Jack B. Schmetterer, United States Bankruptcy Judge.
Leonard Loventhal ("Loventhal"), a creditor in the bankruptcy case of Zisl Taub Edelson ("Debtor"), objects to the Debtor's claim of exemptions relating to a beneficial interest in her residence. (Dkt. 32.). Lovental also objects to confirmation of the Debtor's chapter 13 plan on related grounds, asserting that the beneficial interest should be part of the bankruptcy estate, and that creditors would therefore receive more in a chapter 7 distribution. (Dkt. 69.). The primary issue raised by both objections is whether the Debtor's beneficial interest in her residence qualifies as a tenancy by the entirety under Illinois law and would thus be unavailable to satisfy the claims of creditors holding claims only against the Debtor. Loventhal contends that the Debtor and her husband, who initially owned their residence as tenants by the entirety, voluntarily severed the tenancy by the entirety when they transferred the property into a trust. As discussed below, Loventhal has not shown that the transfer into trust was inconsistent with a tenancy by the entirety under Illinois law.
For the following reasons, both of Loventhal's pending objections will be overruled by separate orders.
The facts relevant to the pending objections are not in dispute. The following facts are drawn from the parties' stipulation of facts and exhibits filed in connection with Loventhal's objection to the Debtor's claimed exemption. (Dkt. 85.). No party has offered, or sought a hearing to offer, additional evidence. Both parties invited the Court to rule based on the stipulated facts, and both thereby impliedly waived the right to offer additional evidence.
The Debtor filed a voluntary petition for bankruptcy relief under chapter 13 of the Bankruptcy Code, 11 U.S.C. § 101 et al., on November 20, 2014. The Debtor is married to Claude J. Edelson ("Claude"), who is not involved in this bankruptcy case. Loventhal is a judgment creditor of the Debtor only and a creditor in this chapter 13 case.
Prior to April 18, 2014, the Debtor and Claude owned their residence commonly known as 2915 W. Farwell Ave., Chicago, IL ("2915 W. Farwell") as tenants by the entirety. On April 18, 2014, the Debtor and Claude executed a deed transferring 2915 W. Farwell to Claude, as trustee of the Claude J. Edelson Revocable Trust Dated January 9, 2011 ("Claude's Trust"). The deed provided that the beneficial interest
Claude's Trust is governed by an amended and restated trust agreement, which was also executed on April 18, 2014 (the "Amended Trust Agreement"). Article I of the Amended Trust Agreement identifies Claude as primary trustee and the Debtor as successor trustee; both Claude and the Debtor are the trust's primary beneficiaries. The trust is to be governed by the laws of the State of Illinois.
Article II of the Amended Trust Agreement sets forth a plan of distribution to take effect upon Claude's death; the allocation of trust assets depends on whether the Debtor survives Claude. If the Debtor survives Claude, trust assets are to be separated into specified marital and non-marital shares; the trustee is then instructed to administer these shares separately. The marital share is identified to include property interests that would pass to or for the benefit of the Debtor, as surviving spouse; these assets would then form a separate trust, known as the "Marital Deduction Trust," to be administered by the Debtor, as trustee and beneficiary of the Marital Deduction Trust. The non-marital share — constituting the remaining assets not included in the marital share — would then form a second trust, the "Family Trust," to be administered by the Debtor, as trustee, for the benefit of a class including the Debtor and their children.
Loventhal has timely objected to the Debtor's claimed exemptions and to the Debtor's proposed chapter 13 plan, and the parties have briefed the issues involved in these two objections.
Subject matter jurisdiction lies under 28 U.S.C. § 1334. The district court may refer a proceeding to a bankruptcy judge under 28 U.S.C. § 157, and is referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (L), and (O). It seeks to determine the allowance or disallowance of exemptions and confirmation of a plan. Therefore, it "stems from the bankruptcy itself," and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).
Loventhal first objects to Debtor's claimed exemption of a beneficial interest in 2915 W. Farwell. (Dkt. 32.).
The Debtor claims her beneficial interest in 2915 W. Farwell as fully exempt under Illinois law, made applicable in this case pursuant to 11 U.S.C. § 522(b)(3)(B) (authorizing exemption of an interest in property held as tenancy in the entirety "to the extent that such interest ... is exempt from process under applicable non-bankruptcy law[.]"). Section 12-112 of the Illinois Code of Civil Procedure, governing enforcement of judgments, provides in relevant part as follows:
735 ILCS 5/12-112 (emphasis added).
Section 1005/1c of the Joint Tenancy Act authorizes property to be held in tenancy by the entirety and describes the scope of that tenancy as follows:
765 ILCS 1005/1c (emphasis added).
Loventhal does not dispute that the Debtor and Claude previously owned their residence as tenants by the entirety; instead, he argues that the Debtor and Claude voluntarily severed the tenancy by the entirety when they transferred their interests into the Claude Trust. (See Loventhal's Supplemental Reply, Dkt. 76, at 3.).
