John Carroll and Catherine M. Carroll, Debtors-Appellants.
Joji Takada, Chapter 7 Bankruptcy Trustee, Trustee-Appellee.
January 17, 2017
from the United States District Court for the Northern
District of Illinois, Eastern Division. No. 13-CV-05995 -
Edmond E. Chang, Judge.
Easterbrook, Williams, and Sykes, Circuit Judges.
their Chapter 7 bankruptcy petition, John and Catherine
Carroll claimed a $30, 000 exemption 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 for
bankruptcy, so the property belongs to the bankruptcy estate.
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.
survived Mary Anna and then died in July 2012. Catherine and
her husband, John, filed for Chapter 7 bankruptcy 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. 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.
a bankruptcy petitioner is entitled to keep certain 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)).
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 spendthrift clause ceases to
exclude the property from the bankruptcy estate.
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 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.
confusion arises from the fact that the Carrolls initially
listed the trust interest as a § 522 exemption. Section
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 surrendered to the bankruptcy estate. See Rousey v.
]acoway, 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 bankruptcy estate altogether. See Owen v.
Owen, 500 U.S. 305, 308 (1991) ("No property can be
exempted ... unless it first falls within the
Carrolls contend that because the relevant statutory
provision is § 541(c)(2), not § 522, it was
procedurally improper 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. ...