UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
MANNING FAMILY TRUST
DEBTOR CASE NO. 01-51231
This matter is before the Court on the Motion of creditor Bank One, Kentucky, N.A. (ABank One@) to Dismiss or, Alternatively, to Lift Automatic Stay, filed herein on May 22, 2001. The Manning Family Trust (AMFT@ or Athe debtor@) filed its objection to the motion on June 8, 2001. The Court conducted a hearing on June 13, 2001, and took the matter under consideration.
Review of this case reveals that the debtor filed a Chapter 11 petition in this Court on April 20, 2001, identifying itself as a ATrust@ in the AOther@ category. According to Bank One, the petition was filed on the day of a foreclosure sale which was to take place pursuant to the Order and Judgment of the Fayette Circuit Court in Civil Action No. 93-CI-1774 c/w No. 93-CI-3935, Manning Family Trust, et al. v. Bank One, Lexington, N.A. regarding the debtor=s mortgage indebtedness to Bank One. This state court action is one of several in which the debtor has been involved.
In its motion Bank One alleges that this case should be dismissed because MFT is not an eligible debtor under Chapter 11. This is the threshold question before the Court. The Bankruptcy Code provides that only those individuals identified as Apersons@ are eligible for relief. 11 U.S.C. '109(a), (d). Pursuant to 11 U.S.C. '101(41), Aperson@ includes a corporation, and pursuant to '101(9)(A)(v), a corporation may be a business trust. If MFT is determined not to be an eligible debtor, other issues raised by Bank One are moot.
The term Abusiness trust@ is not defined in the Code, and there is no definitive, published Sixth Circuit case that addresses the issue. Other circuit and bankruptcy courts have taken varying positions. One author writing on the topic of business trusts represents that
[o]ut of forty-nine cases since 1978 that have dealt with this topic, thirty-six ... have held that the entity was not a business trust, and, hence, ineligible to be a debtor; the remaining thirteen ... have found that the entity was a business trust and was eligible to be a debtor. .... [A] family trust rarely qualifies as a business trust, even when it does business.[FN25] Nineteen of the thirty-six negative cases involved family trusts.
. . . . . .
[FN25] By Afamily trust,@ this Comment means both a traditional trust in which the corpus is preserved for the comfort and maintenance of the beneficiariesBwho are usually the settlor=s or grantor=s relativesBand a trust in which the trustees and beneficiaries are relatives or close friendsBthe trust equivalent of a close corporation.
Takemi Ueno, Defining a ABusiness Trust@: Proposed Amendment of Section 101(9) of the Bankruptcy Code, 30 Harv. J. on Legis. 499, 502-503 (1993). Most courts seem to agree, however, that the issue is fact-specific and must be decided on a case by case basis.
Bank One cites several cases in support of its position on this issue, including In re Secured Equip. Trust of Eastern Air Lines, Inc., 38 F.3d 86, 89 (2nd Cir. 1994), In re Treasure Island Land Trust, 2 B.R. 332, 334 (Bankr.M.D.Fla. 1980), and In re St. Augustine Trust, 109 B.R. 495, 496(Bankr.M.D.Fla. 1990). These cases set out various elements that must be established in order to demonstrate a business trust. These elements include that the purpose of the subject trust be to conduct business or to make a profit, that the beneficiaries of the trust pool capital or otherwise contribute something of value, and that the trustee hold title to the property, be responsible for its management, and have limited liability.
The cases which MFT contends support its position are similar to those cited by Bank One in many respects. In re Medallion Realty Trust, 103 B.R. 8, 11-12 (Bankr.D.Mass. 1989) agreed that ACongress intended to permit bankruptcy relief for all trusts which are created for the purpose of transacting business and whose beneficiaries make a contribution in money or money=s worth to the enterprise, ...@ The court In re Gonic Realty Trust, 50 B.R. 710, 713 (Bankr.D.N.H. 1985) held that a trust must be found to be Aconducting a business@ of some kind to qualify as a Chapter 11 debtor, and that the lack of transferable shares by numerous beneficiaries is not determinative of whether a trust qualifies as a business trust. The elements that all courts look for appear to be the same or very similar; the difference is in how these elements are applied to the various fact situations before each court.
Actually, Medallion Realty Trust is not as supportive of MFT=s position as it contends. There the court engaged in a lengthy analysis of the history and development of the concept of a business trust in the bankruptcy context. The court stated that the test for determining whether a trust was a business trust should be
whether the trust was created to transact business for the benefit of investors. This latter test is certain to deny bankruptcy relief to the traditional donative trust created for the benefit of family members, a result which is consistent with both the history of estate ineligibility and what appears to be the core reasoning of most of the decisions.
Medallion Realty Trust, 103 B.R. at 11.
Bank One makes reference to an unpublished Sixth Circuit decision, Brady v. Schilling (In re Knight), 121 F.3d 708, 1997WL415318 (6th Cir. (Ky.)). This opinion is instructive in that it reviews cases cited by the parties herein and agrees with them that
trusts created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors qualify as business trusts, while trusts designed merely to preserve the trust res for beneficiaries generally are not business trusts. ... Ultimately, the determination is fact-specific, and it is imperative that bankruptcy courts make thorough and specific findings of fact to support their conclusions. (Cites omitted.)
At **4. It appears therefore that this Court=s first task is to determine whether the Manning Family Trust (Athe trust@) was created with the primary purpose of transacting business or carrying on commercial activity for the benefit of investors.
The trust document has been made part of the record herein. It states that it was established for the benefit, including maintenance, education, and advancement, of Simon Manning (son of the settlors and trustees of the trust), his children, grandchildren and unmarried widow, and there is no testimony before the Court that the intention of the settlors/trustees in establishing the trust was to do anything but benefit these individuals. While the trust document indicates that business activity was contemplated as a way of producing income, there is nothing that indicates that the purpose of the trust was to conduct business. Further there is no indication that there was any contribution or investment in money or money=s worth by the beneficiaries. The trust does provide that the trustees will have title to and manage the trust property and that their liability will be limited.
In its memorandum before the Court, MFT recites a litany of business ventures that it has engaged in, although there is no documentation of or testimony concerning these activities. Assuming that MFT has engaged in business, however, the conduct of such activity is not enough to characterize the trust as a business trust. As pointed out by the court in In re St. Augustine Trust, supra, 109 B.R. at 496 , it is not enough for the trust to carry on business: AThe inquiry must focus on the trust documents and the totality of the circumstances, not solely on whether the trust engages in a business.@ The court in In re Gonic Realty Trust, supra, 50 B.R. 710, seemed to say that it was sufficient for a trust to demonstrate that it engaged in business. That court, however, never addressed what the stated purpose of the trust before it was, although it reviewed the provisions of the trust document.
In consideration of all of the foregoing, it is the opinion of this Court that the Manning Family Trust is not eligible to be a Chapter 11 debtor, and that this case should be dismissed. An order in conformity with this opinion will be entered separately.
By the Court -
Judge William S. Howard
Victor Maddox, Esq.
Tracey N. Wise, Esq.