The following is a case update written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.), analyzing a recent decision of interest:
The Bankruptcy Appellate Panel for the Ninth Circuit (BAP) reversed a bankruptcy court decision that had ruled a debtor’s disclaimer of his interest in a trust was invalid because he had accepted the interest before he waived it, resulting in a claim for a fraudulent transfer by the trustee. The BAP interpreted the key documents de novo and found they did not manifest acceptance and therefore there was no transfer. Patow v Marshack (In re Patow), 2021 WL 4026293 (9th Cir BAP, Sept. 3, 2021).
To view the opinion, click here.
In 2006, debtor James Patow’s parents, Alvin and Linda, established the Patow Trust, which ultimately left their property to their children, James and Jennifer. The Patow Trust was revocable during the parents’ lives and provided that upon the death of either spouse the trust estate would be split between two trusts, the Survivor’s Trust and the Bypass Trust. The Survivor’s Trust remained revocable during the surviving spouse’s lifetime, but the Bypass Trust would become irrevocable. The Bypass Trust had spendthrift provisions. Upon the death of the second spouse, the remaining assets of the Bypass Trust would be distributed to the beneficiaries, James and Jennifer.
Alvin died in 2007 and the property was split between the two trusts. Linda remained the trustee of both trusts. Her accountant eventually advised her to transfer the Bypass Trust property to herself, then to the Survivor’s Trust. Although he did not believe consent was needed because as trustee Linda had the power to so act, nevertheless he prepared an agreement which had an “Exercise of Discretion” and a “Consent to Exercise of Discretion” (“Consent EOD”), the second of which James and Jennifer signed. Their signatures on the Consent EOD waived any rights they had under the terms of the Patow Trust. Linda transferred the assets from the Bypass Trust to herself in June 2014.
James filed a chapter 7 petition in March 2018. The trustee filed a complaint against James and Linda, alleging that James transferred his interest in the Bypass trust to her, which constituted both a constructive and an actually fraudulent transfer under both section 548 of the Bankruptcy Code and California law. The trustee filed a summary judgment motion, asserting on undisputed facts that James had transferred a vested interest in the Bypass Trust to Linda for no consideration and that his disclaimer of interest was invalid under California law because he had already accepted the transfer. The bankruptcy court agreed with the trustee and granted the motion in part, concluding that the disclaimer was invalid and that James had transferred his interest to Linda for no consideration, resulting in a fraudulent transfer under California law; the section 548 claim was barred by the statute of limitations.
Linda unsuccessfully moved for reconsideration, then received a Rule 54(b) certification of finality which allowed an immediate appeal to the BAP, which reversed.
Although whether a beneficiary has accepted his beneficial interest through conduct is fact-intensive and usually centers on that conduct, the BAP determined that in this case the only alleged conduct to support acceptance was a written document, so it applied de novo review. The document in question was the Consent EOD, which the bankruptcy court held demonstrated James’ “implicit acceptance” because it provided Linda with the ability to invade the principal of the Bypass Trust. The BAP struck down this interpretation by looking at California law for the definitions of disclaimer and acceptance and for the scope of Linda’s authority.
Under Cal. Prob. Code section 265 a disclaimer is “any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary.” To be effective, it must (1) be in writing; (2) be signed by the disclaimant; (3) identify the creator of the interest; (4) describe the interest disclaimed; and (5) state the disclaimer and its extent. Cal. Prob. Code section 278. However, a disclaimant cannot waive an interest he has accepted. So the BAP then considered the definition of acceptance, looking both to Black’s Law Dictionary and the Probate Code. Acceptance is simply the act of a person to whom a thing is offered to receive it with the intention of retaining it. Probate Code section 285(b) specifies some acts which manifest express acceptance but also calls for a broad interpretation, both explicit and implicit.
With those concepts in hand, the BAP looked at what the Consent EOD said and what James did when he signed it. Nothing in that process implied he intended to receive and retain the interest. Instead, he unilaterally consented to Linda receiving all the assets of the Bypass Trust as her own. Her power to do so was accorded to her as trustee under California law. All the elements of disclaimer cited above had been satisfied, making this waiver valid. Based on the disclaimer, there was no transfer and therefore no fraudulent transfer. The BAP reversed and remanded for appropriate action by the bankruptcy court.
Judge Lafferty enthusiastically concurred and wrote separately to explain that the bankruptcy court had conflated acknowledgement of the interest, as set forth in the Consent EOD, with acceptance. Since James had never received any benefit from acknowledging the interest, he had not accepted it, making his disclaimer valid.
Trustees are hungry and will go after any questionable prepetition actions by a debtor which might be construed to be a fraudulent transfer. Here, the trustee persuaded the bankruptcy court that James had accepted the interest by acknowledging it at the same time he waived it. I think the concurrence appropriately called out the lower court’s error. The BAP’s walk through the Probate Code and common definitions made this disclaimer valid. Without a transfer, nothing fraudulent could have occurred. Moreover, in California a disclaimer of a beneficial interest in a trust, without more, cannot be a fraudulent transfer as a matter of law.
This submission was written by the Hon. Meredith Jury (U.S. Bankruptcy Judge, CD CA, ret.) a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.