Opinion ID: 72001
Heading Depth: 4
Heading Rank: 3

Heading: Costas

Text: Nouveau argues that Drye applies here, effectively overruling Simpson, and that because Laughlin similarly had the power to channel his interest in his father’s estate—either to himself or to a known successor—he thus transferred property for purposes of § 727(a)(2). We have not had occasion to consider the application of Drye as it relates to “property” or “interests in property” under the bankruptcy code; however, the Ninth Circuit has considered whether Drye applies under the bankruptcy code.7 In Gaughan v. Dittlof Revocable Trust (In 7 To date, no other circuit court has considered whether Drye applies in the bankruptcy context. Several lower federal courts have considered whether Drye applies, with most declining to extend its reasoning. Compare Lowe v. Sanflippo (In re Schmidt), 362 B.R. 318, 322–23 (Bankr. W.D. Tex. 2007) (questioning Simpson post-Drye) and In re Kloubec, 247 B.R. 246, 256 (Bankr. N.D. Iowa 2000) (“Debtors assert that as Drye involves tax liens, it is 10 No. 09-10622 re Costas), 555 F.3d 790 (9th Cir. 2009), the Ninth Circuit determined that a properly executed pre-petition disclaimer under Arizona law did not qualify as a transfer for the purposes of 11 U.S.C. § 548, notwithstanding Drye. In Costas, a settlor created a revocable trust,8 under Arizona law, that was to be distributed to several of his children upon his death. Id. at 791–92. The settlor died, and interests were distributed. Id. at 792. One of these children, Costas, disclaimed her interest in this distribution and, shortly thereafter, filed a Chapter 7 petition. Id. The Chapter 7 trustee sought to avoid Costas’s disclaimer under 11 U.S.C. § 548, arguing that Drye overruled a previous Ninth Circuit Bankruptcy Appellate Panel (B.A.P.) decision, Wood v. Bright (In re Bright), 241 B.R. 664 (B.A.P. 9th Cir. 1999), which held that a validly effected disclaimer did not constitute a transfer for purposes of § 548 due to the relation- distinguishable from issues raised in the bankruptcy context. However, it is the conclusion of this Court that, even though Drye was a tax lien case, the issue decided was identical to the issue presented here, that is, whether the state doctrine of relationship-back can modify rights created under Federal statutes.”), aff’d on other grounds 268 B.R. 173 (N.D. Iowa 2001) with Garrett v. Bank of Okla. (In re Faulk), 281 B.R. 15, 20 (Bankr. W.D. Okla. 2002) (“Even though Drye involved the construction of a tax lien statute, the trustee urges this court to apply the Drye holding to the instant case. He asserts that the definition of “transfer” under [§] 541 of the Bankruptcy Code is no less expansive than under [§] 6321 of the [IRC]. This court, however, is not persuaded that Drye has application here for reasons both factual and legal.”) and Grassmueck v. Nistler (In re Nistler), 259 B.R. 723, 726–27 (Bankr. D. Or. 2001) (“I respectfully disagree with [Kloubec]. In Drye, the Supreme Court specifically relied on the language of § 6321 of the [IRC]. All of the cases cited by the Drye Court involved tax liens.”). A number of commentators have also confronted whether Drye applies in bankruptcy and have equivocated about its applicability. See generally Jon Finelli, Comment, In re Costas: The Misapplication of Section 548(a) to Disclaimer Law, 14 AM. BANKR. INST. L. REV. 567 (2006) (criticizing the B.A.P.’s decision in In re Costas); Lander, supra note 4 (recommending that courts that recognize state relation-back fiction reconsider those holdings post-Drye); Stephen E. Parker, Can Debtors Disclaim Inheritances to the Detriment of their Creditors?, 25 LOY. U. CHI. L.J. 31 (1993) (suggesting that courts should ignore the relation-back fiction); Kevin A. White, Note, A Clash of Expectations: Debtors’ Disclaimers of Property in Advance of Bankruptcy, 60 WASH. & LEE L. REV. 1049 (2003) (arguing that Drye does not apply and that courts should not “defeat” pre-petition disclaimers). 8 That is, “[a] trust in which the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income.” BLACK’S LAW DICTIONARY at 1654. 