In re: Benjamin Jones and Jessica Treola Jones

• Court: United States Bankruptcy Appellate Panel for the Ninth Circuit
• Decided: February 5, 2014
• Docket: AZ-12-1644-DPaKu
• Status: Unpublished

Opinion

FILED 2/5/2014 1 SUSAN M. SPRAUL, CLERK 2 U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT 3 UNITED STATES BANKRUPTCY APPELLATE PANEL 4 OF THE NINTH CIRCUIT 5 In re: ) BAP No. AZ-12-1644-DPaKu 6 ) BENJAMIN JONES and ) Bk. No. 11-34839-SSC 7 JESSICA TREOLA JONES, ) ) 8 Debtors. ) ________________________________) 9 ) BENJAMIN JONES; ) 10 JESSICA TREOLA JONES, ) ) 11 Appellants, ) ) 12 v. ) M E M O R A N D U M1 ) 13 BRIAN J. MULLEN, Chapter 7 ) Trustee, ) 14 ) Appellee. ) 15 ________________________________) 16 Argued and Submitted on January 23, 2014 at Tempe, Arizona 17 Filed - February 5, 2014 18 Appeal from the United States Bankruptcy Court 19 for the District of Arizona 20 Honorable Sarah Sharer Curley, Bankruptcy Judge, Presiding 21 Appearances: Trucly Pham Swartz, Esq. of John Joseph Volin, 22 P.C. argued for appellants Benjamin Jones and Jessica Treola Jones; Michael A. Jones, Esq., of 23 Allen, Sala & Bayne, PLC argued for appellee Brian M. Mullen, Chapter 7 Trustee. 24 25 Before: DUNN, PAPPAS and KURTZ, Bankruptcy Judges. 26 1 27 This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may 28 have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1. 1 The bankruptcy court approved the chapter 72 trustee’s sale 2 of real property transferred to debtor postpetition upon the 3 death of the grantor under a Beneficiary Deed under Arizona Law, 4 which had been executed and recorded prepetition. We AFFIRM. 5 I. FACTS 6 As part of her estate plan, on July 16, 2010, Mary Alice 7 Jones (“Mary”) signed a Beneficiary Deed transferring real 8 property (“Property”) in Maricopa County, Arizona, to her 9 grandson, Benjamin Jones (“Benjamin”), effective on her death. 10 The Beneficiary Deed was recorded in the Maricopa County property 11 records on July 27, 2010. 12 Together with his wife, Jessica Treola Jones, Benjamin filed 13 a chapter 7 petition (“Petition”) in the Bankruptcy Court for the 14 District of Arizona on December 28, 2011. Brian J. Mullen 15 (“Trustee”) was appointed as the chapter 7 trustee in the Jones’ 16 bankruptcy case. 17 Benjamin did not disclose an interest in the Property in his 18 bankruptcy schedules filed on December 28, 2011. Mary died on 19 December 31, 2011, having never revoked the transfer made 20 pursuant to the Beneficiary Deed. 21 On August 24, 2012, the Trustee filed a motion (“Sale 22 Motion”) pursuant to § 363(b) and (f) to approve a sale of the 23 Property as property of the bankruptcy estate, free and clear of 24 25 26 2 27 Unless otherwise indicated, all chapter and section references are to the federal Bankruptcy Code, 11 U.S.C. §§ 101- 28 1532.

-2- 1 liens. Benjamin objected.3 2 Relying on § 541(a)(5), Benjamin asserted that to become 3 property of his bankruptcy estate, the transfer of the Property 4 to him must have been by “bequest, devise, or inheritance” within 5 180 days after the Petition was filed. He further asserted that 6 under Arizona law, a bequest is a transfer of personal property 7 under the terms of a decedent’s will, a devise is a transfer of 8 real property under the decedent’s will, and an inheritance is 9 property received as a result of a decedent dying intestate. 10 Because the transfer was of real property, the transfer was not a 11 bequest. Because Mary had a will, the transfer was not an 12 inheritance. Because the transfer was not made to him through 13 that will, the transfer was not a devise. Accordingly, Benjamin 14 asserted that the transfer did not fall within the parameters of 15 § 541(a)(5), and for that reason, the Property never became 16 property of his bankruptcy estate. 17 Following briefing and argument, the bankruptcy court took 18 under submission the issue of whether the Property was property 19 of Benjamin’s bankruptcy estate,4 twice requesting that Benjamin 20 21 3 All proceedings opposing the sale of the Property, 22 including this appeal, were filed in the names of both debtors. Because any interest in the Property was in Benjamin’s name only, 23 we refer only to Benjamin as the opposing party. 24 4 Any procedural error arising from the bankruptcy 25 court’s determination of the validity, priority, or extent of Benjamin’s interest in the Property in the context of a contested 26 matter rather than through an adversary proceeding pursuant to 27 Rule 7001(2) has been waived by Benjamin. He did not raise the issue before the bankruptcy court and has not raised it in this 28 (continued...)

