Opinion ID: 72001
Heading Depth: 3
Heading Rank: 2

Heading: Transfer and Interest in Property

Text: The bankruptcy code defines “transfer” to include “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 U.S.C. § 101(54)(D). “‘What constitutes a transfer and when it is complete’ is a matter of federal law . . . since . . . the statute itself provides a definition of ‘transfer.’” Barnhill v. Johnson, 503 U.S. 393, 397 (1992) (quoting McKenzie v. Irving Trust Co., 323 U.S. 365, 369 (1945)). However, “property” and “interest in property” are not defined in the code. “In the absence of any controlling federal law, [property and] interests in property are [ ] creature[s] of state law.” Simpson v. Penner (In re Simpson), 36 F.3d 450, 452 (5th Cir. 1994) (per curiam) (citing Barnhill, 503 U.S. at 398). Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving a windfall merely by reason of the happenstance of bankruptcy. 6 No. 09-10622 Butner v. United States, 440 U.S. 48, 55 (1979) (internal quotation marks omitted). 3. Interests in Property under Simpson, Drye, and Costas
We have previously looked to state law to determine whether a disclaimer of an interest in an estate constituted a transfer of “property” under the bankruptcy code. In Simpson, we considered whether, “under Texas law, a valid disclaimer or renunciation of an inheritance is . . . a fraudulent transfer [under 11 U.S.C. § 548].”3 36 F.3d at 451. There, the debtor’s father passed away, leaving a testamentary disposition to the debtor. Id. The debtor disclaimed this inheritance, which then passed to the debtor’s children under Texas law. Id. The next day, the debtor filed a voluntary petition under Chapter 7. Id. The trustee appointed to oversee the debtor’s estate filed a petition to set aside the disclaimer as a “fraudulent transfer” under 11 U.S.C. § 548(a). Id. The bankruptcy court granted the trustee’s petition, but the district court reversed, holding that a pre-petition disclaimer of inheritance is not a fraudulent transfer. Id. On appeal, we looked to Texas law to define any “interest in property” that the debtor may have had. Id. at 452. We determined that, under Texas law, a disclaimer of an inheritance “relates back” such “that a beneficiary never gains 3 Section 548 provides, in relevant part: The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily-- made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted[.] 11 U.S.C. § 548(a)(1)(A) (emphasis added). 7 No. 09-10622 possession of disclaimed property.” Id. We then looked to Jones v. Atchison (In re Atchison), 925 F.2d 209 (7th Cir. 1991), where the Seventh Circuit “held that after the execution of the disclaimer, the debtor did not have a property interest to transfer [under Illinois law].” Simpson, 36 F.3d at 452. Following Atchison, we determined that “[t]he law in Texas is similar to the law in Illinois in respects to the relation back doctrine and the property interests of the beneficiaries. . . . Both sets of laws hold that under the relation back doctrine, a beneficiary never possessed renounced property.” Id. Accordingly, we “h[e]ld that under Texas law a disclaimer is not a fraudulent transfer under 11 U.S.C. § 548.” Id. at 453.4
Nouveau argues that we should not apply Simpson here, urging that it was superseded by the Supreme Court’s decision in Drye. In that case, Drye was insolvent and owed the Government a large tax debt, for which federal tax liens had attached to all his assets. 528 U.S. at 52. Comparable to Simpson and the instant case, Drye’s mother died intestate in Arkansas, leaving Drye as her sole heir. Id. Drye disclaimed his interest in his mother’s estate, which then, under Arkansas law, passed to his daughter. Id. Drye’s daughter then set up a spendthrift trust,5 naming her parents as beneficiaries. Id. at 53–54. Under Arkansas inheritance law, “[t]he disavowing heir’s creditors . . . may not reach [disclaimed property].” Id. at 53. 4 In addition to the Seventh Circuit in Atchison, and the Ninth Circuit (discussed below), the Tenth Circuit has “held that a disclaimer issued under Colorado law was also not a fraudulent transfer.” Simpson, 36 F.3d at 453 (citing Hoecker v. United Bank of Boulder, 476 F.2d 838, 841 (10th Cir. 1973)). No other circuit court has held to the contrary, though a few bankruptcy courts have held differently. See David A. Lander, Does the Supreme Court Decision in Drye Mean that a Disclaimer of Inheritance is a Fraudulent Conveyance?, 12 NORTON BANKR. L. ADVISER 1, 3 (2002) (collecting cases). 5 That is, “[a] trust that prohibits the beneficiary’s interest from being assigned and also prevents a creditor from attaching that interest . . . .” BLACK’S LAW DICTIONARY 1654 (9th ed. 2009). 8 No. 09-10622 The IRS then sought to foreclose on its liens and to levy against the trust, and the trust brought an action against the Government for wrongful levy. Id. at 54. The district court ruled that the Government had properly levied against the trust because the disclaimed inheritance interest constituted “property” under the Internal Revenue Code (IRC), and the Eighth Circuit affirmed, reasoning that “state law determines whether a given set of circumstances creates a right or interest; federal law then dictates whether that right or interest constitutes ‘property’ or the ‘right to property’ under [26 U.S.C.] § 6321.”6 Id. The Court granted certiorari to address “whether Drye’s interest as heir to his mother’s estate constituted ‘property’ or a ‘right to property’ to which the federal tax liens attached . . . despite Drye’s exercise of the prerogative state law accorded him to disclaim the interest retroactively.” Id. at 52 (alteration omitted). In answering this question, the Court first considered the nature of “property” under § 6321 and observed that “the language [of § 6321] is broad and reveals on its face that Congress meant to reach every interest in property that a taxpayer might have.” Id. at 56 (internal quotation marks omitted). The Court noted that the IRC provided a list of “exclusive” exemptions to the broad nature of property under § 6321. Id. at 56–57. Searching this list of exemptions, the Court concluded that there was no recognition of “disclaimers” as an exemption. Id. at 57. 6 Section 6321 provides: If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person. 26 U.S.C. § 6321. 9 No. 09-10622 The Court then rejected Drye’s argument that it should look to state law to determine whether his interest in his mother’s estate constituted “property” under § 6321, citing previous tax cases in which it had held that “[t]he question whether a state-law right constitutes ‘property’ or ‘rights to property’ is a matter of federal law.” Id. at 58 (internal quotation marks omitted). Instead, the Court agreed with the Eighth Circuit’s interpretation that, at his mother’s death, Drye “had . . . a valuable, transferable, legally protected right to the property at issue” and held that “in determining whether a federal taxpayer’s state-law rights constitute ‘property’ or ‘rights to property,’ ‘the important consideration is the breadth of the control the taxpayer could exercise over the property.’” Id. at 61 (alterations omitted) (quoting Morgan v. Comm’r, 309 U.S. 78, 83 (1940)). Applying this consideration, the Court concluded that because “Drye had the unqualified right to receive the entire value of his mother’s estate . . . , or to channel that value to his daughter[, that control] rendered the inheritance ‘property’ or ‘rights to property’ [under the IRC]” and affirmed the Eighth Circuit’s judgment. Id. at 60.
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