11 No. 09-10622 back doctrine. Costas, 555 F.3d at 792. The bankruptcy court found Drye distinguishable, and the B.A.P. affirmed. The trustee appealed to the Ninth Circuit. Id. On appeal, the Ninth Circuit noted that, while the question “[w]hether a particular action constitutes a ‘transfer’ is a matter of federal law,” “a ‘transfer’ cannot occur without ‘property’ or ‘an interest in property’” and that “in the absence of any controlling federal law, ‘property’ and ‘interests in property’ are creatures of state law.” Id. at 793 (internal quotation marks, modifications, and citations omitted). Then, in looking to Arizona law, the Ninth Circuit determined that Arizona treated a disclaimer as relating back to the date of death of the decedent. Id. at 793–94. Similarly to Texas and Arkansas law discussed above, the effect of such a transfer was that the “disclaimant [is treated as] neither transfer[ring] nor possess[ing] an interest in disclaimed property . . . .” Id. at 794. The Ninth Circuit then looked to cases post-Butner and concluded that “[t]hough most courts have found that Butner principles preclude avoidance of disclaimers under § 548, this line of authority has been thrown into doubt by Drye[.]” Id. Specifically, the trustee urged that the Ninth Circuit “extend Drye to the bankruptcy context and recognize the ‘right to channel’ as an ‘interest . . . in property’ for purposes of the [bankruptcy c]ode.” Id. at 795. However, the court rejected such an extension, holding “that Drye is distinguishable, both factually and legally, and that its adoption in the bankruptcy context would, in any event, be inappropriate.” Id. First, the Ninth Circuit determined that Drye is factually distinguishable, noting that the tax lien in Drye was already operative before the disclaimer, while in Costas, the disclaimer occurred before the bankruptcy petition. Id. at 795–96. Second, the court held that Drye is legally distinguishable, concluding that the Court’s repeated reference to the scope of the question presented in Drye suggested it was limited solely to the tax lien 12 No. 09-10622 context. On this point, the Ninth Circuit recounted how the Court had “repeatedly construed tax lien provisions to permit the government to reach property beyond the grasp of other creditors.” Id. at 796 (citing references). Finally, the court noted that the scope of exemptions under the bankruptcy code is significantly broader than the exemptions allowed under the IRC and concluded that this “highlights the key difference between ‘property’ for purposes of tax collection and for bankruptcy: the former largely trumps state law, the other tries to incorporate it.” Id. at 797.9 4. Conclusion We find the reasoning of Costas persuasive, and we hold that Butner’s deferential approach to state property law, rather than the rule of Drye, controls when determining whether a debtor has transferred “property” or “interests in property” by executing a pre-petition disclaimer under § 727(a)(2). The Ninth Circuit’s reasoning is sound: the bankruptcy code defines “transfer,” but to effect a transfer there must be “property” or an “interest in property.” And the 9 In Costas, the trustee also argued that, following Butner, there was a “federal interest” exemption that should preclude state law deference. Specifically, the trustee argued that (1) there was a federal interest in bankruptcy estate augmentation and that (2) § 548 created a federal rule of avoidance. Id. at 798. The Ninth Circuit rejected these arguments, determining that as to (1) “such a generic interest in expanding the debtor’s property would . . . interfere with Butner’s three goals of avoiding uncertainty, forum shopping, and windfall recoveries,” and thus the interest was insufficient; and as to (2) there was nothing in § 548 that suggested a deviation from Butner, when Congress had used the generic terms “property” or “interest in property” as it had in other sections of the bankruptcy code. Id. at 795–98. Accordingly, the Ninth Circuit “[a]ppl[ied] Butner’s deferential approach to state law, rather than the rule of Drye[, held that] a disclaimer, properly executed under Arizona law, does not qualify as the ‘transfer . . . of an interest of the debtor in property’ for purposes of § 548,” and affirmed the