-3- 1 provide further documentation. The first request was that he 2 provide a copy of Mary’s will, which he did. The second was that 3 he provide any other estate planning documents Mary executed on 4 July 16, 2010. Benjamin responded to this request only by 5 stating that he had no knowledge of any other estate planning 6 documents executed on that date, except that he believed Mary 7 used beneficiary designations and joint accounts to control the 8 disposition of some assets. 9 On December 13, 2012, the bankruptcy court issued its 10 memorandum decision (“Decision”), in which it determined that the 11 Property was property of the bankruptcy estate. 12 The bankruptcy court first analyzed the transfer of the 13 Property to Benjamin under § 541(a)(5), observing that the 14 dispute as argued by the parties, was solely whether the Property 15 became property of the estate “by devise.” As such, the 16 definition of “devise” in the Arizona Probate Code was 17 controlling; under Arizona law, a devise “when used as a noun, 18 means a testamentary disposition of real or personal property 19 and, when used as a verb, means to dispose of real or personal 20 property by will.” A.R.S. § 14-1201 (West 2012). The bankruptcy 21 court determined that because “devise” is used as a noun in 22 § 541(a)(5), under Arizona law the Property is a devise if 23 4 (...continued) 24 appeal. See Levesque v. Shapiro (In re Levesque), 473 B.R. 331, 25 335 (9th Cir. BAP 2013)(“Ordinarily, if an issue is not raised before the trial court, it will not be considered on appeal and 26 will be deemed waived.”); Simpson v. Burkart (In re Simpson), 27 366 B.R. 64, 76 at n.10 (9th Cir. BAP 2007)(“Generally, an appellate court will not consider matters not specifically and 28 distinctly argued in an appellant’s opening brief.”).

-4- 1 Benjamin acquired it as a “testamentary disposition,” a term not 2 defined in the Arizona Probate Code. The bankruptcy court 3 adopted the Black’s Law Dictionary definition of a “testamentary 4 disposition” contained within the definition of “disposition” as 5 “a disposition to take effect upon the death of the person making 6 it, who retains substantially entire control of the property 7 until death.” See Black’s Law Dictionary 539 (9th ed. 2009). 8 The bankruptcy court then turned to the Beneficiary Deed 9 itself, noting that its use was first adopted in 2001, that it is 10 a provision of the “Property” section (Title 33) of the Arizona 11 Revised Statutes rather than the “Trusts, Estates and Protective 12 Proceedings” section (Title 14), and that the bankruptcy court 13 was unaware of any decision interpreting the Beneficiary Deed 14 statute or the treatment of a beneficiary deed in the bankruptcy 15 context. The bankruptcy court therefore looked to the treatment 16 of trusts, non-probate instruments, for guidance. 17 Citing the distinction this Panel made in Birdsell v. Coumbe 18 (In re Coumbe), 304 B.R. 378, 384-85 (9th Cir. BAP 2003), between 19 testamentary trusts and inter vivos trusts, the bankruptcy court 20 determined that Benjamin’s acquisition of the Property 21 substantially mirrored the effect of a testamentary trust, 22 because Benjamin acquired the Property effective upon Mary’s 23 death, and found that the Property vested in Benjamin at the same 24 time income distributions would vest in a beneficiary under a 25 testamentary trust. Further, Mary’s execution of both her will 26 and the Beneficiary Deed on the same date as part of her estate 27 planning evidenced Mary’s requisite intent to make a testamentary 28 disposition–a transfer of property on her death. The bankruptcy

-5- 1 court also ruled, in the alternative, that the Beneficiary Deed 2 represented a contingent interest held by Benjamin on the 3 Petition Date, and that § 541(a)(1) therefore applied to bring 4 the Property into the bankruptcy estate. 5 An order approving the Sale Motion was entered December 18, 6 2012, and this appeal followed.5 7 II. JURISDICTION 8 The bankruptcy court had jurisdiction under 28 U.S.C. 9 §§ 1334 and 157(b)(2)(A) and (N). We have jurisdiction under 10 28 U.S.C. § 158. 11 III. ISSUE 12 Whether the bankruptcy court erred when it determined that 13 the Property was an asset of Benjamin’s bankruptcy estate that 14 the Trustee could sell. 15 IV. STANDARDS OF REVIEW 16 Whether property is included in a bankruptcy estate is a 17 question of law that we review de novo. White v. Brown 18 (In re White), 389 B.R. 693, 698 (9th Cir. BAP 2008). We can 19 affirm on any basis supported by the record. Shanks v. Dressel, 20 540 F.3d 1082, 1086 (9th Cir. 2008). 21 V. DISCUSSION 22 The filing of the Petition created an estate comprised of 23 all of the Joneses’ legal and equitable interests in property. 24 § 541(a). What constitutes a property interest under § 541 “has 25 26 5 The sale took place. The bankruptcy court entered an 27 order on January 16, 2013, which directed the Trustee to retain the proceeds in the amount of $54,982.48 pending resolution of 28 this appeal.

