Jennie D. Latta, UNITED STATES BANKRUPTCY JUDGE.
BEFORE THE COURT is the motion of Bettye S. Bedwell, Chapter 7 Trustee (the "Trustee"), seeking an order compelling the turnover of property of the estate. At issue are four deposit accounts maintained by the Debtor and/or Elite Contracting Management at Regions Bank. The Debtor consents to the release of two of the accounts, which he treats as personal accounts, but resists the turnover of the other two accounts, which he maintains are the accounts of Elite Contracting Management, LLC, owned by The Robert Massey Erskine, Sr. Irrevocable Living Trust. For the following reasons, the motion will be granted.
Original and exclusive jurisdiction of all bankruptcy cases lies with the district court. 28 U.S.C. § 1334(a). The motion seeks turnover of property of the estate,
In her brief, the Trustee identifies three issues raised by the motion and objection:
The following facts are not in dispute:
1. The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on September 17, 2015.
2. Bettye S. Bedwell was appointed Trustee in Bankruptcy on September 17, 2015.
3. The Debtor maintains two bank accounts at Regions Bank: (1) Account No. xxxxxx8153, which had a balance of $22,256.44 on September 22, 2015; (2) Account No. xxxxxx1487, which had a balance of $221.02 on September 22, 2015. These accounts are referred to by the parties as the "Personal Accounts."
4. In addition, two other accounts are maintained at Regions Bank: (3) Account No. xxxxxx6778, which had a balance of $7,835.53 on September 22, 2015; (4) Account No. xxxxxx2746, which had a balance of $26,566.55 on September 22, 2015. These accounts are referred to by the parties as the "Business Accounts."
5. The account holder for the Business Accounts is identified as "Elite Contracting Management/Robert Erskine."
6. The Debtor asserts that Elite LLC is owned by The Robert Massey Erskine, Sr. Irrevocable Living Trust (the "Trust"). A copy of the Trust agreement dated February 25, 2011 (the "Trust Agreement") was provided by the Trustee as Exhibit 1 to her brief.
7. The Debtor asserts that he was the grantor of the Trust. A copy of the Articles of Organization and Operating Agreement of Elite Contracting Management, LLC dated March 1, 2011, was provided by the Trustee as Exhibit 2 to her brief.
8. The Debtor asserts that the Trust "is listed as the owner of Elite LLC as of February, 2011." Debtor's Objection to Motion to Compel [Dkt.No. 33]. Although the LLC was not formed until after February 2011, the Operating Agreement does identify the initial member as the Trust.
9. The Debtor admits that he is the trustee of the Trust, but asserts that he is
10. Elite LLC was administratively dissolved by the Tennessee Secretary of State on August 9, 2012, and its status was revoked on December 15, 2014. The Trustee has provided a screen shot from the Tennessee Secretary of State website which shows the status of the LLC as "Inactive — Revoked (Revenue)" as of August 9, 2012. Trustee's Brief in Support, Exh. 3 [Dkt. No. 55].
11. The Debtor asserts that the Business Accounts consist of an operating account and a payroll account. He asserts that the operating account is designated for the payments of supplies and services to vendors of Elite LLC. He asserts that the payroll account is designated for payment of payroll taxes which are owed for state and local taxes.
12. The Trustee filed her Motion to Compel Turnover of Property of the Estate on October 30, 2015. A hearing was scheduled for November 19, 2015, but was continued at the request of the Debtor to December 3, 2015. The Debtor filed an objection to the motion on December 2, 2015. The hearing was continued to December 17, 2015.
13. At the hearing on December 17, 2015, the court heard statements of counsel, who asked leave to file briefs concerning legal issues. A briefing schedule was established and later modified. Briefing was completed by the filing of the Trustee's reply brief on March 11, 2016.
Pursuant to the agreement of the parties, the court will treat the motion to compel as a motion for summary judgment for purposes of deciding relevant legal issues. In some instances the court will presume that the facts are as presented by the Debtor in order to determine whether the Business Accounts represent property of the bankruptcy estate. The Debtor has conceded that the Personal Accounts do represent property of the estate. Those will not be dealt with here.
The commencement of a bankruptcy case creates an estate consisting of all legal and equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). Because "[p]roperty interests are created and defined by state law . . . [u]nless some federal interest requires a different result,. . . interests should be analyzed" pursuant to state law. In re Butner, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). In general, restrictions on transfer of an interest in property by the debtor to not prevent that interest from becoming property of the bankruptcy estate. 11 U.S.C. § 541(c)(1). The one exception is "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 541(c)(2). These restrictions prevent such beneficial interests from becoming property of the estate. Property in which the debtor holds only legal title but not an equitable interest becomes property of the estate but only to the extent of the debtor's legal title. 11 U.S.C. § 541(d).
