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Lunkes v. Gecker

March 29, 2010

WILLIAM J. LUNKES AND JAMES A. LUNKES, PLAINTIFFS-APPELLANTS,
v.
FRANCES GECKER, NOT INDIVIDUALLY BUT AS THE CHAPTER 7 TRUSTEE OF THE BANKRUPTCY ESTATES OF WILLIAM J. LUNKES AND JAMES A. LUNKES, DEFENDANT-APPELLEE.



The opinion of the court was delivered by: Judge Virginia M. Kendall

MEMORANDUM OPINION AND ORDER

William J. Lunkes and James A. Lunkes, (collectively the "Debtors") appeal decisions by the Bankruptcy Court for the Northern District of Illinois (the "bankruptcy court") sustaining objections by Chapter 7 Trustee Frances Gecker ("Gecker") to an exemption claimed by each of the Debtors. The Debtors' appeals have been consolidated before this Court. The Debtors challenge the bankruptcy court's findings that the John W. Lunkes Trust (the "Trust") is not a spendthrift trust, and that their interests in the Trust are therefore not exempt from their respective bankruptcy estates. For the reasons discussed below, the Court affirms the decision of the bankruptcy court.

STATEMENT OF FACTS AND PROCEDURAL HISTORY

The Court adopts the relevant facts as set forth by the bankruptcy court. See Fed. R. Bankr. P. 8013 ("Findings of fact, whether based on oral or documentary evidence, shall not be set aside unless clearly erroneous....").

On March 1, 2002, the Debtors' father, John W. Lunkes ("John"), established the Trust. The Trust's assets included two pieces of commercial real property located at 2435-2457 West Irving Park Road, Chicago, Illinois and 2452-2458 West Irving Park Road, Chicago, Illinois (collectively the "Commercial Properties") and a residential property at 510 North Saint Mary's Road, Libertyville, Illinois (the "Residence"), as well as certain other personal property. John was the settlor, trustee, and beneficiary of the Trust.

John initially established the Trust for the purpose of providing regular income payments to himself during his lifetime. According to the terms of the Trust, if John became unable to manage his affairs, a successor trustee could use the Trust's principal for the support and care of John and Marguerite Reichert ("Reichert"). Upon John's death, the successor trustee was to pay all of John's outstanding debts, distribute the principal of the Trust equally among his five children, establish a new trust to provide for Reichert's support and allow her to live at the Residence rent-free, negotiate a sale of the Commercial Properties to certain designated persons, create another separate trust for minor children if necessary, and require the beneficiaries to pay proportionate shares of the federal estate tax.

John died on July 6, 2003, at which time his daughter Patricia Lunkes ("Patricia") became the successor trustee of the Trust. John was survived by all five of his children: the Debtors, Patricia, Donna Bober, and Michael Lunkes ("Michael") (collectively "the Beneficiaries"). According to the terms of the Trust, after paying John's debts and creating new trusts (if necessary) for Reichert and any minor children, Patricia should have distributed the remaining principal of the Trust to the Beneficiaries. However, before the distribution occurred, a dispute arose among the children regarding the sale of the Commercial Properties. The Trust had given John's three sons an option to purchase the properties for 50% of their appraised value, but required that payment be made within nine months after providing notice of intent to purchase. Michael provided such notice, but did not make payment with nine months. Thereafter, Michael filed a lawsuit in the Circuit Court of Cook County, Illinois against Patricia and the other beneficiaries. The suit concerns whether Patricia failed to make a distribution as required by the Trust, and whether she breached her fiduciary duty to the beneficiaries in her capacity as successor trustee. As of the time of the bankruptcy court's decision, the properties had not been sold and no distributions of Trust principal had taken place.