Loventhal first argues that the interest currently held by the Debtor does not qualify as a tenancy by the entirety because 765 ILCS 1005/1c requires both husband and wife to be the settlors of the trust holding the property. According to Loventhal, the Claude Trust fails to comply with terms of the statute because the
Loventhal has offered no precedent in support of his interpretation of 765 ILCS 1005/1c and it is unlikely that Illinois courts would construe terms of the statute in the manner suggested by Loventhal. In instances where the identity of the settlor becomes determinative of the rights of beneficiaries of a trust, courts generally consider the principle that "[t]he person who furnishes the consideration for the creation of a trust is the settlor, even though, in form, the trust is created by another." Stewart v. Merchants Nat. Bank of Aurora, 3 Ill.App.3d 337, 338, 278 N.E.2d 10, 12 (1972) (quoting Guaranty Trust Co. v. New York Trust Co., 297 N.Y. 45, 74 N.E.2d 232 (1947)) (concluding that a trust beneficiary who funded and ratified the trust was the settlor, notwithstanding designation of another under the trust instrument, and could therefore modify the term of the trust); see In re Estate of Hickey, 263 Ill.App.3d 658, 660, 200 Ill.Dec. 514, 635 N.E.2d 853, 855 (1994) (concluding that trust assets were not shielded from liability under Illinois statute requiring reimbursement of state benefits in instances where trust was self-settled, notwithstanding the fact that trust instrument designated another as settlor); see also George G. Bogert & George T. Bogert, The Law of Trusts and Trustees, § 41 (rev. 2d ed. 1984) ("The settlor of an express, private trust is the person who, directly or indirectly, causes the trust relationship to come into existence.... One who furnishes the consideration necessary to induce another to create a trust is the settlor of the trust when it is created.").
In this case, the deed transferring 2915 W. Farwell to Claude, as trustee of the Claude Trust, explicitly identifies the Debtor and Claude (tenants by the entirety before the transfer) as grantors, and provides that the beneficial interest is to be held by the grantors as tenancy by the entirety. There is no reason to conclude that this transfer of title fails to comply with terms of 765 ILCS 1005/1c solely on the basis that the Claude Trust designates only Claude as the original settlor.
Loventhal also argues that the distribution of trust assets set forth in the Amended Trust Agreement is inconsistent with the right of survivorship, contending that the Debtor's interest should therefore not be construed as one held in tenancy by the entirety. However, nothing in the Amended Trust Agreement purports to override the Debtor's right of survivorship. The plan of distribution set forth in Article II of the Amended Trust Agreement is not intended to take effect until Claude's death; nothing in terms of the trust purports to interfere with the Debtor's right to inherit Claude's entireties share and the distribution plan designates the marital share in a manner consistent with the Debtor's right of survivorship. The institution of a plan of distribution to take effect thereafter — by establishing the Marital Deduction Trust — does not interfere with her right of survivorship, nor is it inconsistent with terms of 765 ILCS 1005/1c authorizing parties to hold a beneficial interest in tenancy by the entirety.
Further, 765 ILCS 1005/1c sets forth specific events upon which a tenancy by the entirety will terminate, none of which are consistent with Loventhal's contention that the tenancy by the entirety in this case was severed by terms of the Amended Trust Agreement or by the transfer at issue in this case. The pertinent part of
765 ILCS 1005/1c.
The deed transferring 2915 W. Farwell to Claude, as trustee of the Claude Trust, explicitly provided that the beneficial interest of the trust relationship has to be held by the Debtor and Claude as tenants by the entirety; nothing in the Amended Trust Agreement would override the Debtor's rights under 765 ILCS 1005/1c. Instead, the statute is clear that to the extent that there are terms in the Amended Trust Agreement generally authorizing Claude, as trustee, to dispose of trust property, any disposition of 2915 W. Farwell without the Debtor's authorization would generally be invalid.