The Debtor argues that the Business Accounts are excluded from his bankruptcy estate because the Trust is a valid
Tenn. Code Ann. §§ 35-16-102(7)(A)-(C); 35-16-102(12)(A)-(C); and 35-16-103(1)-(7).
As an initial matter, the only interest that is excluded from property of the estate by section 541(c)(2) is the beneficial interest of a debtor in a trust. According to the Debtor, he does not hold a beneficial interest in the Trust. The Trust Agreement identifies the Debtor's children as the "sole beneficiaries" of the Trust. This, without more, would take the Trust outside of the section 541(c)(2) exclusion. It is apparent, however, that the Debtor does enjoy a present beneficial interest in the Trust. For example, the Trust Agreement provides: "During my life, I shall have the express and total power to control and direct payments, add or remove trust property, and amend or revoke this trust." Art. 4, § 1. See also: Art. 4, § 1.a.: "Absent directions from me, my Trustee shall distribute the trust income to me at least monthly."; Art. 4, § 1.c.: "I shall have the absolute right to add to the trust property at any time and the absolute right to remove property, or any interest therein, from the trust at any time"; and Art. 4, § 1.d.: "I shall have the absolute right to amend or revoke my trust, in whole or in part, at any time. . . . This right to amend or revoke my trust is personal to me, and may not be exercised by any legal representative or agent acting on my behalf." It does appear that the Debtor holds a beneficial interest in the Trust during his lifetime.
The Trust does not qualify as a TAPT, however. With respect to each of the referenced requirements, the Trust Agreement provides as follows:
Although the Trust Agreement satisfies the requirement that it be governed by Tennessee law, it satisfies none of the remaining requirements for a valid TAPT, at least with respect to the present lifetime trust. As a result, there is no exclusion under the Bankruptcy Code to prevent the present legal and beneficial interests of the Debtor from becoming property of his bankruptcy estate.
The Debtor argues that his right during his lifetime to control and direct payments, and his right to "amend or revoke this trust," do not render the Trust revocable under Tennessee Code Annotated § 35-16-111(1) and (7). Those sections provide:
Tenn.Code Ann. § 35-16-111(1)(7). Neither of the sections pointed to by the Debtor include the right to revoke the trust. The Trustee has pointed to two instances in the Trust Agreement in which the Trustmaker is permitted to amend or revoke the Trust (Trust Agreement, Art. 4, § 1; Trust Agreement, Art. 4, § 1.d.), and two additional instances in which the Trust is described as a "revocable living trust" (Trust Agreement, final page). It is tautological:
The Debtor also points to the Trustee's argument that the Trust should be deemed revocable because it includes the provision: "I shall have the absolute right to add to the trust property at any time and the absolute right to remove property, or any interest therein, from the trust at any time." Trust Agreement, Art. 4, § 1.c. The Debtor says that these actions are allowed by section 35-16-111(3), (5), and (6) of the Tennessee Investment Services Act. Those sections provide:
Tenn. Code Ann. § 35-16-111(3)(5)(6).
The rights granted to the Trustmaker in the Trust Agreement go far beyond the rights granted in the Tennessee Investment Services Act. The Trustmaker's absolute right to remove property, or any interest therein, from the trust at any time, goes beyond the right to receive income and beyond the right to receive principal not in excess of 5%. It also is inconsistent with the requirement that distributions of principal beyond 5% be the result of the action of a qualified trustee. As discussed previously, the Debtor, as Trustmaker/transferor, is not a qualified trustee.
With respect to the required spendthrift provision, the Debtor argues that the Protective Clause of the Trust Agreement (Art. 13, § 2) is enforceable in bankruptcy because "the Debtor does not have any interest under this Trust." Debtor's Objection to Motion to Compel [Dkt. No. 33]. Although it is true that the Debtor is not named a "beneficiary" under the Trust Agreement, it is clear that he enjoys a beneficial interest during his lifetime. For example, as stated previously, he has the absolute right to add or remove property from the trust at any time. Trust Agreement, Art. 4, § 1.c. In addition, during any period of disability, the trustee is directed to "provide [to the Trustmaker] as much of the principal and net income of my trust as is necessary or advisable, in its sole and absolute discretion, for my health, support, maintenance, and general welfare." Trust Agreement, Art. 4, § 3.a. The Debtor, as Trustmaker, has a present interest in the Trust which is described in the Protective Clause as "my interest therein while I am living." Trust Agreement, Art. 13, § 2. That clause excludes the Trustmaker's present interest from its anti-alienation provision. As a result, that interest, which includes the absolute right to remove property from the Trust, is not excluded from the Debtor's bankruptcy estate.
