Patow v. Marshack (In re Patow)

632 B.R. 195

IN RE: James Christopher PATOW, Debtor.

Linda Patow; Linda Patow, as Trustee of the Alvin and Linda Patow 2006 Trust, Appellant,

v.Richard A. Marshack, Trustee; James Christopher Patow, Appellees.

BAP No. CC-20-1285-GTL

Bk. No. 8:18-bk-10971-ES

Adv. No. 8:19-ap-01061-ES

United States Bankruptcy Appellate Panel of the Ninth Circuit.

SEPTEMBER 3, 2021

J. Edward Switzer, Jr. argued for appellant; David Edward Hays of Marshack Hays LLP argued for appellee Richard A. Marshack, Trustee.

Before: GAN, TAYLOR, and LAFFERTY, Bankruptcy Judges.

Opinion by Judge Gan

GAN, Bankruptcy Judge:

INTRODUCTION

This appeal requires us to determine whether documents executed by a trust beneficiary, which purport to waive his interest under the trust, constitute a voidable transfer under state law or a valid disclaimer.

Chapter 7¹ debtor James Patow ("James")² was a beneficiary of a trust created by his parents Alvin and Linda Patow. Nearly four years prior to filing his bankruptcy petition, James executed two documents stating that he waived his interest under the trust and that he gave consent for Linda, the sole trustee, to disburse the trust assets to herself.

Chapter 7 trustee Richard Marshack ("Trustee") filed an adversary complaint alleging that the documents constituted a voidable fraudulent transfer. The bankruptcy court agreed and granted Trustee's motion for summary judgment after determining that James accepted his interest and therefore could not validly disclaim it under state law.

The material facts are not in dispute, and resolution of this appeal turns on the purely legal question of whether the documents constitute a voidable transfer under the California Uniform Fraudulent Transfers Act ("UFTA"), Cal. Civ. Code §§ 3439 - 3449.³

We hold that the documents do not evidence an acceptance. They constitute a valid disclaimer which is not a voidable transfer under the UFTA as a matter of law. We REVERSE and REMAND with instruction to enter judgment in favor of Linda, and we publish to emphasize the type of conduct required to constitute an implied acceptance of a beneficial interest.

FACTS

A. The Patow Trust

In 2006, James's parents established the Alvin Patow and Linda Patow 2006 Trust (the "Patow Trust"), for the purpose of leaving their property to their children, James and Jennifer, while minimizing probate and estate tax costs. Later, Alvin and Linda amended the Patow Trust to provide for 100% of the trust estate to pass to Linda's sister Patricia Meredith if neither James nor Jennifer survived them.

The Patow Trust was revocable during the lives of the settlors and provided that upon the death of either spouse the trust estate would be split between two trusts designated as the Survivor's Trust and the Bypass Trust. The Survivor's Trust would remain revocable during the lifetime of the surviving spouse, while the Bypass Trust would become irrevocable.

Alvin died in 2007 and Linda became the sole trustee of the Patow Trust. In accordance with its terms, she transferred Alvin's share of the marital estate, up to the maximum estate tax exemption amount, into the Bypass Trust. The transfer consisted of a 5-unit apartment building and a 51% interest in a 4-unit apartment building located in Los Alamitos, California.

Article 7 of the Patow Trust requires the trustee to distribute all income of the Bypass Trust to the surviving spouse at least annually, and states that the "[t]rustees may distribute to the Surviving Spouse all or any portion of the principal of the Bypass Trust for the Surviving Spouse's reasonable health, education, maintenance, and support in his or her accustomed manner of living." The Patow Trust provides that upon the death of the surviving spouse, the remaining assets of the Bypass Trust are to be distributed to the beneficiaries, James and Jennifer.

The Patow Trust also contains spendthrift provisions applicable to the Bypass Trust. Section 20.1 provides, "[a] beneficiary's interest in the trust income or principal shall not be subject to his or her voluntary transfer. Specifically, a beneficiary ... may not sell, transfer, assign, alienate, encumber, hypothecate, or otherwise dispose of his or her interest in trust income or principal." Section 20.2 includes a spendthrift provision prohibiting involuntary transfers:

[A] beneficiary's interest shall not be subject to the beneficiary's liabilities, contracts, debts, or other obligations; to the claims of the beneficiary's creditors or assignees or others; to the enforcement of a money judgment against the beneficiary; or to assignment, attachment, anticipation, levy, execution, garnishment, pledge, claims arising from bankruptcy proceedings, or any other form of legal or equitable levy or lien or legal process or proceedings.

