IN RE SPENCER

MEMORANDUM DECISION, OPINION & ORDER

MITCHEL R. GOLDBERG, Bankruptcy Judge.

INTRODUCTION

Chapter 7 debtor, Judith Spencer ("Debtor") and her spouse Roderick Spencer1, filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on May 8, 2001 ("Petition"). The chapter 7 trustee, P.J. Zimmermann ("Trustee") filed a complaint for declaratory relief, turnover of property and accounting.2 Trustee contends that the Debtor's beneficial interest in her parents John and Dorothy Griffin's revocable inter vivos spendthrift trust is property of the estate. Debtor brought a motion for Judgment on the Pleadings in response to the Trustee's complaint. Trustee filed opposition and a cross-motion for judgment on the pleadings or, alternatively, for summary judgment. All parties agree that there are no disputed facts and that this proceeding requires only legal rulings by the Court. As such, all parties agree that this motion is similar to case motions for summary adjudication. This Court has jurisdiction under 28 U.S.C. section 157(b)(1).

For the reasons set forth in this memorandum and order, the Court finds that the bankruptcy estate is not entitled to the Debtor's interest in the John and Dorothy Griffin revocable intervivos trust. Judgment will be rendered in favor of Debtor.

STATEMENT OF FACTS

The facts are not disputed. On May 8, 2001, the date of filing, Debtor was a contingent beneficiary of a revocable inter vivos spendthrift trust, the Griffin Family Trust ("Trust"), which was created on September 3, 1987 by Debtor's parents, John and Dorothy Griffin ("Trustors"). Pursuant to Article II of the Trust, the Trust was revocable in whole or in part at any time during the lifetime of either Trustor. The Trust, under Article I paragraph E, provided the following anti-alienation restriction:

The sole asset of the Trust was real property, commonly described as 4332 Hayman Avenue, La Canada-Flintridge, California.3 The Trust provides that on the death of both Trustors, Debtor shall become trustee, and if Debtor is unable to serve in that capacity for any reason, Dennis Griffin, Debtor's brother, shall become trustee. Upon the death of the last remaining Trustor, Article I of the Trust further provides that the trustee shall "distribute all of the remaining corpus of said Trust, including any accrued and undistributed income, equally to the children of the Trustors. . . ." Debtor's mother, Dorothy Griffin, died prior to the filing of the Petition. John Griffin died on November 1, 2001, within 180 days of the filing of the Petition.

The Trustee's position is that the estate is entitled, pursuant to either 11 U.S.C. section 541(a)(1), and/or 541(a)(5)(A), to the Debtor's beneficial interest in this revocable inter vivos spendthrift trust.4

ANALYSIS

A. The Trustors Created a Valid Revocable Inter Vivos Spendthrift Trust that Precludes the Debtor's Interest in the Trust from Being Included in the Bankruptcy Estate under Section 541(a)(1)

Section 541(a)(1) defines property of the estate broadly to include "all legal or equitable interests of the Debtor in property as of the commencement of this case." See § 541(a)(1). Section 541((c)2), however, excludes from property of the estate, trusts with restrictions on the transfer of a beneficial interest of the debtor to the extent that such restriction is enforceable under applicable nonbankruptcy law.5 In this matter, California Probate Code § 1530 is the applicable non-bankruptcy law. This section pertains to spendthrift provisions in California trusts and provides as follows:

This provision enforces anti-alienation clauses, such as the spendthrift provision found in the Griffin Family Trust. California has also recognized the need to place limitations on the immunities of anti-alienation clauses. Indeed, Trustee cites to California Probate Code section 15301(b). Subsection(b) provides in relevant part:

This provision permits a creditor to reach principal that is due or payable to the beneficiary, notwithstanding a spendthrift provision in a trust. Provided the property remains in trust and is not due or payable, the property is not alienable where a valid spendthrift provision is in effect.