The Debtor concedes that the Trust does not have a qualified trustee, but argues that the right of the transferor to appoint himself as an "investment advisor," who may act as trust "protector" who holds one or more trust powers renders him a qualified trustee. See Tenn. Code Ann. § 35-16-109. The Tennessee Investment Services Act defines an "investment
The Debtor argues that the lack of a qualified affidavit is not fatal to his position. The Debtor's argument is puzzling. He says that the Trust Agreement only requires an initial funding of $10. Because this amount is minimal, he says that the required affidavit could be supplied now. If the Trust holds only $10 and does not hold the membership interest in Elite LLC, then there is nothing to talk about. If the Trust does hold the membership interest, but the qualified affidavit was not supplied prior to the transfer of funds necessary to obtain the membership interest to it, then the transfer of those funds is not a "qualified disposition." Tenn. Code Ann. § 35-16-102(11). If there has been no qualified disposition of the funds to the Trust, then there is no restriction on actions to enforce creditor claims against those funds or the membership interest acquired with them. Tenn. Code Ann. § 35-16-104(a). If there is no restriction or enforcement of creditor claims under nonbankruptcy law, then there is no exclusion of the beneficial interest in the Trust from the bankruptcy estate. See 11 U.S.C. § 541(c)(2).
The second issue raised in the parties' briefs is whether the administrative dissolution of Elite LLC in 2012 affects the outcome of this contested matter. The Trustee asserts that the dissolution of the LLC renders the assets of the LLC assets of the Debtor either because the Business Accounts represent assets of the LLC that existed at the time the LLC was dissolved, and thus devolved to the Debtor or the Trust as the sole member of the LLC, or because the Business Accounts represent assets that came into existence while the Debtor was operating the business as a proprietorship. The Debtor has not responded to this argument.
As a general rule, the assets and liabilities of a limited liability company are separate from the assets and liabilities of its members. When a limited liability company or corporation is administratively dissolved, it is prohibited from carrying on any business other than that necessary to wind up its affairs, and the assets of the company pass to its members. Tenn. Code Ann. § 48-24-202(c). See, T.O.T.S. v. Whirlpool Corp., 2009 Tenn.App. LEXIS 857 (Nov. 17, 2009); KHB Holdings, Inc. v. Duncan, 2003 WL 21488268 at *2 (Tenn.Ct.App. Jun 25, 2003); Jesse A. Bland v. Knox Concrete Products, Inc., 207 Tenn. 206, 338 S.W.2d 605, 607-08 (1960). Any assets belonging to the LLC at its dissolution on August 9, 2012, devolved upon its member, the Trust. As we have seen, the assets of the Trust represent
The Debtor continued to carry on business after the administrative dissolution of the LLC. As the Trustee points out, this conclusion is supported by the Debtor's bankruptcy papers filed in a previous case, number 14-24293. He describes himself as "self-employed," he lists an "office phone" contract and "company cell phone" contract as executory contracts, and he lists gross business income of $476,665 for the twelve months preceding the filing of that petition on May 26, 2014. See Trustee's Brief in Support, Exh. 6, 7, and 8 [Dkt. No. 55]. These exhibits show that the Debtor has operated his business as a proprietorship since at least May 26, 2013. It is more likely than not that funds in the Business Accounts were deposited after that date, and for that reason, represent property of the Debtor and thus, property of the bankruptcy estate.
The Debtor argues that the Business Accounts represent funds earmarked (although he does not use that term) for payment of the business obligations and payroll tax obligations of the company. The Debtor references sections 541(b)(1) of the Bankruptcy Code, which excludes from the estate "any power that the debtor may exercise solely for the benefit of an entity other than the debtor," and 541(b)(7), which excludes any amount withheld from wages of employees as contributions to various employee benefit plans. The difficulty with these arguments is that the Debtor has produced no evidence tending to support the application of those sections. He has made no reference to a "power" that he may exercise solely for the benefit of another or to an employee benefit plan. Those exclusions simply do not apply to the facts of this case.
Because the business was operated by the Debtor as a proprietorship from the administrative dissolution of the LLC in 2012, the Business Accounts are assets of the Debtor's bankruptcy estate, and the creditors of the business have claims against that bankruptcy estate.
