, sales and other dispositions of the property. The trust agreement in this case demonstrates that Langley Land Trust is modeled on the Illinois Land Trust device. The characteristics of the trust herein are similar in every way to the typical Illinois land trust.
The Gladstone Glen case, supra, is very instructive in this matter since it involved, among other things, the question of whether in a bankruptcy proceeding, a settlor-beneficiary of an Illinois land trust was actually the equitable owner of the res, even though it held neither the legal nor the equitable title to the property. The Seventh Circuit, without hesitancy, said that there was no doubt that the debtor-beneficiary of the land trust was the real "owner" of the realty. The beneficiary possessed the right to control, use, and enjoy the property. Further, the Court said that, but for the peculiarities of Illinois land trust law, the beneficiary would certainly be regarded as the equitable title holder. Id. at 1018.
In determining just what interest the debtor had in the res, the Seventh Circuit said that a court of bankruptcy, being a court of equity, will look through the form to the substance of a transaction. See also, In re Hotel Gibson Co., 11 F.Supp. 30, 28 Am.B.R. (NS) 520 (S.D.Ohio 1935). In so doing, the Court of Appeals held that the state law "characterization of the...
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