-6- 1 been construed most generously and an interest is not outside its 2 reach because it is novel or contingent or because enjoyment must 3 be postponed.” United States v. Sims (In re Feiler), 218 F.3d 4 948, 955 (9th Cir. 2000) (quoting Segal v. Rochelle, 382 U.S. 5 375, 379 (1966)). Although the Bankruptcy Code defines what 6 property is transferred to the bankruptcy estate, “[p]roperty 7 interests are created and defined by state law.” Butner v. 8 United States, 440 U.S. 48, 55 (1979). Thus, we look to Arizona 9 law to establish the existence and scope of Benjamin’s interest 10 in the Property to determine whether it is to be included in the 11 bankruptcy estate. 12 Benjamin’s interest in the Property was created through a 13 Beneficiary Deed, executed and recorded as provided by A.R.S. 14 § 33-405. As relevant to the appeal before the Panel, A.R.S. 15 § 33-405 provides: 16 33-405. Beneficiary deeds; recording; definitions 17 A. A deed that conveys an interest in real property . . . to a grantee beneficiary designated by the 18 owner and that expressly states that the deed is effective on the death of the owner[,] transfers the 19 interest to the designated grantee beneficiary effective on the death of the owner subject to all 20 conveyances, assignments, contracts, mortgages, deeds of trust, liens, security pledges and other 21 encumbrances made by the owner or to which the owner was subject during the owner's lifetime. 22 . . . E. A beneficiary deed is valid only if the deed is 23 executed and recorded as provided by law in the office of the county recorder of the county in which 24 the property is located before the death of the owner or the last surviving owner. A beneficiary 25 deed may be used to transfer an interest in real property to the trustee of a trust even if the trust 26 is revocable. F. A beneficiary deed may be revoked at any time by 27 the owner . . . who executed the beneficiary deed. To be effective, the revocation must be executed and 28 recorded as provided by law in the office of the

-7- 1 county recorder of the county in which the real property is located before the death of the owner 2 who executes the revocation.... G. If an owner executes and records more than one 3 beneficiary deed concerning the same real property, the last beneficiary deed that is recorded before 4 the owner's death is the effective beneficiary deed. H. This section does not prohibit other methods of 5 conveying property that are permitted by law and that have the effect of postponing enjoyment of an 6 interest in real property until the death of the owner. This section does not invalidate any deed 7 otherwise effective by law to convey title to the interests and estates provided in the deed that is 8 not recorded until after the death of the owner. . . . 9 M. For the purposes of this section: 1. "Beneficiary deed" means a deed authorized under 10 this section. 2. "Owner" means any person who executes a 11 beneficiary deed as provided in this section. 12 The parties agree that the Beneficiary Deed did not transfer 13 a present interest in the Property to Benjamin. Nor is it 14 disputed that Mary could have revoked the Beneficiary Deed at any 15 time prior to her death. 16 The bankruptcy court determined that the Beneficiary Deed 17 created a contingent interest in the Property, and that the 18 contingent interest passed to the bankruptcy estate consistent 19 with the broad scope of § 541(a)(1). Because the contingent 20 interest was held by the estate at the time of Mary’s death, it 21 ripened into a present interest by operation of the terms of the 22 Beneficiary Deed and of law three days after Benjamin’s 23 bankruptcy filing. 24 On appeal, Benjamin challenges this determination on two 25 grounds. 26 First, he asserts that he held no property interest on the 27 Petition date. Rather, he held only an “expectancy.” To support 28 this position, he cites to McKenzie v. Badillo (In re Meza),