As an alternative theory of recovery, the Trustee points to section 548(e) of the Bankruptcy Code, which provides:
11 U.S.C. § 548(e).
The Trustee asserts that the transfer of the membership interest in Elite LLC to the Trust may be avoided pursuant to this section. The Articles of Organization for the LLC are dated March 1, 2011. The name of the organizer is the Trust and the initial member is also identified as the Trust. Trustee's Brief in Support, Exh. 2 [Dkt. No. 55]. The Trust Agreement is dated February 25, 2011. Trustee's Brief in Support, Exh. 1 [Dkt. No.55]. The Debtor indicates that the Trust received a tax
If there was a potentially fraudulent transfer, it could have been the transfer of funds to the Trust by the Debtor to enable the Trust to acquire its interest in the LLC. If there was a transfer of funds by the Debtor after the formation of the Trust on February 25, 2011, it would meet some of the criteria of section 548(c). It would have been a transfer of an interest of the Debtor in property made within 10 years of the filing of the petition that was (A) made to a self-settled trust (for the reasons stated in Section A above); (B) by the Debtor (this is assumed for purposes of this analysis); and (C) the Debtor was a beneficiary of the Trust (for reasons stated in Section A above).
Assuming that the Debtor did transfer funds to the Trust to enable the Trust to make the initial contribution to the LLC, the remaining issue is whether that transfer was made with actual intent to hinder, delay, or defraud a creditor. In support of the argument that the transfer was made with actual intent to hinder, delay or defraud a creditor, the Trustee states that:
In support of these statements, the Trustee offers a copy of a Notice of Tax Lien from the Mississippi Department of Revenue, showing a tax lien enrolled June 16, 2011 (after the formation of the Trust), in the amount of $173,080.06, for taxes related to the tax period ending December 31, 2015. Trustee's Brief in Support, Exh. 4 [Dkt. No. 55]. This tax lien was entered after the creation of the Trust, but it is related to a large debt for unpaid taxes assessed before the creation of the Trust.
The Debtor responds by setting out the following facts taken from an objection to the Mississippi Department of Revenue's claim filed in his previous bankruptcy case:
Debtor's Brief in Opposition [Dkt. No. 67]. The Debtor then states that his prior bankruptcy cases were Chapter 13 cases in which he tried to repay his outstanding obligations, but the "exorbitant" claim of the Mississippi Department of Revenue rendered them not feasible. Id.
The Debtor agrees with the Trustee that he had filed prior bankruptcy cases. The petition which commenced the pending bankruptcy case in Tennessee discloses five prior bankruptcy cases, two of which were filed in Mississippi, one in 2007, and the other in 2008. Petition [Dkt. No. 1]. There is no dispute about those facts. The Debtor's Schedules list no obligation owed to the Mississippi Department of Revenue nor do they list any obligation in the amount of $106,000 resulting from a judgment. They do list a debt owed to Trustmark in the amount of $147,270, but do not provide the date on which that debt was incurred.
It is clear that the Debtor disputes the Mississippi tax obligation. He asserts that he did not become aware of the obligation until sometime after the Trust was created. This raises an issue of fact concerning whether or not the Debtor had the requisite intent to hinder, delay, or defraud a creditor when he created the Trust and made transfers to the Trust. The Debtor
The Trustee is correct that fraudulent intent may be inferred from circumstances. In re Triple S Restaurants, Inc., 422 F.3d 405, 416 (6th Cir.2005); Roland v. United States, 838 F.2d 1400, 1402-03 (5th Cir.1988) ("Since direct proof of fraud often is not available, courts may rely on circumstantial evidence to establish fraudulent intent."). The Tennessee Investment Services Act incorporates the negation of some of these badges of fraud into the Qualified Affidavit required before a transfer is made. Among those that are particularly relevant here are the obligation to affirm that the transfer of assets will not render the transferor insolvent; to affirm that there are no pending or threatened court actions taken against the transferor; and to affirm that the transferor does not contemplate filing for relief under the federal bankruptcy code. Tenn. Code Ann. § 35-16-103. The Debtor admits that a Qualifying Affidavit was not signed prior to the transfer of property to the Trust. Based upon his own admissions arising as the result of his prior bankruptcy filings, it does not appear that he could have given truthful responses in a Qualified Affidavit prior to the creation of the Trust.
All of these issues, however, are factual matters that are best left to a full evidentiary hearing, if necessary. Actual support for the various statements of the parties in the form of affidavits or deposition testimony is incomplete. Because of the court's conclusions with respect to the first two issues raised by the parties, it does not appear that a determination of actual fraudulent intent will ever become necessary. The court declines to make a final determination as to the Debtor's fraudulent intent until it becomes necessary, if ever, and then, only after an evidentiary hearing.
For the foregoing reasons, the court concludes that the Business Accounts are property of the bankruptcy estate of Robert Erskine. The Trustee's Motion to Compel Debtor to Turnover Property of the Estate is