Trustee further argues that this Trust should be viewed as testamentary in nature for the reasons discussed in more detail infra. If the Trustee is correct that the Trust is a testamentary trust, rather than a valid inter vivos spendthrift trust, then Trustee's position as to the applicability of California Probate Code section 15301(b) may be correct. Trustee argues that the Trust became testamentary when the last trustor died and there are no successor beneficiaries, thereby making the spendthrift provision unenforceable under California Probate Code section 15301(b). According to the Trustee, if this trust was testamentary, then section 541(c)(2) is inapplicable and the property in the trust would be declared an asset of the estate under section 541(a)(1) or an inheritance under section 541(a)(5). (But see the recent case of Birdsell v. Coumbe (In re Coumbe) 304 B.R. 378 (9th Cir. BAP 2003)) (holding that a testamentary trust with valid spendthrift provision was excluded from the bankruptcy estate).

While there is no controlling case directly on point, the Court finds the reasoning of the recent case In re Roth, 289 B.R. 161 (Bankr.D.Kan.2003) persuasive. The facts in Roth are strikingly similar to the facts at hand. Edmund and Martina Roth created a revocable inter vivos trust with a spendthrift clause. Id. at 163-164. Both Trusts provided for payment of last expenses and neither Trust provided for the corpus of the Trust to be retained upon the death of the last trustor. Id. at 164. Within 180 days of the filing, the last trustor in both cases, died. Id. The trustee in the Roth case sought to bring into the estate, pursuant to section 541(a), the trust res. Id. at 164. Neal objected on the basis that the trust property was not property of the estate on Neal's petition date, under section 541(a)(1), because of the exclusion contained in section 541(c)(2), for valid spendthrift trusts; and because the property did not subsequently pass to Neal, within 180 days by "bequest, devise, or inheritance," as required by section 541(a)(5)(A). Id. The court in Roth first determined if the trust was property of the estate under section 541(a)(1). Id. at 165.

An asset is determined to be estate property by examining the nature of the asset on the date the bankruptcy petition was filed. See § 541(a)(1); see also In re West, 64 B.R. 738, 744, n. 12 (Bankr.D.Or.1986), aff'd, 81 B.R. 22 (9th Cir. BAP 1987). The Roth court acknowledged, as does this Court, that the existence and nature of the Debtor's interests in property are determined by nonbankruptcy law. In re Roth, 289 B.R. at 165. The court held that under Kansas law, the spendthrift clause set forth in the Roth Trust was valid. As such, "neither Neal's creditors nor transferees had any right to rely upon the Trust for the satisfaction of their claims." Id. at 165, citing Johnson v. Morawitz, 292 F.2d 341, 344 (10th Cir.1961). Thus, Neal had no interest in the Roth Trust assets at the time he filed his Petition and therefore, those potential assets were not property of the estate. In re Roth, 289 B.R. at 166.

The same is true in the case at hand. Even if this Court acknowledges that the spendthrift provision became unenforceable upon the death of the last trustor, the spendthrift provision was valid and enforceable, under California law, at the time Debtor filed her Petition, as Mr. Griffin was alive on that date. See California Probate Code § 15301(a) and (b). This is because at the time of the Petition, the Trust was fully revocable by the Trustor and "neither [Debtor's] creditors nor transferees had any right to rely upon the Trust for the satisfaction of their claims." In re Roth, 289 B.R. at 165; see also, Burton v. Ulrich, (In re Schmitt), 215 B.R. 417, 422 (9th Cir. BAP 1997) (concluding that under either California or Oregon law, an interest in a revocable trust was not a property right because the inter vivos trust was revocable when the bankruptcy was filed). Moreover, because the spendthrift clause was still valid on the date of the Petition, the Trust would have been excluded from the bankruptcy estate under section 541(c)(2). See, In re Coumbe, 304 B.R. 378 (9th Cir. BAP 2003). As such, this Court concludes that because Judith Spencer, under state law, had no property interest in the Trust assets at the time she filed bankruptcy and because the spendthrift provision was still valid under state law on the date of the Petition, the potential Trust assets were not property of the estate pursuant to section 541(a)(1).6

B. Section 541(a)(5)(A) is Inapplicable as Debtor's Interest in the Trust Did Not Pass by Way of Bequest, Devise or Inheritance