On January 9, 2009, the Debtors filed voluntary chapter 7 bankruptcy petitions. In their bankruptcy filings, each Debtor listed his inheritance in the Trust, but claimed an exemption under 11 U.S.C. § 541(c)(2), claiming that the inheritance constituted a spendthrift trust. Gecker, the chapter 7 Trustee, challenged the Debtors' claimed exemptions on the grounds that the inheritances are not spendthrift trusts and are not entitled to exemptions under the U.S. Bankruptcy Code.*fn1

The bankruptcy court agreed with Gecker, finding that the Trust does not constitute a spendthrift trust under Illinois law. The Court held that the Trust is not a spendthrift trust because the Debtors had an immediate right to a distribution under the Trust upon their father's death, notwithstanding the fact that the Debtors had not yet received any distribution from the Trust. As a result, the bankruptcy court concluded that the Debtors' interests in the Trust were not exempted from their bankruptcy estates. The Debtors filed a Motion for Leave to Appeal [the] Order Denying Exemption, arguing for the first time that there are two classifications of assets within the Trust-personal property and the Commercial Properties-each governed by different sections of the Trust and only one of which is a spendthrift trust. The Debtors asserted that although they did have a right to immediate distribution of certain assets from the Trust following John's death, the Commercial Properties were not among those assets, as they were governed by different sections of the Trust and not subject to compelled distribution. The Debtors make that same argument on appeal.

STANDARD OF REVIEW

This Court has jurisdiction to review final bankruptcy court decisions. 28 U.S.C. § 158(a)(1); Fed. R. Bankr. P. 8001 and 8002. Orders granting or denying exemptions are appealable as final judgments under 28 U.S.C. § 159(d). See Matter of Yonikus, 996 F.2d 866, 868 (7th Cir. 1993). On appeal, a district court reviews a bankruptcy court's factual findings for clear error and its legal conclusions de novo. See id.; In re McCoy, 02 C 3258, 2002 WL 1611588, at *2 (N.D. Ill. July 22, 2002) (Holderman, J.). Whether a debtor is entitled to a bankruptcy exclusion or exemption is a question of law. Matter of Yonikus, 996 F.2d at 868.

DISCUSSION

When a debtor files for bankruptcy, nearly all of his or her property becomes the property of the bankruptcy estate. See 11 U.S.C. § 541(a) (stating that the debtor's estate includes all of the debtor's legal and equitable interests in property); Matter of Yonikus, 996 F.2d at 869. Courts have defined the term "property" broadly, and it includes "contingent interests in future income." Matter of Yonikus, 996 F.2d at 869. Thus, even if the debtor has not yet received the benefit of the "property," it can be part of the debtor's bankruptcy estate. Id.; In re Smith, 189 B.R. 8, 10 (Bankr. N.D. Ill. 1995) (citing Segal v. Rochelle, 382 U.S. 375, 379 (1966)). Nevertheless, the bankruptcy code does allow debtors to keep some property out of the bankruptcy estate. For example, section 541(c)(2) of the bankruptcy code excludes from the bankruptcy estate property that is part of a valid spendthrift trust. 11 U.S.C. § 541(c)(2). Whether a trust is a valid spendthrift trust is a question resolved by "applicable non-bankruptcy law." Id.; see also In re McCoy, 274 B.R. 751, 761-62 (Bankr. N.D. Ill. 2002), aff'd In re McCoy, 2002 WL 1611588.

The parties agree that Illinois law governs whether the Trust at issue here is a spendthrift trust. The purpose of a spendthrift trust is to provide money for the care and maintenance of another person while protecting the trust from the beneficiary's incapacity or financial imprudence. See Morter v. Farm Credit Servs., 937 F.2d 354, 356 (7th Cir. 1991); In re Balay, 113 B.R. 429, 437 (Bankr. N.D. Ill. 1990). A spendthrift trust often includes an anti-alienation clause, purporting to restrict the voluntary or involuntary transfer of funds from the trust. See In re Balay, 113 B.R. at 437. The inclusion of such a provision does not necessarily mean that the trust is a spendthrift trust; rather, to be a valid spendthrift trust under Illinois law, the beneficiary cannot have a right to or control of any immediate distribution from the trust. See id. Illinois courts ask the following questions when determining whether a valid spendthrift trust exists: (1) does the trust restrict "the beneficiary's ability to alienate and the beneficiary's creditors' ability to attach the trust corpus[?]"; (2) was the trust self-settled-that is, did the beneficiary create the trust-and did he ...


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