The spendthrift provisions do not prohibit a beneficiary from disclaiming or renouncing any interest in the Bypass Trust. Section 8.1 authorizes disclaimers and states that "any person granted any right, title, interest, benefit, privilege, or power" under the Patow Trust "may at any time renounce, release, or disclaim all or any part of that right, title, interest, benefit, privilege, or power, including his or her right, title, and interest in and to trust income or principal."

B. The Agreement And Consent To Exercise Discretion

In 2014, Linda's tax advisor and estate attorney advised her that the Bypass Trust was no longer necessary to reduce taxes on her estate. Linda's attorney advised her to use her discretion under the Patow Trust to transfer the Bypass Trust property to herself, then to the Survivor's Trust. Although he believed that consent was not required, Linda's attorney recommended that she inform the beneficiaries of her decision to prevent confusion, disagreements, or litigation.

The attorney prepared a document titled "Agreement" which included as exhibits an "Exercise of Discretion" and a "Consent to Exercise of Discretion" ("Consent EOD"). The Agreement provides that Linda would execute the Exercise of Discretion, which states that she would transfer the principal of the Bypass Trust to herself pursuant to her discretion under the Patow Trust. The Agreement also provides that James and Jennifer would execute the Consent EOD, and that by doing so, they would waive any and all rights they may have under the terms of the Patow Trust. The Consent EOD signed by James states:

I, James Christopher Patow, as a beneficiary of the Alvin and Linda Patow 2006 Trust – Bypass Trust, established June 23, 2006, do hereby consent to the Exercise of Discretion by the Trustee of said Trust, to invade the principal of said Trust and return it all to Linda E. Patow.

James and Jennifer acknowledged that they did not receive any consideration for signing the Agreement or Consent EOD and that they were not promised anything from Linda's trusts in the future. James and Linda each signed the Agreement—and James signed the Consent EOD—on May 22, 2014.⁴ Pursuant to the Exercise of Discretion, Linda transferred the assets from the Bypass Trust to herself in June 2014.

At the time James executed the documents, default judgment had been entered against him and in favor of Asset Acceptance, LLC in the amount of $16,583.68. In September 2015, Interinsurance Exchange of Automobile Club ("Auto Club") filed suit against James based on an automobile accident which occurred in 2012. Auto Club obtained default judgment against James in May 2017. Both judgments remained unsatisfied at the time of James's bankruptcy petition.

C. The Adversary Complaint And Motion For Summary Judgment

James filed a chapter 7 petition on March 21, 2018. In May 2019, Trustee filed his first amended complaint against James and Linda. He alleged that James transferred his interests in the Bypass Trust to Linda, which constituted a fraudulent transfer made with actual intent under § 548(a)(1)(A) and a constructive fraudulent transfer under § 548(a)(1)(B). He also alleged that James transferred his interests in violation of the UFTA, California Civil Code §§ 3439.04(a)(1)-(2) and 3439.05. James and Linda denied that the Agreement and Consent EOD constituted a transfer, and Linda asserted an affirmative defense that the documents were a disclaimer which cannot be a voidable transfer under state law.

In August 2020, Trustee filed a motion for summary judgment, or alternatively for summary adjudication, on his fraudulent transfer claims and on Linda's affirmative defenses. Trustee argued that James had a vested interest in the Bypass Trust which he transferred to Linda for no consideration. Trustee asserted that Linda admitted that she did not use the Bypass Trust principal to pay expenses related to her health, education, maintenance, or support, and therefore she lacked authority to invade the principal without James's consent. Regarding Linda's affirmative defense, Trustee argued that James did not validly disclaim because he exercised control over his interest by directing that it would go to Linda instead of other beneficiaries. Trustee argued that entering into the Agreement qualified as an acceptance and prevented James from disclaiming his interest under California Probate Code § 285.

Linda opposed the motion and argued that the Agreement did not constitute a transfer of an interest in property. She maintained that James's consent was unnecessary for her to use her discretion as trustee to invade the principal of the Bypass Trust, and the Agreement merely operated as a disclaimer of his interest. Linda argued that Trustee's claims under § 548 were barred by the statute of limitations, and under state law a disclaimer does not constitute a voidable transfer. James did not file an opposition.

After a hearing, the bankruptcy court granted Trustee's motion in part and denied it in part. The court granted summary adjudication in favor of the defendants on Trustee's § 548 claims because the alleged transfer did not occur within two years of the petition date. The court granted summary...