As did the court in Roth, this Court must still answer the question whether Debtor's interest in the Trust became property of the estate pursuant to § 541(a)(5). See In re Roth, 289 B.R. at 165. Section 541(a)(5)(A) provides that upon the commencement of a case under bankruptcy, an estate is created that is comprised of

Section 541(a)(5)(A). There is no dispute among the parties that the Debtor's interest in the Trust was acquired within 180 days after the filing of the petition. The issue before this Court, as in the Roth case, "is whether the Debtor acquired the property by way of `bequest, devise, or inheritance.'" In re Roth, 289 B.R. at 166. In Roth, the court looked at the Kansas statute to define the terms of bequest, devise, or inheritance as involving transfers of property by way of will or intestate succession. Id. at 166-67. Similarly, this Court must now turn to California law. California has determined that "devise" means a "testamentary disposition of land" whereas "legacy" or "bequest" mean a like disposition of personalty. Estate of Cochran, 30 Cal.App.3d 892, 898, n. 2, 106 Cal.Rptr. 700 (1973). In 1983, the California legislature determined that the distinction was no longer necessary and amended the California Probate Code to provide:

California Probate Code § 32.

Trustee urges this Court, however, to determine that the Griffin Trust was, in reality, testamentary in nature. Trustee states the Trust is not a "true" revocable inter vivos spendthrift trust because it has the elements of a testamentary trust. Trustee cites Richardson v. McCullough (In re McCullough), 259 B.R. 509 (Bankr.D.R.I.2001) which defined testamentary trusts or "will substitute" trusts as instruments through which property passes via a trust by way of devise or bequest, typically characterized by the immediate transfer of the trust assets to the beneficiaries upon the death of the last trustor. In contrast, the Trustee argues that "true" inter vivos spendthrift trusts are typically designed to immediately provide regular income for a beneficiary, regardless of whether the trustor lives or dies. See e.g., Canfield v. Security First National Bank of Los Angeles, 8 Cal.App.2d 277, 280, 48 P.2d 133 (Cal.Ct.App.1935) (identifying a valid inter vivos spendthrift trust where the beneficiaries have creditors waiting to seize assets and where the beneficiaries have demonstrated an inability to manage or save money). To further bolster Trustee's position that the Griffin Trust should be considered testamentary in nature, Trustee argues that inter vivos spendthrift trusts do not contain provisions requiring the trustee to pay the burial expenses of the Trustors. See In re McCullough, 259 B.R. at 520 (stating that "[t]here can hardly be a clearer expression of testamentary intent than a direction by the testator to pay funeral and burial expenses. . . ."). But see, In Re Roth, 289 B.R. at 163 for a contra position. This Court is not persuaded that the trust is testamentary simply because the Griffin Trust explicitly provides that upon the death of the last Trustor, the trustee was to distribute all of the remaining corpus of the Trust to the beneficiaries and, in addition, provided for the payment of burial expenses under Article I of the Trust.

California law is clear, "[t]rusts are . . . classified as either testamentary or inter vivos, depending upon whether they become effective after the death of the settlor or during the settlor's lifetime." 60 Cal. Jur.3d Trusts § 2; see also, Black's Law Dictionary, 7th Edition (1999), pp. 1516 and 1518 (defining testamentary trusts as trusts created by will and takes effect when the settlor dies, in contrast to an inter vivos trust which is created by the grantor and takes effect during the settlor's lifetime). See also, In re Roth, 289 B.R. at 167, n. 2. Moreover, California courts recognize that an inter vivos trust does not constitute a testamentary disposition. See e.g., Bucholtz v. Belshe, 114 F.3d 923, 925-926 (9th Cir.(Cal) 1997) (holding that in California creditors may not pursue the beneficiaries of inter vivos trusts to recover the costs of Medi-Cal services, but could pursue people who received property held by decedent in the form of tenancy in common or community property); see also In re Schmitt, 215 B.R. at 422-423; n. 2 (stating that section 541(a)(5)(A) does not concern inter vivos trust, citing, In re Neuton, 922 F.2d 1379, 1381 (9th Cir.1990)) (dealing (albeit) with irrevocable inter vivos trusts); Tennant v. John Tennant Memorial Home, 167 Cal. 570, 140 P. 242 (1914); 60 Cal. Jur.3d Trusts § 27 (stating "the fact that the settlor of an inter vivos trust both reserves a life estate and retains a power of revocation does not make the trust invalid as being testamentary in character.") Other circuits have also reached the same conclusion. See e.g., Magill v. Newman, 903 F.2d 1150, 1154 (7th Cir.(Ill.) 1990) (holding that property interests obtained from revocable inter vivos spendthrift trusts are not interests by way of bequest, devise or inheritance bringing such property within the bankruptcy estate); In re Roth, 289 B.R. at 167 (citing additional cases and noting that the case of In re McCullough, 259 B.R. at 519, relied upon by the Trustee, was determined to be a testamentary disposition because the trust was funded solely by the proceeds of Juliet McCullough's life insurance policy and the proceeds were to be distributed only after her death. Thus, no present interest in property passed to the trustee at its inception); and In re Crandall, 173 B.R. 836 (Bankr.D.Conn.1994) (discussing extensively the origins of section 541(a)(5)(A) and concluding that a debtor's interest in an inter vivos trust is not property of the estate under section 541(a)(5)(A)).

