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In re Glen

decided: August 27, 1980.


Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79 C 2052 -- Frank J. McGarr, Judge .

Before Pell and Sprecher, Circuit Judges, and Markey, Chief Judge.*fn*

Author: Pell

On September 23, 1977, Gladstone Glen, a partnership, commenced this action seeking relief under Chapter XII of the Bankruptcy Act of 1898.*fn1 The partnership alleges that its sole asset is an apartment complex in Wheeling, Illinois, and that it is unable to pay its debts as they mature. Among the creditors that Gladstone Glen is unable to pay are Alden Apartments and Wheeling Apartments, partnerships of which the appellant, Michael Sparks, is the general partner. During the pendency of proceedings on Gladstone Glen's petition before the bankruptcy court, the appellant filed a motion to dismiss. The appellant argued, and the bankruptcy court agreed, that because Gladstone Glen held its interest in the subject real estate in the form of a beneficial interest in an Illinois land trust, the petitioner was not a "debtor" and thus was unable to initiate arrangement proceedings under Chapter XII. Gladstone Glen appealed the bankruptcy court's action to the district court which reversed. The appellant, in turn, appeals to this court requesting that we reverse the judgment of the district court and reinstate the order of the bankruptcy court dismissing the action.

The principal issue before us is whether the beneficiary of an Illinois land trust is a "debtor" as that word is defined in section 406(6) of the Bankruptcy Act.*fn2 The question has yielded different answers from the district court and bankruptcy court judges in the Northern District of Illinois who have confronted it. Compare In re Romano, 426 F. Supp. 1123 (N.D.Ill.1977), appeal disposed of as moot, Nos. 77-1385 & 77-1386 (7th Cir. unpublished order dated Jan. 2, 1980) (beneficial owner is not a "debtor") with In re Gordon, 2 Bankr.Ct.Dec. 1269 (N.D.Ill.1976) (beneficial owner is a "debtor"). See also Comment, May the Beneficiary of an Illinois Land Trust Proceed Under Chapter XII of the Bankruptcy Act?, 10 J. Mar. J. Prac. & Proc. 567 (1977) (discussing the decisions cited above as well as unpublished decisions of the bankruptcy judges in the district).*fn3 Section 406(6) of the Bankruptcy Act provides in pertinent part that " "debtor' shall mean a person, other than a corporation as defined in this Act, . . . who is the legal or equitable owner of real property or a chattel real which is security for any debt." 11 U.S.C. § 806(6). Under Illinois law, the beneficiary of an Illinois land trust is considered to possess neither legal nor equitable title to the realty itself. Instead, the beneficiary is regarded as owning only a personal property interest in the proceeds of the realty. The issue thus presented is whether a person, who under state law, is considered to have neither legal nor equitable title to real property may, for purposes of federal law, be regarded as the realty's "legal or equitable owner."

Both parties agree that the issue is ultimately one of federal law.

Federal, not state, law determines whether a debtor may invoke the jurisdiction of the bankruptcy court. See, e.g. Segal v. Rochelle, 382 U.S. 375, 379-81, 86 S. Ct. 511 (514-515,) 15 L. Ed. 2d 428 (1966); Board of Trade of City of Chicago v. Johnson, 264 U.S. 1, 10, 44 S. Ct. 232 (234), 68 L. Ed. 533 (1924); In re Romano, 426 F. Supp. 1123 (N.D.Ill.1977). On the other hand, state property law may be relevant to determining whether a particular interest qualifies a debtor as the "legal or equitable owner" of real property within the meaning of 11 U.S.C. § 806(6). As one court has stated, state law "supplies the factual matter concerning the nature of (the debtor's) interests; it delineates . . . what rights and obligations an owner of such an interest has." In re Romano, supra, 426 F. Supp. at 1127.

In re Bergman, 585 F.2d 1171, 1176 (2d Cir. 1978); see DiFoggio v. United States, 484 F. Supp. 233 (N.D.Ill.1979) (beneficiary of an Illinois land trust is pursuant to 26 U.S.C. § 6337(b) entitled to redeem realty sold to satisfy federal tax liabilities). With that in mind, we examine the characteristics of the Illinois land trust under Illinois law.*fn4

We need not undertake to write a treatise on Illinois land trusts here. The subject has been ably explored by numerous commentators and recently and thoroughly reviewed by the Illinois Supreme Court. See People v. Chicago Title & Trust Co., 75 Ill.2d 479, 27 Ill.Dec. 476, 389 N.E.2d 540 (1979) (and authorities cited therein). A land trust is typically

created by execution of a deed in trust transferring all legal and equitable title to a trustee. The deed specifically provides that one dealing with the trustee need not inquire about the trust agreement and stipulates that the interest of the beneficiary is personal property. The deed (is) recorded. A second document, the trust agreement, (is) simultaneously executed, though not recorded. That agreement recites that all legal and equitable title remains with the trustee with an assignable personal property interest in the beneficiary. The beneficiary retains absolute control of the management and receives all the proceeds of the property. Under the agreement, all money advanced by the trustee must be paid by the beneficiary, and the trustee is not required to pay any taxes or assessments. The beneficiary may order the land sold at any time, and the trustee may not act except on written authorization of the beneficiary.

Id. at 485-86, 27 Ill.Dec. at 478, 389 N.E.2d at 542. The land trust at issue here appears to differ in no material respect from the norm.

The Illinois land trust primarily serves "as a useful vehicle in real estate transactions for maintaining secrecy of ownership and allowing ease of transfer." Id. at 487, 27 Ill.Dec. at 479, 389 N.E.2d at 543. Notwithstanding the recitations in the trust instruments concerning title,

it is apparent that true ownership lies with the beneficiaries though title lies with the trustee. The trustee derives all of his power from the beneficiary and acts solely on the beneficiary's behalf. The beneficiary may withdraw or modify the trustee's authority at any time. (Cf. Board of Trustees v. Board of Supervisors (1875), 76 Ill. 184, 186-87.) Indeed, there is not a single attribute of ownership, except title, which does not rest in the beneficiary. The rights of creation, modification, management, income and termination all belong to the beneficiary. (Cf. Wendt v. Myers (1974), 59 Ill.2d 246, 253 (319 N.E.2d 777).) In reality the transfer to the trustee is a formality involving a shifting of legal documents. The land trust is, in fact, a fiction which has become entrenched in the law of this State and accepted as a useful instrument in the handling of real estate transactions. Outside of relationships based on legal title, the trustees' title has little significance.

Id. at 492-93, 27 Ill.Dec. at 481, 389 N.E.2d at 545 (emphasis in the original).

With this data as our factual background, we examine the question of federal law: Whether the beneficiary of an Illinois land trust is "the legal or equitable owner of real property" within the meaning of Chapter XII. It is plain that Gladstone Glen is not the legal owner of the real property here. We understand "legal owner" to mean the owner of record, see In re Spicewood Associates, 445 F. Supp. 564, 569 (N.D.Ill.1977), and the federal courts will look to and follow state law in determining whether the debtor is the legal owner. See, e.g. Owners of "SW 8" Real Estate v. McQuaid, 513 F.2d 558 (9th Cir. 1975). Here the legal title and legal ownership of the real property are vested in the trustee of the land trust, not the beneficiary. Section 406(6), however, also ...

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