John Carroll v. Joji Takada ( 2017 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 14-3576
JOHN CARROLL and
CATHERINE M. CARROLL,
Debtors-Appellants.
v.
JOJI TAKADA,
Chapter 7 Bankruptcy Trustee,
Trustee-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 13-CV-05995 — Edmond E. Chang, Judge.
____________________
ARGUED JANUARY 17, 2017 — DECIDED JULY 18, 2017
____________________
Before EASTERBROOK, WILLIAMS, and SYKES, Circuit Judges.
SYKES, Circuit Judge. In their Chapter 7 bankruptcy peti-
tion, John and Catherine Carroll claimed a $30,000 exemp-
tion for Catherine’s interest in a trust settled by her since-
deceased parents. The bankruptcy trustee objected, and the
bankruptcy court sustained the objection and struck the
exemption. The district court affirmed and so do we.
Catherine’s trust interest fully vested before the Carrolls filed
2 No. 14-3576
for bankruptcy, so the property belongs to the bankruptcy
estate.
I. Background
In 1993 Catherine Carroll’s parents, Henry and Mary
Anna Miskowicz, settled an inter vivos trust with real estate
as the trust property. Several trust provisions are relevant to
this appeal. First, the trust document included a standard
spendthrift provision meant to shield the trust’s future
benefits from the reach of beneficiaries and their creditors.
Second, the document contained a distribution provision
directing the trustee to evenly divide all remaining principal
among the Miskowiczes’ three children at the time of the
surviving spouse’s death. Any share belonging to a child
who did not survive the surviving spouse by 60 days would
go to the child’s successors. Finally, the trustee was given
discretion to delay the distribution for six months.
Henry survived Mary Anna and then died in July 2012.
Catherine and her husband, John, filed for Chapter 7 bank-
ruptcy seven months later in February 2013. They claimed
$30,000 for “Wife’s Father’s Estate” (in reference to
Catherine’s interest in one-third of the trust proceeds) as
property exempt from liquidation under 11 U.S.C. § 522.
Michael Berland, then the trustee of the Carrolls’ bankruptcy
estate, objected to the exemption on the ground that Henry’s
death gave Catherine an immediate and unconditional right
to receive her interest in the trust property. 1 That right, he
argued, removed the interest from the purview of the trust’s
spendthrift provision. The bankruptcy court agreed. On
appeal the Carrolls insist that the spendthrift provision
shields the interest from the bankruptcy estate.
1 Berland has since retired and was replaced by Joji Takada.
No. 14-3576 3
II. Discussion
Whether a bankruptcy petitioner is entitled to keep cer-
tain property from creditors is a legal question that we
review de novo. Fowler v. Shadel, 400 F.3d 1016, 1017 (7th Cir.
2005). The Bankruptcy Code allows debtors to retain certain
property through bankruptcy. A future interest in a trust, for
example, is excluded from the bankruptcy estate when
“applicable nonbankruptcy law” restricts its transfer. In re
Baker, 114 F.3d 636, 638 (7th Cir. 1997) (quoting 11 U.S.C.
§ 541(c)(2)).
The relevant nonbankruptcy law in this case is an Illinois
statute that prevents creditors from reaching property held
in a valid spendthrift trust. See 735 ILL. COMP. STAT. 5/2-1403
(1999). Since a debtor-beneficiary has no control over
spendthrift-trust property, the logic goes, creditors shouldn’t
be able to access the property either. But the statute no
longer applies when the trust property is distributed to the
debtor-beneficiary. See In re Sharp, 860 N.E.2d 539, 549 (Ill.
App. Ct. 2006). Once the property is alienable, the spend-
thrift clause ceases to exclude the property from the bank-
ruptcy estate.
Here the unambiguous terms of the trust document gave
Catherine a vested right to one-third of the trust residuum
60 days after her father’s death. The document directed that
“[a]t the surviving spouse’s death, the trustee shall distribute
the remaining Trust Estate” to the Miskowicz children (or
their successors) in one-third shares. That language leaves
no room for discretion. The Carrolls point out that the
document allowed deferral of the distribution for six
months. But the same provision also clarified that “[w]hen
the trustee so defers, … all beneficiary rights in those trust
assets shall accrue and vest” as of “the time prescribed in the
4 No. 14-3576
absence of this paragraph.” Once Henry died, vesting was
delayed only by the uncertainty of whether Catherine would
survive him by 60 days. Catherine’s interest fully vested
when that 60-day mark was reached in September 2012,
several months before the Carrolls filed for bankruptcy.
Some confusion arises from the fact that the Carrolls ini-
tially listed the trust interest as a § 522 exemption. Sec-
tion 522 of the Bankruptcy Code facilitates the debtor’s fresh
start by allowing the debtor to “exempt” from liquidation
certain essentials (like a home or car) that have been surren-
dered to the bankruptcy estate. See Rousey v. Jacoway,
544 U.S. 320, 325 (2005). Section 541(c)(2), on the other hand,
concerns property (like a spendthrift-trust interest) that
doesn’t belong to the debtor at the time the bankruptcy
petition is filed. Such property is excluded from the bank-
ruptcy estate altogether. See Owen v. Owen, 500 U.S. 305, 308
(1991) (“No property can be exempted … unless it first falls
within the bankruptcy estate.”).
The Carrolls contend that because the relevant statutory
provision is § 541(c)(2), not § 522, it was procedurally im-
proper for the bankruptcy court to decide the issue by
sustaining the trustee’s objection. They suggest that a court
may consider a § 541(c)(2) exclusion claim only pursuant to a
separate adversary proceeding. But the trustee’s objection
and the bankruptcy court’s ruling simply responded to the
Carrolls’ own § 522 exemption claim. Catherine’s trust
interest is neither exempt nor excluded from the bankruptcy
estate, so the trustee’s objection was properly sustained.
AFFIRMED.