Of all the cases cited, only the court in Crandall discussed at length that the revision to the Bankruptcy Act of 1898 included inherited assets received by a debtor within six months of filing bankruptcy. In re Crandall, 173 B.R. at 838. The court in Crandall made clear that the Bankruptcy Reform Act of 1978 did not place within the 180-day window established by section 541(a)(5) devices generally described as "will substitutes" and acknowledging that one of the most common will substitutes is the revocable inter vivos trust. Id. There is no denying that the Griffin Trust was a revocable inter vivos trust, and under Crandall, one categorized as a "will substitute" as the Trustee so urges this Court to adopt. Indeed, in Crandall, the court acknowledged the reasonableness of the argument that revocable inter vivos trusts are testamentary in nature. Id. However, the court in Crandall recognized two important distinctions. First, "`will substitutes are simply `nonprobate wills' — each reserves to the owner complete lifetime dominion, including the power to name and to change beneficiaries upon death.'" In re Crandall, 173 B.R. at 838; quoting, John H. Langbein, The Nonprobate Revolution and the Future of the Law of Succession, 97 Harv.L.Rev. 1108, 1109 (1984). Second, and most importantly, the court in Crandall recognized that federal courts are to interpret the words of the Bankruptcy Code according to their plain meaning:

Id. at 839. The court in Crandall, ultimately concluded that the debtor's interest in the revocable inter vivos trust was not property of the estate within the meaning of section 541(a)(5)(A).7 To further support its holding, the court in Roth added that at the time section 541(a)(5)(A) was added to the Bankruptcy Code, "Congress expressly contemplated, in a different context, the use of inter vivos trusts in passing title to property" under section 7 of the White Earth Reservation Land Settlement Act of 1985. In re Roth, 289 B.R. at 168; citing, 25 U.S.C. section 331 (repealed 2000). Indeed, the court in Roth stated that it "cannot simply assume that Congress intended to include every vehicle for transferring property upon death in § 541(a)(5), since [Congress] clearly understood the concept of trusts in passing other federal statutes in the same time frame." Id. at 168.8

Based on the foregoing, this Court must also conclude that section 541(a)(5)(A) does not operate to include interests in property transferred to a debtor by way of inter vivos trust. The revocable inter vivos Trust was not testamentary in nature and, thus, the Trust interest did not pass to the Debtor, Judith Spencer, by way of "bequest, devise or inheritance."

CONCLUSION

In conclusion and for the reasons set forth above, this Court must find for the Debtor, Judith Spencer. The Trust at the time of the Petition date was not property of the estate under section 541(a)(1), nor did Debtor's interest in the inter vivos Trust pass by way of bequest, devise or inheritance within the meaning of section 541(a)(5)(A).

ORDER

Therefore, it is

ORDERED, Debtor, Judith Spencer is entitled to Judgment on the Pleadings, Points and Authorities presented, and after oral argument of all counsel. The Trust and property interest from the inter vivos Trust are not property of this bankruptcy estate.