None of the cases cited by Loventhal are convincing for purposes of his pending objection to the Debtor's claimed interest. In his supplemental reply, the Debtor cites In re Werner, 410 B.R. 797 (Bankr.N.D.Ill. 2009) for the general proposition that a tenancy by the entirety may be severed; that case, however, concerned avoidance of a transfer of property into tenancy by the entirety because the transfer was invalid pursuant to the terms of 735 ILCS 5/12-112. See Werner, 410 B.R. at 806. As mentioned before, Loventhal does not argue (nor do the relevant facts suggest) that the Debtor transferred 2915 W. Farwell "into tenancy by the entirety with the sole intent to avoid the payment of debts existing at the time of the transfer," 735 ILCS 5/12-112. Rather, the stipulated record shows that the Debtor and her husband owned 2915 W. Farwell as tenants by the entirety before Loventhal became a judgment creditor of the Debtor. The Debtor has stated that the transfer was made for estate planning purposes and Loventhal has offered no facts or evidence to dispute this.
For these reasons, Loventhal has failed to show that the interest currently held by the Debtor would not qualify as an interest held in tenancy by the entirety under Illinois law. On this basis, the pending objection to the Debtor's claimed interest will be overruled.
In the second pending matter, Loventhal objects to confirmation of the Debtor's Modified Chapter 13 Plan, dated April 27,
Bankruptcy Code section 1325(a)(4) requires the Court to consider whether unsecured creditors would fare better in a hypothetical chapter 7 liquidation. Under this provision, the Court must consider whether "the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date." 11 U.S.C. § 1325(a)(4).
Commencement of a bankruptcy case under any chapter of the Bankruptcy Code creates an estate that automatically includes "all legal or equitable interests of the debtor in property as of the commencement of the case," 11 U.S.C. § 541(a), and includes "every conceivable interest of the debtor, future, nonpossessory, contingent, speculative, and derivative." Matter of Yonikus, 996 F.2d 866, 869 (7th Cir.1993). Notwithstanding this general provision, individual debtors may subsequently remove property from the bankruptcy estate as exempt. 11 U.S.C. § 522(b); Yonikus, 996 F.2d at 870. Exempt assets would therefore not be liquidated in a chapter 7 case. Thus, if an asset is deemed exempt, it will not be considered for purposes of determining whether the plan meets the standard set forth in section 1325(a)(4). In re Allard, 196 B.R. 402, 416 (Bankr.N.D.Ill.) aff'd sub nom. Great S. Co. v. Allard, 202 B.R. 938 (N.D.Ill.1996); see also Garcia v. Bassel, 507 B.R. 907, 911 (N.D.Tex.2014).
The arguments set forth by Loventhal in objecting to confirmation under section 1325(a)(4) have been discussed above in connection with his objection to the claimed exemption of 2915 W. Farwell. The Debtor's schedules disclose no other significant assets that could enhance the recovery potential of unsecured creditors in a hypothetical chapter 7 case. Unsecured creditors, therefore, would receive far more under the Debtor's chapter 13 plan than they would receive if the Debtor's estate were liquidated at this point in chapter 7. Thus, Loventhal's objection may not be sustained on these grounds.
Loventhal also argues that the Debtor's plan should be rejected as not proposed in good faith. In confirming a chapter 13 plan, the Court must consider whether "the plan has been proposed in good faith...." 11 U.S.C. § 1325(a)(3). "[T]he good faith inquiry is `whether the plan could be said to be a sincere effort at repayment, or was instead an effort to
With respect to the first argument, the Debtor's previous conduct in filing of an adversary complaint against Loventhal, which was later voluntarily dismissed, has no bearing on the question of whether the current plan is proposed in good faith. Loventhal's arguments in this respect are without merit.
The second argument is also not compelling. Loventhal's contention that the transfer of 2915 W. Farwell into a trust would constitute a sufficient basis for rejecting the Debtor's current plan is similarly unsupported. As previously discussed, Loventhal does not dispute that the Debtor and Claude owned their residence as tenants by the entirety before they transferred their interest into a trust. The transfer itself does not give rise to an inference of bad faith sufficient to sustain Loventhal's objection.
While assessing good faith for purposes of plan confirmation depends on the "totality of the circumstances," the primary question is whether the debtor is "really trying to pay the creditors to the reasonable limit of his ability or is he trying to thwart them?" In re Schaitz, 913 F.2d 452, 453-54 (7th Cir.1990). Loventhal has not provided convincing reasons why the Debtor's plan does not constitute a reasonably sincere effort to pay her creditors to the extent she is able to. The Debtor's plan proposes to pay all of the Debtor's projected disposable income for the applicable commitment period of five years. Loventhal has not provided a compelling reason why this plan should be rejected. His objection will not be sustained on this basis.
For the foregoing reasons, Loventhal's objection to the Debtor's claimed exemptions will be overruled; Loventhal's objection to confirmation of the Debtor's chapter 13 plan will also be overruled. Separate orders, overruling each of the foregoing, will be entered concurrently herewith.
