Roy v. Edgar
| Decision Date | 10 June 1981 |
| Docket Number | Bankruptcy No. 78-0029-E. |
| Citation | 11 BR 853 |
| Parties | Lansing J. ROY, Trustee, Plaintiff, v. William H. EDGAR, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Florida |
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Lansing J. Roy, Keystone Heights, Fla., for plaintiff.
Jules S. Cohen, Orlando, Fla., for defendant.
THIS CAUSE was submitted and argued upon cross motions for summary judgment, there being no dispute as to any matters of material fact. The debtor, defendant, is the income beneficiary of a testamentary spendthrift trust established under the laws of Michigan by his grandfather's 1932 will which is being administered by the Detroit Bank & Trust Co., as trustee.
Upon the death of his father in 1957, the debtor, as his father's sole issue, became entitled to and began to receive a portion of the testamentary trust income. He continues to receive these income distributions annually as directed by the terms of his grandfather's will establishing the trust. Within a period of six (6) months after the filing of his petition and adjudication, the Detroit Bank & Trust Co., as trustee, distributed to the defendant certain trust income in excess of $40,000.
The plaintiff trustee claims these distributions on behalf of the estate under the second (unnumbered) paragraph of § 70(a) of the Act asserting that they constitute property vesting in the defendant within six (6) months after bankruptcy "by bequest, devise or inheritance".
The defendant disputes the plaintiff trustee's claim arguing (1) that the distributions received from a testamentary trust estate do not constitute property received by "bequest, devise or inheritance"; (2) that the distributions so received do not constitute property which vested in the defendant within six (6) months of his filing; and (3) that the distributions made within the six (6) months period continue to be protected by reason of the spendthrift provisions.
Under the defendant's first argument it is maintained that § 70(a) has no application to the instant factual situation for the reason that distributions of income from a trust estate are not a "bequest" and thus do not come within the express provisions of the statute dealing with property acquired by "bequest, devise or inheritance". The defendant asserts that such distributions are gifts of income received from a separate and independent legal entity, a trust, and thus cannot be considered as property received by any manner of succession.
The parties' arguments and briefs presented no case or other authority wherein the specific issue presented for determination was whether the gift of income from a testamentary trust is a "bequest". Supplemental research leads to the case of Smith v. City of Providence, 63 R.I. 333, 9 A.2d 10 (1939) wherein the Supreme Court of Rhode Island specifically addressed this issue.
Although it did not involve the construction of the word bequest as it appears in § 70(a), the Smith case is persuasive in its holding that the legal meaning of the word "bequest" encompasses testamentary gifts of income from a trust. The Smith case involved a construction of a will which contained a testamentary trust provision and an amendatory codicil. The representative of the beneficiary whose interest had been extinguished by the codicil sought to restrict the meaning of the word "bequest" so as to exclude from the revocatory provisions of the codicil a gift of testamentary trust income originally provided and bequeathed. As aptly stated by the Smith court at p. 14, supra;
The United States Supreme Court case of Irwin v. Gavits, 268 U.S. 161, 45 S.Ct. 475, 69 L.Ed. 897 (1925), cited and relied upon by the defendant herein, clearly affords no support for any contention that a testamentary gift of trust income does not constitute a bequest. The Irwin case was also cited and relied upon by the complainant in the Smith v. City of Providence case referred to above wherein a similar argument seeking to restrict the meaning of the word bequest was made. As was properly noted by the court in the Smith case, the testamentary trust gift involved in the Irwin v. Gavits case was termed by the Supreme Court in its opinion as a bequest. Smith, supra, 14, 15. When properly read the case of Irwin v. Gavits is authority against the defendant in the instant cause.
