UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION
IN RE:
MANNING FAMILY TRUST
DEBTOR CASE
NO. 01-51231
Chapter
11
MEMORANDUM OPINION
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.
Dated:
By
the Court -
_________________________________
Judge
William S. Howard
Copies to:
Victor Maddox, Esq.
Tracey N. Wise, Esq.
U.S. Trustee
All Creditors