-8- 1 465 B.R. 152 (Bankr. D. Ariz. 2012), which in turn cites Abele v. 2 Phoenix Suns Ltd. P’ship (In re Harrell), 73 F.2d 218 (9th Cir. 3 1996). Neither is on point. 4 In Meza, the debtor’s wife changed the beneficiary 5 designated on a term life insurance policy she owned from the 6 debtor to third parties. The bankruptcy trustee asserted the 7 change constituted a fraudulent transfer. The Meza court 8 disagreed, stating that Arizona law does not provide designated 9 beneficiaries of term life policies any rights during the life of 10 the insured that could amount to a property interest recognized 11 by federal bankruptcy law. The Meza court relied upon case law 12 from the Arizona Supreme Court which held that prior to the 13 insured’s death, a life insurance beneficiary had no vested right 14 which the law would protect. We read Meza only to provide that 15 had Mary revoked the Beneficiary Deed postpetition but before her 16 death (which she did not do), the Trustee would not have been 17 able to assert a fraudulent transfer claim. 18 The Meza court then states broadly “[a]nd Ninth Circuit law 19 is clear that when state law recognizes no such vested right, 20 bankruptcy law cannot find a property interest to exist, but only 21 a mere expectancy.” The Ninth Circuit case cited by the Meza 22 court for this broad proposition is Harrell. In Harrell, the 23 debtor held season tickets, playoff tickets, and an opportunity 24 to renew the season tickets to a local professional sports 25 franchise. The Ninth Circuit stated that the mere expectation of 26 an interest in property, in Harrell the right to renew season 27 tickets, did not constitute a property right, where the sports 28 franchise made clear in written notices sent to season ticket

-9- 1 holders each year that the “opportunity [to renew season tickets] 2 is a privilege granted by the [franchise] and may be withdrawn in 3 the [franchise’s] discretion.” We cannot make the stretch 4 Benjamin asks of us to apply Harrell to this case. The debtor in 5 Harrell never had a legal right to renew his season tickets. 6 Benjamin, however, held a valid future interest in the Property 7 by virtue of the Beneficiary Deed, subject only to Mary’s 8 revocation of the Beneficiary Deed, which never occurred. 9 Second, Benjamin contends that his rights with respect to 10 the Beneficiary Deed were similar to those of a beneficiary of a 11 paid on death (“POD Account”) account. He cites to In re Hall, 12 394 B.R. 582 (Bankr. D. Kan. 2008), and In re Holter, 401 B.R. 13 372 (Bankr. W.D. Wis. 2009), as decisions of courts that have 14 held that a contingent interest to a POD Account should not 15 constitute property of the estate. 16 Unfortunately for Benjamin, the issue is governed by 17 longstanding Ninth Circuit precedent which holds that property of 18 the estate under § 541(a)(1) includes contingent interests. See, 19 e.g., Neuton v. B. Danning (In re Neuton), 922 F.2d 1379 (9th 20 Cir. 1990). 21 In Neuton, the Ninth Circuit held that a beneficial interest 22 in an inter vivos trust that was revocable on the petition date 23 constituted property of the bankruptcy estate, as it became 24 irrevocable when the debtor’s interest vested upon the death of 25 the settlor, an occurrence which took place forty-six days after 26 the bankruptcy petition was filed. 27 Ignoring Neuton, Benjamin asserts that in Burton v. Ulrich 28 (In re Schmitt), 215 B.R. 417, 421 (9th Cir. BAP 1997), this

-10- 1 Panel held, “We determine that because the Trust was revocable, 2 the Debtor’s interest in it is no part of the estate.” While 3 that is a direct quote from Schmitt, it mischaracterizes what was 4 actually decided. In Schmitt, the chapter 7 trustee sought to 5 compel turnover of the value of a debtor’s beneficial interest in 6 an inter vivos trust. When the trustee determined that the 7 debtor’s interest in the trust likely was not property of the 8 estate because it remained revocable, the trustee filed a motion 9 seeking approval for his proposed compromise of the dispute with 10 the trust grantor regarding turnover. In affirming the 11 bankruptcy court’s approval of the settlement, the Schmitt Panel 12 decided that an inter vivos trust that remained revocable at the 13 time the chapter 7 trustee sought to enforce debtor’s contingent 14 interest in it, was not property of the estate. Thus, by 15 inference, we have recognized that an interest of the debtor in 16 property that was contingent on the petition date, but vests 17 postpetition, is property of the estate pursuant to § 541(a)(1). 18 Because the bankruptcy court correctly concluded that 19 Benjamin’s contingent interest in the Property became property of 20 the estate pursuant to § 541(a)(1), the bankruptcy court did not 21 err when it authorized the trustee to sell the Property once 22 ownership of the Property had vested in Benjamin following Mary’s 23 death. The proceeds of the sale belong to the estate. 24 § 541(a)(6). 25 We therefore do not reach the issue of whether the transfer 26 of the Property through the Beneficiary Deed constitutes a 27 “bequest, devise or inheritance” to render it property of the 28 estate under the provisions of § 541(a)(5).

-11- 1 VI. CONCLUSION 2 Under the Beneficiary Deed, Benjamin held a contingent 3 interest in the Property on the Petition Date. Because legal 4 title vested in Benjamin upon the Mary’s death three days later, 5 the Property is property of Benjamin’s bankruptcy estate pursuant 6 to § 541(a)(1). We AFFIRM. 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

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