Similarly the cases of Klebenoff v. Mutual Life Insurance Company of New York, 362 F.2d 975 (2nd Cir. 1966) and Friedman v. McHugh, 168 F.2d 350 (1st Cir. 1948) constitute no authority for any limitation of the legal meaning of the word "bequest" as urged by the defendant. Klebenoff involved no rights created by will and embodied in the terms of a trust. The subject matter there was certain proceeds of life insurance created and transferred by the terms of certain life insurance contracts wholly independent of the terms of any will. Friedman involved rights created under a wrongful death statute which rights, again, were wholly independent of any will.
This court is of the opinion that the word "bequest" as used in § 70(a) should be construed so to encompass within its meaning gifts received by way of distributions from testamentary trusts, as it has been so construed under the general law of wills. To do otherwise would be to ignore the fact that a testamentary trust is itself a testamentary disposition whereby rights created under a will, together with property dispositions directed thereby, are to be given effect.
Under the defendant's second argument it is maintained that the trust income received was not property that "vested" in him within the six (6) month period after the filing for the reason that his interest with respect to the trust income had already vested way back in 1957 upon the passing of his father who was the defendant's predecessor in interest. He maintains that, as his interest was already vested and protected by the spendthrift provisions of his grandfather's will creating the trust, there was no "vesting" of any property in him within the six (6) month period. This contention raises one of the troublesome issues not clearly settled since the amendments in 1938 to § 70(a), i.e., the meaning of "vesting" within six (6) months in light of varied state laws and case holdings regarding the devolution of property, both real and personal. See, 1 Cowans, Bankruptcy Law and Practice, 2 ed., § 342.
The general outline or pattern for the administration of a debtor's property for the benefit of his creditors is set forth in the provisions of § 70(a). A single creditor representative entitled a trustee, for the purpose of administration, is vested with and takes title to all nonexempt property which is owned by a debtor on the date of the filing of his petition and which is of such a nature that it is transferable or leviable. At the outset then, it can be seen that to be subject to administration the property must be nonexempt; the property must be owned by the debtor at the date of his filing, rather than after acquired; and the property must also be a kind of property which is transferable or leviable. See 1 Cowans, supra, §§ 342 and 343.
As a result, only nonexempt property owned by the debtor as of the date of the petition which is of such a nature as to be transferable or leviable will vest in or pass to the trustee. The transferability or leviability is decided by the law of the state in which the property is located. If either transferable or leviable, the property right or interest will pass to the trustee. Both are not required. 1 Cowans, supra, § 360.
The foregoing measuring standard of the trustee's rights is applicable to both present and future, legal or equitable, interests or rights. If a debtor, as of the date of the petition, under local law, could have transferred a future interest or right or creditors could have levied, the trustee takes such future right or interest irregardless of whether it is a vested, contingent, executory or other type of interest or right. If such interests or rights, or some of them, are not transferable or leviable under local law they will not pass to the trustee. In some states all future interests or rights of any type are transferable or leviable. In others, while vested interests or rights are transferable or leviable, certain future interests such as contingent rights or interests (commonly contingent remainders) are not. In these states the most common reason for non-transferability or non-leviability is the contingent nature of the interest or right. 1 Cowans, supra, §§ 343 and 359.
In view of the divergent laws of the various states as to the transferability or leviability of property, especially future interests, the Fifth Circuit has wisely interpreted the word "vest", as it is used in the "bequest, devise or inheritance" exception paragraph of § 70(a), broadly rejecting any notion that it may be used to draw a distinction between interests which are vested and those which are contingent. Thornton v. Scarborough, 348 F.2d 17 (5th Cir. 1965). As a result, the court has retained uniformity of application of the concept central to all of the various provisions of § 70(a), i.e., any determination of a trustee's interest in or right to property is dependent upon whether the interest or right is transferable or leviable under the law of the state involved; and not whether the property right is vested or contingent under such law for the purpose of the application of the Rule Against Perpetuities.
The second (unnumbered) paragraph of § 70(a) is one of the important exceptions to the general rule that only property owned at the date of the petition, as distinguished from that after acquired, passes or vests in the trustee. The Thornton case dealt with this exception and the court expressly concluded that the word "vest" is not used...
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