Opinion ID: 3064379
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Heading: “Property” and Arizona Disclaimer Law

Text: [1] We begin with the two relevant and disputed terms from § 548: “transfer” and “property” (or, more broadly, “an interest . . . in property”). The Code defines “transfer” expansively, reaching “each mode, direct or indirect, absolute or conditional, voluntary or involuntary of disposing of or parting with — (i) property; or (ii) an interest in property.” 11 1 The Code also contains a provision allowing the trustee to “borrow” a state’s fraudulent conveyance provision. 11 U.S.C. § 544(b). Most courts, however, have held that state fraudulent transfer rules do not reach disclaimers that relate back. See, e.g., Essen v. Gilmore, 259 Neb. 55, 607 N.W.2d 829 (2000) (“[I]t is the majority view that a renunciation under the applicable state probate code is not treated as a fraudulent transfer of assets under the [Uniform Fraudulent Transfers Act], and creditors of the person making a renunciation cannot claim any rights to the renounced property in the absence of an express statutory provision to the contrary.”); Sara L. Johnson, Annotation, Creditor’s right to prevent debtor’s renunciation of benefit under will or debtor’s election to take under will, 39 A.L.R.4th 633 (1985); see also In re Popkin & Stern, 223 F.3d 764, 76869 (8th Cir. 2000) (analyzing Missouri law under § 544(b) and concluding that a disclaimer could not be avoided as a fraudulent transfer). 1384 IN RE COSTAS U.S.C. § 101(54). Whether a particular action constitutes a “transfer” is a matter of federal law. Walker v. First Security Bank of Idaho, N.A. (In re Walker), 77 F.3d 322, 323 (9th Cir. 1996) (quoting Barnhill v. Johnson, 503 U.S. 393, 397 (1992)). However, as the definition makes clear, a “transfer” cannot occur without “property” or “an interest in property.” See § 101(54). Thus, the key issue in the case is elucidating the meaning of “an interest . . . in property.” See Frierdich v. Mottaz, 294 F.3d 864, 867 (7th Cir. 2002) (“Although the definition of transfer is obviously federal, its references to ‘property’ and ‘interests in property’ require an analysis of whether a property interest was created under state law.”) [2] The Code does not define “property” or “an interest . . . in property.” Rather, “Congress has generally left the determination of property rights in the assets of a bankrupt’s estate to state law,” Butner v. United States, 440 U.S. 48, 54 (1979), meaning that “[i]n the absence of any controlling federal law, ‘property’ and ‘interests in property’ are creatures of state law.” Barnhill, 503 U.S. at 398 (citations omitted). Therefore, to understand the definition and scope of “property,” we turn to Arizona law. [3] Like other states, Arizona allows beneficiaries to renounce their interests in trusts through use of a disclaimer. See Az. Rev. Stat. § 14-2801 (2004) (repealed).2 A “disclaimer”3 2 Effective 2005, Arizona repealed § 14-2801 in favor of a statute based on the Uniform Disclaimer of Property Interest Act (1999) (now incorporated into the Uniform Probate Code as Section 11). Although the Uniform Act dropped the phrase “relation back”, it did not discard its application. See Uniform Probate Code § 2-1106, cmt. (“This Act continues the effect of the relation back doctrine, not by using the specific words, but by directly stating what the relation back doctrine has been interpreted to mean.”). 3 Statutes also frequently refer to a “disclaimer” as a “renunciation.” See, e.g., Mapes v. United States, 15 F.3d 138, 140 (9th Cir. 1994), abrogated by Drye v. United States, 528 U.S. 49 (1999) (construing “renunciation” under a prior version of § 14-2801). IN RE COSTAS 1385 has been defined as “the refusal to accept an interest in or power over property.” Uniform Disclaimer of Property Interests Act § 2(3) (1999). At all relevant times, Arizona law required disclaimers to be filed with the court and a representative or fiduciary of the decedent “not later than nine months” after the effective date of the instrument. Az. Rev. Stat. § 14-2801(B), (C) (testamentary and non-testamentary, respectively). The disclaimer itself also had to “describe the property or interest disclaimed, declare the disclaimer and its extent and be signed by the disclaimant.” § 14-2801(F). Where the beneficiary had previously made “[a]n assignment, conveyance, encumbrance, pledge or transfer of the property or interest or a contract” or accepted certain benefits or interests in the property, the right to disclaim was barred. § 142801(J), (M). The Trustee concedes the validity of Costas’ disclaimer under Arizona law. Costas, 346 B.R. at 200. [4] A properly executed disclaimer carries a significant advantage for an insolvent debtor: it shields the disclaimed interest from the disclaimant’s creditors. Arizona achieved this protection through § 14-2801(G), which provides that “[a] disclaimer relates back for all purposes to the date of death of the decedent.” This relation-back rule, a common feature in many states, is a legal fiction that retroactively eliminates any property interest that a disclaimant previously held in the disclaimed property. As the Supreme Court has explained, “an effective disclaimer . . . relate[s] back to the moment of the original transfer of the interest being disclaimed, having the effect of canceling the transfer to the disclaimant ab initio and substituting a single transfer from the original donor to the beneficiary of the disclaimer.” United States v. Irvine, 511 U.S. 224, 239 (1994). “An important consequence of treating a disclaimer as an ab initio defeasance is that the disclaimant’s creditors are barred from reaching the disclaimed property.” Id. at 239-240. [5] In short, Arizona’s relation-back rule says that a disclaimant neither transfers nor possesses an interest in disclaimed 1386 IN RE COSTAS property and thus creditors cannot reach the disclaimed interest.